Nearshoring is expected to fuel manufacturing growth across Mexico over the next several years as shippers look for supply chains that are closer, cheaper and more favorable to doing business with the U.S.
Mexico offers transportation options that are shorter and less expensive than those from Asia, a lower-cost labor force and a country causing fewer trade concerns compared to China.
While nearshoring in Mexico is starting to become a reality on a large scale, the country faces fierce competition for foreign manufacturing investments from countries such as India, Vietnam, Thailand and Malaysia. China will also continue to fiercely fight for its share of the global market.
FreightWaves recently spoke with Jorge Gonzalez Henrichsen, co-CEO of the Texas-based The Nearshore Co., an international trade and development firm that helps companies set up shelter operations in Mexico. The Nearshore Co. helps operate 13 factories around Mexico for 30 clients in various industries.
In addition, FreightWaves also interviewed Mark Russo, head of industrial research for Savills, and Carlos Olson, vice president of Occupier Services-Savills in Mexico. London-based Savills is a global real estate services provider.
Russo and Olson recently collaborated on a report titled “Mexico Drawn by Labor and Location Advantage” on how more global production is shifting to Mexico from countries such as China.
“With this nearshoring trend, we found local and macro data showing that Chinese companies are increasingly expanding in Mexico instead of in China,” Russo told FreightWaves.
Here are five things Mexico needs to do to keep the wave of nearshoring momentum headed south of the border.
Mexico needs to reinforce its status as a magnet for foreign investors.
While the nearshoring wave has arrived in Mexico, Mexican authorities should be committed to promoting the country as a secure place to invest their operations, Gonzalez Henrichsen said.
Over the past several years, Mexican President Manuel Lopez Obrador’s administration has reversed the previous administration’s policy of liberalizing the energy industry in favor of state-owned companies. The move has prompted some private-sector companies in Mexico and abroad to become cautious about investing in the country.
In July, the U.S. and Canada filed a complaint against Mexico under the United States-Mexico-Canada Agreement trade deal, saying Mexican authorities have favored the country’s state-run companies over U.S. and Canadian firms. The USMCA dispute panel has yet to announce its decision.
“The government has to send positive signals, especially now that we have a golden opportunity to really boost manufacturing and supply chains in Mexico,” Gonzalez Henrichsen said. “We’re not the only country out there. You have India, which is a powerhouse, they’re doing the iPhone. You have Vietnam, Thailand. Just because we share these huge borders with the U.S., Mexico is not the only option.”
Gonzalez Henrichsen said any company that wants to put a factory in Mexico has to be thinking about electricity generation.
“I think that’s a concern with almost any company that you speak to, what’s going to happen to the electric industry, and that really is in the hands of the federal government to regulate and to unregulate,” Gonzalez Henrichsen said.
Another dispute that has recently arisen between the two countries is Mexico’s ban on imported genetically modified corn from the U.S. starting in 2024.
Mexico is one of the world’s largest importers of corn, the majority of which comes from the U.S. In 2021, Mexico imported $4.7 billion worth, behind only China ($5 billion). In December, Mexican authorities decided to postpone the ban on genetically modified corn until 2025. Both sides said they are still far from reaching an agreement to settle the trade dispute, according to the Associated Press.
Russo and Olson said there is also a lack of government incentives and energy infrastructure that could challenge future growth.
“Apple has 150,000 employees in China, right? Imagine that Mexico brings those jobs to Mexico because of whatever incentives they can bring to get them to come here,” Olson said. “The first thing that China will do is to push back against Apple, maybe tell them, ‘You will never sell an iPhone here again,’ and they could block that market. That’s how China plays it.”
Olson said because of China’s tough stance against leaving the country, Mexico should have more incentives for manufacturers to take the leap and put factories in the country.
“Right now, the Mexican government, the federal government, is completely asleep, they don’t really offer any types of incentives,” Olson said. “The only ones that are putting in the effort are the state governments, but state governments don’t have a lot of power. We could offer more, such as tax holidays or land for free. We could definitely bring a lot more and compete much better with Asia.”
Expand the country’s labor pool and manufacturing base.
Mexico’s export manufacturing industry is centered around several regions, the largest of which is along the U.S.-Mexico border, in the Mexican states of Chihuahua, Coahuila, Nuevo Leon, Tamaulipas and Baja California.
During the third quarter of 2022, these five states accounted for $71.7 billion in exports, led by the state of Chihuahua at $20.2 billion, according to Mexico’s national statistics agency (INEGI).
In comparison, Mexico’s 27 other states accounted for $63.1 billion in exports during the fourth quarter. The Mexican state of Guanajuato, where hundreds of automotive factories are located, accounted for $8.4 billion in exports during the quarter.
“Being right on the border definitely has advantages from a logistics perspective. That is difficult to compete with when you’re thinking of central Mexico,” Gonzalez Henrichsen said. “For U.S. companies, it’s also easier to attract U.S. talent when your factory is right on the border because the U.S.-based plant manager is bringing the family and they’re living in the U.S., so they still have U.S. schools, U.S. health care, U.S. shopping malls, but the manager is crossing every day to the plant in Mexico.”
Gonzalez Henrichsen said for Mexico to stay competitive on a global scale, the country must expand its manufacturing base and labor pool to more states.
“If you want other states to be competitive, you need to really make public policy efforts, and the federal government, they have a different minimum wage on the border (minimum wages are higher along the border) than the rest of the country,” Gonzalez Henrichsen said. “One of the reasons is they want to make labor costs more competitive if companies go further south. There’s other reasons to have this different minimum wage, but that’s one of them.”
Gonzalez Henrichsen said on a regional level, many state governors across the country have also been aggressively trying to attract more OEMs.
“If they can attract OEMs, it creates a whole ecosystem of suppliers from around the world, which is what happened in Bajio (in the state of Guanajuato) with automotive,” Gonzalez Henrichsen said. “A lot of companies took the leap and went to the center of Mexico.”
The top Mexican-made products being exported to the U.S. include cars and trucks, household appliances and medical instruments, as well as food and beverages such as beer.
Trade volume from Mexico to the U.S. totaled $382.1 billion during the first 10 months of 2022.
Olson said there is more than enough skilled labor in Mexico to produce any kind of product across multiple industries, especially automotive, aerospace and electronics.
“It’s divided by regions. You have talent, for example, in textile in certain regions, or for automotive in other regions, depending on the area based on the graduates from there, people that graduate from universities that want to work in manufacturing,” Olson said.
Create more warehouse and industrial space.
There is currently a 1.6% vacancy rate for industrial space across Mexico, with the greatest demand for spaces of at least 100,000 square feet, according to Russo and Olson.
“I think it speaks to the demand for the market relative to supply at the moment,” Russo said.
Both labor and transportation costs are the primary forces of the transition of production from China to Mexico and driving demand for space, Russo and Olson said.
“We saw a lot absorption in large buildings, from 500,000 square feet to 1 million square feet, from e-commerce companies,” Olson said. “On the larger scale, we see larger users, the automotive companies or metal producers, we’ve seen these types of larger transactions coming in, but the 100,000-square-foot buildings are the sweet spot that developers come in and do.”
The demand for space is centered around the U.S.-Mexico border region, as well as major cities such as Monterrey and Mexico City.
“There are three areas that keep booming. First is the entire border region, cities like Reynosa, which is across the border from McAllen, Texas, and Mexicali, which is near Tijuana. Mexicali is booming,” Olson said. “Reynosa used to have low demand. Now there’s almost a zero percent vacancy rate.”
Olson said logistics and manufacturing space around Monterrey and Mexico City are in high demand because of their large populations, which give companies access to labor.
“You have manufacturing on the border, logistics around Mexico City and then automotive in the Bajio region (central Mexico),” Olson said. “If you ask me where demand is the most right now, the most active area is Monterrey.”
Improve and protect the Monterrey-Nuevo Laredo highway.
Mexico’s federal highway 85, sometimes referred to as the Monterrey-Nuevo Laredo highway or the NAFTA highway, is a major roadway that connects Mexico City and Monterrey to Nuevo Laredo, where freight trucks cross the border at the World Trade Bridge in Laredo, Texas.
More than 2.6 million commercial trucks crossed Laredo’s World Trade Bridge last year.
Cargo theft increased 23% last year compared to 2021, with the roadways just north of Mexico City being some of the most dangerous in the country. There was also an 80% year-over-year increase in the use of violence to steal tractor-trailers from roadways, totaling 507 incidents in 2022.
Olson said the highway needs to be expanded more to take advantage of the increased trade going on between the U.S. and Mexico, while also being better protected from cargo thiefs.
“For that being one of the main roads for trade, it should be much better protected in terms of security,” Olson said. “[The government] is investing in it, they are constantly growing it, especially right now outside of Mexico City, but it is still in need of being much, much more improved compared to the roads that China has, for example. For being the main road, it is not at a high standard.”
Keep Mexico’s maquiladora program strong.
Mexico’s maquiladoras have been an important generator of manufacturing and employment in the country for decades.
Maquiladoras are mainly located along the border and are defined as a factory in Mexico run by a foreign company and exporting its products to the country of that company.
Over 3,000 maquiladoras provide employment for about 1 million workers, making products such as medical devices, consumer products, electronics, aerospace parts and automotive parts.
In 2006, the Mexican government expanded the maquiladora program and renamed it the Manufacturing, Maquila and Export Service Industry (IMMEX), which allows foreign manufacturers to import raw materials and components into Mexico, tax and duty free, under the condition that all finished goods will be exported out of Mexico.
Gonzalez Henrichsen said IMMEX has been a success for Mexico.
“IMMEX has attracted investment in Mexico, because with a shelter license, it is a very quick way to get companies into Mexico with very little risk,” Gonzalez Henrichsen said. “We are able to have a company come sign a manufacturing services agreement, such as a U.S. company or U.S. entity, and from that moment on, four weeks later, our clients are actually shipping products out of Mexico.”
Gonzalez Henrichsen said the only recommendation he has to make the IMMEX program more attractive is to simplify it. There are currently five different types of IMMEX license or registration programs: holding companies, industrial, services, shelter and outsourcing.
“Why don’t we just have one IMMEX license? Depending on what on what a company wants to do in Mexico, having more than one, it just creates more costs, because you’re audited and then all that admin overhead, that goes with managing the complexity, which is an issue.”
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Eric
Manufacturers should also consider Central America and Haiti as alternatives to investing in Mexico. This would also help slow illegal migration to the U.S. from countries such as Guatemala, Honduras, El Salvador, and Haiti. All these countries are relatively close to the U.S. Also, finding labor in Mexico will become increasingly difficult as Mexicans prefer working in the informal sector (60% of the economically active people work on their own) as they favor the flexibility it provides, and not paying taxes is an additional incentive.
Carlos Olson
You give us a clear blueprint of where to focus on as a Country to take this one in a generation opportunity.