Nearshoring to Mexico: It’s happening already, what’s next?

• A combination of geopolitical events and technological advancements have led to the ongoing growth in nearshoring and foreign direct investment into Mexico.
• Nearshoring in Mexico is likely to continue to evolve going forward, in part due to the country’s geographical and logistical advantages.
• Mexico attracts the global automotive industry, providing a competitive manufacturing landscape for car and auto part production. Simultaneously, new sectors grow at a breakneck pace, including agricultural and protein exports.
• Despite the investment opportunities, challenges exist around the availability of clean energy, infrastructure, and the need for a skilled, future-proofed workforce.

Speaking at HSBC’s Global Emerging Markets Forum 2023, Eduardo Ramos, Senior Consultant in Public Policy and Affairs and International Trade, De la Calle, Madrazo, Mancera, and Jorge Arce, CEO, HSBC Mexico, were in conversation with host Jose Carlos Sanchez, HSBC Mexico Economist. The panel discussed Mexico’s nearshoring and investment trends and examined the country’s near-term prospects as a key player among the world’s emerging markets.

In today’s post-pandemic world, where supply chain risks have been brought to the fore, companies are rethinking their global value chain approaches – including shifts from just-in-time to just-in-case inventory systems, and vice versa. Combine this with recent geopolitical events and economic volatility, and the relocation of parts of the production line to neighbouring countries has become commonplace. Companies seek to capitalise on cheaper or more efficient manufacturing, alongside better trade agreements and logisitical advantages.

“Certain structural conditions, some geopolitical events, and recent emergency situations have favoured nearshoring in Mexico,” says Ramos. “For example, the US-China trade and technological war has fostered nearshoring, as has the Russia-Ukraine conflict. All of these events have pushed businesses to rethink their reliance on value chains.”

“China’s participation in the US market fell almost eight percentage points between 2018-2023,” says Ramos. “In contrast, Mexico has increased its participation in US imports by almost two percentage points. So, we can see that Mexico has really taken advantage of this fall in Chinese participation.”

Many US companies have relocated their factories – or at least part of their production chain – to Mexico, as a result of this geopolitical volatility. However, other factors have played a part in the nearshoring phenomenon.

“Even more central has been the technological changes which have allowed firms to reduce the segments of their global value chains,” says Ramos. “And of course, the political initiatives inside Mexico itself – such as the United States-Mexico-Canada Agreement (USMCA).”

Mexico’s proximity to the US is undeniably the largest advantage the country offers to companies looking to nearshore their production lines. The subsequent strength of Mexico’s trading relationship with North America, alongside the ease of shipping, can significantly reduce both manufacturing time and cost for companies moving into Mexico. It also helps mitigate the risk of supply chain disruption.

“Logistics are definitely cheaper. You can send a truck from Central Mexico to Chicago in about 48 hours, instead of 23 days from Asia. Plus, you remove the time that it takes to unload a boat, load it onto a truck to take it into the centre of the US,” says Arce. “Nobody buys more from the US than Mexico, and nobody sells more to the US than Mexico. Mexico has created an ecosystem in logistics, factories and workers to turn itself into an export powerhouse.”

But it is not Mexico’s proximity to the US alone that provides geographical and logistical advantages to companies’ global value chains.

“There are two phenomenons at play. The first is that yes, Mexico is such an important trading partner of the US and Canada that it has specialised its economy in certain sectors where it has strong competitive advantages,” says Arce.

“But, global players are in Mexico also because of its geographical location to South America, Central America, and even Europe. It is a two-ocean country. It has a strong railroad network, strong road network, and free trade agreements with almost everybody.”

Over the last period, Mexico’s automotive industry has emerged as a definite nearshoring winner – with the country becoming home to some of the globe’s largest car production players.

“There are companies in the US that credit Mexico for saving the company after the economic crisis when they moved production here,” says Arce. “We have the competitive advantage when it comes to producing cars and auto parts.

“CEOs from global companies from Asia, Europe and the US all come to Mexico because we have the ecosystem. We have developed a lot of expertise, our workforce, and our relationship with unions – which is so important right now when you see what is happening in the US.”

Ramos adds: “The local producers of auto parts also produce other things for other industries – the medical sector, appliances, metal, etc. So Mexico is developing a wide range of manufacturing expertise.”

Indeed, the growth of various industries has propelled nearshoring decisions, as the country is increasingly able to cater for specialist requirements and many companies are expanding their production.

Many sectors have benefited from nearshoring alongside the automotive industry. One important example is the rise in the scale of Mexico’s agricultural sector.

“We’ve seen the development of a completely new industry – the agricultural sector,” says Arce. “Mexico has exported around $77bn worth of agricultural products this year, which makes them one of the top exporters of agricultural products in the world. This has never happened before. All these factors are providing dynamism to the economy.”

Despite the evident opportunities nearshoring is providing to foreign companies choosing to nearshore their operations in Mexico, and the various sector and market benefits arising for the country internally, some challenges are expected in the future. These include the availability of clean and affordable energy, particularly in light of the sustainability commitments made by many global manufacturers.

“Another challenge relates to human capital,” says Ramos. “We have a qualified workforce, that even with salary increases, we’re still competitive in the world. But, to bring the segments of the value chains that are more technologically intensive, we have a challenge to rescale and upskill our workforce.”

However, when it comes to the emerging markets playing field, investors may be drawn to Mexico’s ongoing prevalence – as the country continues to capitalize on its advantages and attract international interest.

“No country is more open than Mexico, no currency in the emerging markets is more traded than the Mexican Peso. We’ve seen this year around $40bn in foreign direct investment – a record,” says Arce.

“We have created this ecosystem in logistics, factories, and workers, that is geared to export to the world and to trade with the world.”