Nearshoring’s Rapid Shift, Part II: Perspectives from Mexico

As we noted last week in the first article of this series, “Nearshoring’s Rapid Shift, Part I: Benefits, Progress, and Concerns,” experts have been predicting a nearshoring shift for some time, but many are surprised about how rapidly nearshoring efforts are coming together.

Although Mexico isn’t the only country U.S. companies are eyeing for nearshoring’s benefits, its close proximity and perceived perks make it a major player for those seeking to pull up stakes from overseas locations and plant them closer to home.

Here, we’ll take a look at what several insider experts say about the potential Mexico offers—and what changes need to take place for the country to make the most of the opportunities at hand.

Embracing the “North American Moment”

Although some have expressed their concerns about setting up shop in Mexico, others see great potential for both Mexico and the U.S.

In a recent article for Mexico Business News, Pedro Casas-Alatriste, American Chamber of Commerce of Mexico Director General described a “winning formula” for nearshoring.

“In my first few weeks as AmCham’s Vice President and Director General, nearshoring dominated all my high-level meetings,” Casas-Alatriste wrote. He said companies are looking for what he described as a simplified “winning formula” for success: “Nearshoring attractiveness = infrastructure + human capital + energy + water.”

Casas-Alatriste noted that in 2022, the “cumulative total” of trade in goods between Mexico and the U.S. was US$779.3 billion—which was 17% higher than the year prior. He said there was also US$15 billion of direct investment from America into Mexico—which was 42.56% of Mexico’s total foreign direct investment (FDI)—and that the combined dynamics are creating “a historic moment of growth” for Mexico “based on regional integration.”

Citing January’s North American Leaders’ Summit, Casas-Alatriste said the intentional way in which the three leaders—U.S. President Joe Biden, President Andrés Manuel López Obrador of Mexico, and Prime Minister Justin Trudeau of Canada—referred to North America reflects “extensive work behind the scenes with USMCA, regulatory cooperation, and an absolute conviction in the value of building back together.”

Noting that China has also invested significantly in Mexico, Casas-Alatriste said, “Mexico’s strategic position for investment is clear to everyone.”

“As neighbors to the world’s most prominent economy, with 12 trade agreements that give us preferential access to 46 countries and a skilled labor force, Mexico is the obvious destination for the relocation of global value chains,” he wrote. “The expectation is for foreign companies to keep moving their manufacturing to Mexico from Asia to sell in the US market while reducing risks, time, and costs for suppliers.”

However, Casas-Alatriste also acknowledged that some parts of Mexico may be better suited for certain business needs than others.

“The goods of the future, the goods North America is betting on — electromobility, semiconductors, batteries, and medical devices — require four critical components for their production: infrastructure, human capital, energy, and water,” he wrote. “Here is the conundrum: northern states are relatively rich in infrastructure and human capital but lack what southern states have in abundance: water and energy.”

After providing a detailed description of each region, Casas-Alatriste said the question isn’t about which should attract the investment, but how to prioritize development at the pace that’s needed.

“It’s a matter of timing and strategy, and the time is NOW,” he wrote. “The industry must voice its needs. More importantly, companies must unite and find a common, coordinated, proactive agenda to find solutions and genuinely embrace the North American Moment.”

Mexico’s “Moment for Jobs and Upskilling”

In another recent article for Mexico Business News, Monica French, Linkedin Head of New Business Hispanic America agreed that the rapid nearshoring push offers opportunities that Mexico can capitalize on.

“With all this hype, there is still much to understand about the real opportunity behind nearshoring and what this means for mobilizing the Mexican labor force,” French wrote. “Will there be a huge boom for job creation? Is Mexico producing the right talent with the skills needed to meet this demand? How can companies better prepare their workforce and talent strategy for this?”

Noting that although nearshoring will create front-line jobs, it will also create a big demand for “highly skilled talent,” which is “a critical piece of the talent equation.”

She cited several studies that reflect both the current capacity and future need for such talent in Mexico:

While all of that sounds like good news, French noted that “only 12% of current Mexican graduates are studying STEM” and that “data pulled from the LinkedIn Economic Graph of over 20 million members in Mexico” revealed that “only 57,000 members have the title of Software Developer and over 17,000 have the title of Project Engineer.”

The Need for More Investment in Infrastructure

In a recent Mexico News Daily (MND) article that highlighted the views of various business experts working within Mexico, MND underscored the critical need for more infrastructure investments within the country.

Citing Tesla’s announcement about building a new Gigafactory near Monterrey, Nuevo León, MND said “Mexico looks set to become the largest manufacturer of EVs in Latin America” and noted that this type of investment is due to nearshoring trends.

“But some experts are saying that a lack of infrastructure in Mexico could make it more difficult to attract foreign investment and create jobs in the manufacturing and logistics fields,” MND said, noting that “Mexico invests less than 1% of its GDP in infrastructure development when it should allocate at least 5%,” citing the president of the Mexican Chamber of the Construction Industry (CMIC), Francisco Solares.

MND said infrastructure needs also extend to the country’s ports, noting that one expert who’s worried about port capacity is Ignacio Szymanski, the president of the SoyLogístico Association.

“There are many opportunities in Mexico, but we have to go fast, we must increase the infrastructure in ports, land transport, help cargo carriers to modernize their fleets and update programs so that young men and women become interested in being operators,” he reportedly said.

MND said industrial space is another concern. The outlet cited Foreign Affairs Minister Marcelo Ebrard as saying that to meet nearshoring demand, 25 additional industrial parks need to be built by the Mexican government before the end of President López Obrador’s administration in 2024.

MND also noted that manufacturing of EVs requires “large amounts” of electricity “and companies do not currently have any guarantee that they will receive an appropriate supply, due to power shortages in the region.”

Plus, water supply is a big issue in some regions, which has become more dire due to “droughts in states like Nuevo León, the planned location for Tesla’s megaplant.”

On the flip side, one expert—academic researcher José Antonio Ordóñez—said the water situation could be remedied with the proper investments. And in that context, having foreign companies set up shop may be the impetus needed to create change.

That sentiment was echoed by three analysts for Deloitte Mexico, in “Mexico economic outlook, December 2022.”

“…Mexico has a golden opportunity in the form of nearshoring, as it could drive investments, exports, and overall economic growth, especially in the manufacturing sector,” they wrote. “Nearshoring can also be a driver for Mexico to implement long-due structural changes to its economy, which will help the country’s medium-term growth prospects. Creating proper conditions to cash-in on this opportunity, thus, becomes critical.”

Please join us next week for our third in this series of posts, which will focus on how nearshoring may impact industries such as manufacturing, warehousing, shipping, and various types of services.