John Steinbeck’s 1939 novel The Grapes of Wrath portrays the struggles of tenant farmers from Oklahoma during the Great Depression. These people, driven from their land by drought, embark on a journey to California in search of a better life. Much like the migration documented by Steinbeck, another narrative is unfolding in the currents of globalisation and economic realignment. In this evolving landscape, Mexico and Central America are poised to leverage advantages once deemed unfavourable compared to many parts of Asia.
There are many factors at play. What professionals call the “extended supply chain” found its roots in advancements in information technology, material handling capabilities and a managerial ethos that believes “lean” manufacturing can unlock unparalleled competitiveness.
For more than four decades, North American companies embraced these principles, having ventured to distant shores – especially Asia – for cost savings, market expansion and improved brand reputation, reaping substantial profits. Beneath these foundational conditions lie additional factors that also play a role: sustained growth at home, lower costs abroad, a stable international trading system and a degree of cooperation among state rivals.
While the internet and containerisation have solidified their place in commerce, recent challenges have highlighted the fragility of supply chains, especially those stretched across oceans. The disruptive impact of the Covid-19 pandemic, inconsistent government response, port congestion, shipping delays and increasing costs have heightened interest in their vulnerability.
The disruptions thus far have been more of a nuisance. The problem is that it’s hard to put it out of mind once one is alerted to the danger. Every news story further solidifies this concern and the rationale for action becomes more compelling. Entrepreneurs swoop in to take advantage of the situation.
Recently, for example, labour disputes involving longshoremen on the West Coast of the United States and Canada posed a serious threat to trans-Pacific shipping routes. Meanwhile, the Panama Canal is wrestling with an unprecedented backlog because of the drought-induced scarcity of fresh water needed for its locks. In addition, Russia’s ongoing war in Ukraine has raised pertinent questions about the competence of global powers to effectively manage turmoil, if not altogether preventing it.
In the face of these challenges, some have taken action under what is erroneously called repatriation. The catalyst for this comes from an unlikely place. In 2017, difficulty in securing H-1B work visas for overseas tech workers in US-based companies led some to hastily relocate those personnel to Canada, where work documentation is easier to obtain.
The main advantage was being within the same time zone and close to US-based teams. There was also the allure of lower wages in Canada. This caught the attention of manufacturers who sought out destinations south of the Rio Grande. The notion of “nearshoring” is not new, but what is different now is the momentum.
In the near term, Mexico can expect sectors where there is already a substantial footprint – such as computer assembly and motor vehicle parts – to bolster that presence. Headsets manufacturer Plantronics has already relocated to Mexico from China, as have outdoor furniture and grill purveyors Meco Corporation and medical supplies company DJO Global.
This phenomenon transcends US enterprises, as well. Take for example Preslow, a garment manufacturer based in Mexico City with a key client in Walmart. It shifted its manufacturing operations back to Mexico last year. Chinese furniture giant Man Wah, recognising the volatility of global trade conflicts, has also established a presence in Mexico to safeguard its vital US market share.
It’s a good fit. Mexico and Central America offer cost competitiveness, linguistic familiarity and reliable land transport networks. Furthermore, the risk of geopolitical tensions leading to supply disruptions is notably absent. Mexico is also a party to the US-Mexico-Canada Agreement, the successor to the North America Free Trade Agreement. Amid these transformative currents, it emerges as the most likely beneficiary.
Even so, this migration is not without its challenges. Mexico and Central America struggle with stability. The flood of asylum seekers across the southern US border is an irksome multilateral topic. The extreme, highly publicised violence associated with the illicit drug trade causes trepidation. Mexico also lacks the industrial base to accommodate most transitions seamlessly. It often needs to be built, a risky and costly endeavour.
For these reasons, few are predicting a seismic shift. However, it would be a mistake to underestimate the impact of incrementalism. Markets are made at the margins, and even a tiny withdrawal can disrupt market conditions. Even if this never comes to fruition, there are still more concerns.
North American businesses have cultivated collaborative relationships with overseas suppliers for decades, rooted in long-term commitments and mutual prosperity. This is classic late 20th-century supply chain orthodoxy. Today’s challenge lies in navigating this impending migration without sowing discord, yet one thing holds: vehemently denying the potential for change often signals that shifts are already under way.
Much like the characters of Steinbeck’s tale, regions and industries must adapt to secure a better future. As tenant farmers embarked on their arduous quest for prosperity, today’s business world is navigating uncharted waters, driven by the currents of opportunity and challenge. The spirit of endurance and the pursuit of a brighter horizon remain as relevant as ever, urging us to glean wisdom from the past while embracing the promise of a new era.
Source: SCMP