Unleashing the Catalyst for Mexico's Nearshoring Growth

Mexico is poised to reap substantial benefits from nearshoring, driven by its strategic geographical location and proximity to the United States. The industrial sector is the cornerstone to achieve this ambitious goal, as it plays a pivotal role in wealth creation. But to be truly successful, the industrial sector needs to be backed by strong policies, according to the Confederation of Industrial Chambers (CONCAMIN). 

"Industrial policy emerges as a vital catalyst for economic growth, aiming to reinforce public policies that sustain the country's industrial sector," says José Abugaber Andonie, President and Director General, CONCAMIN.

Mexico stands on the brink of economic prosperity, with nearshoring emerging as a key driver. Its geographical proximity to the United States and a well-established trade network are catapulting Mexico into the spotlight as a nearshoring hub. The country’s advantages are palpable, ranging from cost reduction and access to talent to improved product quality and reduced operational risk, adds Abugaber.

The ongoing trade disputes between the United States and China have created a big opportunity and shifted global trade dynamics. Mexico has become an alluring alternative strategically positioned and boasting resilient supply chains. The disruptions caused by the COVID-19 pandemic further underscore the importance of proximity and reliability, aligning perfectly with Mexico's nearshoring narrative.

The potential economic windfall from nearshoring is substantial. By leveraging nearshoring opportunities, Mexico could attract an additional US$35 million to US$65 million in Foreign Direct Investment (FDI), explains Abugaber. Beyond the monetary gains, such a move has the potential to create a million jobs for every US$10 billion invested, providing a crucial solution to combat informal employment, he adds.

Nearshoring’s anticipated contribution to Mexico's GDP growth, which is expected to surpass 3% this year, is a testament to its transformative power. However, realizing this potential demands significant infrastructure investment between US$3,750 million and US$10,000 million annually to bolster the electrical infrastructure, explains Abugaber. Therefore, for every percentage point that the GDP grows, Mexico must invest 0.5% in electrical infrastructure annually.

The path to nearshoring success in Mexico has challenges, especially since Vietnam holds the top position in nearshoring, with Mexico ranking seventh. Therefore, for Mexico to succeed, it is necessary to implement fiscal incentives to attract and retain businesses in the nearshoring ecosystem. 

Simultaneously, a comprehensive National Infrastructure Plan encompassing water, electricity, and road infrastructure is essential for sustained growth, says Abugaber. The strategic focus on energy, particularly renewable sources, is paramount in nearshoring, paralleled by the secondary importance of water. 

Engagement with authorities, both at the national and regional levels, becomes imperative to shape industrial policies that foster nearshoring. Strategically positioned development zones like the Interoceanic Corridor can become focal points for economic activity, adds Abugaber. This corridor boasts of abundant water resources, potential for ample energy, and significant labor force. 

Addressing regional imbalances to prevent disparities between the northern and southern regions is also crucial, as it will ensure overall national equilibrium. This approach also contributes to retaining Mexicans in the country by mitigating their migration to the United States, says Abugaber.

Aligning with the goals and investments announced by the United States, certain sectors emerge as pivotal for nearshoring success: semiconductors, printed circuits, energy, electromobility, and medical devices.

As of 2023, Mexico's economic landscape is thriving, explains Abugaber. The country can boast of robust GDP growth of 3.5%, FDI reaching US$33 billion in the first nine months, and positive industrial growth rates in key states such as Baja California (6.1%), Sonora (5.2%), Mexico City (4.2%) and Guanajuato (2.2%). These signs point to a nation on an upward trajectory, he adds.

The strengthened labor market reflects a robust internal economy, with a record 22.3 million workers registered with the Mexican Social Security Institute (IMSS). Despite a slight dip, consumer confidence maintains an upward trajectory, indicating a positive sentiment among the populace.

Abugaber highlights that In October 2023, the Global Business Confidence Indicator registered a level of 55.4 points, a 5.6-point increase compared to the same month in 2022.

International trade remains a linchpin for Mexico's economic vitality. While monthly trade figures fluctuate, year-to-date records reveal record-high exports and a strategic decrease in imports. Efforts to manage inflation, which stands at an annual rate of 4.26%, indicate a proactive approach to economic stability. Meanwhile, the currency dynamics, marked by a favorable exchange rate of MX$17.55 per dollar in November 2023, pose challenges for exporters but open avenues for acquiring foreign machinery at a lower cost.

To capitalize on the advantages of nearshoring, Mexico needs to join forces and pour efforts into key sectors, including infrastructure development, service assurance, productivity enhancement, entrepreneurship, innovation, financial access for small industries, export promotion, and a commitment to sustainable practices. “Working hand-on-hand, the government, industry, academia, and society can face every challenge that comes our way,” says Abugaber.