Nearshoring and Supply Chain Development: Aligned and online?

In recent weeks, the demand among foreign companies for landing options for their investments in Mexico has accelerated. All these companies have a similar objective: to maintain or obtain a strategic, cost-effective position to supply the North American market, particularly the US. 

Companies looking to relocate their operations from Asia to the Americas may either be Western firms that have lost the competitive advantage of producing in Asia and shipping their final products or pre-assembled components to our shores, or Asian enterprises that are looking to venture, many for the first time, directly into the North American playground.

Sergio Argüelles, the current President of the Mexican Association of Private Industrial Parks (AMPIP) and General Director of FINSA — one of the most relevant industrial park developers in the country — told Forbes magazine recently that “despite factors such as the lack of water and violence, the arrival of companies in the expansion of operations and transfer of factories from Asia to Mexico has not inhibited, the nearshoring phenomenon has exhausted the available spaces.” Argüelles, a seasoned and respected leader in the sector, is correct in describing the industrial developer's bonanza but I humbly believe he falls short in the assessment.

Indeed, according to analysis firm DATOZ, the absorption rate of industrial real estate is practically at its peak in the north and center of the country, and the trend remains positive. But is it really a reflection of nearshoring, offshoring, or ally-shoring strategies? 

Unfortunately, I certainly don't think so.

Foreign companies have undeniably arrived but we must take the facts with a grain of salt: According to the Ministry of Economy, Mexico bagged US$27.51 billion  foreign direct investment in the first half of 2022, an increase of 49.2 percent compared to the same period in 2021.

However, this surge reflected "extraordinary movements" related to the merger of the television conglomerates Televisa with Univision and the debt restructuring of Mexico's flagship air carrier Aeromexico, which together represented US$6.9 billion, approximately 26 percent of the total amount.

Suppose we break it down a little more? In that case, the information by type of investment or origin of financing shows that only 43 percent originated from new investments. Yet, 42.4 percent is the direct result of profit reinvestments and 14.6 percent from accounts between companies. So, the data is not bad at all, right? 

Wrong, and worrying. Almost 60 percent of the foreign direct investment is a safeguard to maintaining operations while deciding the next steps.

We can extrapolate from this analysis that companies continue to be cautious of the general conditions for investment beyond incidental issues like insecurity, lack of water, and energy. They will not fade (yet) but stakeholders will not put all their eggs in a basket shaken by uncertainty.

Let's look at another piece of data from the Ministry of Economy. Investment by country of origin also does not reveal the appetite of Asian companies for Mexico: The US contributed 39.9 percent, followed by Canada, with 10.3 percent; Spain, with 6.8 percent; and Argentina, with 5.9 percent. The UK accounted for 3.3 percent, Germany 2.6 percent, and the rest of several unspecified countries contributed the remaining 31.2 percent, possibly Asian. Still, the authorities' methodology does not allow them to identify them, leading to a premature ringing of the bells for the supposed nearshoring success.

If we observe the figures by sector, manufacturing activities received only 34.3 percent and transport 16.3 percent, which shows that the growth of foreign investment is very focused on finding logistics solutions to source the US market. 

The pendulum is swinging, and if adequate measures are not taken to reinforce the attraction of new investments in manufacturing, Mexico could soon find itself in a predicament. 

On the one hand, a significant reduction in the cost of transporting containers from Asia to America is already beginning to manifest itself (A 40-foot container from Shanghai to Manzanillo went from US$18,000 in June to less than US$6,000 in September, which is at pre-pandemic levels). On the other hand, the paradox is that today, sending a container of the same proportions from Monterrey to Indianapolis can cost almost the same as shipping it from Asia, which radically affects Mexican competitiveness. Of course, the story might be different if we manage to pair some added value or national content. We will examine this issue in our next article.

Similarly, tariffs can be a factor, but depending on the products, they may or may not impact the price of the final product. Logic indicates that US-China relations will continue to motivate international companies to seek options and redundancies in their supply chain, so I think it is necessary to ponder how to boost the strategy of enhancing successful supply chains in Mexico. Just consider this: What if inflationary pressures force the US International Trade Commission (USITC) to recommend reducing some tariffs to ease life for domestic consumers? Or perhaps the ongoing panel on energy policy review under USMCA treaty rules will go sour, and some tariff compensations will be passed onto Mexico early next year?

I firmly believe that if, as Daniel Stanton, an international specialist on the subject, says, "a supply chain is a complex network made of people, process and technology that is engineered and managed to deliver value to a customer," we need to rethink what public policymakers, economic development entities, and private businesspeople are doing to advance value chains and analyze in more detail if our perception is in line with reality. In other words, what are we doing to crystalize the nearshoring opportunities into tangible and realistic outcomes? How are we creating our own “complex network” model?

Large Asian corporations are going to study — and are currently looking with great care and depth — if there are conditions to establish solid supply chains before embarking on the adventure of coming and settling fully in Mexico. Many may choose contract manufacturing solutions that don't meritoriously represent new investments; others might remain too shy to push the throttle fully and stay at a sparing threshold. Frankly, they don't care about the PR picture of a local government investment announcement. Instead, they want to see if we are up to the task of clearly developing soft-landing conditions for effective operations.

I don't want to convey that the implemented public policies are dead wrong. Still, there's room to avoid missing the train and have a successful nearshoring attraction strategy. The dilemma mentioned in this article is part of our current agenda with Spyral's customers. Together, we are finding innovative actions with outside-the-box solutions to support them successfully jettying on our haven.