Automotive nearshoring: Should auto parts manufacturers consider moving to Mexico?
- Faced with rising costs, tariffs and labor challenges, more automotive suppliers are considering nearshoring as an option to strengthen profitability, specifically by moving production to Mexico.
- Nearshoring in Mexico can help Tier 2 and Tier 3 auto parts suppliers to reduce labor costs while taking advantage of at least temporarily lower tariffs on goods produced in Mexico.
- Suppliers should work with an advisor who understands how business is done in Mexico and consider the impact of nearshoring on their customers, supply chain and bottom line before moving forward.
In a challenging era for the manufacturing industry, automotive parts manufacturers are looking for options to control costs and make their businesses more viable. One option to consider is nearshoring, with more Tier 2 and Tier 3 American suppliers joining their larger Tier 1 contemporaries in weighing whether to move at least some production to Mexico.
Nearshoring isn’t a cure-all. But in certain situations, it can help you rein in labor expenses, integrate your supply chain more closely and potentially, even avoid headaches around tariffs.
Keep reading to learn more.
Why are automotive suppliers exploring nearshoring?
Automotive parts manufacturers, like much of the rest of the manufacturing sector, have been buffeted by tariffs, rising costs and labor challenges. These challenges have manufacturers exploring the impact of moving existing production to Mexico from either the U.S. or plants based elsewhere, like China.
Here’s some more details on the key problems auto parts suppliers are looking to overcome:
- Tariffs: The auto industry has been hit hard by tariffs, both in terms of outright costs and because of the broader climate of economic uncertainty that tariffs have helped fuel. As a result, firms are reevaluating their supply chains to adjust to these new realities.
- Labor issues: Labor shortages and costs are an ongoing issue for manufacturing, with automotive as no exception. Companies face challenges not just in finding and retaining skilled workers, but in preventing labor costs from becoming too high.
- Inflation and interest rates: While both are down from their peak, inflation and interest rates remain high enough to hurt consumers, limiting interest in new car buying and putting pressure on the automotive sector by slowing demand.
- Supply chain issues: Global supply chains have been reshaped by tariffs, with ripple effects that create cost challenges for auto manufacturers. Suppliers continue to face rising costs around raw materials, semiconductors and logistics.
Nearshoring can help resolve challenges that auto parts manufacturers face
Nearshoring isn’t just hypothetical. Automotive parts manufacturers are beginning to move more production south of the border to Mexico. Here’s why:
Protection from tariffs via USMCA
The Trump administration initially announced huge tariffs on imports from Mexico. However, those tariffs have since been significantly blunted, with many products and supplies covered under USCMA at least temporarily exempt from tariff collection, while goods sourced from countries like China continue to face tariffs of 50% or more.
Will this favorable treatment last? With the USMCA also up for renegotiation in summer 2026, many manufacturers hope those meetings may lead to a more formal and lasting reduction of trade barriers between the U.S. and Mexico.
Lower labor costs
Labor costs in Mexico are significantly cheaper than in the U.S. While Mexican law demands substantial compensation for any workers who are let go, wages and benefits costs remain less expensive than elsewhere in North America, even for skilled labor.
For manufacturers squeezed by shrinking margins, this element alone can make nearshoring worth considering.
Hedging bets
For companies that continue to lean on production based in China or another country facing high tariffs, even planting a flag in Mexico can be a hedge against risk. Depending on how long current tariff rules last, it may make increasingly more sense to look for production opportunities in lower-tariff countries as time goes on, so exploring your options now could pay off down the road.
How should mid-market automotive suppliers take action on nearshoring?
Does nearshoring make sense for your business? You won’t know until you assess your supply chain, your customers' needs, your tax position and how nearshoring will impact the economic pressures you face.
Here are key steps to take as you evaluate and begin to explore nearshoring options:
1. Map your supply chain
Before anything else, figure out how nearshoring could affect your supply chain. This includes both your materials sourcing and your customers, like OEMs or Tier 1 parts suppliers.
Where are your supplies coming from and where are your parts going to? You need to know both.
Then consider nearshoring within that context. If you ship to a Tier 1 customer who operates a plant in Mexico, it might make sense to move your production down there as well to take advantage of savings on not just labor, but shipping costs.
2. Consider additional economic pressures you face
If nearshoring makes sense within the context of your supply chain, consider your additional cost and economic pressures as well. Would moving production to Mexico help alleviate those?
Evaluate how nearshoring could affect your labor, materials and tariff expenses to get a sense of the overall impact on your bottom line.
3. Understand your tax position
There’s a tax element to think about here as well. If you’re going to nearshore, you need to make sure you’re maximizing your tax position by making sure to leave your profits in the right places.
Talk with your tax advisor to understand the implications here.
4. Build relationships to help you operate in Mexico
Nearshoring isn’t just a logistical shift, but a cultural one. To succeed, you’ll need to know the right people to talk to, which processes to go through and how to make deals happen.
If you’re seriously considering nearshoring, find an advisor or guide who can help walk you through how business gets done in Mexico and facilitate connections. This is an invaluable step you’ll need to take before you kick off implementing any nearshoring strategy.
How Wipfli can help
We advise Tier 2 and Tier 3 auto suppliers on operations, financials and growth. Let’s talk about the challenges you face and whether strategies like nearshoring could help make your business stronger. Start a conversation.
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