Is Mexico Prepared to Cash in on Nearshoring Opportunities?

COVID-19 has been a wake-up call for the risk of hyperextended global supply chains. Likewise, U.S.-China trade tension likely is to continue or even grow regardless of who is in the White House in 2021.

All of this sets the stage for unique historic nearshoring opportunities for Mexico. But is our southern neighbor ready to harness them?

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Given its strategic location, its wide network of trade agreements (in which the USMCA stands out), advanced manufacturing capability and production volume, and a developed network of Tier 1 suppliers, Mexico is in a privileged place to benefit from nearshoring.

Thanks to NAFTA and the USMCA, the Mexican auto industry has made important leaps in the past three decades.

According to the Mexican Automotive Industry Assn. (AMIA for its initials in Spanish), the industry directly employs almost 1 million people and more than 3 million indirectly. Meanwhile, foreign direct investment has exceeded $35 billion in the past five years.

And although Mexican suppliers leave behind the dream of exceeding production of $100 billion for this year, they still have a base of about 600 Tier 1 suppliers and 800 Tier 2 and Tier 3 suppliers. According to the National Industry of Autopartes (INA), production value could fall 23% to $75 billion for 2020.

So, what does Mexico need to do to maintain growth of its industry, which was producing 3.8 million light vehicles a year and selling 1.3 million before COVID-19?

Fitch Solutions recently calculated a score of 59.8 points out of 100 for risk/reward of Mexican automotive production. The score is above both the global average of 50 points and the average for the Americas of 43.2.

However, it’s worth noting the weakest factors Fitch identifies are cost and availability of services – specifically the cost of electricity, as well as short and long-term political risk. These points contrast with the strengths of the industry such as manufacturing capacity, production volume and a still-strong industrial policy.

For Oscar Albín, executive president of the INA, the pending tasks for Mexico to be more competitive in worldwide automotive production are promoting competitive utilities (electricity rates in Mexico are about double those of the southern U.S.), tax incentives and security.

But the most important factor he sees is peaceable labor relations, especially given the goals of independent and representative unions as outlined in the USMCA, as well as new government-union relations under the current executive administration.

Consulting firm Kearney noted progress by Mexico vs. China regarding 2019 exports to the U.S. in its Reshoring Index this year.

The report recognizes Mexico’s competitive advantages such as the recently implemented USMCA, its labor base, geographic location with respect to the U.S. and the development of its industrial base.

However, it adds Mexico will need to invest more aggressively in security, roads, ports and infrastructure to gain more global production share in the long term.

The most frequently cited negative messages from Mexican President Andrés Manuel López Obrador in terms of foreign investment are the cancellation of a $12 billion airport in Mexico City and the rejection of the construction of an almost-completed, $1.4 billion Constellation Brands (Corona) brewery plant in Mexicali.

However, the disintegration of ProMéxico as a federal entity to promote, attract and maintain foreign investment also was very relevant for the auto industry.

The resulting rift between the federal government and the auto industry has yet to be repaired. This is especially pressing due to recent local, state and federal issues the auto industry faces.

In the words of the executive president of AMIA, José Zozaya, all these challenges are summarized in the need to respect the rule of law, including contracts and agreements, whether between individuals or with the government, in addition to the issue of security.

Maintaining effective high-level communication channels with the federal government is key to ensuring the rule of law and confidence for foreign investment.

Dan McCosh

Zozaya says his first recommendation for Mexico is to make sure existing carmakers are getting adequate attention from the federal government, with hopes of expanding existing production facilities (AMIA represents 22 carmakers in the country).

Nearshoring is practical to the extent that it reduces investment and operating risk, specifically in the scenario of an open trade war between the U.S. and China, or other events such as the COVID-19 catastrophe.

However, for Mexico to be a refuge from these risks, a clearer commitment from the federal government is needed to work hand-in-hand with industry to improve security and infrastructure, but above all, to promote the rule of law.

Daniel McCosh (above) represents Automotive PR in Mexico and has focused on strategic communications for Mexican industry since 2002.