The trend for nearshoring, i.e. the shifting of industry suppliers closer to their customers, facilitating supply and reducing the risk of strangulation of supply chains by random events or geopolitical tensions is now being implemented in Mexico at the initiative of the US.
A case in point is Pesquería (Pesquería), a town just outside Monterrey, Mexico, nicknamed “Pescorea” by locals because automaker Kia has increased production at its plant, which is soon to be expanded to produce electric cars.
Industrial real estate is expanding, but at the same time vacancy rates are below 2%. Developers are even building a skyscraper taller than the Empire State Building.
Monterrey, a business-friendly city a few hours from Texas, has become a trademark of Mexico’s ability to reap the benefits of nearshoring.
Mexico is one of the countries best positioned to benefit economically from geopolitical changes. Already, the country’s northern cities are churning out thousands of highly skilled graduates and shipping millions of tons of goods, from refrigerators to Legos, north to the US.
Pole of attraction for job search
Monterrey is now a magnet for Mexicans from elsewhere looking for work. However, it also presents many of the bottlenecks that could hold back progress.
Long disparaged by residents of the capital as a provincial factory town, Monterey has become an international hub as companies from the US, Europe and Asia announce investments.
Business leaders have lamented that Latin America’s second-largest economy is not making the most of the opportunity it has. Many blame the government of leftist President Andrés Manuel López Obrador. However, although skepticism remains, industrial growth in the north has helped change the mood, and some now say that nearshoring can now be seen in the numbers
Growth estimates for the country in 2023 have been revised upwards to 3.3%, from less than 1% in January, central bank surveys show. It is a measure of investment that reflects the public and private sector has soared to its highest level ever. At the same time, the Mexican peso has strengthened 15% against the US dollar this year, the second biggest gain of any emerging market currency.
Mexico: the largest trading partner of the US
Mexico became the US’s largest trading partner this year, overtaking Canada, as it began to gain a larger share lost to China.
Skeptics point out that foreign direct investment, which rose to a record $32.9 billion in the first nine months of this year, mostly reflects reinvestment of profits rather than new projects.
But the Nuevo León state government in Monterrey says the billions in investment announced there are not yet reflected in foreign direct investment and export figures.
These include a $5 billion commitment by Tesla to build a new factory, although the project is being delayed by concerns about the global economy. When all the planned ones are up and running, the number of exports will skyrocket.
Barriers and poor infrastructure
But poor planning, aging infrastructure and persistent insecurity could put a cap on Mexico’s economic ambitions.
These issues are evident in Monterey. Road traffic has doubled since 2019, making Monterrey the most congested city in the country and 11th in the world. Public transport, although expanding with new metro lines, is limited. A severe water crisis caused by the drought meant that at one point last year the entire city was reduced to just six hours of water a day.
Companies are also spending increasing amounts on electricity infrastructure to connect projects to the grid as years of national underinvestment begin to peak.
Unsolved national structural problems – such as corruption and a lack of competition in the economy – cause serious problems with cost overruns and delays in construction.
Ambiguous Obrador government
Obrador’s government has not formulated a comprehensive strategy to attract or direct investment. He abolished the state investment company ProMexico, leaving the country’s banks, consultants and state governments to promote Mexico as a destination.
Despite a reputation for hostility to the private sector, the government recently surprised investors by announcing tax incentives for investment by export-focused companies in certain sectors. Some saw it as a positive sign ahead of elections for a new president in June.
The economic recovery has come to López Obrador with less than a year until the election, when he hopes his protégé, former Mexico City mayor Claudia Sheinbaum, will win the presidency.
The question that needed to be resolved, he said, was long-standing issues such as infrastructure and insecurity to make the most of the new prospects.
