Mexico: The future of Nearshoring

Businesses have been tapping into Mexico's top-notch talent and product development services through outsourcing and staff augmentation.

Businesses have been tapping into Mexico's top-notch talent and product development services through outsourcing and staff augmentation. Mexico has the perfect mix of software development expertise, a friendly business environment, and geographic proximity to the United States. It's no wonder why it’s quickly becoming a go-to destination for top talent sourcing.

Mexico is a hot destination for US firms, with the country's Economy Minister, Raquel Buenrostro, revealing that around 400 companies are already eyeing the country for nearshoring opportunities. Thanks to the U.S.-Mexico-Canada Agreement (USCMA) and the close distance to the United States, it's no surprise that businesses are flocking to Mexico.

Foreign direct investment (FDI) in Mexico soared by a staggering 12 percent in 2022 to reach US $35.3 billion. Interestingly, nearly $15 billion of that sum came from the United States, highlighting the country's appeal to American businesses. The manufacturing and transportation sectors, in particular, saw the highest concentration of FDI, with an increase in hiring by foreign companies and new manufacturing investments expected in the coming years.

As a matter of fact, a recent Deloitte study showed a growing interest in relocating manufacturing closer to the end consumer to mitigate supply chain disruptions and inflationary effects on the cost of goods. Along with the large commitment to manufacturing, other industries are benefiting from nearshoring. In 2022, American companies reshored around 350,000 jobs, a significant leap from the previous year's 260,000. Mexico is proving to be a fertile ground for all sorts of industries looking to tap into its remarkable talent pool.

The software development and technology landscape

Even in the face of daunting economic challenges like inflation and recession, companies are forging ahead with their tech spending plans. They're doubling down on investment in next-generation technologies, hoping that these innovations will serve as a launchpad to catapult them to the next level of process optimization or even usher in an entirely new era of business altogether.

According to Gartner's latest forecasts, tech spending is slated to rise by 5.1% in 2023 compared to the previous year. And, interestingly enough, when it comes to tech spending priorities, it's security that tops the list of concerns for CTOs and other C-level executives. As for where the bulk of tech budgets are headed, cloud technologies are poised to take center stage in 2023, with analytics and AI/ML continuing to be a key focus for companies looking to stay ahead of the curve.

Outsourcing changes in Mexican Law

In April 2021, Mexican President López Obrador amended the Federal Labor Law to clamp down on tax avoidance by international companies. This move is expected to benefit Mexico's economy by discouraging corporations from outsourcing "core business activities" to avoid paying taxes and other mandatory benefits.

However, the lack of clarity surrounding the definitions of "core" and "non-core" activities is causing confusion among businesses that outsource highly skilled specialists. With the new reform, both the beneficiary and the subcontracting or outsourcing company are now obligated to fulfill employee profit-sharing, year-end bonuses, registration verification, quarterly reporting, and payroll obligations. The companies that fulfill these obligations can access tax deductions under the amended Income Tax and VAT Laws.

Organizations seeking to outsource their "non-core" activities can continue as usual, but those outsourcing activities related to their corporate purpose may want to consider offshoring or nearshoring to Mexico to keep their business on the right side of the law.

This means that organizations can subcontract specialized services that they require, such as legal, IT, and professional services, but only if these services are not part of the organization's corporate purpose. An agency that handles the IT talent in Mexico becomes an integral part of the equation to comply with this regulation. With the new law in place, businesses must tread carefully to ensure compliance with the regulations while making the most of outsourcing opportunities in Mexico.

Mexico as an exemplary workforce

The race to the top in the global workforce market is fiercely competitive, but the Total Workforce Index (TWI) by ManpowerGroup has given countries a unique way to measure their standing. The TWI evaluates more than 200 factors across four categories, including availability, cost efficiency, regulation, and productivity. It takes into account factors like remote workforce readiness, technology infrastructure, gender participation, and skill development. And Mexico is making waves in the rankings, leaping an incredible 44 spots from 53rd to ninth place in just one year.

Mexico's success is due in part to its impressive performance in the cost efficiency category, where it earned a score of 0.77 out of 1, as well as its strong showing in regulation and productivity. Despite scoring lower in workforce availability, ManpowerGroup notes that Mexico's standing in that category has improved significantly, thanks to laws that prohibit the outsourcing of contingent workers and most types of subcontractors, resulting in more access to full-time permanent labor

As American companies look to nearshore locations, Mexico's unique combination of a large, young, and skilled permanent workforce and lower costs has proven to be a powerful draw. While the law prohibiting the outsourcing of labor in Mexico may have discouraged some foreign investment, companies looking for stability and a steady workforce can find what they need.

But Mexico's workforce stability isn't the only thing that sets it apart. In a recent study on employee turnover, Mexico emerged as an exception to the rule. While countries like the The United States and China are projected to lose billions of dollars due to high employee turnover, Mexico's projected losses are a fraction of that amount. That's because the Mexican job market is less competitive, meaning employees are more likely to stay put, providing a stable foundation for businesses looking to set up shop in the country.

The product development industry in Mexico

Entrepreneur reports that Mexico is quickly becoming a hotbed for technology development, as the country is committed to cultivating IT talent that can work in a remote environment while efficiently delivering its clients’ goals. Almost 72% of Mexicans now have internet access and are actively contributing to the growing technological landscape.

Here are some fascinating facts about Mexico that highlight its diverse culture and robust workforce: Firstly, the currency used in Mexico is the Mexican Peso (MXN), and the official language is Spanish. The country is situated in the GMT-6 time zone and has a population of over 127 million people. In terms of STEM graduates, Mexico boasts a whopping 800,000 working in the field. The average developer's salary in the country is USD $30,000 per year, and the maximum number of working hours is 48. Additionally, Mexico has eight national holidays per year, providing ample opportunity for workers to recharge and enjoy time with their loved ones.

Scaling the smart way

In today’s fiercely competitive world, companies are always on the lookout for ways to cut costs without sacrificing quality talent. Unfortunately, the local labor market is a shark tank filled with blue-chip corporations that have already snatched up the best employees.

This leaves other businesses struggling to find and retain the best engineers, architects, project managers, and other top-tier personnel. However, there is a solution to this problem: nearshoring.

Maintaining a team of highly skilled professionals can quickly become a costly undertaking. In Mexico, software engineers typically earn between $15k and $75k. In comparison, software engineers in the US earn anywhere from $65k to $325k. It's worth noting that the recruitment process in the US can be quite costly, with expenses ranging up to $80k or 25% of a new hire's yearly salary. Additionally, if a company has a high turnover rate and frequently hires and dismisses employees, these costs can become even more substantial.

Companies know how difficult it can be to expand without overtaxing their resources. Nearshoring enables companies to leverage the power of larger and more affordable teams. This enables them to scale quickly and cleanly without incurring massive overhead costs or organizational issues.

For those who remain unconvinced about nearshoring, hiring software developers in Mexico offers many benefits. The shared border and cultural similarities between the US and Mexico make the time zone difference a non-issue, while trade agreements protect intellectual property (as part of the USMCA). Additionally, the country boasts a large talent pool of software developers due to recent educational initiatives and a well-developed IT infrastructure.

Nearshoring is a company’s founder's secret weapon, a highly effective way to save money, build IT teams quickly, and scale up efficiently. By hiring software developers in Mexico, businesses can take advantage of the country's cost-effective solutions, a large talent pool, and excellent trade agreements, among other benefits.

Final word

Mexico has become an increasingly popular destination for businesses looking to nearshore their operations. Its proximity to the United States, favorable business environment, and top-notch talent pool make it an ideal choice for US firms. Moreover, the manufacturing and transportation sectors have seen a high concentration of foreign direct investment, and Mexico is proving to be a fertile ground for all sorts of industries.

However, the Mexican government's recent amendments to the Federal Labor Law have caused confusion among businesses that outsource highly skilled specialists. Although organizations can continue to outsource their "non-core" activities, those outsourcing activities related to their corporate purpose may want to consider offshoring or nearshoring to an agency in Mexico to keep their business on the right side of the law.

Despite these challenges, Mexico's workforce stability, cost efficiency, and a strong showing in regulation and productivity have earned it a top spot in the Total Workforce Index. With a large, young, and skilled permanent workforce, Mexico's unique combination of factors has proven to be a powerful draw for American companies looking for stability and a steady workforce. As businesses continue to double down on investment in next-generation technologies, it's no surprise that Mexico's tech landscape is also poised for growth, with cloud technologies and analytics at the forefront of companies' tech spending priorities.

If you have questions about engaging with a nearshore provider, don’t forget to review our  Ultimate Guide to Nearshore Software Development.

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