Mexico widens its lead as the top Center of Excellence Nearshore Location in the Americas

It might surprise newcomers in the region, but regulars know that Mexico has been the top destination for running nearshore operations such as CoE, business units and more, for North America since the 2000s. Seven years ago, Gartner confirmed the country’s leadership due to its large talent pool and hard-to-ignore location, in their Evaluating Global Offshore/Nearshore Locations report. So, why does it continue to be in the news? And how has Mexico increased its lead over other options in the Americas?

The use of nearshore was already accelerating in the Enterprise SW ecosystem but got a big boost when hybrid work appeared and went overdrive with the nearshoring phenomenon, which concentrated in Mexico, of all places. On top of it, the cost and risk of opening foreign operations went down with new soft-landing options. So, who is taking advantage, and what are they building?

Nearshore Accelerates

Nearshore is the business strategy where companies locate delivery capabilities in nearby countries, over offshore locations. Proximity is needed for highly interactive application development projects and business-critical applications versus routine application management done in offshore centers. Competency centers, with methodologies that require same-time-zone collaboration and real-time information exchange, are deployed in the region that needs them.

Nearshore adoption increased when Enterprise Software moved to the Saas model, which enabled a mostly remote implementation. System Integrators started using cost-efficient nearshore teams that could go back and forth when needed. Silicon Valley Startups that wanted to extend their runway, hired product teams in Mexico, which worked well with their real-time Agile Methodologies.

During the pandemic, non-IT companies experimented with remote work and global hiring. However, they eventually shifted to hybrid work models, focusing on hiring closer to their headquarters in regional locations where employees could meet regularly, recognizing the value of face-to-face collaboration.

Nearshoring boom

Is nearshore and nearshoring the same thing? Not quite.

Reshoring or Nearshoring, is the business practice where a company transfers back some of its operations or services to a nearby country. This trend exploded in the past years because of the need to de-risk supply chain disruptions derived from COVID-19 and the United States’ trade tensions with China.

Mexico, being the neighbor of the largest economy and with a trade agreement and infrastructure in place, rapidly benefited. It became the USA’s top trading partner and in 2023, for the first time in Decades, the U.S. bought More From Mexico Than China, showing how much global trade patterns shifted. Mexico, already one of the two heavyweights in the continent, along with Brazil, began to increase its lead as The Nearshore option. According to Fitch Ratings in 2023, Mexico could seize half of the total foreign investment inflows in Latin America continent in the coming years.

As global companies updated their supply chains and brought more of their production closer to the U.S., Private Capital firms are now looking to Capitalize on the Nearshoring trend, accelerating its impact in Mexico. But it’s not just the Manufacturing industry, that has the spotlight of this trend, but the Tech industry has been active as well. On February 2024, Amazon Web Services (AWS), announced it will invest over $5 billion in Mexico, to meet the high demand for cloud services in the region. Two months later, Microsoft announced its first hyper-scale cloud data center in Mexico, becoming the first Microsoft data center region in Spanish-speaking Latin America. Google in the same month, announced moving positions to India and Mexico. Offshore and Nearshore.

For Tech companies, Mexico possesses the two main attributes they evaluate: Talent and Cost. Its population of 130 million dwarfs other countries like Panama, Costa Rica, and Uruguay with less than 5 million people. With a cost of living lower than countries like Chile and Costa Rica, and lower operational expenses than Brazil, it offers the ideal combination.

Who’s opening CoE and Shared Service Centers in Mexico?

Everyone. The usual suspects, Large Indian and Global IT Companies have been in Mexico for the past 20 years, but the growth of foreign Small-to-Midsize companies moving to Mexico has accelerated considerably, due to soft-landing options. Everest Group, mentioned that if a company wanted to operate a foreign CoE 15-20 years ago “it required 1,000 – 2,000 people. The economics are now down at 30 – 40 people”.

Countries with strategic geographical locations have an advantage, and they have built an ecosystem designed to facilitate foreign companies moving into the region. Mexico has had the shelter model for 30 years, which enables foreign manufacturers to operate under an existing Mexican corporation, providing a “shelter” from local risks and lowering operating costs by using economies of scale. The IT Industry adopted this model to start small or large operations quickly, as a pay-per-use model, known as the Subsidiary-as-a-Service framework.

Announcements of global tech companies opening Mexico operations are common, like Koch Global Services opening a subsidiary in Guadalajara, or the new AI Engineering Center from Ascendion in Monterrey, hiring 1,500 positions. But the opening of smaller operations by foreign SME’s has gone unnoticed, except to analyst firms like ISG, which calls them Micro Capability Centers that are well suited for innovation, as it’s a scalable and cost-efficient way to test digital Initiatives. Companies of all sizes are benefiting from this trend, and it does not appear to be slowing down, as Mexico’s airports keep growing double digits. Just last year, Monterrey’s Airport increased substantially its international destinations and had a 22% annual growth of passengers.

In Conclusion

Nearshore shows no signs of slowing down, and for small and large tech companies, it is becoming an integral part of maintaining competitiveness. Mexico will continue to increase its lead as the prime nearshore option, shifting the question for companies from “where” to “how.” A complex setup and steep learning curve can negate the anticipated cost-efficiency of a new center. In LATAM countries, compliance, operating structures, and labor laws differ from those at home and frequently change. CoE’s, Capability Centers, and Regional Sales offices are being set up constantly, so expect to find local vendors with this experience.

Keep in mind that the nearshoring trend has boosted foreign investment in the country, but also attracted new foreign vendors eager to join the trend. Amid all the media noise, we should keep remembering that it is not new. Manufacturing companies have leveraged soft-landing options for almost 40 years. This industry prefers vendors with local experience in multiple areas, as landing in a new country involves not just recruitment, but international laws, taxes, facilities, government offices & university relationships, and much more. Economies of scale are achieved through volume and infrastructure built over time. This way, they add certainty to the many moving parts of international expansion, as they have tight timeframes to meet as they are part of a long productive chain. Tech companies can learn from this industry as well.

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Mexico widens its lead as the top Center of Excellence Nearshore Location in the Americas

It might surprise newcomers in the region, but regulars know that Mexico has been the top destination for running nearshore operations for North America since the 2000s. Seven years ago, Gartner confirmed the country’s leadership due to its large talent pool and hard-to-ignore location, in their Evaluating Global Offshore/Nearshore Locations report. So, why does it continue to be in the news? And how has Mexico increased its lead over other options in the Americas?

Read more »
cover image for blog on how to Learn how to open a business in Mexico, including key steps for business incorporation. Expert guidance for entering the Latin American market.

How to open a business in Mexico: Incorporating Your Tech Company

So, your tech company is evaluating opening an office in Mexico to hire nearshore talent or to enter the Latin America Market? But before you dive in, the question of how to open a business in Mexico arises, as well as what else should you be considering regarding business incorporation.

Yes, it has more steps and nuances than one would expect, but the following steps are usually what it takes to do it. Remember, this is just a starting point, and consulting with legal and financial professionals specific to your situation is highly recommended.

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