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Energy Policy and Industrial Nearshoring

By Roberto Ballinez - HR Ratings
Executive Finance and Infrastructure Director Sr.


By Roberto Ballinez | Director - Fri, 02/03/2023 - 13:00

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As we all know, the industrial relocation (nearshoring) process began with President Donald Trump's trade policy against China in 2019. However, this process did not stop with the change of government in the US. It has deepened due to the COVID-19 pandemic and the inflationary cycle that we are experiencing. Another important fact to highlight is that this migration is made up primarily of companies dedicated to supplying consumer goods and services to the North American market.

Industrial relocation will bring benefits to those countries that can attract it, but it will undoubtedly also represent many challenges. We must be aware that these companies will look for a place where there are efficient logistics routes, cheap and trained labor, and above all a legal environment that guarantees the execution of long-term contracts. In addition, we must consider the requirements in terms of infrastructure that these companies need for their production processes. Having said this, the challenges are enormous for any country that wants to attract this foreign investment.

Despite all the shortcomings of our country and the areas in which it lags,  Mexico can become a great place for companies seeking to relocate. Among our country’s advantages, which we all know, are its geographical location, a flexible labor market and its macroeconomic stability. Along with this, probably the existence of tax incentives, provided by federal and state authorities, would be another attractive element for the arrival of new companies.

However, in terms of energy infrastructure assets, our current offer may not fully cover the requirements requested by these new companies. For example, let's think about the automotive industry, the battery industry, or the semiconductor industry; in these cases, we must be aware that these types of industries are highly demanding of electricity and natural gas.

Particularly with electricity, it is important to understand that the industry requires cheap, reliable, accessible and, above all, clean energy. According to the International Renewable Energy Agency (IRENA), the global annual growth of renewable energy has been around 9% in recent years. However, more than half of this new generation capacity has been developed in Asia. Undoubtedly, Mexico must invest more resources to increase the participation of these generation sources within its energy matrix and, therefore, be attractive to new industries. According to the National Energy Control Center (CENACE), at the end of 2021, 57% of the electricity in Mexico was generated with combined cycles (which use fossil fuels) and only 28% with renewable energy.

In addition, this investment must also include the construction of new charging stations as well as the expansion and modernization of our transmission grid., The aim is to deal with the complexity associated with system management, since it is likely that our current transmission network will face congestion problems and, therefore, will be unable to meet the electricity demand of a growing production plant.

Regarding the supply of natural gas, we can say that our country offers a globally competitive price and its availability represents an opportunity for the growth of the industrial sector. Among the infrastructure works that are being developed, we can mention the construction of gas liquefaction plants, both in Salina Cruz, Oaxaca, and in Ensenada, Baja California. Despite this, without a doubt, it is also necessary to invest in the expansion of the gas pipeline network and in the storage of the resource.

Having said all that, the energy policy that our country decides to carry out will either slow down or accelerate the economic potential of the relocation of companies in Mexico. In particular, the policy related to the generation of electricity through clean energy is key.

More and more companies are being instructed by their boards of directors to produce their goods and services with less polluting energy. In this sense, if we cannot guarantee a supply of clean and reliable electricity, it will be difficult for foreign investment to reach our country.

Given these circumstances, in my opinion, we should promote greater investment in wind power generation projects around the Interoceanic Train and materialize the goals of the so-called Plan Sonora in terms of solar power generation (with the solar farm in Puerto Peñasco). The intention is to  encourage new poles of industrial development in the north and southeast of the country. In fact, it is precisely in these regions of Mexico where there is the greatest potential in the generation of clean energy.

Finally, we know that last year, the northern region of our country had an outstanding performance in relation to the relocation of companies. It even seems that the supply of space in its industrial parks is running out. According to the consulting company Market Analysis, between January and September 2022, various companies rented or leased approximately 4.224 million square feet of industrial buildings to install a plant or production lines in Monterrey, Saltillo, Tijuana, and Ciudad Juarez s well as in Queretaro and Mexico City.

Photo by:   Roberto Ballinez

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