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News Article

Uncertain Energy Supply Threatens Nearshoring Boom in Mexico

By María José Goytia | Fri, 09/30/2022 - 13:10

Nearshoring represents a unique opportunity for Mexico to leverage foreign investment and consolidate its role within North American value chains. However, the lack of reliable, accessible and clean energy limits the country's potential to exploit this opportunity to the fullest.

Problems in the electricity supply for some regions of the country as well as general insecurity are the main concerns companies show when considering relocation to Mexico, warned industrial players.

The conflict between the US and China, the COVID-19 pandemic and Russia's invasion of Ukraine have placed global supply chains before an impasse, causing many industries to consider relocating their operations to regional hubs.

Thanks to its geographic advantages and availability of skilled labor, Mexico stands out as an attractive option for industrial relocation. However, the lack of guaranteed energy availability for this growth limits the attraction of these investments in the country.

Sergio Argüelles, CEO, Finsa and President, the Mexican Association of Private Industrial Parks (AMPIP), commented that "the main challenge to take advantage of the arrival of new investments will be to guarantee the availability of energy and provide certainty in the country for the installation of industrial parks and warehouses."

Argüelles also highlighted the shared commitment that the three levels of government must build in conjunction with civil society associations to meet the needs that companies have to maintain their operations in Mexico and to receive those new investments that will foster greater economic growth and well-being.

"Yes, we will continue to attract investment, we need to continue working with the different players that affect us. As an association, we have been talking with CFE to coordinate our actions and avoid production stoppages or energy shortages in certain locations," Argüelles explained.

In general, all AMPIP member industrial parks have energy reserves to cover from 6 to 12 months of consumption in case of power shortages or outages. However, AMPIP stressed that it is working with the state-owned company to avoid energy supply problems affecting industrial activity.

"We have presented the work table to CFE, including 34 different projects on behalf of AMPIP and the company has dealt with each of the partners individually," Argüelles explained.

By 2022, AMPIP members will invest around US$2.5 billion to build 25 new industrial parks, which will add more than 6 million m² to the industrial real estate market.

Although AMPIP invests in energy infrastructure through the construction of electrical substations, the association highlights the pending problem of connectivity in Mexico. "There may be enough power production, but the problem is the transmission and distribution of this energy to the different sites where a greater energy supply is being demanded," commented Argüelles.

The lack of access to cheaper, cleaner and more reliable energy is a priority for investors seeking to relocate their operations in the country. In Mexico, industrial activity consumes 32 percent of the energy supply. Therefore, increasing power production capacity and boosting public investment in high and medium power transmission and distribution lines to development poles is crucial to take advantage of the industrial investment potential. "The most important service for the manufacturing and transformation industry is electricity," said Sergio Mireles, CEO, Datoz Consultora.

According to official data, cumulative FDI in electricity between 2012 and 1H2022 totals US$15 billion, of which US$10 billion entered Mexico between 2014 and 2018. From 2019 to 1H2022, the drop in investment was one of 88 percent.

According to the Program for the Development of the National Electricity System (PRODESEN) 2022-2036, Mexico requires at least US$26 billion of investment in electricity generation and a US$20 billion investment in transmission and distribution infrastructure to cover an energy demand of 110GW in the next three years. 

 A growing population, digitalization and nearshoring-driven industrial growth will continue to accelerate energy demand in the country. If FDI were to enjoy a higher degree of certainty, the electricity sector could experience a rebound that would benefit the entire economy by strengthening productive capacities.

"It is a fact that CFE cannot do it alone," concludes Ana Lilia Moreno, Coordinator of Regulation and Economic Competition, México Evalúa.

The data used in this article was sourced from:  
El Financiero, El Economista, Animal Político
Photo by:   Pixabay
María José Goytia María José Goytia Journalist and Industry Analyst