Nearshoring Gains Momentum in Mexico, and It’s China’s Loss

As shippers reevaluate their sourcing options, Mexico is gaining ground as a nearshoring hub and stealing import share from China.

Shipment volume from Mexico to the U.S. increased 20 percent year-over-year, when measuring the 14-day average number of tracked shipments for the company's customers, according to FourKites data.

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Although volume continues rising, delayed shipments for exports out of Mexico are down 25 percent year-over-year, per the supply chain and transportation visibility platform—which seems counterintuitive as more products in the pipeline would suggest higher congestion.

But according to Glenn Koepke, FourKites general manager of network collaboration, this speaks to better planning at ports and borders, and more transportation and logistics investments to better understand supply chain visibility and source labor.

"What we typically see is when volume goes down, waiting time, detention costs and dwell time also go down in parallel," said Koepke. "There's a correlation though, to the sequencing of the volume. If the volume is going down 10 percent overall, but all of a sudden, it's only concentrated in one day, it still creates a bottleneck at different ports and border locations and different physical sites. The waiting time makes sense based on what we’ve seen, and the market did need to recover."

A Brookings Institution report predicts that $60 billion-$150 billion will flow into Mexico as a result of new manufacturing investments and relocations. A recent Prologis report indicated that net absorption—the amount of real estate space that became occupied minus the space that became vacant—in Mexico's six major markets doubled from 2019 to 2022. Vacancy in those regions fell to just 1.1 percent in the 2023 first quarter after averaging 6 percent in pre-pandemic years. Of the sites under still construction, 60 percent have been pre-leased versus just 36 percent in 2019.

Mexico's gain could be China's loss, and other markets, too. In November 2022, the Mexican Economy Minister's office identified more than 400 companies that plan to relocate production from Asia to Mexico. Two months later, the U.S., Mexico and Canada established a goal to produce in North America 25 percent of the goods they currently import from Asia under a new drive to promote Mexico's economy.

The ongoing shift toward Mexico comes as the volume of shipments from China to the U.S. tracked by the FourKites platform has declined 44 percent year-over-year.

Even China-based Shein is reportedly looking to build a factory in Mexico.

When exclusively singling out apparel and textiles, Mexico's imports declined slightly year-over-year through April at a pace of 1.6 percent, according OTEXA data, while China's were down 32.1 percent.

"The focus on distributing suppliers out of China has been intentional, and we see a lot of companies still relying on importing products from overseas and where they can get out of China and go to Southeast Asia," said Koepke. "For specific products, where either the labor, the R&D, the transport, product availability, they are looking at moving to Mexico, but also other LatAm countries."

The main challenge right now with nearshoring in Mexico, Koepke says, is that there isn't enough capacity to absorb all of the business China can accommodate.

Like Mexico, China saw a link between shipping volumes and delays. Forty-two percent of shipments were held up, for an increase from 35 percent a year ago. But even with the increase, shipping volumes plummeted.

Despite the delays, transit times out of China declined significantly. Transit from a peak of 55+ days in May 2022 to less than 36 days, though FourKites speculates it might begin to increase again with reports of ocean carriers "slow steaming" as freight capacity remains abundant.

Although nearshoring is gaining momentum, Koepke is bullish on China's role in the apparel supply chain.

"Companies still have to manufacture their products, they need to be able to balance their supply chain. China will always have a stronghold on sourcing for the world," Koepke said. "The need is, you’d have to be diversified. At some point, the U.S. economy may or may not be the dominant economy, so even if you think of American companies that are manufacturing and shipping globally, at some point, it may go backwards where their sales are in other markets, and they have to think about their manufacturing footprint as well."

Koepke said that despite the shift, there'ss still a place for textile products sourced in the Asia-Pacific region, which specializes in basics and essentials. Brands looking at more technically challenging and niche designs could benefit from bringing textile production closer to the U.S. market.

"Part of that shift is also in alignment with the ocean market and air freight market," Koepke said. "Things have stabilized so it's unclear as to how much of that will go back to the APAC markets, whether it's India, Vietnam, China and so on."

Koepke advised companies interested in nearshoring that there isn't a one-size-fits-all solution. He also recommended companies to do their due diligence when it comes to assessing risk and analyzing infrastructure to understand what it takes to work with new suppliers, and the investments needed to succeed in a new market.

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