Mexico Strengthens Advantage in the Global Industrial Sector

At the outset of 2022, we are seeing multiple regions in Mexico leverage their advantages as part of North America to receive strong, continuing industrial investments from global operations.

Our team, NAI Mexico serves national and global companies through our 15 offices and we track 20 industrial markets in Mexico. As CEO, I have the opportunity to discuss expansion plans with global manufacturing executives across the country. Weekly, we analyze which groups are investigating each region and confirm how they arrive; whether they reply to economic development agencies, consultancies, or by stealthier means. It's always an interesting combination depending on the project teams’ previous experience and resources. Yet, their reasons for targeting regions vary significantly.

In the northwest, Tijuana has always been a destination. With nearly 700 firms, it hosts the largest number of foreign manufacturing operations in the country. Due to its proximity to California, in 2021, Tijuana received the largest investment demand in its 40- year industrial history. 

Similar trends are occurring in the other border markets. Juarez, with its north-central location, allows manufacturers to ship overnight to both the Midwest and Western markets in the US. Juarez offers highway access but also benefits from its access to the US rail system.

For the last two years, the biggest surprise has been Monterrey, the “Chicago of Mexico.” Located close to commercial entry ports at McAllen and Laredo, Texas, it hosts a 100-year supplier infrastructure and many of Mexico’s national firms. This balance, along with the perception of a quality lifestyle for expat global managers, has driven Monterrey's highest level of demand in recent history.

Mexico City attracts continuing demand each year and progresses at its own pace, independent of the border. Once the world’s largest city, both manufacturers and logistics firms invest yearly to support the populace of more than 20 million people. During the last 36 months, logistics and fulfillment providers, led by Amazon and Walmart, have expanded to meet the growing national demand.

Central Mexico continues to see steady growth with tech and logistics operations in Guadalajara and automotive OEMs and suppliers in the Bajio states.

More sophisticated industrial sectors are also benefiting from being in Mexico.

During the ‘90s, we watched Mexico attract low-skill, low-tech assembly operations, offering labor rates at 10-20% of comparable rates in the US. This initial appeal has now evolved to include a tremendous scale up in the value chain. Many manufacturers now establish new Mexican facilities with state-of-the-art high-tech systems in their global platforms. With Mexico producing more engineers per capita yearly than the US and Germany, global managers are leveraging the higher level of resources, often including R&D centers of excellence from Mexico. The wage differential for higher skill sets, including engineering, is still a fraction of the US.

Earliest adopters to capture these benefits were the automotive OEMs, which required their suppliers to follow. There are automotive clusters in nearly every region of the country, now including the Japanese, Koreans, and the Germans. Mexico ranks sixth in worldwide production in the automotive sector.

Aerospace firms are investing in three regions: Baja California, Chihuahua, and Queretaro. Each cluster grew rapidly during the last 10 years, albeit with a slight downturn in 2020-2021. These regions are rebounding due to the competitive ability to capture strong engineering talent in Mexico.  Bombardier, Saffran, and the Boeing suppliers are continuing investments.

The medical devices industry continues its aggressive expansion in Baja California, Juarez and Monterrey.  A sector once established to assemble “disposables” has now evolved to include ventilators, cardiac, renal, hearing, orthopedics, dental, and optical care products. The facilities receive significant investment in clean room and ventilation systems from the tenants investing from the US, Denmark, and Germany. Many are experiencing sales growth of more than 20% annually.

Suppliers, logistics firms and “fulfillment” firms are located near these manufacturers. E-commerce providers have taken strong positions on the border markets and in Mexico City and will continue through 2022.

We are also seeing significant benefits for Mexico resulting from the supply chain disruptions in the Pacific Rim.

Seven years ago, labor rates in China rose to the same level as Mexico. While that drove some migration from China’s special economic zones (SEZs), at that point, local supplier bases were still very strong. There had also been some discontent with political stability and recently our clients sought a China + 1 strategy, primarily establishing additional capacity in Vietnam or Thailand. Now, Mexico has been added to the solution.

By February-March 2020, the Chinese response to the pandemic flipped the entire dynamic. Today, the pre-pandemic cost for our clients has become a dream, noting the cost per container has risen from $1,600 to $20,000. The extended waiting time at Los Angeles is clearly visible to anyone driving on Interstate 405, as all can see the cargo ships delayed in the harbor. The demurrage charges to store the offloaded containers exaggerate the expense.

We are receiving two types of Pacific Rim migration. The first is global firms producing in China, urgently seeking locations in Mexico to relocate operations after many years in China. This group consists of Fortune 100 firms in China supporting the same operations. The second group is made up of the Chinese and Taiwanese firms that long benefited from locational advantages but that are also now subjected to the same transportation issues, as well as stronger tariff and anti-dumping constraints. The vast majority of these firms are electing to transition to Mexico rather than the US. There are even two industrial parks catering exclusively to Chinese firms moving to Mexico.

Recently with the delayed global supply chain, we have experienced two clients urgently struggling to solve the delays. One furniture manufacturer from California selected its site in Tijuana but was reluctant to proceed without confirming raw material timeliness from China. A second client, an aftermarket auto conglomerate from Detroit, had already negotiated its site in Monterrey. In late January, the management team placed the project on hold, requiring more clarity for deliveries from its Pacific Rim while setting up supplier sourcing in Mexico. Most current clients that are able to move some production are in the planning stages now.

In early 2022, we are creating more sophisticated analytics to assist with global firms’ changing priorities and how they consider new industrial operations for Mexico. I expect investment demand for Mexico to significantly scale up and continue to evolve in more sophisticated fashion for the next 10 years.