Mexico has been another key beneficiary of nearshoring. The country boasts an already large manufacturing sector; a strategic location as a US neighbor with significantly shorter transport times versus China; a high skilled yet lower-cost workforce; and good international trade cooperation on the back of the recently renegotiated North American Free Trade Agreement (NAFTA), aka the United States-Mexico-Canada Agreement (USMCA).
Existing manufacturing ecosystems are already well integrated into the US, and new corporate policy agendas will probably drive future capital expenditure tailwinds. CBRE data show demand for industrial space in Mexico has doubled from 2020-21 and was forecast to double again from 2021-22, with approximately one out of every four square feet going towards nearshoring, about 70% concentrated around Northern Mexico.
The recent decision from Tesla to build a battery manufacturing facility in Northern Mexico is evidence of both corporate interest in nearshoring and high demand for industrial space in Mexico. Our recent visit to Mexico coincided with Tesla’s final investment decision, which made the cover of several local newspapers and came up in all 24 meetings we had during our trip.
Mexico has typically been thought of as a high beta, or more volatile, play on the US economy, meaning that it is viewed as moving with greater momentum, either up or down, relative to the US.
However, even with a slowdown in the US, remittances should continue to support domestic consumption and the peso, while ongoing nearshoring investments could offset a broader global slowdown.
Current manufacturing exports from Mexico represented about 35-40% of that nation’s GDP in 2022 and should continue to grow as existing and emerging manufacturing clusters take market share from Asian economies, and thus potentially reverse trends since China’s entry into the WTO in 2001.8,9
The US imports some USD575bn per year from China compared to about USD450bn from Mexico.10,11
For each market-share point gain in US imports, Mexico’s GDP could increase by approximately 2.6%, or some USD33bn.12
In general, Mexico offers more geopolitical stability than China, as well as more robust intellectual property rights and environmental regulations. Moreover, wages, commodity costs, healthcare costs, and taxes tend to be lower than in China, on top of greater proximity to US end consumers.
Despite the positive dynamics, Mexico probably still needs to improve its infrastructure, increase energy production, and continue growing its skilled labor in order to meet expected demand from nearshoring “waves” in the future.
Unfortunately, the current AMLO Administration has been slow to act, and we view it as one of the main impediments to Mexico benefitting even more from nearshoring.
In our view, Mexico needs to materially increase investment/GDP to build the capital stock needed to allow for more nearshoring expansion, and the government is slowly realizing this ahead of the 2024 Presidential elections.
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