Latin America

Due to the ongoing risks associated with offshoring, many North American companies have begun to nearshore to countries such as Mexico, Brazil, Chile, Colombia and Costa Rica.

According to the Sourcing Journal, the average cost of labor in Mexico is less than the average cost of labor in China. Not only is hiring in Latin America cost-effective, as wages are significantly lower than that of other countries, but North America has the added benefit of geographical proximity and being able to operate in similar time zones, making nearshoring an attractive alternative.

Mexico

Mexico, Latin America’s second largest economy, has stayed resilient despite central bankers earlier this year predicting sluggish growth. Most of the growth in the Mexican economy is due to strong domestic demand, as consumer confidence has stayed at historic highs. Mexico has continued to see high consumer confidence most likely due to a robust job market fueled by foreign investments from North American nearshoring efforts. As US-China tensions continue, diversifying supply chain efforts has made Mexico an appealing alternative. Foreign direct investment (FDI) is already up more than 40% in 2023, with Mexico having one of the best-performing stock markets.

As Mexico has benefited from FDI, the country continues to profit from the boost in manufacturing sales, which has contributed to over 80% of all exports in 2023. Manufacturing in Mexico represents a large portion of the country’s economy and is a driving force in the country’s growth. Not only are more US companies expanding supply chain efforts into Mexico, but other foreign companies have invested in offshoring efforts to find ways to be closer to the US economy. Total Mexican exports rose by 5.8% from May 2022 to May 2023, with the second-highest reading on record.

The aerospace manufacturing industry in Mexico is the sixth largest in the world, and its automotive manufacturing industry is a substantial contributing factor to the Mexican economy. Due to large foreign investments, and favorable free trade agreements, manufacturing semiconductors is expected to have a large boom in Mexico in coming years.

Mexico has also gained popularity in accessing high-quality IT talent. Despite Latin America often being a latecomer to technologies, this region is being recognized as an emerging technological hub on a worldwide scale due to increased investment in technology and education. Mexico and Colombia are among the top 10 countries with the most STEM graduates as a share of all higher-educated graduates; Chile, Brazil, Uruguay and Argentina sit within the top 20 countries.

Brazil

Brazil, like Mexico, has been benefiting from a robust job market. Post-pandemic, Brazil has seen its labor market heat up as more people re-enter the workforce and participation rates reach near pre-pandemic levels. With access to more talent within the Latin American labor market, Brazil has also become a good candidate for nearshoring efforts, specifically within the IT space. As Latin America grows as an emerging technological hub, Brazil has a rapidly growing pool of skilled tech-savvy professionals. Brazil is home to about 12,000 active start-ups contributing to its software market growth. Additionally, nearshoring efforts in Brazil are attractive to many US companies, not only because of geographical convenience but also due to its cultural proximity to the region.

Argentina

Argentina possesses the world’s fourth-largest shale oil and second-largest shale gas reserves, making Latin America a potential candidate in sourcing for talent within the oil and gas space. As the Russia-Ukraine war continues, causing international energy prices to skyrocket, many countries are looking to source oil and gas outside of Russia. This creates significant potential for the oil and gas industry within Argentina. The country’s biggest obstacle, however, in their push to increase production and exports is their lack of infrastructure. Despite this, the government of Argentina’s “PlanGasAr” aims to increase its local natural gas production by building a framework that ensures access to foreign exchange and government support for increased production. As Argentina’s economy evolves and policies continue to be put in place in support of production and exports, employers can look for potential opportunities to diversify their supply chain in the oil and gas industry.

Sourced from Bloomberg

Summary

As companies continue to diversify their supply chain efforts, we will most likely continue to see growth in nearshoring and offshoring efforts in Latin America, particularly within IT and manufacturing spaces. Mexico will specifically see increased investment via the US through the CHIPS and Science Act, as they take charge in designing, packaging and testing chips. Costa Rica may also see increased investment in the coming years as the Ministry of Foreign Trade and Costa Rican Foreign Trade Promoter presented a new strategy for attracting FDI, aiming to generate 100,000 jobs within the country. As employers navigate continued sourcing and labor challenges, strategic sourcing strategies within Latin America will become increasingly more beneficial due to the region’s growing economies and increased global competition.