Nearshoring and its impact on Mexican industries

Thanks to the geographical proximity and the various trade agreements that have been in place between Mexico and the United States for many years, the nearshoring strategies of foreign companies to the Aztec country have favored the national economy. In turn, the potential for mass production at lower costs (compared to other regions) has made several Asian and European companies want to expand their industrial capacity and supply chains in this Latin American country.

However, in order to supply and meet the expectations of foreign investment, Mexico needs to expand its industrial park infrastructure, which is closely related to the capacity to generate and distribute the amount of electrical energy needed in each manufacturing process. According to projections by AMPIP and BBVA Research, it is expected that between 2023 and 2025, around 453 new companies will be set up (of which 20% are of Asian origin), which will further intensify the energy infrastructure. Below, we will address several aspects of the impact of nearshoring, its advantages, disadvantages, benefits and impact in Mexico.

What is nearshoring?

Nearshoring or relocation is a commercial strategy used by companies to move part of their production from their country of origin to other neighboring territories where they can optimize times and reduce costs, thus bringing the supply chain closer to the final consumer.

It should be borne in mind that nearshoring and offshoring are strategies with a common objective, but the difference between them is that the former involves relocating manufacturing processes to closer geographical areas, while the latter can involve moving to more distant countries.

How does Mexico benefit from nearshoring?

In Latin America, Mexico is the country that benefits most from nearshoring, due to its geographical proximity to the United States and the extensive trade relationship with Canada through the USMCA. Factors such as the abundance of natural resources, renewable energy, economic stability and a skilled workforce make the country a continuous focus of foreign investment. This has a positive impact, generating more employment and promoting the transfer of modern technologies from abroad.

According to the Inter-American Development Bank (IDB), Mexico could attract around USD 35 billion in investment through nearshoring. Furthermore, in the last five years, the sectors that have benefited most from this commercial dynamic have been: automotive, manufacturing and electrical appliances, thus diversifying the country’s economy and reducing its dependence on a single sector.

Another benefit for the country is the development of infrastructure and transportation routes. An example of this is the demand for industrial space which, in places like Monterrey, grew by 10%, with a request for 12,499,000 m², and in Ciudad Juárez it increased by 11%, with an area of 4,329,000 m² during 2023.

What are the advantages of nearshoring?

1. Efficiency in cost and time: thanks to the geographical proximity to the country chosen for the nearshoring strategy, companies can streamline supply chain processes, significantly reducing transportation and logistics costs. Additionally, it allows for a faster response to changes in product demand, special requirements and quality controls.
2. Greater export opportunities: Mexico, as a member of the USMCA (United States-Mexico-Canada Agreement) and with trade agreements with more than 40 countries, offers preferential access to global markets. This facilitates the export of products and services, diversifying business opportunities.
3. Qualified talent at competitive costs: Mexico’s diversity of industrial sectors has allowed it to develop a skilled and experienced workforce. In addition, the government’s training and technical education programs guarantee a continuous supply of highly qualified labor at a low cost (compared to wage rates in other countries), which represents a competitive advantage for companies that choose this country as their nearshoring strategy destination.

What are the disadvantages of nearshoring?

Although Mexico has invested more than 32 million pesos in the last year in road infrastructure, improving its ports, highways and railways, significant investment is still needed in industrial parks in terms of energy and connectivity for the country to develop as a profitable investment destination for nearshoring.

Other disadvantages of nearshoring in this country are associated with:

1. Competition for resources: the growing demand for skilled labor and infrastructure can generate inflationary pressures and a brain drain.
2. Additional costs in security measures: crime in certain regions of Mexico can lead to disruptions in operations due to cargo theft, extortion and acts of violence. These situations generate uncertainty and can affect business continuity, which leads to higher costs due to the need to implement robust security measures, such as private surveillance, security systems and theft insurance.
3. Regulatory challenges: although Mexico has improved its regulatory framework, bureaucracy and the complexity of administrative procedures can lead to delays and increase operating costs, especially for small and medium-sized enterprises. In addition, the application of countervailing duties on imported products can affect the competitiveness of some sectors.

How does nearshoring impact the Mexican energy sector?

Without a doubt, nearshoring has a positive impact on the Mexican economy thanks to foreign investment and long-term commercial relationships with companies in industries such as the automotive, telecommunications and electronics sectors. This encourages more employment and access to first-hand technologies.

However, in terms of energy generation, there is a latent challenge in guaranteeing a sufficient, affordable and clean energy supply in the sectors with the highest demand.

The growing flow of investment resulting from nearshoring is accelerating energy demand in Mexico. This situation tests the country’s commitment to achieving 35% of electricity generation from renewable sources by 2024, a target that is still below what has been set. According to IMCO data, in 2022, only 28.7% of electricity was generated from clean sources. Furthermore, the National Electricity System Development Program (Prodesen) estimates an annual growth in energy demand of 2.5%, which further exacerbates the existing gap.

To meet this growing demand and comply with the energy transition objectives, Mexico must redouble its efforts in the development of renewable energies, especially solar and wind. Although these energy sources have experienced significant growth, representing 8.4% and 7.9% of installed capacity in 2023, respectively, there is still ample room for expansion. Nearshoring presents a unique opportunity to boost this development, but it requires sound public policies and greater investment in infrastructure.