Industry News
With Reshoring Latin America can be the Factory of the World
BY Hugo Ivan Domínguez, IberoNews
Covid-19 and trade tensions between China and the United States have revived the interest in an eventual reshoring phenomenon in Latin America. This concept consists of returning production operations to the country of origin or others nearby. Mexico, Guatemala, El Salvador, Costa Rica, and the Dominican Republic have the upper hand.
That virus emerged in the city of Wuhan, China turned the world upside down. And it caused multiple havoc in different parts of the world. For example, there were interruptions in the supply of products and components. This is one more argument to detract from China’s prominence as a manufacturing center. It’s something the U.S. has been trying since Donald Trump’s administration.
That virus emerged in the city of Wuhan, China turned the world upside down. And it caused multiple havoc in different parts of the world. For example, there were interruptions in the supply of products and components. This is one more argument to detract from China’s prominence as a manufacturing center. It’s something the U.S. has been trying since Donald Trump’s administration.
Asia, and China, in particular, has been one of the world’s factories. According to the business and economics site www.usnews.com, Vietnam, India, and China are the countries with the cheapest manufacturing costs in the world.
However, businesses are looking beyond manufacturing prices toward other factors that are gaining more weight in investment decisions. One of them is the risk of suffering interruptions in the supply of products and raw materials, as happened at the beginning of the pandemic. Another is a potential trade war between the United States and China — the world's two largest economies. Latin American countries should be vigilant and refine their strategies.
Why is reshoring important in Latin America?
Reshoring in Latin America can benefit countries. This phenomenon is happening because companies do not want to suffer a disruption in their supply chains again, as happened with Covid-19.
“The pandemic hampered factory operations and sowed chaos in global shipping. Many economies around the world were affected by shortages of a wide range of products, from electronics to wood to clothing.” This is indicated by the article “How the World was Left with Nothing”, in the New York Times published in June 2021.
The operations of companies have become global. The production here, the design here, the distribution center there, and the transportation over there. But decision-makers have realized that stretching supply chains too far is risky for business. It is more costly to suffer disruptions in the supply of products and raw materials. And the risk of this happening is greater when they come from Asia.
“The unforeseen impact of Covid-19 has renewed interest and debate about the global dependence on offshoring manufacturing and services to China,” notes consultancy MarshMcLennan. “As a result, nearshoring has become an attractive possibility for many companies,” he delves into the report “Latin America Is Missing a $72 Billion Opportunity in Nearshoring”, published in July 2021.
Gartner published the “Weathering the Storm: Supply Chain Resilience in an Age of Disruption” survey in June 2020. It found that 33% of supply chain leaders moved their businesses out of China. Or, if anything, they planned to do so by 2023.
The most attractive Latin American countries
The largest economy in the world is still the United States. Therefore, companies will look to manufacture in sites closer to that market. Faced with a possible reshoring in Latin America, some countries have an advantage.
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Mexico, without a doubt, is one of the most advantaged. It’s simply 11th in terms of manufacturing costs, according to the US News “These Countries Have the Cheapest Manufacturing Costs” ranking.
This country is a center specialized in manufacturing. In addition, it has a Free Trade Agreement with the United States and Canada.
But it’s not the only one. Following the ranking: Guatemala (12) and the Dominican Republic (15) offer competitive costs for manufacturing. They are followed by El Salvador (18), Ecuador (20), Costa Rica (22), Peru (23), and Colombia (24).
In addition to costs, other factors lead companies to think about the risks of manufacturing in distant places. Among them are long response times in the value chain, exhaustive travel, and expensive shipments.
In some cases, transportation costs from China to Mexico have increased by as much as 600% since the start of the pandemic. This is explained by an entrepreneur in the textile sector who prefers to remain anonymous. He adds that this is a result of the low supply of transport.
“As the idea of bringing manufacturing closer to the United States and, in particular, to countries with common political ties has taken root, it’s no surprise that people are looking to Latin America,” MarshMcLennan adds. “However, the question is whether the region can seize this opportunity and China’s growing global vision as an adversary and strategic competitor.”
How to make reshoring an opportunity for Latin America?fDi Intelligence points out that, in the face of a reshoring phenomenon in Latin America, countries will have to make an attractive sales pitch with agencies in the United States. A good example is the Association of Free Zones of the Americas (AZFA) of the Americas. The organization brings together 25 countries on the continent. And it seeks to promote the main manufacturing centers in the region.
A fundamental problem has to do with a company not moving on its own. Migrating operations requires moving a supply chain. This may involve dozens of companies that would have to leave Asia to move their operations to Latin America. But many of those countries are not ready for it. For example, infrastructure and transportation costs, electricity, and skilled labor.
Mexico, Colombia, Panama, and Costa Rica can match the low costs and high human capital of Southeast Asia. But the case of the Northern Triangle countries is different. Guatemala, El Salvador, and Honduras struggle with low human capital and security problems. So says Jimena Blanco, Americas leader at Verisk Maplecroft, quoted by fDi Intelligence.
The conditions for attracting investment are there. But the task does not look simple.
This country is a center specialized in manufacturing. In addition, it has a Free Trade Agreement with the United States and Canada.
But it’s not the only one. Following the ranking: Guatemala (12) and the Dominican Republic (15) offer competitive costs for manufacturing. They are followed by El Salvador (18), Ecuador (20), Costa Rica (22), Peru (23), and Colombia (24).
In addition to costs, other factors lead companies to think about the risks of manufacturing in distant places. Among them are long response times in the value chain, exhaustive travel, and expensive shipments.
In some cases, transportation costs from China to Mexico have increased by as much as 600% since the start of the pandemic. This is explained by an entrepreneur in the textile sector who prefers to remain anonymous. He adds that this is a result of the low supply of transport.
“As the idea of bringing manufacturing closer to the United States and, in particular, to countries with common political ties has taken root, it’s no surprise that people are looking to Latin America,” MarshMcLennan adds. “However, the question is whether the region can seize this opportunity and China’s growing global vision as an adversary and strategic competitor.”
How to make reshoring an opportunity for Latin America?fDi Intelligence points out that, in the face of a reshoring phenomenon in Latin America, countries will have to make an attractive sales pitch with agencies in the United States. A good example is the Association of Free Zones of the Americas (AZFA) of the Americas. The organization brings together 25 countries on the continent. And it seeks to promote the main manufacturing centers in the region.
A fundamental problem has to do with a company not moving on its own. Migrating operations requires moving a supply chain. This may involve dozens of companies that would have to leave Asia to move their operations to Latin America. But many of those countries are not ready for it. For example, infrastructure and transportation costs, electricity, and skilled labor.
Mexico, Colombia, Panama, and Costa Rica can match the low costs and high human capital of Southeast Asia. But the case of the Northern Triangle countries is different. Guatemala, El Salvador, and Honduras struggle with low human capital and security problems. So says Jimena Blanco, Americas leader at Verisk Maplecroft, quoted by fDi Intelligence.
The conditions for attracting investment are there. But the task does not look simple.