Nearshoring in México – Cost Optimization

International trade continues to evolve to favor the presence of companies in foreign markets, either to market their products or provide their services. In this evolution, the transfer of operations, functions, and processes from a company to a developing foreign country, to achieve cost reductions in labor and taxes (among other benefits), became a common business activity. This activity, most popular between 1990 and 2010, is known as offshoring.

The COVID-19 pandemic had a significant impact on companies globally, causing disruptions in the supply chain and affecting their purchases and sales by reducing manufacturers’ capacity to produce and deliver products. As a result, there was an increase in product prices and a decrease in demand and sales. In addition, economic uncertainty and the decrease in consumers’ purchasing power also contributed to a negative impact on trade.

Faced with the economic impact caused by the pandemic, companies have adapted to economic circumstances by seeking efficient solu&ons to ensure the delivery of products to their consumers in op&mal &me and at a reasonable cost. Nearshoring has gained relevance, becoming an attractive strategy in this sense, as it allows to shorten the distance between the manufacturer and the consumer, reducing shipping and transportation costs and improving efficiency in delivery.

Nearshoring is an outsourcing strategy in which a company moves part or all of its operations to a nearby country instead of a distant one. The idea behind nearshoring is to take advantage of the lower costs and specialized skills of a nearby country, while maintaining a geographical and cultural closeness that facilitates communication and collaboration.

Benefits of Nearshoring.

Cost reduction.

Labor in product manufacturing in developing countries is more accessible. Likewise, reducing the distances between manufacturing and the end consumer favors delivery times and reduces transportation tariffs.

Similar time zones.

Collaboration between suppliers and consumers in common time zones allows for smoother communication with greater synchronization and without pauses.

Supplier diversification.

Having an additional product production plant multiplies the possibilities of supplying other markets to reduce risks and ensure deliveries.

The practice of nearshoring does not distinguish the size of the company, it applies to small, medium and large companies alike, as well as to manufacturers of products and providers of services. This practice is conceptualized as a strategy that simply applies to obtain commercial advantages by reducing costs, getting closer to their customers, eliminating unnecessary tariffs, and taking advantage of free trade agreements by providing the same treatment as national investment companies.

1. The Main Access Point to Global Markets.

Mexico has established itself as an excellent option for nearshoring thanks to its geographical location near the country with the highest consumption: the United States. The skilled and affordable labor, its advanced infrastructure in transport and roads, and its free trade agreement with North America. These combined factors offer companies a unique opportunity to optimize their costs efficiently.

The Mexican Republic is considered the first starting point for the commercial internationalization of companies. The multiple international agreements signed by Mexico favor and provide preferential access to the world’s most important markets.

International agreements describe standard rules and regulations to favor the exchange of products and services, facilitating access to Mexican and foreign consumers. In addition, these agreements favor the reduction of tariffs and promote access to more competitive prices of goods.

In 2023, Mexico maintains 14 Free Trade Agreements (FTAs) with 50 countries, 30 agreements for the Promotion and Reciprocal Protection of Investments (APPRIs) with 31 countries or administrative regions, and 9 limited scope agreements (Economic Complementation Agreements and Partial Scope Agreements) within the framework of the Latin American Integration Association (LAIA).

Click here to see the map of current interna&onal trea&es and agreements in Mexico.

2. Favorable Legal Framework in Mexico.

Limited Liability.

Commercial companies, particularly Public Limited Companies, Limited Liability Companies, Investment Promotion Public Limited Companies, Stock Companies, and Simplified Public Limited Companies, are endowed with a legal personality different from that of the partners who make them up, who are only obliged to the payment of their contributions. (Exceptions of lifting of corporate and fiscal veil)*.

Foreign Investment.

Since the publication of the Foreign Investment Law in 1994, the locks that prevented investment have been gradually opened. The vast majority of activities are open to any percentage of foreign investors, even if it involves one hundred percent. However, companies must comply with obligations, mostly informative, in the National Register of Foreign Investment.

Immigration Permits.

“Resident” and “non-resident” immigration permits for investors are practically allowed for anyone wishing to conduct business activities in Mexico, no minimum investment is required as in other countries, and they go from one to three years, being renewable unlimitedly.

Foreign Workers.

Mexican companies can hire one foreigner for every nine national workers. This number can be expanded considering that two or three trusted workers will not be considered in this calculation.

Intellectual Property

Intellectual property legislation recognizes intangible rights of companies that currently constitute their most significant assets. Distinctive signs, industrial secrets, confidentiality, and patents are recognized equally to Mexicans and foreigners. In 2020, the new Federal Law for the Protection of Industrial Property was published with regulatory improvements that allow for the protection and defense of intangible assets.

Commercial Formats.

Franchises, maquiladoras, distribution contracts, licenses, and supply and avío contracts are widely recognized by current legislation, providing legal certainty to companies and their investments.

Treaties to avoid Double Taxation.

Mexico has concluded various treaties to promote cross-border trade and investment to provide companies with greater fiscal certainty and reduce fiscal barriers, regulating fiscal residence, dividends, interests and royalties, recognizing methods to eliminate double taxation, and establishing rules for dispute resolution procedures.

In conclusion, Mexico is positioned as the key country for the development of business and commercial strategies in the world. The distribution of the products that are manufactured provides not only a close geographical position to effectively reach the largest consumers, but also the reduction of tariffs favors the transit of goods to all the commercial partners of the Mexican Republic.

Companies when incorporated in Mexico are born with Mexican legal personality, so they enjoy all the advantages offered by International treaties, regardless of the nationality of the partners who integrate it.

Similarly, Mexican legislation is in an optimal state to provide partners with a favorable environment for the development of their businesses and the necessary legal certainty to protect their investments and intangible assets.

In summary, Mexico presents an attractive and competitive opportunity for international business expansion for companies seeking to optimize their supply chain, reduce costs, and increase global competitiveness.

If you need legal advice for your company, do not hesitate to contact me.

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About the Author: Mr. Rafael Giménez Camacho is a graduate of the Universidad Iberoamericana in Mexico City and holds a Master’s degree in Commercial Law from the Escuela Libre de Derecho. He taught Commercial Law and Commercial Procedural Law for four years at the Instituto Tecnológico de Estudios de Monterrey Campus Estado de México, has given lectures at the International Congresses of the Universidad Panamericana since its inception, as well as at other universities, was appointed in 2010 an honorary member of Phi Delta Phi Chapter Ignacio Burgoa and is continuously consulted by various media mass communication in periodical publications and radio and television media. He is a founding partner of Giménez & Asociados Abogados, SC, a firm where he has practiced for twenty-one years and is a member of the Board of Directors in various companies of great national importance.

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