Mexico is seeing strong growth in manufacturing. OEMs are building up their supply networks in America’s southern neighbor to nearshore their supply networks closer to the U.S. market and secure redundant sources of supply. “Due to strong U.S. demand and a revival of the auto sector, investors are moving in and banks are getting ready to finance new projects,” in Mexico, reported Bloomberg in April. “Exports of non-petroleum goods grew almost 27% in February compared with the year earlier.”
With the USMCA trade agreement providing greater certainty on trade rules and more transparency around labor and other ESG issues, OEMs in industries ranging from automotive to furniture, toys to medical products are growing their Mexico-based supply chains. Even semiconductor production will grow in Mexico on the heals of the CHIPs Act, predicts Monica Duhem Delgado, head of market intel at Mexico’s Secretariat of the Economy. As new U.S. fabs tool up, Mexican companies can provide back-end process steps such as assembly and testing (as a center of automotive supply chains, Mexico is already a major destination for automotive semiconductors).
Mexico’s largest categories of exports to the U.S. in 2019 were vehicles ($101 billion), machinery ($66 billion), electrical machinery ($64 billion), and agricultural products ($28 billion), according to U.S. trade data. In the current investment surge, the furniture industry is one of the sectors increasing operations in Mexico most robustly. Furniture Today reports that Chinese furniture makers Manwah and Kuka “have both made massive investments in Mexico to bring production closer to the U.S. Market.”
U.S.-headquartered Marge Carson—with a 25-year history of manufacturing in Tijuana—announced last year that it would shift its entire business model, consolidate operations and exit all case goods manufacturing in Southeast Asia “in an effort to reduce supply chain and freight bottlenecks,” according to Furniture Today.
Many OEMs are building out their Mexican supply bases while maintaining contracts with Asian suppliers, according to Marketplace. Toy maker MGA Entertainment recently opened two factories in Juarez, but “is keeping its U.S. factory and its relationships with Chinese factories.”
As Resilinc blog readers know, the imperative to develop multiple supply sources arose from the unprecedented disruptions and delays of the last two and a half years. One CEO recently reported that merchandise that merchandise – which used to take 21 days to travel from China to the port of LA or port of Long Beach – now takes 159 days to get to the warehouse.
“That ability to go from one to two to three or four suppliers for different items to ensure [products are] available for the consumer [is] a big issue that’s being addressed right now,” Tom Stringer of BDO USA told The Wall Street Journal.
For companies used to dealing with Chinese suppliers, shifting supplier networks to Mexico “will be more management-intensive” writes Harris Bricken attorney Dan Harris on Lexology. “In Mexico you should plan on putting in serious amounts of time, money, and energy developing relationships and connecting the dots of your new supply chain.”
“Mexico has a lot of untapped potential and a universe of possible new partners for those willing to put in the time and bandwidth to develop them,” wrote Harris. “Building networks and finding sources may not seem like the best use of your time, but in Mexico there was never a “race to the bottom” on pricing, or a government directed ramp-up of capacity. The ability to put together deals and develop networks is a valued skill here. Those whose main professional experience has been Shenzhen or Shanghai will find much of their experience isn’t exactly on-point in Mexico City or Monterrey.”
And for those looking to expand in one of the five border states, vacancy rates for commercial and industrial real estate are very tight. “If you’re trying to find real estate or industrial parks or warehousing close to the border, you won’t get anything until 2024, 2025,” Omar Troncoso, a partner at Kearney’s Mexico City office told Marketplace.
President Lopez Obrador’s (known as AMLO) energy policies could also pose barriers. As AMLO re-nationalizes the electricity sector, “companies that need power for new plants in Mexico are struggling to secure adequate supplies,” reported FT in July. And because Mexico’s state-owned CFE relies on oil and gas burning power plants, publicly held companies with strong ESG commitments may “simply leave” Mexico, according to Alberto de la Fuente, president of Mexico’s Executive Council of Global Companies.
But business leaders say that while AMLO’s policies have hampered some foreign investment, nearshoring and supply redundancy have become major drivers that will outlast the current president, whose term expires in 2024. “The [momentum] for nearshoring is big and hopefully will outlast ALMO and help Mexico in the medium term,” Ernesto Revilla, head of Latin America economics at Citi and a former Mexican finance ministry official, told FT.