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News Article

Mexico’s Manufacturing Potential Stifled By Challenges

By Cinthya Alaniz Salazar | Wed, 05/11/2022 - 17:17

Mexico has the potential to become a global manufacturing hub but lacks important capabilities related to infrastructure, digitalization and diversification of productive capacity. Bridging these gaps will be fundamental if Mexico is to seize the nearshoring opportunity emerging from the reconceptualization of global supply chains, according to industry experts.

“Relations between the US and China have deteriorated as they compete for global hegemony. This has manifested vulnerabilities along their supply chains, which represents an important opportunity for Mexico,” said Deepak Chhugani, Founder and CEO, Nuvocargo.

The COVID-19 pandemic upended traditional supply chains across the world and exposed various vulnerabilities and inefficiencies that are largely tied to a lack of digitalization. These challenges echoed through the manufacturing sector, which came to compound inflexible operating practices, e-commerce’s sudden exponential growth and rising commodity prices. Ultimately, this resulted in logistical congestion and bottlenecks that hurt entire industrial sectors and end-consumers alike. Altogether, in the post-pandemic reality, it has become observably clear that geographically disaggregated supply chains are no longer viable. Instead, it is likely that economies will defer to geographic units for the production and transportation of goods, representing a significant nearshoring opportunity for Mexico, said Óscar del Cueto, President, General Manager and Executive Representative, Kansas City Southern México.

Before Mexico can begin to capitalize on this investment, it will first need to prioritize the development of domestic competencies, starting with infrastructure. Mexico needs to prioritize strengthening the connectivity and security of its internal infrastructure across railroads, roads and ports. Addressing this issue highlights the importance of federal and local state support, as these governments approve and oversee the development of infrastructure projects and have the power to improve security along these avenues. As it is, security is the highest cost for the transportation of goods in Mexico and it is of immediate concern given that investor confidence is directly tied to it. This was a concern that resonated with transportation workers who staged protests that crippled the national railroad network in 2021 and congested roads earlier this year.

A parallel development is the digitization of processes to improve traceability and expedite international exports, which are plagued with time-consuming bureaucratic customs. Logistical companies in Mexico are racing against the clock to modernize and digitalize their internal process to gain market supremacy. They must also cope with the surge of e-commerce and prepare for the influx of business expected to come from US manufactures. To support these efforts, the Mexican Transportation Institute (MIT) announced plans to develop a national intelligence center for transport and logistics innovation to digitize data from Mexico’s logistics hubs, making the country’s supply chains more competitive. Ultimately, an important aspect of this transformation involves streamlining processes at the border, which will require public and private investment, said del Cueto.

Another element of this strategic development involves the diversification of Mexico’s manufacturing capacity and its export portfolio as a means of reducing risk, said Wilfredo Ramos, President Mexico and Latin America District, UPS. Currently, Mexico’s manufacturing capabilities are concentrated mainly in automotive manufacturing, but the country has the capabilities and investment attractiveness to expand into new frontiers. Bridging this gap will be challenging but Mexico should be able to extract value from its standing free-trade agreements with its northern neighbors, which have expressed interest in exporting their manufacturing to Mexico. At the moment consultants lack sufficient information to guide this process step-by-step, but these issues are not different to the ones they first encountered when US businesses decided to export their manufacturing process to China, said Carlos Ornelas, Associate Partner, McKinsey & Company. Ultimately retroactive feedback between these partnerships can give way to a fruition of a North American industrial manufacturing unit.

These three elements highlight a starting point for Mexico to begin building up as needed to attract investment and partners, key steps in the achievement of its ambition of becoming a manufacturing hub.

Cinthya Alaniz Salazar Cinthya Alaniz Salazar Journalist & Industry Analyst