The Trend Report, May 2023 Edition | Volume 16 – Issue 05
If we think about it, the last five years have been somewhat of a ‘perfect storm’ for Mexico. The first conversations about nearshoring, came about when the US decided to place tariffs on Chinese imports in early 2018. This coincided with the ratification of the revised NAFTA Agreement (USMCA) later that year, immediately followed by the global pandemic and the disruptions it caused to off-shore manufacturing and global supply chains. More recently, President Biden’s visit to Mexico in January 2023 further cemented Mexico’s role as a strategic partner in building back the North American block. At that meeting, President Biden expressed interest in having Mexico, along with Canada, play a more prominent role in some of the industrial initiatives undertaken by the US government to advance innovation, while bolstering independence from Asia on matters of national security such as semiconductors, electromobility, and energy. In August of last year, Biden signed the CHIPS and Science Act, which included the International Technology Security and Innovation Fund, which provides the State Department with $500 million over five years to partner with key allies, like Mexico, to ensure a more resilient and secure semiconductor supply chain. Furthermore, the Russian-Ukraine war continues to increase tensions in the region, further incentivizing US industry to operate closer to home, not to mention the impact the war has had on global energy prices, boosting Mexico’s oil revenue. It’s been a win for Mexico all around.
So where does Mexico stand currently? For the second consecutive month this year, Mexico is now the United States’ largest trading partner, according to the US Census Bureau. February alone closed with a total trade volume of $60.6 billion, with Canada following closely behind at $59.3 billion, and China in somewhat of a distant third place, at $42.2 billion. According to Pedro Casas of the American Chamber of Commerce of Mexico, the total trade volume between US and Mexico for 2022 was $779.3 billion dollars, which represents a remarkable 17% increase over 2021. It is estimated that foreign direct investment (FDI) in Mexico also increased by 12% in 2022. Mexico’s Ministry of Economy estimates total FDI at $35.3 billion, of which $15 billion was American direct investment alone. Of this total, the manufacturing sector was the big winner, receiving roughly $12.7 billion in FDI, or 36% of the total. So, there’s no question that Mexico is in a strategic position for foreign investment, and there is no question that nearshoring has and will continue to impact the Mexican economy beyond anyone’s expectations. But the question remains: Is this sustainable?
From the perspective of its geographic location, Mexico’s proximity to the US and time zone alignment continues to make a compelling business case. The ease of trade and transport of goods and individuals across borders is not only convenient, but a dramatic cut in costs and time.
As it pertains to connectivity, Mexico’s robust multi-modal infrastructure, including eight key railways, 11 main truck gateways, and 15 federal seaports, has allowed Mexico to keep up with demand in this initial stage of increased trade and production (Andres Mendoza, et al, Kearney 2022). Nevertheless, Mexico’s government committed $38 billion USD in 2022 for additional improvements to roads and railways, not to mention investments by private companies like Kansas City Southern and Canadian Pacific Railway who recently merged to create the first and only single-line railroad connecting Canada, US and Mexico (Mexico New Daily, Feb 2023).
Last, but certainly not least, is Mexico’s human capital, which is perhaps its greatest asset. Mexico has enviable demographics (for now). Whereas China, Japan, and much of Europe are aging, in Mexico, according to INEGI, the national census bureau, of the total 130 million population, approximately 60.3% is economically active, with a median age of 29. Compare that to the 39-year median age of US workers, or 41 median workforce age in China. Mexico’s workforce is also diverse, ranging from low-skill, affordable production labor, concentrated mainly in southern states, to highly-skilled professionals and tech talent mainly in the northern states along the US-Mexico border. Overall, wages in Mexico are still below those in China, averaging $4.45 per hour in Mexico, and $5.51 per hour in China, according to Statista’s most recent publication on labor rates. In summary, Mexico continues to be highly competitive from a diversity, skills, and cost perspective, which allows it to adapt and cater to a vast array of industries.
But now, the country is not without challenges, and if I had to sum up what they are, I would say real estate and energy. According to Jonathan Pomerantz, Chief Investment Officer of MEOR, one of the largest private developers of industrial parks in the country, Mexico will be facing a deficit of approximately 120 million square feet of industrial space in 2023 alone. Developers are struggling to keep up with demand, and this is due primarily to the government’s inability to supply electric power for these new projects, particularly in the north, which has seen the majority of new construction. CFE, the government owned and operated electric power company, has been desperately trying to meet the demand, as evidenced by their recent acquisition of 13 power plants from Iberdrola, the Spanish energy giant, for $6 billion USD, and their recent $1.6 billion USD investment in a solar power plant in Puerto Penasco, Sonora, the largest in Latin America, to be partially operational this month (Mexico News Daily, Feb. 2023). While there is a concerted effort to meet demand, there may be a lag in the government’s ability to deliver. Having said that, these challenges are not deterring companies in their expansion efforts. Tesla recently announced a $4.5 billion dollar investment in a new factory just outside of Monterrey, Nuevo Leon. And BMW, who has been operating in San Luis Potosi for many years, announced an additional $800 million USD investment to expand their electric vehicle production.
In conclusion, I would say that Mexico is well positioned to capitalize on this once, or twice-in-a-lifetime opportunity, or as well positioned as possible, given the nature and magnitude of the global disruption. Let’s just hope that the Mexican government continues to provide an environment of certainty and security for further investment, including addressing crime and corruption. On the private sector side, let’s hope they can embrace and exploit this historic moment along with their North American counterparts, and consolidate what may be the world’s new economic powerhouse.