Nearshoring positions Mexico above China | 18 September 2023
September 18, 2023

The emerging Cold War presents a promising business landscape, and Mexico finds itself in a highly advantageous position to capitalize on this opportunity. The ongoing tensions between the United States and China are reshaping the global trade landscape, driven by the US’s quest to reduce its reliance on geopolitical adversaries for supply chains and to source imports from more proximate locations. Mexico stands out as a prime contender on both fronts, and this is a significant factor in its recent achievement of surpassing China as the largest supplier of goods to its massive neighbor, the United States.

Mexico Surpasses China as the Largest US Trade Partner

In the month of July, Mexico has outstripped China, contributing to 15% of US imports while China accounted for 14.6%. Beyond this remarkable feat, Mexico can boast of resurging exports, an exceptionally robust currency performance this year, and one of the most outstanding stock markets globally. Moreover, foreign direct investment has already surged by over 40% in 2023, even before Tesla Inc. commences the construction of its anticipated $5 billion factory. This level of investor attraction has not been witnessed since the North American Free Trade Agreement (NAFTA) was signed in the 1990s.

Historical Missed Opportunities and Contemporary Hurdles

Nevertheless, it is essential to recognize Mexico’s historical pattern of missing out on potential moments of prosperity. Over the past three decades, even substantial trade agreements with the world’s largest economy, akin to the current wave of “nearshoring,” have attracted considerable foreign investment but failed to extricate Mexico from its economic stagnation.

Since 1994, the year NAFTA came into effect, Mexico’s economic growth has averaged a modest 2% per annum, falling significantly short of the performance expected from developing economies and proving inadequate to alleviate the plight of millions of Mexicans trapped in poverty. Comparatively, Turkey, Malaysia, and Poland offer compelling examples of nations that were less affluent than Mexico at the dawn of this century but have since achieved substantial economic advancement.

Tesla’s Influence and the industrial hub

A notable case in point is Tesla’s role in Mexico’s evolving industrial hub. Two years ago, when Tesla was on the verge of opening a factory in Texas, the company sought a supplier capable of manufacturing the intricate components for its electric vehicle computers, which connect to satellites and enable autonomous driving in close proximity, thereby eliminating the need for long-distance shipping from China. Taiwan-based Quanta Computer Inc., where Campa was employed until recently, responded to the demand and established production facilities in Monterrey, the capital of Nuevo León state. The process began in August, with production already underway by December. Moreover, Tesla is poised to become a neighbor, with plans for the construction of the Monterrey Gigafactory set to commence this year.

Exploring the Implications of ‘Friend-Shoring’ on Future Trade

The manufacturing plant faced a persistent challenge of frequent power blackouts, severely affecting its productivity. This recurring issue stemmed from the strain placed on the city’s electrical grid by its rapidly expanding industries. During these trying moments, thoughts regarding Mexico’s economic prospects took on a somber tone. The question arose: Could a significant portion of the nearshoring phenomenon relocate elsewhere due to Mexico’s apparent lack of capacity to accommodate it? Despite the obstacles, there’s an undeniable sense that certain regions within Mexico are currently experiencing an industrial renaissance.

In Monterrey, the telltale signs of growth are evident, with dust from construction equipment permeating the air as new manufacturing plants spring up. Warehouses are in such high demand that they are being snapped up before the finishing touches, such as ceilings and doors, are even added. The industrial space has expanded by a remarkable 30% since 2019, a surge attributed in part to the rush to supply components for Tesla’s operations. Notable players in this expansion include AGP Group, specializing in windshields, China’s DSBJ focusing on electronics parts, and Italy’s Brembo SpA, known for producing brakes – all of whom are either setting up new facilities or expanding existing ones.

The Tesla effect has been substantial, with more than 30 companies making their move to Nuevo León following Tesla’s announcement of plans to establish factories in Texas and Nuevo León. According to Ivan Rivas Rodriguez, the state’s economy minister, Tesla issued a directive to its suppliers, urging them to establish a presence in North America. Rivas sees his role as crucial in ensuring these deals come to fruition.

However, the industrial transformation in Mexico isn’t solely centered around Tesla. Other major automakers, including General Motors, Kia Motors, and BMW, have announced substantial investments in electric vehicle production in Mexico since the beginning of 2021. The expansion isn’t limited to the automotive sector; electronics and home appliance manufacturers are making their mark in the country’s heartland. Along the border with California, industries in aerospace and plastics are experiencing growth as well.

Industrial parks are rapidly reaching capacity levels. Nationwide, vacancies plummeted to just 2.1% last year, according to data from the Mexican Association of Private Industrial Parks. In Monterrey, securing a lease often necessitates a commitment of a decade or more. Notably, approximately three-quarters of these renters are foreign enterprises, as highlighted in a survey conducted by Spanish bank BBVA. Among the new entrants, one in five are Chinese companies, many of which are seeking to circumvent US tariffs. The robust demand for industrial real estate has prompted substantial investments. Corporación Inmobiliaria Vesta SAB, an industrial real estate developer, raised nearly $450 million in a US initial public offering in July, marking the largest such offering by a Mexican company in over a decade. The company is expediting a $1.1 billion pipeline of projects to meet the surging demand resulting from nearshoring. Prologis Property Mexico SA and its parent company have plans for a substantial $1.2 billion investment in warehouses and land.

Local landowners have also reaped significant benefits from this economic resurgence. José Maria Garza De Silva, a third-generation leader at Grupo GP, a prominent developer, reminisces about the past fifteen years, marked by a consistent declaration of “We’re here, we’re here, and then – boom!” The company has a stake in Monterrey’s most extensive industrial park. Nevertheless, Nuevo León faces potential limitations on its growth due to its natural resources, most notably, water. A drought in the previous year left reservoirs nearly empty, leaving thousands of residents without access to water. The local industry had to accept a reduced share of the state’s water supplies, prompting the government to expedite the construction of a new aqueduct aimed at supplying water to Monterrey and addressing this pressing issue.

The lingering question revolves around whether domestic investment will see an uptick – a development that could effectively disseminate the benefits of the nearshoring boom more equitably and propel the economy onto a swifter growth trajectory. In the absence of such an upturn, some economists contend that Mexico may find itself increasingly reliant on importing components for assembly and subsequent export, with minimal value added within the country’s borders.


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