From nearshoring boom to sustainable ally-shoring with Mexico

Why Mexico is getting increasingly invaded by US, European, and Chinese companies, rising geopolitical tensions, new dynamics in trade, and the pandemic have influenced investment decisions and the movement of goods around the world.

Regarding sourcing and trading goods with the United States, Mexico is a logical sourcing alternative. Although China has dominated for two decades with its “China Export” machinery, the (pre-pandemic) increase in tariffs on US-China trade contributed to the new “nearshoring” trend among companies strongly dependent on and linked to China.

Subsequent global supply chain disruptions during COVID-19 increased trade activity between the United States and Mexico, leveraged through the new USMCA free trade agreement, even more holistically than the former NAFTA.

Furthermore, a wave of industrial policy incentives (through the Infrastructure Investment & Jobs Act and the Inflation Reduction Act) have motivated US companies to move production back home or at least closer to the market. According to our “Nearshoring investment map” (by TMH Consulting and Investment Group), we have detected more than 150 investment announcements in Mexico since January 2022, totaling more than 20 billion dollars.

Mexico could achieve additional economic growth of up to 8 percent in its Gross Domestic Product (GDP) in the next six years, driven by the relocation of investments. In other words, Mexico could go from representing 14 percent of imports from the United States of America to 20 percent by the year 2030, opening up an unprecedented opportunity. Each percentage point that Mexico gains in the share of North American imports implies an acceleration of more than one percent in GDP.

Companies are aiming for shorter and more resilient supply chains while avoiding geopolitical risks, making Mexico a prime production location for manufacturing serving the North American market. Indeed, there is increasing evidence of companies shifting production from Asia to Mexico, including Boeing, GM, Honda, Nucor, Oster, Samsung, Mattel, and Black & Decker, which have shifted more than $3 billion in annual production.

Historically, the United States has accounted for almost half of the FDI into Mexico, indicating the highly integrated trade relationship of the two countries. IBM, Coca-Cola, Walmart, and Procter & Gamble have been among the main US companies operating in Mexico. US companies invested US$15 billion in the Mexican economy in 2022.

More than 50 percent of the most recent nearshoring activity goes to the State of Nuevo Leon (mainly to its capital Monterrey) and the State of Coahuila (Saltillo and Ramos Arizpe). The States of Chihuahua and the Bajío region (Jalisco, Guanajuato, Queretaro, Aguascalientes, San Luis) are also benefiting strongly. “Western” companies such as Tesla, Bosch, ZF Group, BMW, Continental, Magna, Navistar, Whirlpool, AGP Glass, Honeywell, Eaton, Georg Fischer, Borgwarner and Kohler have joined recent investments in Mexico. Additionally to the traditional manufacturing sectors, tech giants like Amazon, Facebook, and Intel have outsourced some of their technical talent to Mexico.

Mexico’s good labor supply and relatively low wages also make it a profitable location for Asian companies that have announced new investments in Mexico almost every week under the pressure being able to continue serving the US market with adequate lead times. Among these companies are Hyundai-Kia, Hisense, Yanfeng, Lizhong, Lingong, Daye, and Yinlun. In particular, China has significantly expanded its investments and is the fastest growing source of foreign investment in Mexico.

Mexico has not only an accessible labor force, but also qualified labor empowered by its universities, technological institutes, and engineering schools, which have allowed the country to have one of the highest penetration rates of engineers per capita, ranking in the world’s TOP 10. The automotive supply chain is enormously strong, which will allow Mexico to participate in the electric vehicle revolution. Most of the auto parts produced in Mexico are for foreign markets and include global brands such as General Motors, Ford, Honda, Hyundai, Kia, Toyota, Mercedes-Benz, and Nissan. In the end, nine out of every ten vehicles manufactured in Mexico are exported.

So, it is cristal-clear why Tesla recently announced its new GigaFactory in Mexico. Tesla picked Nuevo Leon, Mexico’s industrial hub close to the Texan border, because of its lower costs, availability of a qualified workforce and presence of key parts suppliers.

But still, in this fast-growing environment, there are huge challenges such as environmental impacts, energy and infrastructure availability, and security issues that are a must for selecting a location. State and municipal governments, companies, universities and the population must act in a coordinated manner so that the new projects are of benefit to all participants.

The scarcity of natural resources such as water and the polarized environment in Mexican politics, with elections on the horizon, are factors to take into account. It is a complex environment and the opportunity cost of poor decision making is higher than ever before, both at political and business level. The first challenge for companies that decide to relocate is human capital. Salary level, benefits, proximity to the workplace, and transportation are real needs that affect staff turnover.

In addition, the site selection process must be in accordance with the logistical needs of the operation for the company. Many companies come with great expectations and certain promises that must be verified when establishing themselves in a specific county or municipality. In fact, once starting operations, many companies have a long learning curve and additional costs occur. The current financing conditions and sectoral regulations are other challenges that must be considered.

The USMCA Corridor, which consists of a new port and rail logistics project, is one of the largest initiatives in the field of international trade that seeks to expand rail connections from Mexico to new areas of the North American continent. This strategic project plans to connect from the port of Mazatlan to Durango, strengthening the routes to the North to Monterrey, Ciudad Juarez, Laredo, Houston, Dallas, Tulsa, Chicago, and to Winnipeg. It is an example where there is a strong business vision, but at the level of agility and implementation one depends on the support and commitment of the Government.

Mexico, particularly at federal level, should invest much more in its rail and road infrastructure because transportation will enable the new logistics dimension. Investments in infrastructure, education and certifications must be prioritized and accelerated to take advantage of the Nearshoring trend. Foreign companies that establish themselves in Mexico must value the resources and the land, whereas it is not only a matter of capitalizing on short-term opportunities but mainly looking to achieve mutual long-term benefits. In this context, “ally-shoring” makes much more sense than a mere “nearshoring” approach.

Ally-shoring with Mexico, which occurs much more among Western companies, implies developing a long-term ecosystem. Boosting Mexico’s economic growth, merely with an opportunistic nearshoring approach, without sufficient development would be very dangerous and costly. Productive projects with a value-added approach, beyond the pure “maquila” intention, are essential because they generate better long-term financial results and at the same time better jobs.

Long-term implications and benefits must be factors to take into account to generate sustainable development and growth. Having greater North American integration and competitiveness in multiple industries can only occur with a comprehensive and circular approach. In conclusion, the topic of Nearshoring is a real and current trend, but it still takes a lot of planning, bilateral relationships, coordination and investment to generate circular and sustainable benefits over time.

The US needs a strong Mexican economy and ecosystem to compete with China. In fact, Mexico with 16 percent already buys more U.S. products than any other nation except Canada, but more than just an export market, Mexico and the United States are true allies. This will prevail with both a Democrat or Republican President. Especially, the Texas – Mexico relationship is going to further grow during the next years. Mexico was Texas’ #1 trading partner in 2021 with $122.7 billion in exports. Texas top exports to Mexico were oil and gas; chemicals; nuclear reactors; iron and steel, plastics and copper.

Mexico was Texas’ #1 import source country in 2021. Texas’ $108.4 billion in Mexican imports included nuclear reactors; plastics; oil and gas; furniture; and fruits and nuts. With 34 percent Mexico is the leading trade partner of Texas. The new “Elon Musk triangle” between Austin (Tesla GigaTexas & Boring Company), Corpus Christi (Tesla Lithium Refinery), Boca Río (Space X), and Monterrey (Tesla GigaMexico) is maybe the best example to showcase this new dynamic, especially connecting the Northeast of Mexico with Texas. Ally-shoring is definitely the future for maintaining a stable economy and improving the competitiveness of the region. So, better together.

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Written by Thomas Michael Hogg.
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