Dear Members and Friends:
First of all, we hope you had a great holiday season. Now that we are officially in 2024, it’s time to look at what will be dealing with in the new year.
Not a week goes by when those of us looking at trade and investment matters don’t come across an item or two (or three) on “nearshoring.” Just what is nearshoring, and what opportunities and challenges are out there for us to know?
What. Let’s begin by using ChatGPT (isn’t everyone?) for a tentative definition. “Nearshoring” refers to the process of outsourcing a business or production process to a provider located in a geographically close country – close to the parent company or home market. It differs from “offshoring,” in which a process from the parent country is taken to a foreign country, and “reshoring,” which refers to taking the process from a foreign country to the home or parent country.
When. Although the process has become more popular of late, its origins for Mexico may be traced back to 1965, when the Border Industrialization Program, better known as the maquiladora program, began and when both US and foreign companies used the border zone to produce products for global markets. Although we in the US relate nearshoring with Mexico, it can relate to China and countries in Europe as well.
Why. There are several reasons for the recent increase in nearshoring activity, especially as regards Mexico.
The relative increase in fully loaded hourly wages and manufacturing costs in China compared with Mexico
The growing eco/political clash between the US and China during the Trump Administration, resulting in each country imposing tariffs on the other – many of which are still in existence
The reduction in production and realignment of global supply chains during COVID as globalization turned into regionalization
The uncertainties and costs associated with shipping from Asia to the US
The structuring of the USMCA from NAFTA providing a more modern agreement with further clarity and certainty for those wishing to produce and trade in North America
The Mexican government initiating new policies supporting investment in nearshoring
Let’s look at a number of recent reports that discuss nearshoring activities with Mexico.
The first, “The Position of Mexico in the First Wave of Nearshoring,” prepared by Mexicom Logistics earlier last year, looks at Mexico and Altasia as likely geographic areas that could benefit from Nearshoring. Altasia refers to the Asian nations that are replacing China as the center of supply chains, such as Vietnam, Bangladesh, and the Philippines, among others.
In making its case for Mexico, Mexicom Logistics refers to two studies done by A.T. Kearney’s Supply Chain Institute in the US, “America is Ready for Reshoring. Are You?” and Savills World Research in the UK, “Global Manufacturing Supply Chain: The Future.” The Kearney report indicates that, since COVID, an indicator of the growth of nearshoring in Mexico is that imports of manufactured goods from Mexico has increased 26%, from $320 billion to $402 billion. The Savills report has Mexico as 15th on their list of countries with nearshoring potential – the highest one for the Americas. It indicates that the relative low labor cost and the proximity to the US market secures it as a key nearshoring destination. The report also points out that Chinese manufacturing companies have emerged in Mexico as a strategy to build and expand their capabilities closer to the American market.
Blue Grace and the Journal of Commerce have done a brief report, “Harnessing Nearshoring Potential: Answers to Key Questions,” that details why nearshoring is gaining traction and what the potential would be for Mexico. They mention the June 2022 study by Inter-American Development Bank (IDB) indicating that nearshoring could boost Mexico’s annual exports to the United States by $35.3 billion, of which $29.7 billion could be what IDB describes as “quick wins” whereby Mexico-based producers replace suppliers from outside the Americas for the top 50 products imported to the United States. At the same time, IBD announced it would provide up to $2.25 billion in short- and long-term financing to help build new industrial parks, invest in so-called “anchor” companies – including relocation expenses – and develop innovative financing mechanisms for small and mid-size companies (SMEs) working within global supply chains.
Xometry, a company involved with digital manufacturing, has put together an interesting list: “11 Benefits of Nearshoring: Why You Should Choose Nearshoring.” The benefit list includes:
Access to skilled workforce
Faster market access
Decreased Customs expenses
Strengthened intellectual property control
Minimized digital disturbance
Speedy delivery
Increased operational flexibility
Improved customer satisfaction
Faster problem solving
Improved supply-chain management
Enhanced risk management
Although Xometry does not mention Mexico in their piece, most of the benefits would accrue particularly to US companies in Mexico. They also compare nearshoring with offshoring, reshoring, and onshoring. They indicate that there could be some downside to nearshoring:
The act of moving production from overseas to a closer point is resource-heavy and can result in disruption
There are always new challenges with setting up production in an area you haven’t previously used for production
The organization will need to forge new relationships with suppliers and logistics
Although the quality of the new production may be better, it will still be a change; some customers dislike changes of any kind
The Federal Reserve Bank of Dallas (FRB) has put together a very detailed report, “Mexico Awaits ‘Nearshoring’ Shift as China Boosts its Direct Investment.” The report, which was done nine months ago, makes some interesting observations. “Anecdotal media reports suggest that the nearshoring move to Mexico is at hand, while hard data provide no such conclusive evidence. . . Nearshoring to Mexico should be reflected in foreign direct investment (FDI) data. But FDI in Mexico was largely flat from 2015 to 2022.” (Note: See further discussion below.) In 2022, the US accounted for $15 billion, or 42.6%, of the total FDI in Mexico. The manufacturing sector accounted for 47% of US investment and the automotive industry took up $3 billion of that – primarily automobile manufacturing and auto parts.
China only accounted for $0.3 billion, or less than 1 %, of FDI in 2022. However, an FRB chart shows that the pace of Chinese investment has increased significantly since 2016. This investment is mostly directed toward manufacturing plants and regions that export to the US. It’s not certain whether China’s investment increase was due to companies trying to maintain access to the US market or if that investment had been planned before the twin shocks of higher tariffs and pandemic limitations. The manufacturing sector accounted for 47% of US investment and the automotive industry took up $3 billion of that – primarily automobile manufacturing and auto parts.
The FRB ended the report by saying there’s “no free lunch.” “Rising geopolitical tensions, barriers to trade, and the pandemic have influenced investment decisions and the movement of goods around the world. The resulting investment and trade distortions may be necessary for national security or supply-chain resiliency, but they come with a cost by creating inefficiencies in the use of capital, labor, and technology and resulting in the production of goods at a relatively higher price.”
A recent release by Mexico News Daily, “Foreign Direct Investment in Mexico Hits Record High,” indicates that FDI in Mexico reached $32.9 billion in the first nine months of 2023, with three months of data still to come! This could mean that 2023 will be a banner year for FDI in Mexico – and would put a different spin on the observations in the FRB Dallas report above. The majority of the FDI, 76%, came from reinvestment of profits, while 16% came from loans and payments between companies and 8% was new investment. About $13.5 billion, or 41% of the total, came from the US. China was not one of the top ten countries for investment. Although not mentioned, 8% of the $13.5 billion from the US would amount to a little more than $1 billion in new investment. Other than Mexico City, Nuevo Leon attracted the most investment of almost $3 billion – and this does not appear to include several projects that have been announced, including the planned $5 billion for Tesla.
BBVA Research and the Mexican Association of Private Industrial Parks (AMPIP) did a survey of AMPIP members to learn what their concerns were about nearshoring, “Nearshoring Outlook: Mexico’s Industrial Parks Survey.” The report highlights that, although there are many opportunities for Mexico via nearshoring, there are also drawbacks regarding industrial parks that must be addressed going forward. AMPIP in 2023 represented 430 industrial parks in 21 states with over 3,800 companies installed and growing at a rate of 35% in the North and Central regions. About 20% of the companies in the parks surveyed were domestic, while American firms represented about 38%. Between 2018 and 2022, an average of 207 new companies came in per year. Between 2024 and 2025, AMPIP expects to receive 453 new companies, of which 77 or about 20% would be Chinese – a much higher incoming rate than before.
AMPIP members were asked about concerns they had in bringing in new companies. Of those surveyed, 91% reported experiencing drawbacks related to energy supply, 63% related to water scarcity, and 74% of the parks reported drawbacks in terms of ease and speed of procedures – likely legal and permitting matters. The responses on drawbacks varied with different states and regions. The report ended by stating “Mexico must prepare its energy infrastructure for an expansion by focusing on renewable energies that, in addition to being more efficient in terms of costs, represent an improvement in terms of emissions that in the medium term could be an increasingly relevant requirement for the companies.”
The final report covered was released recently by the law firm of Cacheaux Cavazos Newton (CCN), based in San Antonio and with eight offices in Mexico. The report, “CCN Guide to Nearshoring in Mexico,” is meant “to provide foreign investors with an executive summary of Mexico’s legal system, as well as a general and practical overview of key items to be taken into consideration when conducting business operations in Mexico and the different options to conduct such.” It contains detailed sections on corporate governance, foreign investment, taxes, labor and Social Security, international trade and customs, real estate, environment, energy, intellectual property, compliance, and dispute resolution.
Conclusions. Can any conclusions be inferred from the above reports?
Mexico has many investment attributes that would be a fit with companies interested in nearshoring there
Although FDI in Mexico in 2023 will show a very good year, the portion of FDI taken by new investment is not growing and may reflect that announcements of new projects have not yet been turned into real pesos
China is growing its presence in projects in the country, although its investments are still fairly low compared to the US and other countries
Mexico appears to have increased its lead over China in imports into the US, indicating that nearshoring has had an effect; in the first ten months of 2023, Mexico has been considered the US’s number one trading partner
The federal government and the private sector must do more to ensure that infrastructure and skills are in place in the major states and cities to support new nearshoring investment