Nearshoring in Mexico vs Portugal

As part of our international expansion strategy, velv decided to conduct an in-depth analysis of nearshoring options to ensure we made informed decisions based on unbiased information. Understanding the pros and cons of each potential destination was crucial for us, as we needed comprehensive insights into various factors such as cost efficiency, skill levels, compliance, and regulatory guidelines. This first analysis aims to provide a clear comparison between Mexico and Portugal, highlighting key considerations to help businesses like ours evaluate the best nearshoring options based on their specific needs and strategic goals.

Mexico is ideally positioned for nearshoring due to its proximity to the US and benefits from the USMCA. However, expected nearshoring benefits haven’t fully materialized because of rising costs, infrastructure issues, and political uncertainty. Industrial space and labor costs are increasing, and Mexico’s infrastructure struggles to keep up with demand. Additionally, security concerns and slow action from companies hinder progress. The upcoming election could impact business friendliness, crucial for realizing Mexico’s potential.

This puts some pressure on North American companies that are used to using Mexico as a nearshoring destination. Although nearshoring can be applied to several industries, the reasons above might also affect IT service providers from this region in Central America. So we put our research team to look into it and did a thorough comparison of Mexico and Portugal when it comes to IT nearshoring and IT services.

Both Mexico and Portugal offer compelling advantages for nearshoring, but the choice between them depends on the specific needs and strategic goals of the business. Mexico is ideal for North American companies seeking cost-effective labor and proximity, while Portugal offers a gateway to the European market with a highly skilled workforce and robust infrastructure. Evaluating these factors will help businesses make informed decisions about their nearshoring strategies. So let’s take a look at our analysis:

Comparison chart between Mexico and Portugal

Comparison Criteria:

• Cost efficiency: Mexico offers slight lower labor costs than Portugal.

• English Proficiency: Portugal has a higher level of English proficiency.

• Economic Stability: Portugal is rated higher for economic stability.

• Political Stability: Portugal also scores better in terms of political stability.

• Infrastructure Quality: Portugal has superior infrastructure quality.

• Cultural Adaptability: Portugal has a faster and more similar culture, and way of work.

• Time Zone Adaptability: Mexico has advantage in adapting to US time zones since it’s closer geographically.

• Skill Level: Portugal has a significantly higher skill level.
  

This first analysis shows that there are actually more advantages to choosing Portugal over Mexico, except when it comes to proximity and time zone compatibility. For the sake of this research, cost comparison was extremely difficult because we saw similar companies in Mexico practicing very different values. In any case, it is safe to say that in some cases Mexico was indeed less costly but, again, this depends on the vendor and technologies, while Portuguese companies tend to practice more or less the same values. For companies looking for quality and skill level, Portuguese engineers definitely have a big advantage, and their adaptability to the way of work in the long term is more compatible.

According to the latest Global Competitiveness Report by the World Economic Forum (WEF), Portugal ranks higher in overall competitiveness compared to Mexico. Portugal benefits from its robust infrastructure, higher political stability, and better educational system which supports a skilled workforce. These factors make Portugal a strong contender for nearshoring, particularly in sectors requiring advanced skills and stable business environments.

In the QS World University Rankings for 2023, Portugal has a notable presence with several universities ranked highly for their academic and research excellence. Notable institutions like the University of Lisbon, Universidade do Porto, and NOVA University Lisbon are recognized for their strong performance across various disciplines, particularly in engineering, technology, and the natural sciences. On the other hand, Mexico’s universities also feature in the QS rankings, with institutions such as the National Autonomous University of Mexico (UNAM) and Tecnológico de Monterrey being prominent. While these universities are known for their high-quality education and research capabilities, they generally rank lower than their Portuguese counterparts in terms of global competitiveness and specific academic strengths.

Culturally speaking, although Mexico shares a border with the US, in our research we found that company cultures are indeed more similar with the Portuguese corporate mindset, which is in fact an European mindset nonetheless. This fact was a bit surprising, considering the IT outsourcing industry and its relationship with business processes, company strategies and the overall impact IT and software development has in business operations. This cultural impact might not be so important if we’re talking about industry nearshoring (factories, production, etc), it is definitely a very important factor for IT development and IT teams being integrated and mixed with teams based in the company HQ in North America.

Other factors like compliance and regulatory guidelines usually are more inline between Portugal (EU) and the United States. This alignment is due to Portugal’s adherence to stringent EU regulations, which often mirror or complement U.S. standards in areas such as data protection, privacy laws, and corporate governance. Consequently, businesses operating between Portugal and the U.S. can expect smoother regulatory compliance processes, reduced legal barriers, and enhanced cooperation on international standards, making Portugal an attractive nearshoring destination for U.S.-based companies.

It is important to note that Portugal is a market not yet fully explored by North American companies, which means there is not enough data to dig deep into this comparison but enough to have an overall understanding of it. However, there are already some US companies, most located on the East Coast, that are trying out nearshoring in Portugal and replacing part of their operations in Mexico.

This research did not aim to determine which country is the best IT nearshoring destination. This is because many other factors need to be taken into consideration, depending on the scenario at hand. During this research, we studied several reports and articles from different global institutions. Since we wanted to conduct this study to include in our own global expansion strategy, we had to ensure that the information we were obtaining was as unbiased as possible.

Here’s how we approached and based this research:

Economic Stability and Infrastructure Quality:

• World Economic Forum’s Global Competitiveness Report

• World Bank’s Doing Business Report

• OECD Economic Surveys

Cost Efficiency and Labor Costs:

• Numbeo Cost of Living Index

• Statista reports on average wages and labor costs in Mexico and Portugal

• Reports from consultancy firms such as McKinsey & Company or Deloitte on outsourcing costs

English Proficiency:

• EF English Proficiency Index (EF EPI)

Political Stability and Economic Conditions:

• The Economist Intelligence Unit’s (EIU) Country Reports

• Transparency International’s Corruption Perceptions Index

Cultural Adaptability and Time Zone Adaptability:

• Studies on cross-cultural communication and business practices, such as those published by Hofstede Insights

• Time zone maps and data from services like WorldTimeZone

Skill Level and Educational Quality:

• QS World University Rankings

• Reports from the UNESCO Institute for Statistics

• Country-specific reports on higher education and workforce skills from organizations like the European Commission for Portugal and CONACYT for Mexico

General Nearshoring and Outsourcing Trends:

• Industry-specific reports from consulting firms such as PwC, KPMG, and Gartner

• Articles and case studies from business magazines like Reuters, Harvard Business Review and Forbes

• Different articles from nearshore vendors based in Portugal or Mexico and South America