Mexico's Nearshoring Momentum Will Continue

Mexican businesses, particularly those tied to real estate and construction, are banking on foreign investment from nearshoring to boost profits and economic growth.

"Many companies in Mexico are quite aware of nearshoring and the economic benefits that come with it," said Fermin Rodriquez Sosa, managing director of Genera Softlanding, a firm that helps foreign companies find optimal locations for future operations in Mexico. “This is a very exciting time.”

The Mexican government expects nearshoring, the trend of locating manufacturing capacity in Mexico closer to the U.S. market rather than in Asia, to contribute up to 1.2 percentage points to growth, expected to reach 3.5 percent this year.

The government's optimism is echoed in the statements made during third-quarter earnings calls, where nearshoring has been a prominent topic. In the first half of 2023, Mexico attracted around $29 billion in foreign direct investment, a 5.6 percent increase from 2022, with over half directed towards the industrial sector.

Tesla's reported $5 billion factory in northern Mexico is one notable project credited with attracting $1 billion in Chinese investments to nearby industries. Mexican gross fixed investment is on track to post its strongest annual growth since 1997, surging 31.5 percent year-on-year in seasonally adjusted terms in August 2023.

The nearshoring momentum in Mexico is anticipated to continue for the next decade at least, Rodriquez Sosa said.

The Asociación Mexicana de Parques Industriales Privados (AMPIP), which translates to the Mexican Association of Private Industrial Parks in English, is an organization in Mexico that represents private industrial parks, reports a significant increase in estimated manufacturing property demand for 2023/24, reaching 2.5 million square meters, up nearly 80 percent from the previous year, with strong demand in the auto sector, electronics industry, and among machinery makers.

Rodriquez Sosa emphasized that the benefits of nearshoring extend not only to the northern region but also to the central carmaking/aerospace region known as El Bajio. El Bajio, which includes the states of Guanajuato, Aguascalientes, Jalisco, and Querétaro, is a "very good location" for multinationals, with a great labor pool, good logistics, and strong infrastructure, he said.

A Significant and Enduring Shift

For years, China held its status as the primary supplier of foreign-made goods to American consumers, producing everything from clothes and iPhones to TVs. However, over the past decade, imports from Mexico to the United States have experienced a steady and remarkable increase.

Since 2010, Mexico has effectively doubled its imports to the U.S., and the trend suggests that it is poised to overtake China as the nation's leading supplier of foreign-made goods and services by the end of this year, ending China's unofficial title since 2008.

This transformation in trade dynamics is not surprising, given the strained relations between the United States and China, especially during the Trump administration. Initially focused on trade disputes, which saw President Trump imposing significant tariffs on China, these tensions have since escalated to encompass political and other issues.

The global economic repercussions of the pandemic have further amplified these challenges, leading to disruptions in world trade flows, severe supply shortages, and a surge in global inflation.

In response to these challenges and the evolving geopolitical landscape, multinational companies have been compelled to reassess their supply chain strategies. The tension between the U.S. and China has prompted companies to either withdraw from China or diversify their sources of supplies, seeking alternatives in friendly nations or those geographically closer to U.S. borders, where costs are often lower.

Now the U.S.'s Largest Trading Partner

Having already established itself as one of the top three trading partners with the U.S. following the NAFTA free-trade deal in the late 1990s, Mexico has experienced a surge in business relocations and new supply sources post-pandemic. The country has recently achieved the unprecedented status of being the U.S.'s largest trading partner and is now poised to surpass China as the leading importer of goods.

Key imports from Mexico include a variety of products such as new cars, trucks, appliances, machinery, and agricultural goods like fruits and vegetables, constituting approximately 70 percent of all Mexican imports. According to government figures from the first half of 2023, U.S. imports from Mexico amounted to $239 billion, surpassing those from China ($219 billion) and Canada ($214 billion).

Importantly, the trade relationship between the U.S. and its northern and southern neighbors is not as imbalanced as the U.S.-China dynamic. U.S. exports to Canada and Mexico significantly outweigh those to China. For instance, U.S. exports reached $177 billion to Canada and $160 billion to Mexico in the same period, compared to a more modest $77 billion in exports to China.

The momentum in favor of Mexico as the primary source of imports is unlikely to reverse course. Chinese imports have declined by 24 percent in the first nine months of 2023 compared to the same period in 2022.

A Prime Location for Asian Companies

Mexico has exceeded the Inter-American Development Bank's (IDB) expectations for nearshoring in 2023, according to René Mendoza, the national president of the Chain of Industry Suppliers in Mexico (CAPIM).

Mendoza predicted that Mexico will easily surpass the IDB's projected figure of US $35 billion for nearshoring in the country.

"México is now a prime choice for large Asian corporations looking to relocate their factories, expand operations, or increase production in their existing facilities within the country," he said.

As a result, the number of local suppliers has grown by an impressive 213 percent in the first half of 2023.

"The need to establish suppliers in Mexico is driven by the automotive sector, which is benefiting from changes in the rules of origin that came into effect this year," Mendoza explained.

"Previously, companies could import up to 40 percent of their components from countries other than Mexico, the United States, and Canada. Today, they are only allowed 25 percent. This 15 percent reduction means a requirement to replace imports from Asia and Europe worth around US$35 billion. When compared to the current production of auto parts, this constitutes more than a 30 percent increase."

Moody's Raises Growth Projections

Last week, Moody's ratings agency raised its growth projections for Mexico's economy for both this year and 2024, attributing the positive adjustments to surprises in the country's productive sectors and anticipating further expansion driven by the "nearshoring" phenomenon.

Moody's now anticipates Mexico's gross domestic product (GDP) to grow by 3.5 percent this year, up from the previous forecast of 3.3 percent, and 2.3 percent in the following year, compared to the previously estimated growth of 1.9 percent.

The ratings agency pointed to "repeated positive surprises" as the driving force behind the upward revisions. Additionally, Moody's suggested that the consolidation of nearshoring, involving the relocation of businesses exporting to the United States from Asia to nearby countries like Mexico, could contribute to a real GDP growth ranging from 2.0 percent to 2.5 percent in 2025.

Mexico's government also forecasts GDP growth of at least 3.5% for this year and the next. The country's economy exhibited resilience by growing 0.9 percent in the three months ending in September, marking the tenth consecutive quarter of economic expansion and bringing the year-on-year growth to 3.3 percent.

Note: If your company is considering future operations in Mexico, contact me, Dean Barber, or Fermín Rodriguez Sosa via LinkedIn. We are Genera Softlanding. We will not only find you an optimal location but also assist with permitting, construction, banking, legal, etc. We will ensure that your company has a soft landing in Mexico.

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