Nearshoring Latin America

By Henry Martell and Chris Hernandez

One unforeseen impact of COVID-19 is the disruption to the worlds’ supply chain and the dependence on the off-shoring of manufacturing and services from China. This dependence exposes many of the shortcomings of global supply chains that spread across the globe and brings to light the advantages of shorter, regionalized supply chains. In the case of the U.S., Latin America serves as a much better alternative to Asia because it has similar time zones, geographical proximity, and greater cultural and language affinity than other suppliers. The U.S. recognizes these advantages, and provides an economic incentive to promote the “nearshoring” of offshore production facilities from China to the Latin America. These potential economic shifts present extraordinary opportunities for many Latin American industries.

Based on recent surveys, the supply chain leaders predict that one-third of sourcing and manufacturing has or will leave China within the next three years. Latin America has the potential to absorb considerable demand and become a nearshoring destination. According to Mauricio Claver-Carone, President of the Inter-American Development Bank, “If Latin America captured 15% of the U.S. imports from the top 10 source destinations outside the Western Hemisphere, the region could increase its exports of goods by $72 billion. This result could be achieved by replacing China with Latin America as the origin of exports of products that the countries in the region send to the US. Claver also said, “It is clear that if the region wants to take advantage of this relocation of chains, it must make adjustments to reduce the cost of transportation. The potential to provide lower transportation costs over China is achievable given its proximity to the U.S.” Data from the bank also indicates that reducing international freight shipping costs in the region by 10% would boost the value of exports by an average of 30%.

Aside from political instability and governmental policies that inhibit foreign investment, the inefficient infrastructure of logistics and transportation appears to be the region’s largest impediment. These inefficiencies have taken a toll on the region for years. For example, it costs more to transport agricultural products from Rosario Argentina to the Port of Buenos Aires (303km distance) than what it costs to transport the same products from the Port of Buenos Aires to Asia. Countries that have more advanced technological and logistic infrastructures and close ties to the United States are better poised to attract nearshoring. Infrastructure reform is necessary for the region to maximize its potential, and experts believe it is achievable. Which industries and countries are best poised to benefit?

Costa Rica is well poised to benefit. The country has a highly educated workforce that is backed by a stable economy. Politically, the nation is well positioned with favorable trade policies. Costa Rica benefits from its 57 trade agreements, including a Free Trade agreement with China. Companies needing electronics, medical devices and high-tech services will enjoy the advantages of trading with Costa Rican businesses. Medical and technical equipment represent the largest exports for the nation accounting for $2.6 billion in annual revenue last year. The electrical components industry exported $436 million in 2020 generating demand for more companies to establish their production and assembly operations in Costa Rica.

Mexico is often the first choice for automotive production and assembly. Mexico exported a record $3.4 billion of Mexican-made cars and light trucks. Corporations such as Nissan, GM, Ford and Chrysler all have a presence there. It s the primary exporter of automobiles to the United States and the 4th overall in the world. Mexico is well poised to further improve its economic efficiencies of production by the nearshoring of its automotive suppliers to Mexico and other neighboring countries making the region even more appealing to the auto manufacturing industry.

China has been a dominant player in the textile industry for years because of the low cost of labor. However, the political climate has imposed new costly tariffs and large minimum order requirements. Automation of textile manufacturing has reduced the dependence of labor. This scenario along with the supply chain disruption, has opened the doors to opportunity in Guatemala’s third largest industry: textiles. The industry represents over $2 billion in export textiles manufactured in the country. China’s textile market represents $137 billion in exports. If Guatemala were to capture 2% of China’s production, it would double the nations textile industry production.

On the topic of technology, the world leader in software development is China, followed by Ukraine, Poland, and the Philippines. Education and technological infrastructure are crucial elements to become contesting players in this industry. Brazil has the infrastructure and human capital and is therefore well-positioned for nearshoring of software development and IT services. Brazil has a growing population of young, educated people specializing in technology, software engineering, IT management, and other relevant areas. The culture is extremely westernized eliminating typical misunderstandings that come from the cultural differences that arise from outsourcing to overseas companies.

According to published statistics, in less than 15 years, the Brazilian talent pool created over 510,000 IT professionals. Most of the youth gravitate towards careers in IT. Many universities and outsourcing companies in Brazil make it a point to make sure their employees and pupils are up-to-date on all the latest equipment, processes, and concepts in their region. Brazil is possibly the most valuable market for US-based clients and companies for multiple strategies of software development. It’s estimated that about 13,000 students graduate annually from highly commended Brazilian universities-all new, all educated, and all prepared to demonstrate their ability, engineering skills, and art.

There are several other industries and countries that can benefit from nearshoring opportunities. For the region to truly benefit from this unique moment, investment in education and infrastructure must increase and be coordinated. Greater regional cooperation is a key component to lowering costs and creating synergies that attract not just companies, but industries. None of this is attainable without the private sectors intervention. National deficits have increased due to the pandemic; therefore, the public and private sectors must partner with investing in the infrastructure and human capital necessary to benefit from this opportunity. Furthermore, economic policy that facilitates trade must take precedence in government political agendas. Nearshoring is a unique opportunity for Latin America, but the region must initiate change while the window of opportunity remains open.