Could Mexico replace China as top global manufacturing exporter?
Nearshoring represents ‘lifetime opportunity’ to invest in Mexico, experts say
Mexican Economy Minister Raquel Buenrostro said last month over 400 companies were currently looking to move operations from Asia to Mexico. Pictured is the World Trade Bridge in Laredo, Texas. (Photo: Jim Allen/FreightWaves)
While the world economy continues to face multiple headwinds, such as the Russia-Ukraine war, lingering pandemic effects and inflationary pressures, many trade professionals remain bullish about the prospect of more companies nearshoring operations to Mexico over the next decade.
A growing number of global shippers view Mexico as an alternative sourcing location to China and other Asian nations by either relocating manufacturing operations just south of the border or choosing to expand existing production in Mexico, experts said.
Nearshoring is the relocation of production and manufacturing operations from one country to another that is closer to the final consumer.
“I think executives are starting to rethink that decision of going to China and repositioning their strategy in terms of having dual manufacturing sites,” Rosemary Coates, executive director of The Reshoring Institute, told FreightWaves. “In the past five to 10 years, regardless of the pandemic, there has been a lot of development and growth in contract manufacturing in Mexico.”
According to Mexican Economy Minister Raquel Buenrostro, hundreds of foreign companies are currently interested in relocating to Mexico.
“More than 400 North American companies have the intention to carry out a relocation process from Asia to Mexico,” Buenrostro said at an appearance before Mexico’s Senate last month. “This is a sign of the importance of the United States-Mexico-Canada Agreement, a trade pact where ties with the U.S. and Canada have been strengthened, and where an institutional framework was established that grants legal certainty to investors, businessmen and consumers in the region.”
Carlos Capistran, Bank of America’s managing director of Canada and Mexico economics, recently said nearshoring represents a “lifetime opportunity” for companies to invest in Mexico.
“Mexico has a lifetime opportunity with near/reshoring, the relocation of supply chains to North America, and it has started,” Capistran said in a Bank of America report published in November.
Interest in Mexico is expanding rapidly
Joshua Rubin, vice president of the Javid Group, said in previous years his company used to get one or two calls a month from foreign firms inquiring about relocating manufacturing operations to Mexico. Lately, Javid has been receiving dozens of calls a month.
The Javid Group is a shelter company that facilitates foreign companies setting up manufacturing in Mexico. Javid is based in Nogales, Mexico, just across the border from Nogales, Arizona.
“When the USMCA went into effect in 2020, everyone expected this huge flood of companies into Mexico,” Rubin told FreightWaves. “Unfortunately, we had a pandemic going on. There were a few phone calls in 2020 but not a lot.”
The USMCA replaced the North American Free Trade Agreement among the U.S., Mexico and Canada in July 2020.
Rubin said 2021 and 2022 “flipped the script completely” in terms of interest in Mexico as a supply chain alternative.
“We began getting a lot of phone calls, about four or five phone calls a week, if not more, saying, ‘Hey, we want to move to Mexico,’” Rubin said. “Now in 2022, it’s a whole different story, we have definitely seen an explosion of companies interested in moving here.”
The nearshoring momentum for Mexico is also represented in some of the latest data on foreign direct investment (FDI), which has reached a record high this year in the country.
FDI in Mexico increased about 30% to $32 billion in the first nine months of 2022 compared to the same period in 2021, according to statistics from Mexico’s Economy Ministry (SE).
About 45% of the $32 billion total was new investment, 44% was reinvestment, and 11.1% was
financial transactions between different legal entities within the same parent company in Mexico, according to the SE.
The U.S. was the largest foreign investor in the Mexican economy between January and September at 39% of total FDI. The next biggest investors were Canada, 10%; Spain, 7%; Argentina, 5%; and Japan, 4%.
‘Nearshoring is a fad,’ China is not going away
Not all cross-border trade professionals feel that nearshoring in Mexico will have the impact that some predict it will.
“Nearshoring is a fad word,” Jorge Canavati, a principal at J. Canavati & Co., told FreightWaves.
- Canavati & Co. is a San Antonio-based company that provides international logistics and trade consulting. Canavati is also chairman of the San Antonio chapter of the Global Chamber of Commerce.
Canavati said China will continue to be a huge part of the U.S. economy and supply chain and that there has been migration of manufacturing from China, but to India, Vietnam and other countries.
“This is where the confusion lies, what is happening in Mexico is new investment, fresh FDI from around the world,” Canavati said. “A separate issue is that companies have been moving from China to Vietnam, India. There are various reasons for this: China’s strict COVID regulations, much of which are still in place, trade issues, etc. To be clear though, China will still be a force to contend with in trade.”
Canavati said Mexico is an “extraordinary place for FDI in manufacturing,” but if the country wants to attract even more FDI in the coming years, it needs to clamp down on violence around the country, continue modernizing digital and physical infrastructure and work on more binational projects with the U.S., such as border gateway infrastructure.
Mexico also needs to resolve its USMCA disputes with the U.S., which seem to be mounting, Canavati said.
Over the last year, trade disputes over energy and genetically modified corn have emerged between Mexico and the U.S.
“It is important to understand that the USMCA is a partnership,” Canavati said. “Making unilateral decisions like what is happening in the energy sector, the agriculture sector and other areas causes serious damage to FDI opportunities. Money scares off easily and confidence dissipates fast.”
Tariffs, transportation costs, labor and trade lanes
In addition to the Russia-Ukraine war and the pandemic effect, other factors sending factories from Asia to North America include the ongoing U.S.-China trade war, Mexico’s large manufacturing base and Mexico’s location.
“Mexico already has a large manufacturing base that is highly integrated with the U.S. and positions the country ahead of other economies to receive more manufacturing of products for the U.S. market,” Capistran said. “Mexico is a natural candidate for firms to relocate production to serve the U.S. market, following the fragmentation of global supply chains and the ongoing reversal of the China trade shock of the early 2000s.”
Capistran also said Mexico’s labor costs are now in line with those of China. In Mexico, minimum wage is around $1 an hour, while in China it has increased to about $3 an hour.
“To the extent that Mexican low labor costs remain below the costs of Asian manufacturing production, Mexico has a cost advantage,” Capistran said.
Coates cites import tariff benefits that are available to goods manufactured in Mexico as another element in nearshoring.
“Goods coming into the U.S. directly from China are subject to a 25% tariff,” Coates said. “Manufacturing products in Mexico, with Mexican parts and labor, may qualify for duty-free importation under the USMCA.”
Greg Orr, president of truckload carrier CFI, said he sees a lot of opportunity to capitalize on freight movements from all of the production relocating from overseas to Mexico. Joplin, Missouri-based CFI provides dry van and temperature-controlled truckload services throughout North America.
CFI’s cross-border operation accesses five major entry points, running tractors to and from the Mexican border, including its largest facility in Laredo, Texas.
“I think with the labor rates in Mexico being competitive, versus what it is in China, minus the transportation costs that you would have coming across the Atlantic Ocean versus crossing the border, I definitely think Mexico is positioned well to partake in attracting more companies,” Orr told FreightWaves.
Orr said he hopes that U.S. manufacturers will also bring back more jobs stateside, which would help cross-border freight movements with Mexico.
“I’ve heard a lot of stories and rumors that there’s quite a few companies that are looking to bring stuff back into the United States, and I hope that there’s just a good balance or combination of manufacturing on both sides of the border,” Orr said. “Because truth be told, as great as it is to have the northbound freight coming [to the U.S.] from Mexico, the hard part is getting the southbound freight to [Mexico] to be able to capture that freight going north. Right now, it’s definitely a lopsided ratio. I would hate for it to become even more lopsided.”