Nearshoring transits between skeptics and believers of relocation in Mexico

Presidents Joe Biden, Justin Trudeau, and Andrés Manuel López Obrador meet in Mexico City to participate in the North American Leaders Summit and discuss business, business relocation, and investment issues, but, nearshoring in Mexico moves between skeptics and believers.

Analysts wonder if nearshoring is a reality as forecasts point to slower growth in Mexico in 2023 due to a possible recession in the United States and despite the arrival of investments last year that suggest the country is being a magnet for investors.

The Foreign Direct Investment (FDI) that has arrived in Mexico in the first nine months of the year, the latest data available, set a record amid the nearshoring of companies seeking to settle in the country to access the United States market.

Mexico registered US$32.147 billion for FDI from January to September 2022, a figure 29.5% higher than the preliminary figure for the same period in 2021, when US$24.831 billion entered.

The United States and Canada have an open dispute against Mexico within the framework of the T-MEC, in which they argue discrimination against companies in the Mexican energy sector and that State companies, Pemex and CFE are prioritized.

The countries have given themselves time to find a solution to the dispute and avoid a dispute panel, but while that happens, several of the companies interested in settling in Mexico derived from nearshoring are awaiting the commercial resolution to make investment decisions.

More than 400 North American companies intend to carry out the relocation process from Asia to Mexico, however, these industries request a guarantee in energy matters to be able to settle in the country, according to Raquel Buenrostro, Secretary of Economy.

Nearshoring presents growth opportunities for Mexico and the balance seems to lean towards a feeling of optimism for the relocation of companies, however, doubts persist as to whether the country and the government of AMLO, as the president is known, will know how to capitalize on the advantages competitive under the USMCA.

COMPANIES IN MEXICO ALREADY FEEL NEARSHORING: BANXICO (BELIEVER)

In their last two reports on the regional economies, published in September and December 2022, companies have told Banco de México (Banxico) that they are already feeling the effect of nearshoring, mainly manufacturing industries established in the north of the country and on the border with the US.

Around 16% of companies with more than 100 workers nationwide have benefited in some way from nearshoring since the beginning of 2022, either due to foreign direct investment, due to greater demand from companies established in the US, or by companies that moved their operation to Mexico, companies told the central bank.

In December 2022, business contacts pointed out that the process of relocating manufacturing lines to supply the US market was one of the main factors of external origin that boosted manufacturing activity in the northern region of Mexico.

MEXICO HAS NOT BEEN ABLE TO BENEFIT FROM NEARSHORING: CITIBANAMEX (SKEPTICAL)

Until now, Mexico has not been able to benefit significantly from nearshoring trends, note Ernesto Revilla, Citi’s chief economist for Latin America, and Adrián de la Garza, Citibanamex’s chief economist until December 2022.

Economists said in a December 2022 research note on Mexico’s economic situation that there are features that position the country as a potential beneficiary of nearshoring, but even so, the hard data suggests little has materialized.

Mexico could boost its exports to the US by US$50 billion in the following years, which, considering the level of investment required and the multiplier effects, could increase GDP by 0.3 percentage points per year.

Although Mexico faces challenges in achieving gains from nearshoring in the short term, these would likely be overcome.

IS NEARSHORING REAL? YES, SAYS BANK OF AMERICA (BELIEVER)

Bank of America (BofA) affirms that nearshoring in Mexico is real. BofA Global Research noted in a January 4, 2023 note on the outlook for Mexico that the country has a unique opportunity with the nearshoring and ensures that there is reliable evidence that the relocation is real and is already helping the Mexican economy.

Foreign Direct Investment in new capital was US$14.5 billion in the first three quarters of 2022, the most since 2013, when Mexico enacted several structural reforms, while manufacturing increased to 16.8% of GDP in the third quarter of 2022, the highest percentage since 2007.

The pull factors are: Mexico’s location, USMCA, large manufacturing base, macroeconomic stability, political stability, relatively skilled labor, and relatively low wages in Mexico.

TOO SOON TO TELL IF MEXICO WILL WIN FROM NEARSHORING: UBS (SKEPTICAL)

UBS believes that it may be too soon to tell if Mexico will become a clear winner in nearshoring.

While Mexico has undeniable strengths such as its proximity to the US, USMCA, manufacturing know-how, and low language barriers, it also has some drawbacks such as security, energy costs and reliance on fossil fuels, and political uncertainty.

UBS said in a note published in December 2022 after a trip to Mexico by the bank’s analysts, that part of the investment may be related to changes to stricter rules of origin, imposed by the T-MEC, rather than with the corporate relocation trend.

Mexico will benefit from nearshoring, but UBS doubts that in 2023 it will be a sufficient driver to allow the country’s economic results to decouple from those of the US.

NEARSHORING IS ALREADY HAPPENING IN MEXICO: BARCLAYS (BELIEVER)

Mexico is already enjoying the effects of Western companies moving their production centers out of China, Barclays Plc said in a late November 2022 report reported by Bloomberg News.

Direct Foreign Investment should exceed US$40 billion by the end of 2022, compared to US$26.6 billion last year, Barclays projected. He highlighted that around half of inflows come from new investment and that the gap between exports from China and Mexico has fallen to 31%, from 62% in 2017.

Barclays acknowledged that nearshoring is in its initial stages and agreed that Mexico faces power supply problems, low investment in infrastructure and a weak rule of law and security. However, he argued that geopolitics, rising labor costs in the US and China, and transportation distances supported his optimism.

NEARSHORING WILL DEPEND ON BUSINESS ENVIRONMENT: MOODY’S ANALYTICS (SKEPTICAL)

The relocation of investments to Mexico is a reality, which is definitely favorable for strengthening the country’s productive capacity, but its effect will occur mainly in the medium term, Alfredo Coutiño, director for Latin America at Moody’s Analytics, told Bloomberg Línea.

He believes that the potential of nearshoring will depend to a large extent on the business environment offered and promoted by the government. “Policies and rhetoric contrary to free competition will continue to generate an environment of reluctance for private investment in the country,” he said.

In 2023, the country’s economic growth will drop, even with the relocation of investments. If this investment process is strengthened and given the traditional effect of the political-electoral cycle, growth in 2024 could pick up to 3%, although the economy will be subject to a slowdown.

With information from Bloomberg