How Nearshoring Has Improved Our Supply Chain

The following article was first posted on the IndustryNet website. It is reposted here with the permission of Ulbrich Stainless Steels & Special Metals.

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Nearshoring is the concept of relocating enterprises in order to shorten supply chains in North America.

This concept has increased in popularity over the last couple years, as it allows businesses to be consistent and trustworthy to the industries that they serve.

In the past, several North American industries were focused on cost reductions through outsourcing and relocation of production to low-labor-cost countries and regions.

Many Asian countries—and especially China—were the recipients of these new investments.

However, there have been several global events since 2020 that reverted this trend as supply chains were greatly disrupted. These include:

• President Trump’s speech against China and his intentions to reduce U.S. economic dependency on Chinese supplies
• Renegotiation of NAFTA to become the new USMCA, with new and tougher rules of origin
• Several months-long closures of Chinese factories due to COVID-19
• Port closures causing disruption of transport patterns and ocean routes from China to America
• Significant increase in ocean transport costs between Asia and America
• The auto industry’s high dependency on Taiwanese semiconductors (chips) and auto parts manufactured in several Asian countries
• The invasion of Ukraine by Russia altering commercial flows and merchandise transport
• Economic and military tensions in the south China sea derived from Xi-Jinping’s declarations related to his intended reunification of Taiwan and China

Mexico

It is for these reasons that American and European firms were forced to look for new locations to return production from China and Asia to sites nearer to North American factories; and Mexico has been a key spot.

The Mexican economics and politics opinion leader Macario Schettino disaggregated the different segments of the Mexican industry, founding that the manufacturing segment has recovered very fast, even to higher pre-pandemic levels, which is explained by the nearshoring effect.

American and European firms were forced to look for new locations and Mexico has been a key spot.

On the other hand, the president of the Mexican Association of the Private Industrial Parks, Sergio Argüelles González, told Forbes Magazine that 2021 has been the best year ever for the Mexican industrial parks, and its projections for 2022 is the opening of 25 new parks, representing 6 million square meters (1,482 acres) of construction, with the generation of 107,000 new jobs.

Total estimated capex is around $2.5 billion. Argüelles believes that the automotive segment will keep the lead in the economic development of the industrial parks. In 2021, only 50% of the activity in these industrial spaces corresponded to this segment, especially in auto parts.

Production Growth

In the November 2022 edition of the Mexican newspaper Reforma, it was reported that auto parts production in the first eight months of 2022 were 7% higher than the pre-pandemic level.

August saw the highest growth rate at 16% vs the same month of 2019. Total investment in this sector reached $3.4 billion in 2021, and the destination of Mexican auto parts exports is 89% to the U.S., 3% to Canada, and the rest to Brazil, China, and Japan.

Mexico and the U.S. plan to reap the benefits of the Biden administration’s massive investment in semiconductor production.

Additionally, the Mexican bank and brokerage firm, Grupo Bursátil Mexicano stresses that Mexico and the U.S. recently announced they plan to reap the benefits of the Biden administration’s massive investment in semiconductor production to push the integration of their supply chains and jointly escalate the production of electric vehicles.

GBM estimates that if Mexico substitutes 5% of the exports to the U.S. from China and its Asian main competitor in 10 relevant categories, Mexican exports could grow by an additional $22.9 billion per year (equivalent to 1.77% of GDP).

Development Opportunities

Nearshoring’s development opportunities are mid- and long-term and not just a temporary trend, given the economic and geopolitical causes of its origin.

An additional positive factor is the associated knowledge transfer, which might allow Mexico the development of new technologies for the global operation of firms.

Nearshoring’s development opportunities are mid- and long-term and not just a temporary trend.

It is in this context that the board of directors of Ulbrich Stainless Steels & Special Metals, Inc. approved the capex project to install a 36” wide slitter at Ulbrinox, the service center specialized in precision strip, that the group has in the city of Querétaro, Mexico.

The new line will be fully operational by the third quarter of 2023 and will process aluminum and stainless steel in a thickness range between 0.060” and 0.005”, and an exit width range between 36” and 0.300”.

This new equipment, and its associated fully automated packing line, will allow Ulbrinox to serve the needs of a wider product range in the automotive, appliances, and electronic industries, which are the most favored by nearshoring.