Can the Latin America and Caribbean Region Use Nearshoring to Become a Supply Chain Hub?
As companies look to restructure their global supply chains in response to the Covid-19 pandemic and other disruptive forces, the Latin America and Caribbean (LAC) region has an opportunity to become the next manufacturing and logistics hub.
by Chris Mejía Argueta and Ken Cottrill
As companies look to restructure their global supply chains in response to the Covid-19 pandemic and other disruptive forces, the Latin America and Caribbean (LAC) region has an opportunity to become the next manufacturing and logistics hub.
The region could capitalize on the nearshoring trend given its nearness to US markets. Other advantages it offers include LAC’s rich natural resources and one of the fastest-growing economies in the world. However, the region must address some shortcomings too, notably its poor infrastructure, growing fragmentation, and inadequate talent development.
To what extent do LAC’s hub-related pros outweigh the cons, and can the cons be fixed in time to capture the opportunity to attain hub status?
A promising global picture for nearshoring
In a report published August 2020 by the Economist Intelligence Unit (EIU), the EIU said the LAC region “has the potential to gain considerably from nearshoring in the coming decade, given some comparative advantages, including its long list of free trade agreements, proximity to the US market and increasingly competitive wages.”
Using its business environment rankings to evaluate the potential of countries in the region, the EIU singled out Mexico, Costa Rica, Chile, and Colombia as well-positioned to compete with Asia in supply chains.
The EIU evaluated various countries’ readiness to compete globally out of a score of 10 based on six business environment rankings. Chile came in second, just behind Taiwan, with high scores on Political Effectiveness, Foreign Direct Investment Policy, and Foreign Exchange & Exchange Controls. Costa Rica, Mexico, and Colombia came in fourth, fifth, and sixth, respectively (behind Malaysia).
While this evaluation provides an overview of LAC’s national competitiveness on the world stage, the picture is much more nuanced within the region.
Leveraging national specialties across LAC
Some LAC countries have a strong presence in certain markets for products and services they can build on.
Mexico, for example, is perhaps the most regionally integrated LAC country from a supply chain perspective, largely thanks to the North American Free Trade Agreement and its successor, the United States–Mexico–Canada Agreement (USMCA), which came into force on July 1, 2020. As the EIU report notes, USMCA adds impetus to nearshoring by raising regional content requirements to 75% in some sectors. Mexico is particularly strong in heavy manufacturing industries, notably, automotive.
An inhibitor to integrating Mexico into North American supply chains is a lack of efficient transportation links, but there is some good news on this front too. In March of this year, the railroads Canadian Pacific and Kansas City Southern announced they had entered into a merger agreement. The plan is to create the first rail network connecting the US, Mexico, and Canada. It is expected that the new network will significantly expand the market reach of their respective shipper customers in the region.
Another leading country in the region, Colombia, has carved out healthy export markets for raw materials and coffee. The country can also build on its growing services sector. Its second-largest city, Medellín, is leading the way with a “smart city” program that includes big investments in driverless vehicles. Paperless microfinancing for small businesses is another area of focus, and there are many other interesting spinoffs and startups for social and business inclusion. A consortium of enterprises including the national bank Bancolombia is supporting the program.
LAC’s biggest economy, Brazil, is strong in various raw materials markets and supplying parts for the aero industry, although the country is hard-hit by the pandemic. Also, its size and distance from US markets increase exporters’ reliance on air and maritime transportation.
Examples like these suggest that LAC countries have an opportunity to use the post-pandemic recovery to build on their strengths and pursue integration with global supply chains. A report published by the World Bank in April 2021 titled Unleashing Central America’s Growth Potential generally supports this view. “Covid-19 has accelerated the ongoing regionalization of global value chains,” says the report, one of the trends that augurs well for the recovery of small open economies.
However, to realize this potential, LAC countries much overcome some difficult challenges.
Speed bumps on the road to regionalization in Latin America
The World Bank report referenced above concludes that key to achieving post-pandemic growth for Central American countries is increased productivity. “However, in the past decades the region has been unable to experience sustained productivity growth, which indicates the necessity to introduce reforms consistently over time to generate a significant structural change,” the report says. Although Costa Rica and Panama are well placed compared to other regional countries to compete in international trade, “all countries compare unfavorably with their relevant peers,” The report says factors like education, infrastructure, the efficiency of markets, and the quality of institutions are especially important.
Similar arguments apply to the broader LAC region. Here are some examples:
- Political wild cards: The region’s varied political profiles include regimes with nationalist and protectionist tendencies that can be hostile to globalization and regionalization.
- Lack of relevant skills: This is a worldwide problem but especially severe within the LAC region and compounded in countries such as Mexico by the migration of managerial talent to other countries, especially the US, Canada, and Europe.
- Poor infrastructure: While infrastructure quality is generally subpar, it varies from country to country. For example, Mexican railroads are in much better shape than rail networks in Brazil, while Colombia’s road system is extremely poor.
- Unstable tax base: Small, mom-and-pop businesses in the region are notorious for evading taxes. For example, in Mexico as much as 57% of small, family-owned businesses exist off the taxation radar. Called “informal” businesses, including mom-and-pop stores (i.e., nanostores), these enterprises distrust government — they are particularly concerned about privacy issues — and the lack of trust is exacerbated by aggressive government actions.
- Equipment and technological obsolescence: This is endemic in the LAC region and reflects insufficient investment in capital equipment and technology. As a result, member countries are hugely dependent on other nations to develop technology or perform advanced processes for them.
Remedies are within reach from Argentina to Acapulco
While the above ills are formidable, they are not incurable.
The World Bank report on prospects for companies recommends policy changes to lower the cost of transborder trade and promote foreign direct investment. The report also points to complementary action in key areas such as human capital and infrastructure.
The push to improve LAC’s international competitiveness is helped by the fact that member companies possess a capability that enables them to navigate volatile markets: tenacity. The global disruptions caused by the Covid-19 pandemic underscore the value of this capability, explains Prof. Yossi Sheffi, Director of MIT CTL, in his new book, The New (Ab)Normal: Reshaping Business and Supply Chain Strategy Beyond Covid-19 (MIT CTL Media, 2020). The book is now available in Spanish.
In countries where unstable competitive environments and hurdles such as corruption and underdeveloped business credit services are the norm — Sheffi points to examples such as Argentina — entrepreneurs still start and build businesses. In addition to being inured to instability, they are always preparing for crises of all kinds, Sheffi says.
The power of education is critical to developing the LAC region
Another critical factor is education and research, and there is progress in this area. Educational programs supported by The MIT Center for Transportation & Logistics and the MIT SCALE Network in Latin America and the Caribbean are prime examples of how innovative educational models can make a difference.
The Graduate Certificate in Logistics and Supply Chain Management (GCLOG) program is an elite academic program geared to exceptional graduate professionals from the LAC region. The program brings logistics and supply chain management knowledge and best practices from around the world to the region. The GCLOG program has graduated 350 students from over 15 countries in 11 classes. These graduates are now serving as change agents for the region in public and private sectors, academia, and other organizations.
Also, the Center for Latin-American Logistics Innovation (CLI), part of the MIT Global SCALE Network, offers the Undergraduate Certificate in Logistics and Supply Chain Management, a challenge-based education program that immerses students in practical experience to solve real problems from industry. CLI also offers a series of online courses in Spanish and recently in Portuguese through its portal LOGYCAx at EdX.
Applied research is needed in a region where knowledge and technology face continuous challenges. The MIT SCALE network for Latin America and the Caribbean comprises over 40 high-ranked universities and CLI. Together, they are developing cutting-edge applied research in nine regional initiatives in the region with the support of MIT CTL and CLI. Academics work hand in hand with various organizations including governments, the private sector, and NGOs to solve the biggest regional challenges in areas such as urban logistics, supply chain management for food and agri-business, data-driven and emerging technologies, and supply chains for small, family-owned retailers (i.e., nanostores), micro and small firms.
In Latin America, if there’s a will, there’s a way
There is a promising road ahead if the aforementioned challenges are properly addressed in the coming years by academia, government, and the private sector. The LAC region has the means to leverage increased interest in nearshoring and accelerate the region’s integration into global supply chains. It remains to be seen whether its member countries have the will to capture this opportunity.
