Nearshoring to Mexico: A Guide to Cross-Border Shipping into the United States

Mexico has become increasingly attractive to manufacturers who want to diversify their supply chains and mitigate some of the risks of over-relying on operations in China.Two clear signs of that: Foreign investment in Mexico surged 48% in the first quarter of this year alone, and 50 new industrial parks are planned. Since C.H. Robinson opened the first of our nine Mexico offices more than 30 years ago, we’ve never had so many customers asking for help nearshoring to Mexico or adding production lines in Mexico.

We expect this trend to play out across the next five years, which means all manufacturers in Mexico need an up-to-date cross-border shipping strategy—one that accounts for a greater flow of freight into the United States putting pressure on current infrastructure.

If you’re thinking about nearshoring to Mexico for the first time, a local legal firm can help you get incorporated there and a local accounting firm can help you handle your affairs with Mexico’s Tax Administration Service (SAT). First, you’ll need an experienced supply chain and logistics provider to help you:

• Analyze what tax and duty incentives you might qualify for, based on inputs and equipment you’ll be bringing into Mexico
• Determine where you should locate your facility in Mexico
• Set up your cross-border shipping strategy and relationships with freight carriers to get your finished product to the United States or Canada

If you already have a presence in Mexico and are exploring new investment, you’ll need similar help because it’s likely that the business environment and your needs have changed since you first set up there. Some business regulations in Mexico are updated as often as quarterly.

STEP 1: Analyze your supply chain inputs

What materials and equipment can you source in Mexico and what will you need to import?

First of all, you may need special certifications for certain commodities or components. But knowing what you plan to obtain locally and what you need to import is also essential for determining your transportation costs, your taxes and duties, and what expenses you may be able to offset under Mexico’s IMMEX program for manufacturers.

As foreign investment in Mexico has grown, so has the likelihood of being able to source locally. For example, the more auto assembly plants that moved to Monterrey and central Mexico, the more Tier 1 and Tier 2 parts suppliers sprang up nearby.

While this is most pronounced in automotive, industrial clusters of all sorts have formed across Mexico. When electronics manufacturers and assemblers gravitated to Guadalajara, their supplier base gravitated there, too. Even the food and beverage industry is finding that sugar and other ingredients can be sourced and processed in Mexico.

If you can obtain raw materials, ingredients, parts, or components for an equal or lesser cost in Mexico and the quality is equal, it makes sense to procure locally. Transit times are shorter. You’ll need to keep less safety stock. And your plant and your supplier will be working in the same language and same currency.

How will you transport your supply chain inputs?

If you’ve primarily been manufacturing in China or Southeast Asia, the relative cost of your inbound freight after nearshoring may vary widely depending on the proportion of items you’ll need to bring in by ocean or air versus how much you can move by truck or rail from suppliers within Mexico. The size, weight and handling required for those items—and the frequency and predictability of when you need them—will matter as well.

If what you need to send from China to Mexico is large and bulky versus small items that can fit in a minimum of ocean containers, that potentially raises your costs. If longer and less predictable ocean transit times for your inputs mean more frequent shipping by air to Mexico to keep your just-in-time system functioning, you’ll need to take that into account.

What tax and duty incentives will you qualify for in Mexico?

Goods coming to Mexico are subject to a Value Added Tax (VAT) equal to 16% of the value. Under the IMMEX program, you can deduct the VAT from your year-end tax bill on certain materials and equipment you import for the purpose of manufacturing products for export. But you must inform the government what your imports will be, to find out which ones qualify for the offset.

For some of the materials or components you bring in, you’ll also face duties based on the material itself or its country of origin. This is Mexico’s way of encouraging manufacturers to buy their supply chain inputs in Mexico or elsewhere in North America. Under Mexico’s PROSEC program, manufacturers in certain industries such as automotive, plastics and paper can get these duties reduced to 0% if the materials can’t be found in sufficient quality or quantity in Mexico.

An expert analysis of your supply chain inputs is needed to determine these incentives. Without this due diligence, you might not get the breaks you hoped for and your margins could end up squeezed.

Even if you’re already operating in Mexico and plan to expand, you may still need to hire someone for this analysis because the list of qualifying goods is complex and ever changing. Say you’ve been bringing in rolled steel from overseas. You might discover that the quarter-inch pipe you’ll need at your new plant will be subject to a duty that doesn’t apply to the half-inch pipe you use at your current plant.

Step 2: Determine an optimal location

What location would be most efficient and cost-effective for your freight transportation?

This is a complicated equation encompassing where your suppliers are, where your customers are, and how close you’ll be to a border crossing that serves your needs.

Mexico has 10 seaports. If your supply chain inputs are coming by ship from China or elsewhere in Asia, the Port of Manzanillo on the west coast is the most well-connected to Mexico’s industrial corridor. For air cargo, Mexico has declared that freighters can fly only into Felipe Angeles International Airport and are no longer permitted at Mexico City International Airport. If you’ll procure a high percentage of materials within Mexico, locating your manufacturing line in or near one of the clusters that caters to your industry could be advantageous.

That needs to be balanced with where you’ll deliver your finished product. If the bulk of your customers are in the western United States, a western location in Mexico might make sense. If you’re also serving customers in the U.S. Midwest and along the U.S. East Coast, a two-plant strategy might be recommended rather than putting all your production lines in one location.

There are 26 ports of entry from Mexico into the United States, and they’re not all equal. Some have a rail bridge; some don’t. Some can handle oversize freight or hazardous materials; some can’t. Some crossings are much busier than others—and getting busier.

Not only is Laredo, Texas, the busiest border crossing between Mexico and the United States, it’s the busiest crossing of all 450 ocean, air, and land ports where freight enters the United States.

What are your energy and water requirements?

Once you’ve worked with a logistics company to establish a short list of locations that would make for efficient freight transportation, you can assess whether those sites will be able to support your power and water needs.

While electrical service in Mexico is consistent where it’s established and is more reliable than in some developing countries, the power grid struggles to keep up with growth in all areas of the country. Similarly, water resources are not centrally managed and some areas are prone to water shortages.

What are your labor needs?

Your labor costs are likely to be higher per unit in Mexico than in China, but Mexico’s new tax incentives provide for a 25% tax deduction on the cost of worker training. Aside from expense, make sure you locate in an area with a sufficient labor pool. Mexico has a strong university system turning out professionals, and the country’s increasing urbanization means that the workers you may need are more than ever concentrated in cities.

Step 3: Develop a cross-border shipping strategy for your outbound freight

A flexible strategy for getting your finished product across the border is essential for minimizing costs, flexing with market conditions, and managing risks. In other words, give yourself the ability to shift between modes of transportation. When pricing is advantageous, freight with longer lead times could go by rail. If you operate just-in-time and there’s a natural disaster, a trucking strike, or other disruption, you could serve some of your customers by air. The important thing is to work with a logistics provider that has extensive carrier relationships on both sides of the border and can execute any option at any time.

Just within trucking, getting across the Mexico border presents some everyday complexities you may not have encountered elsewhere. While direct shipping from Mexico to a destination in the United States is available, it’s not the norm, it’s often more expensive and the availability of carriers who do it is more volatile.

Typically, it takes three trucks to cross the border from Mexico:

• A Mexico carrier brings the trailer to the border
• A Mexico transfer carrier takes it across
• Then the freight is unloaded and reloaded onto a U.S. carrier’s trailer. That transloading process happens at a facility called a cross-dock.

Because you can’t control congestion or backups at the border crossing itself, it’s at the cross-dock where you can get greater throughput. That requires a well-designed facility, and services and expertise specific to these cross-border shipping processes. For example, most cross-border logistics facilities have loading docks on only one side. A facility with dock doors on both sides allows for freight to be unloaded immediately when it arrives and also reduces reloading time because forklifts don’t have to crisscross the building.