Nearshoring Logistics Challenges, Mexico's Infrastructure Needs

Mexico stands at a pivotal point with the rise of nearshoring, which presents unparalleled growth prospects. However, unleashing Mexico's potential as a logistics hub demands the strategic alignment of infrastructure development and technological evolution. 

Global analysts recognize Mexico as the fourth most attractive destination for nearshoring investments, trailing only behind Japan, Canada, and the United States. Despite the numerous opportunities it could bring to the country, this trend is also challenging existing infrastructure, services, policies, and business practices. For example, cross-border processes are critical bottlenecks in the supply chain, especially in the wake of nearshoring, says Antonio Tejedo, Executive Vice President of Investor Relations, Traxion. Effective coordination across both countries is necessary to address this problem, as is technology, he adds. 

Nearshoring also challenges Mexico’s uneven regional development. The concentration of substantial nearshoring-related investments in specific regions raises concerns about regional disparities. Nuevo Leon, for example, captured 38% of proposed investments, followed by Sonora with 31% and Queretaro with 9%, as highlighted by Santander Mexico. This concentration could leave other regions with fewer economic growth and development opportunities. As capacity becomes a significant challenge in the nearshoring landscape, there is a need for a strategic and inclusive approach.

Despite the challenges, nearshoring is a transformative event for the country, says Tejedo. "Nearshoring is bigger than any bottleneck. This trend's force will overcome any obstacle; the bottlenecks will slow it down, but nearshoring seems inevitable," he says. Mexico also has one of the largest number of engineers within the OECD, and its location makes the country an unavoidable part of global logistics, explains Tejedo.

Strategic infrastructure investments in Mexico are imperative to meet the escalating demand for nearshoring logistics. The initial challenge lies in enhancing logistical infrastructure, spanning mobility, roads, airports, maritime ports, and railways. This entails modernizing transportation networks and leveraging technological advances for optimized supply chain processes. However, the country needs many more coordinated actions across all levels of government to streamline the arrival of more companies.

"It does not matter if there is infrastructure if the other factors are not in place. Infrastructure development presents obstacles. An example is rights of way, the country needs coordination between federal and state policy. Climate risks also generate challenges, especially regarding access to financing," says Luis Ampudia, Head of Project Information, Banobras.

The industry will also need essential energy, water, drainage, and gas services. Ensuring reliable access to these services creates an environment conducive to industrial operations. The lack of renewable, affordable, and reliable energy sources could deter potential investments. Thus, prioritizing sustainable energy solutions is imperative to attract and retain foreign investments.

Water and energy access are just part of the challenge, says Paul Sarrapy, President, AOLM. While Mexico is a viable option, stakeholders need to initiate activities to meet the rising demand in the country. Despite talent being a strength in Mexico, there is a significant challenge in relocating and attracting talent to the nearshoring hubs, says Sarrapy. Thus, the country must take a proactive approach to align talent with operations due to the country's regional distribution of skilled workers, he adds.

Sustainability is also key, says Sarrapy. Despite ongoing efforts, many Mexican companies still need to fully embrace investments in sustainable technologies. This is a challenge especially as access to financing is increasingly tied to companies' Environmental, Social, and Governance (ESG) efforts, adds Ampuda.

When deciding whether to invest in Mexico, 41% of manufacturers cite concerns over capital costs and 34% over legal and regulatory obstacles, according to Standard & Poor. Security concerns rank in third place among their major considerations.

Sarrapy points out that the Association of Logistics Operators of Mexico, which oversees over 100,000 workers, has witnessed significant investments over approximately three decades, primarily due to Mexico's strategic location. The disruptions in the supply chain brought about by the pandemic accelerated the trend toward regionalization. This breakdown underscored the critical importance of Mexico's geographical position. "There exists a deficiency in infrastructure, presenting an opportunity for Mexico to embrace intermodality. The challenge lies in forging partnerships between the government and the private sector to create incentives that stimulate the necessary investments for enhancing industry processes," says Sarrapy. 

The industry is also in the early stages of digitalization, and advancing in this aspect will instill confidence in investors, manufacturers, and operators, encouraging the expansion of operations within the country, says Sarrapy. The influx of foreign companies is expected to bring with it a focus on technology. Therefore, addressing the digital divide is equally urgent. Closing gaps in digital infrastructure, including coverage, access, and affordability, is essential to harness the full potential of nearshoring.