Global Manufacturing Tumbles but Mexico Remains Strong

Global manufacturing activities have not recovered from the impact of the COVID-19 pandemic and following disruptions, contracting for the third consecutive month in September 2022. The downturn in manufacturing is the earliest sign of an impending global recession, reported FrontierView. Partial recovery is expected by late 2023, with certain markets showing resilience, including Mexico.

The global manufacturing sector contracted in September, continuing a downturn that began in April 2022. Production fell at the fastest rate since April, when lockdowns in China disrupted global manufacturing activities. Besides the pandemic, the drop was the most abrupt since 2012. Two-thirds of major markets are currently suffering a contraction, including the EU, the UK, China, Japan and South Korea.

The decline was partially countered by expansions in the US, Brazil, India, Southeastern Asia and Australia. EU manufacturers continue facing pressure from rising energy prices, in addition to poor demand on domestic and international orders due to tougher economic conditions and uncertainty, reported FrontierView.

During 2Q22, Mexico’s manufacturing GDP amounted to MX$5.43 billion (US$2.7 billion), an increase of 3.67 percent compared with 1Q22, according to the Government of Mexico. According to INEGI, manufacturing industries registered a total of 608,256 business units in the country. The states with the most business units are the State of Mexico with 64,989, Oaxaca with 53,556 and Puebla with 53,292. In pre-pandemic figures, gross production amounted to MX$10.8 billion (US$5.4 billion) in 2019.

Manufacturing industries are the most important economic activity in Mexico. In 2021, the industrial sector contributed to 18 percent of the country’s GDP, followed by real estate services, which occupied the second place with a 9.6 percent contribution, according to Statista. The automotive sector is the leading manufacturing industry in Mexico, making up about 20 percent of the manufacturing GDP and 3 percent of the country’s overall GDP.

Mexico could continue to thrive in the manufacturing sector, taking advantage of the global decline. FrontierView forecasts that China will not end its zero-COVID strategy before the end of 2023, resulting in weak business confidence and fluctuations in production due to factory closures, operational difficulties and weaker demand. These factors, in addition to logistics costs and nearshoring trends, have opened big opportunities for Mexico.

Nearshoring: Mexico’s Edge

The pandemic exposed weaknesses in global supply chains and globalization, with production stops across several industries due to component and raw material shortages. Over the past two years, companies have turned to nearshoring to tackle the problem. In addition, logistics and fuel costs worsened the situation, favoring relocation of international companies in Mexico that are taking advantage of the USMCA.

Sea freight saw a stratospheric price increase. In 2020, the cost to transport a full container load from China to Mexico ranged between US$1,800 and US$2,500. In 2021, the same route and same container capacity ranged from US$12,000 to US$16,000. In 2022, sea freight is coming down but still remains close to that in 2021, wrote for MBN Carlos Canseco, Director, Queretaro Innovation Logistics Cluster.