Delivering on Nearshoring Promise Puts Demands on infrastructure

Tesla's arrival in Nuevo Leon, Mexico, recently filled the headlines of the main local and Latin American media. The electric vehicle company confirmed its confidence in the country to build its next “gigafactory,” which will entail an initial cost of between US$5 billion and US$6 billion and would be consolidated in a total of US$10 billion in its different phases.

The news is the best reflection that nearshoring, the trend by which companies relocate to manufacture products closer to the market where they are sold, is working and will be a key pillar for the Mexican economy in the coming years.

However, both the government and the business sector will have to work under pressure to guarantee the conditions needed to consolidate nearshoring, since the country requires a stronger industrial infrastructure to be able to offer the minimum to companies, such as stable electrical connectivity. Only in this way will the economy be able to receive the more than US$35 billion per year that relocation is expected to bring, according to the Inter-American Development Bank (IDB).

Transport Chains Are Key

The attraction of nearshoring to Mexico could be based on two main elements: the USMCA trade agreement between Mexico, the US, and Canada and the high tariffs that the US applies to Chinese imports, which are 25%.

It is there where the country has established itself as a "big player" in the relocation of companies, since around 88% of its annual exports to the US are routed by land and rail logistics networks, a solution to bottlenecks that the global supply chain is suffering, 90% of which is carried out by sea, according to the UN.

The development of more and better logistics and connectivity networks will be the key for companies not only to be interested in establishing themselves in Mexico but also to be able to do so in different states without excessive concentration. This was already seen in Tesla's decision. CEO Elon Musk’s choice of Nuevo Leon was decided, in part, due to its proximity to Texas and the available land routes, despite the fact that the AMLO government did not intend for the gigafactory to be there.

This type of action could even lead to a reduction in shipping costs to the US and an expansion of the cargo transportation sector in Mexico, given the growing demand that there will be for its services when the companies that have announced their interest in relocating begin to produce and sell.

But the scenarios also go beyond internal logistics chains, since the country must also prepare with measures like streamlining procedures for the arrival of companies, better development of industrial sectors, and advancing first-rate border infrastructure.

Industrial Parks and Power Generation

Logistical challenges are not the only area on which local and national authorities must focus. Undoubtedly, one of the biggest obstacles for industrial production companies to reach the country is electrical connectivity and its supply, a basic service needed by companies that have intense energy consumption.

This is due, in part, to the fact that Mexico reached its best occupancy level of industrial parks at the end of 2022, according to information from the Mexican Association of Private Industrial Parks.

That occupancy was 97% the previous year and precisely creates a new need for nearshoring: the construction of more industrial parks where essential services can be guaranteed and companies can establish themselves.

Our country is already working on it and the Association has identified almost 50 industrial parks that are in planning or construction, demanded by countries that include  China, Italy, Germany, and South Korea. Calculations indicate that before President Andrés Manuel López Obrador ends his term, the country should have 25 new industrial parks to meet the demand for nearshoring.

The Potential for Relocation

Foreign direct investment (FDI) in Mexico is already showing encouraging figures and the end of 2022 was a seven-year record, reaching US$35.3 billion, an increase of 12% compared to 2021 and an expansion that would be maintained given the positioning of nearshoring.

Relocation is absolutely promising and already a reality. Not surprisingly, Foreign Minister Marcelo Ebrard said in February that this trend will increase the amount of capital that will arrive in the country, since there are at least 400 companies on the list pending landing in Mexico.

Due to the reconfiguration of supply chains, unleashed by the COVID-19 pandemic, the blockade of the Suez Canal, and Russia's war in Ukraine, billion-dollar trade relations are also expected to have other types of actors.

For example, the European Union would boost its trade with the US by $359 billion over the next nine years, largely from US energy exports to Europe, while expanding its trade with Africa and the Middle East, according to Boston Consulting Group (BCG).

While this is happening, BCG expects trade between the US and China to fall in the same period of time by US$63 billion.

This is how the public and private sectors must take ownership of the golden moment that the Mexican industry and its international relations are experiencing, working so that nearshoring is consolidated and literally comes to fruition, since it also has the possibility of promoting investment from venture capital in the country and to boost investments in transportation, logistics and everything related to export services to the US and the continent.