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Where to nearshore: Mexico or elsewhere in Latin America?

A factory in Mexico manufactures a series of automotive part and components.

When it comes to running a factory offshore, the question becomes where exactly to set up shop. Do manufacturers take their business to the immediate south by opening a maquiladora in Mexico? Or do they run their production further south in places like Costa Rica, Brazil or Argentina? There can be a lot of attractive elements to using Latin American nations besides Mexico for creating a new source of manufacturing goods. However, the issues and risks which are typical of new nearshoring opportunities make Mexican manufacturing a more reasonable solution for production and supplying materials.

What makes it work
Latin America in general has been picking up steam in recent years. The primary reason concerns the Dominican Republic-Central America Free Trade Agreement, also known as CAFTA-DR. The treaty offered countries such as Costa Rica and Guatemala many of the benefits bestowed upon Mexico when it signed the North American Free Trade Agreement in 1993. As to be expected, it has opened up new markets for American companies to set up shop in places further south than before. It also made it easier to deliver machinery and goods to these countries so as to run a factory, according to the  U.S. Chamber of Commerce.

In addition, there is the matter of China. According to the Boston Consulting Group, the country's competitive edge has declined dramatically. As the country develops and a middle class fills the void, the cost of labor has increased dramatically over the past 10 years. When factoring in the cost of natural gas and electricity, important resources needed to run a business, China's competitiveness to even the U.S. is almost completely lost.

As a result, many businesses are looking at Latin America countries outside of Mexico as a place to do business. Consulting firm Flat World Solutions notes many of the particular benefits that are associated with manufacturing in Mexico can apply to other countries as well. With the exception of Brazil, Latin America speaks various forms of Spanish that are similar enough to be understandable. That means that businesses that are familiar or learn it will have access to most of these countries. There is very little time zone difference, if any, for working in these countries. According to GT Nexus, the production cycle is tightened over offshore countries such as China. All of these factors play a prominent role in the appeal.

An incomplete business
However, the problem with a lot of Latin American countries is that they weren't ready for offshoring operations. This has created a series of drawbacks that Mexico has long addressed. For example, places like El Salvador and Guatemala lack much of the infrastructure required to manage large shipments of goods, such as highways and decent roadways. Gang violence has recently plagued the two countries in a level that has surpassed Mexican drug-related violence. There is also not a lot of government support in some of these countries. In another BCG report, the one nation that matches Mexico in infrastructure in Latin America, Brazil, suffers from productivity losses, low worker investment as well as the use of a language that is quite different from Spanish.

As a consequence, manufacturing is not particularly favorable in Latin America outside of low-cost manufacturing such as textiles. Meanwhile, Mexico has increasingly been used in high-end manufacturing, such automotive and aerospace, according to CNBC. This includes car parts, full-sized automobiles, sheet and plate aluminum and electronics. The country is also the leading exporter of refrigerators. The lower cost of shipping direct to the U.S. over other countries has been helpful as well.

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