Nearshoring Opportunities, Challenges for Canadian Companies

This might not be the first or the last article you read on nearshoring; the trade disruption brought on by the COVID pandemic, which severely affected producers and consumers, has made it clear that in order to counter this  phenomenon, each region shall reconsider the location of its supply chain as I had the opportunity to explain in a recent MBN article. 

In fact, the main takeaways after Canada, the US and Mexico met at the recent North American Leaders Summit in early January, were the need for each country to urgently deepen economic cooperation, strengthen supply chains and promote clean energy investments and innovation, across the continent. These are the types of commitments that are poised to boost regional integration and greenfield investments across the region, which will further trade connections between the three North American countries. 

At the same time, today’s media places a heavy focus on the terms nearshoring, friend-shoring, ally-shoring, and other similar terms, to describe how multinational companies are coming up with more ways to mitigate supply risks, by sourcing from closely-linked geographic neighbors     , with shared values. Moreover, these large companies are looking to integrate local providers in their supply chain, in the hopes that this new trend will bring a steady and sustained rise to international trade, in the upcoming years.

Over the past couple of years, Export Development Canada’s (EDC) team in Mexico has seen an uptake of Canadian companies interested in expanding internationally, either through trade or investments in production facilities in Mexico. These companies are increasingly seeking to benefit from existing trade agreements or regional partnerships, such as the Canada, United States and Mexico Agreement (CUSMA) and the Comprehensive Progressive Trans-Pacific Partnership (CPTTP). Mexico’s Ministry of Economy released figures showing that Canada has invested more in new projects in Mexico in the last 10 years than any other of the Top 5 overseas investors, becoming the second source of inbound foreign capital this year. This begs the question, why is Mexico becoming more relevant for Canadian importers and exporters in the context of the nearshoring trend?

Mexico is one of Canada’s key trading and diplomatic partners and both countries benefit from intimately connected economies, since the inception of the North American Free Trade Agreement (NAFTA) in 1994. Mexico is the world’s 15th-largest economy and the 10
-most populated country with more than 130 million people. Mexico is not only the second‑largest economy in the Latin American region, but its geographical proximity to the US, coupled with the fact that many multinational companies are moving to Mexico to be closer to the American economy, are among the reasons why Canadian manufacturers and service providers are now looking to integrate into Mexico’s supply chains and set shop south of the Rio Grande.

We have also witnessed Mexico’s rise as one of the most competitive manufacturing industries in the world, due to its high-quality labor force specializing in what EDC sees as sectors of the future: agribusiness, advanced manufacturing/technology in the automotive, aerospace, medical devices, electronics, appliances, and pharmaceuticals. As my colleague Jorge Rave explained in a recent MBN article, Canadian companies are a perfect match for North America’s future needs, given the emphasis leading Canadian firms place on technology and innovation and given their ability to be vital providers of natural resources, both critical minerals and preparing for a sustainable future.

In Mexico, the regions located in the north of the country, bordering the US (Baja California, Sonora, Chihuahua, Coahuila, Nuevo Leon and Tamaulipas), as well as the regions of the Bajio (Aguascalientes, Jalisco, Guanajuato, Queretaro, San Luis Potosi, Michoacan and Zacatecas) are likely to increase the country’s production and demand in the global value chains, due in part to nearshoring. These regions are becoming digital and corporate hubs in Mexico, due to their connectivity, infrastructure and a variety of multinational companies already operating and exporting to the US, Latin America, Europe and Asia. 

A clear example of this is the recent announcement by Tesla, regarding the opening of its largest electric vehicle (EV) plant in the world, in Monterrey, Nuevo Leon, which was also announced after a string of EV investments tied to BMW, General Motors, and Ford. The automotive parts and manufacturing sectors in Mexico are expected to make the country a leader in this field.

The above-mentioned sectors and the increased focus on EV production are aligned with EDC’s 2030 Strategy, as we look to support even more Canadian companies in their export journey. For instance, EV batteries are a critical element in Canada’s strategy to reach net-zero by 2050, and Canadian exporters and investors are ready to offer solutions to become active players within the tightly integrated North American supply chains.

Canadian exporters and investors with businesses in Mexico benefit from a myriad of interconnected relationships, doing business is always easier when you share time zones with your consumers or suppliers. It improves communication and provides a higher quality of client service. Canadian companies are highly focused on reducing their carbon footprint, and a North American partnership results in shorter shipping distances, which maximizes sustainability in supply chains by lowering customs and duty charges as well as transportation costs. Canadian and Mexican businesses also benefit from having shared high standards on matters of intellectual property. 

While Mexico offers tremendous business opportunities, it is important that Canadian exporters and investors navigate the corporate environment with eyes wide open. In fact, EDC has identified obstacles that may get in the way of Canadian businesses looking to set up in Mexico, to take advantage of this nearshoring trend. For example, the lack of modernized infrastructure in parts of the country that can lead to difficulties connecting different regions. There are much needed improvements to communication services in some regions and potentially a lack of reliable basic services such as clean water or electricity. To this end, observers have also identified lack of understanding of local regulations, complex business taxes procedures and a perceived disconnect between federal priorities and regional governments. Finally, there is also looming uncertainty from the current Mexican administration on the availability and supply of clean energy resources.

EDC has over 20 years of business experience in Mexico, and we predict that some of the barriers to business explained in this article may be addressed in the coming years. As innovation and corporations begin to make use of the North American interconnectedness, there will be a better comprehension of global commitments to address climate change and pressure from the domestic and international consumers of products and services provided by Mexico. 

At EDC, we believe in the ability of Canadian companies to have a greater impact in Mexico, with the help of our strategies that can provide solutions, knowledge and create networks to support Canadian companies. We welcome you to peruse our recently updated Doing Business in Mexico Guide, as well as our Doing Business in Mexico: 12 Essential Etiquette Tips. 

Stay tuned, as EDC’s team in Mexico will be delivering more comprehensive articles this year, explaining our strategy and providing even more solutions to address Canadian needs in key sectors. Our goal is to help Canadian companies succeed and take advantage of the nearshoring trend and pursue more of Mexico’s exciting opportunities.