Sourcing in Latin America

Opportunities and Strategies for the

Latin American Region

A GT Nexus White Paper

The Economics of Sourcing in Latin America
After years of companies flocking to Asia in search of low-cost manufacturing, Latin America is showing strong
as the sourcing landscape evolves.
Historically, most brands looking to manufacture products abroad set up shop in China, where they were able
to counter the longer lead times with low production and labor costs. Now, however, the changing cost struc-
ture in China and the trend toward near-sourcing and supply chain agility are causing them to rethink their
sourcing strategies.
The Latin America and the Caribbean (LAC) region including Mexico, Central and South America, and the
Caribbean Basin, has experienced steady growth in recent years, with average GDP doubling over the past few
decades and the middle class growing by approximately 50% since the early 2000s.1 Its economies have ben-
efitted from trade agreements like NAFTA, which phased out tariffs associated with trade between the US and
Mexico, and CAFTA, a similar agreement across a broader spectrum of Latin America that has been a catalyst for
increased exports from the region in recent years. These had an impressive impact: the trade balance between
the US and Mexico alone swung from a $1.7 billion U.S. surplus in 1993 to a $61.4 billion deficit in 2012.2
Over the last decade, US imports from Latin America have more than doubled.
For mid-size firms, or larger firms looking to pilot a single product line in the region, the area is rife with
opportunity. Factories are eager to build long-term relationships and will accept smaller orders on shorter
timelines. Additionally, because of order downturns in the 2000s, capacity is not an issue. Some facilities are
able to fill gaps in their manufacturing schedule, which makes them more willing to work with smaller brands.
Latin America is not the next China. Labor, energy, and transportation is still more expensive, although the
wages are much closer than they used to be. But its proximity to regions where the final products will be sold
contributes to shorter lead times and greater agility and efficiency major benefits that are luring brands to
the region to compete with the most nimble global supply chains.

Fast Fashion and Omnichannel Retailing

Consumer expectations around fast fashion have driven down lead times at some brands from 90 days to 4-6
weeks. Fast fashion chains such as Zara, H&M, and Uniqlo have been employing strategies to get products to
consumers more quickly in regions that offer proximity and low enough production costs. Retailers are consid-
ering more than just labor costs theyre weighing the data on supplier performance and reliability, trans-
portation options, distance to end customers, and the prospect of forging more collaborative partnerships in
the region.
The Americas proximity to the US means firms can wait longer to make decisions about combinations of styles,
sizes, and SKUs to order, which helps them confront this trend more effectively. Many firms are fortifying their
omnichannel strategies with technology that allows for visibility into these products as theyre being produced
and transported, allowing customers to purchase from the same pool of inventory via online, mobile, or in-
store shopping channels.

1
The World Bank, Latin America: Middle Class Hits Historic High
2
Council on Foreign Relations, NAFTAs Economic Impact

GT Nexus, Inc. | www.gtnexus.com

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FIGURE 1: Sourcing in Latin America makes apparel companies more agile, shortening lead times and giving customers in nearby
markets on-trend clothes.

U N I T E D S TAT E S

1 1 Latest trends are identified and orders are sent to factories

in nearby, low-cost regions
3
2 Production cycle is completed quickly
3

2 3 Proximity allows for faster transportation, shortening lead

times by several weeks
MEXICO

Asian markets have difficulty competing on this front. In China, this is due to sailing times and rising wages.
In Pakistan, Bangladesh, and Vietnam, quick turn factory capacity is largely dedicated to European firms and
markets, and quality can be inconsistent. The additional cost of air-freight for quick turn goods also erodes
the competitive edge of these countries, despite their low wages. Because of this, apparel retailers catering to
volatile demand and seasonal trends make up a large portion of companies using Latin America as a manufac-
turing base.

Automotive and Electronics Driving Growth in the Region

An interesting result of broad free trade agreements (FAs) has been the easier flow of goods from one country
to another throughout production. In addition to textiles, the automobile and electronics industries in Latin
America have become pivotal in many brands sourcing strategies.
Automotive production has been steadily growing thanks to the proximity of Latin America to a major customer
base in the United States. Transportation and lead times are shorter than in the Asia-Pacific region, and wages
are still a fourth of those manufactured within the US. Often, as a result of FAs, parts used in these autos will
originate in places like Nicaragua, making Latin America an attractive place for n-tier suppliers as well.

Mexico Positioning Itself in the Auto Industry

Japanese car giant Nissan holds production facilities and R&D centers in Mexico, with its latest $2 billion manu-
facturing complex in Aguascalientes, Mexico. The automotive company is using its Latin American investments to
drive a global growth strategy, expanding to a regional headcount of over 13,000 local employees.
Honda turned to Mexico too, for production of its new Honda Fit at an $800 million factory near Celaya, Mexico,
proving the countrys skill in manufacturing sophisticated autos at relatively low labor rates and loose export
regulations.

Mexico is poised to have as much as 25% market share of autos exported to the US by 20203 as it builds a reputa-
tion as a reliable, cost-effective, and high-quality locale for auto manufacturing.

3
LA Times, Mexico becoming a driving force in auto production, 2014

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The story is similar in electronics. Costa Rica processes integrated circuits from the United States, China, and
other countries for re-export under CAFTA. Mexico is one of the largest electronics exporters with companies
like Samsung, LG, Toshiba, and Flextronics all investing in production facilities in the country. Local demand
for consumer electronics is set to grow significantly, and many manufacturers are investing more in near-
sourcing to cover both Latin American and US demand.

Maintaining Control Over Local Transport & Logistics

For those companies that have yet to set up a solid supply chain network in Latin America, a challenge is to
maintain control over transportation and suppliers in the region and still choose the right strategy for each
location. While its often necessary to build new relationships with local transportation and logistics partners,
companies must have a system in place that integrates the entire transportation process.
Control and visibility is especially important in the Latin American region, where ground transportation has
been a target of criminal activity and infrastructure around port facilities is still considered below average
by the World Bank. Transportation in general is still very fragmented, with many transactions and regulations
complicating the system.
However, the risk from these factors can be mitigated. Companies investing in Latin America are able to control
their providers and keep manual transactions down to a minimum by adopting cloud-based technology. Their
supply chain networks pull data from various transportation partners into a control layer that can alert supply
chain managers when a disruption has or is expected to occur.

FIGURE 2: A visibility platform brings together fragmented transportation providers often prevalent in Latin America.

Extended Enterprise Visibility and Control Infrastructure

TM Control Layer

TM 3PL 3PL TM TM

With the right tools, companies can take advantage of opportunities in Latin America without losing control
over their transportation activity. The region remains an attractive place for US shippers and manufacturers,
and foreign direct investments are trending upward. As trade and infrastructure continues to develop in places
like Mexico, Panama, Peru, and Brazil, having a strong transportation network will be a competitive advantage
for global brands.

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Financing Suppliers in a Tight Credit Market
Access to credit and lack of working capital can be major pitfalls when working with Latin American factories.
The region has the highest level of partially credit constrained firms behind Sub-Saharan Africa4; in other
words, they were rejected from most financial markets and institutions but were still able to receive some fund-
ing through alternative means.
To counter this, brands can help their Latin American trading partners by leveraging their own financial
strength and credit ratings. They can implement supplier financing programs that offer the same lending terms
to suppliers as they would receive, improving the suppliers working capital and strengthening the health of
their overall supply chain network.
Early payment programs can also help suppliers gain a better working capital position. Companies are allowing
suppliers to discount orders in exchange for earlier payment, contributing to two important areas: better sup-
plier relationships and greater assurance of supply.

FIGURE 3: Supply Chain Finance in Action: Sellers can leverage their buyers stronger credit ratings to get financing
based on buyer-approved invoices.

1 1 Buyer issues purchase order

Suppliers PO Buyers
Accounts 2 Accounts 2 Supplier delivers goods
Receivable Goods Payable
3 3 Supplier invoices buyer
invoice
4 Buyer approves invoice for payment;
sends confirmation
5 4
5 Supplier offered early payment discount

6
6 Supplier accepts early payment discount
7 Bank funds early payment
7 $ 8 $ 8 Buyer makes payment on original due date

Bank

A Good Long-Term Outlook for Latin America

Companies can count on continued long-term growth in most of the regions economies, meaning that the
infrastructure and investment they set up now will allow them to reap the benefits for years to come. However,
because of the nature of these still-developing countries, its crucial to not only invest in sourcing but in tech-
nology that can monitor and control supply chain activity in a holistic way.
With a strong network of suppliers, a platform that can monitor transportation and logistics partners, and a
plan to manage risk and supply chain disruption, companies can make the Latin American region a profitable
and competitive sourcing location for many of the worlds largest industries.

4
Enterprise Surveys, Obtaining Credit in Latin America and the Caribbean

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