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Near-shoring boom boosts Mexico’s economy

Changing supply chain dynamics have created a surge in near-shoring activities. But the government must do much more if the economy is to benefit in the long term, says John Manners-Bell.

I have had the good fortune of visiting Mexico City three times in the last year to speak to different audiences about the forces driving the development of the global supply chain and logistics industry. Each time I have been impressed by the dynamism and energy of the people I have talked to and how fast things have progressed in this country, even over the last year.

Many of the themes I was discussing in 2022 – which I’m guessing many people found slightly remote – are now at the top of the corporate agenda. There is definitely a feeling that the country has moved from the post-Covid stage and is now looking at the huge opportunities which are in the offing. Take near-shoring, for example. There has been a surge of interest amongst US (and other) manufacturers in either relocating production to Mexico from China or using Mexican suppliers. This has led to demand for cross-border logistics and warehousing services. Many businesses were burnt by the West Coast port congestion which snarled supply chains or are worried about the risks involved in dependence on China. Others are benefitting from the huge subsidies on offer from Biden’s Inflation Reduction Act which is encouraging investment in green technologies, particularly electric vehicles. Mexico’s membership of the USMCA free trade bloc and its status as a trusted ally of the US (despite some obvious tensions) have combined with a low cost labour force and direct, land-based connections to put the country in an ideal position to take advantage of the boom.

However, as I made clear in my presentation to the ANIQ annual forum of chemical executives in October 2023, the potential may be there, but it still has to be realised. Whilst those I spoke to were positive about the prospects for near-shoring driven growth, there was a huge level of frustration about the business environment. There were concerns that the government had little interest in engaging with the industry’s challenges and that ports and road infrastructure were creaking under the pressure. In many cases this is not due to a lack of ‘hardware’ but to inefficient operational practices and trade processes leading to congestion. One speaker compared clearance times of 4 hours in China against the weeks it might take in Mexico. There is also a lack of trucking capacity and drivers, a situation which may be made worse by a new US visa system which will encourage many drivers to move north of the border.

‘Vanity projects’ such as the Tehuantepec isthmus corridor railway – an alternative to the Panama Canal – were also cited as examples of populist policies which had little practical value to ease present capacity problems. Security, corruption and general mismanagement are also putting off investors although a more beneficial tax regime is in the offing. A poll at the ANIQ forum of chemical industry leaders found that 60% of respondents had experienced an increase in the number of security incidents over the past year.

Indeed, the results of this year’s Agility Emerging Markets Logistics Index were confirmed by the many conversations I had with industry executives: great potential for domestic and international logistics but poor performance in terms of ‘digital readiness’ (for example the strength of ICT and energy networks) and business fundamentals.

The success of near-shoring relies on a combination of US economic growth, the adoption of supply chain risk mitigation strategies by global manufacturers and the right domestic conditions in Mexico. If any one of these imperatives is compromised, Mexico’s growth prospects will be compromised. An example, of this is that Tesla is apparently cooling on its decision to locate a new factory in Mexico despite the regional government committing $130 million to infrastructure improvements. The consequences would reach far beyond Tesla’s own investment. If the auto manufacturer reverses its decision, a possibility due to slowing demand for EVs, the region could lose about $1 billion in investment by Tesla’s Chinese suppliers which are planning to locate close to the assembly plant.

There is no doubt that near-shoring is already bringing the Mexican economy a significant ‘windfall’. If the right domestic policies are put in place and the US economy remains robust there is no reason why this trend will not power growth for many years to come, allowing the government to modernise infrastructure and raise living standards which will result in a ‘virtuous economic cycle’. However, this is by no means guaranteed. Much work is required by government and industry to ensure that the country takes advantage of the transformation of global supply chain strategies.

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