Mexican Businesses Embrace ‘Nearshoring’ Trend as Investment Boosts Profits

Mexican businesses are welcoming the rise of ‘nearshoring’ as a way to boost profits and stimulate economic growth. Nearshoring refers to the trend of locating manufacturing facilities in Mexico, closer to the US market, rather than in Asia. This approach is expected to add up to 1.2 percentage points to the country’s growth, which is projected to reach 3.5% this year.

Despite concerns over cartel violence, and challenges related to water and energy supply, both local and foreign businesses are looking to take advantage of the evolving production chains. Many companies are already discussing the economic benefits of nearshoring and believe that this trend will take off in the near future. However, it may take some time to fully realize the potential.

Earnings calls during the third quarter of this year were full of discussions about nearshoring. In the first half of 2023, Mexico saw around $29 billion in foreign direct investment, representing a 5.6% increase from the previous year. More than half of this investment went into the industrial sector.

One notable project that reflects the impact of nearshoring is Tesla’s plan for a $5 billion factory in northern Mexico. This project has already attracted $1 billion in Chinese investments to nearby industries. It serves as an example of the economic benefits that nearshoring can bring.

Mexico’s gross fixed investment is on track to achieve its strongest annual growth since 1997, with a year-on-year increase of 31.5% in August.

With the momentum of nearshoring expected to continue for the next 15 years, Mexican real estate investment trust Fibra Uno has plans to launch a trust that allows investors to capitalize on the growth of industrial assets.

Despite concerns, demand for manufacturing properties in Mexico is expected to rise by nearly 80% from last year. The strong demand comes from sectors such as automotive, electronics, and machinery.

Construction firm Vesta believes that not only the northern region but also the central carmaking region known as El Bajio will benefit from nearshoring. This region, which includes states like Queretaro, Guanajuato, and Jalisco, is considered a prime location for multinationals due to its labour pool and logistics infrastructure.

Relocation activity is set to fuel significant growth in northern, western, and central Mexico. Among the advantages Mexico has to offer are its shared border with the US, favourable trade agreements, and lower labour costs compared to Asia.

However, challenges remain due to concerns over the government’s control of energy. The instability of electricity transmission, water scarcity, and limited industrial space are already creating bottlenecks for the investments the country is receiving.

Despite these challenges, nearshoring is already making a tangible impact on the Mexican economy. Cement company GCC reported increased demand for cement driven by the construction of industrial projects in Chihuahua state, which borders Texas. Overall, the Mexican construction output saw a significant growth of almost 46% in August year-on-year, with strong performance in northern states.