As OBG has detailed, supply chain disruption created by the pandemic has led many multinational companies to rethink their production operations.
Even prior to Covid-19, a ‘China+1’ strategy was becoming increasingly common. Rising production costs – combined with the US-China trade war – caused some companies to diversify production into third countries, while still maintaining significant operations in China.
Another option that is becoming more common is ‘reshoring’, or bringing production back to the country in which a company is headquartered. In many cases, however, the extra stability this provides also involves renouncing broad-based cost benefits.
Nearshoring constitutes a midway solution, offering a range of potential advantages relative to traditional offshoring: fewer cultural, linguistic and time-zone differences; more involvement in day-to-day decision making; reduced travel expenses; greater regulatory alignment; and less risk to intellectual property.
Emerging economies with geographical proximity to established markets – including several Latin American countries – are well placed to exploit the ongoing uptick in nearshoring.As Francisco Santos, Colombia’s ambassador to the US, recently told Reuters, Latin America could be “the big winner” in the post-Covid-19 nearshoring shift: “in five years, the economy is going to look radically different than the one we have now.”
Two Latin American countries in particular stand out as affordable nearshoring options: Mexico and Colombia. The US has free trade agreements with Mexico, Colombia and Chile, as well as several Central American countries. Of these, relatively affluent Chile is perhaps the least appealing option for large-scale nearshoring, while Central America is grappling with a series of challenges.
Mexico is already the largest trade partner of the US, and is thus a logical nearshoring choice for US or US-oriented firms. The United States-Mexico-Canada Agreement (USMCA), effective from July 1, will also be a significant boon.
Mexico has several characteristics that make it a strong nearshoring location, among them a broad range of cities, a developed labour pool and proximity to the US.
Additionally, the country has a highly diversified economy and increasing levels of specialisation. Its well-developed industrial capabilities are perhaps most evident in the automotive and aviation segments.
Colombia is likewise poised to benefit. “Thanks to the country's favourable time zone, there are substantial prospects for enhancing nearshoring activities over the medium term,” Pedro Fernández, vice president of innovation and sectoral intelligence at ProColombia, a government agency, told OBG.
Indeed, prior to Covid-19, Colombia's economy was already oriented towards nearshoring opportunities. The business process outsourcing industry in Bogotá alone has seen annual growth of 16% in recent times, according to the city’s investment promotion agency.
“Business processing outsourcing is already one of Colombia's largest employers, and projections show there could be up to 15,000 more jobs created after Covid-19 in call centres alone,” Fernández said.
Notably, the pandemic does not seem to have seriously affected Colombia’s services industry. For example, customer management firm Konecta recently announced that 70% of their business had shifted to home-working, and thus far no jobs have been lost. Further to this, the Colombian peso has seen its value drop by around one-third against the dollar this year, which will ensure higher profit margins.
Other countries in the region, as well as Caribbean nations such as Trinidad and Tobago, are also working on enhancing their appeal to nearshoring firms. If certain hurdles can be overcome, Mexico and Colombia could soon be facing fierce competition from regional neighbours.
Various issues need to be addressed in order to unlock the full nearshoring potential of the region as a whole. One is a lack of private investment. In order to attract foreign direct investment, regulation and taxation regimes will need to be made more attractive to foreign firms.
Another is infrastructure. While Mexico shares a land border with the US, and Colombia has direct sea routes from its various ports, other countries will need to boost their transport infrastructure and connectivity to ensure frictionless passage north for manufactured goods.
Similarly, in many parts of the region digital infrastructure – key to successful nearshoring operations – needs to be consolidated, while in others energy supply can also be unreliable.
Lastly, and perhaps most crucially, Latin American countries need to continue prioritising the development of a large, skilled labour pool. In this, Colombia is a leading example, having set itself the goal of becoming the "most educated" nation in Latin America by 2025.
Notwithstanding these medium-term challenges, Latin America is in a strong position to play a leading role in what many anticipate will be sharp growth in nearshoring during the post-Covid-19 recovery.