Many US businesses have taken steps to reduce supply chain risks.
Some firms are bringing manufacturing jobs back to the US, but finding workers has been a challenge.
Mexico's growing manufacturing base has made it an attractive alternative for US businesses.
The push by US businesses to make more stuff in America has an ongoing challenge: It's hard to find workers.
That's due in part to the country's low unemployment rate, which could make it difficult for companies to bring manufacturing jobs back to the US, says Christian Ulbrich, CEO of the real estate services company JLL.
"There aren't any people to do the work," Ulbrich told Business Insider editor in chief Matt Turner at the recent World Economic Forum.
Ulbrich says this stands in sharp contrast to Mexico, whose growing manufacturing base could entice companies to make supply chain investments there, rather than in the US.
Some corporations, like General Motors and Intel, have — to the delight of the Biden administration — already announced plans to shift more of their supply chains and manufacturing back to US shores, often called "on-shoring" or "re-shoring." The US government is also investing billions of dollars to boost the domestic production of electric vehicles, semiconductor chips, and batteries.
But labor force shortages have already proven to be an obstacle to the "Made in America" movement. Even as the pandemic-era labor shortage has eased, the demand for construction and factory workers has continued to exceed supply.
Some companies are turning to Mexico amid US labor force challenges
Since 2020, the COVID-19 pandemic, Russia's invasion of Ukraine, the world's changing climate, and, more recently, the attacks by Houthi rebels in the Red Sea have thrown a wrench in global supply chains. These factors, along with mounting fears of a possible Chinese invasion of Taiwan, have persuaded some US businesses to bring the production of their goods closer to home.
Companies like Ford and Tesla have "near-shored" or "friend-shored" part of their supply chains, relying more on countries like Mexico that are close physically and politically — and still often cheaper than the US. Mexico received $29 billion in foreign direct investment during the first half of last year, Reuters reported, up 5% compared to 2022. Over half of this investment was in the industrial sector.
If countries like Mexico can de-risk supply chains and offer an adequate labor supply for some businesses, then perhaps a surge in "near-shoring" is a good thing for the US economy. Lower labor costs could mean cheaper goods for US consumers, and if most Americans are employed — or don't have the requisite skill sets for manufacturing roles — maybe losing out on some jobs isn't such a bad thing.
On the other hand, Susan Golicic, a supply chain professor at Colorado State University, said that the types of manufacturing jobs created by on-shoring have typically paid more than many service industry jobs — and thus should be attractive to many Americans, whether they already have jobs or not.
Mexico is also supplanting other US trade partners
Due in part to this near-shoring shift, Mexico eclipsed Canada and China last year to become America's top trade partner, accounting for over 15% of goods exported and imported by the US. Last May, Mexico's global exports were the second highest on record.
"Many companies are looking at Mexico for production in lieu of Asian countries to be closer for any major supply chain disruptions that often occur in Asia," said Golicic, adding, "Mexico is close, and labor is still a lot lower than the US."
The labor costs of manufacturing in Mexico are also less expensive than in China, where manufacturing wages have risen in recent years, Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, told BI. Mexico's median age is roughly 30, he added — compared to nearly 40 in China — which has contributed to a strong labor supply.
"Companies moving to Mexico will have greater visibility, control and influence on HR, and also on the quality of their goods, and will enjoy shorter delivery times," he said.
But manufacturing in Mexico also isn't without its challenges. Limited infrastructure, inconsistent energy and water supply, and the threat of gang violence could each face more scrutiny if investment in the country continues. Compared to Mexico, manufacturing in the US would likely offer businesses reduced supply chain disruptions and lower transportation costs.
"There are many drawbacks of near-shoring to Mexico, including complicated labor laws, crime and violence, ease of doing business, and regulatory and legal obstacles," Abadia said.
Why the US and Mexico are best as complements to one another
In reality, many businesses will make supply chain investments in both the US and Mexico, Luis Torres, a senior business economist at the Federal Reserve Bank of Dallas, told BI. He recalled a recent visit to an automaker's manufacturing plant in San Antonio, where he learned the site was sourcing some parts from Mexico and others from Tennessee and Alabama. Likewise, he said many Mexican factories use parts that are manufactured in the US.
"Mexican manufacturing is a complement of US manufacturing," he said. "It's not that they're competing."
But if the US wants to move the needle toward domestic manufacturing in the years ahead, there are a few steps it could take to boost its labor supply. Colorado State's Golicic said businesses can provide competitive pay and benefits to attract workers — and may also need to resort to more contract or subcontract employees.
Where a lack of skilled workers is the problem, investments in training programs could help fill some of the gaps. And where there simply aren't enough workers available, increasing immigration levels could be part of the solution.
While governments can encourage on-shoring, it will be up to business leaders to decide to what degree "Made in America" investments are worth it.
"Ultimately, corporations have to determine in their cost-benefit equation if this makes sense," Golicic said.
Read the original article on Business Insider