Nearshoring: A tailwind, but hardly a quantum leap for Mexico

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In this report, we take a deep dive into the nearshoring phenomenon. We explore the opportunities it represents for Mexico, but also the challenges for the country to land a relevant share of the nearshoring trend and for this to become a true catalyst.

Nearshoring: a hot topic. The trend of relocating previously offshored processes to a neighbouring country has gained momentum since 2017 as the US-China trade war and protectionist policies escalated. Moreover, the outbreak of the COVID-19 pandemic and the Russia-Ukraine conflict have added momentum to the phenomena.

Mexico’s competitive advantages can turn it into a preferred destiny for nearshoring demand for the following main reasons: i) its geographical position and proximity to the US; ii) high degree of integration with North American value chains; iii) a growing labour force at relatively competitive cost; iv) trade agreements; and v) its strategic role in the US-China conflict.

Nearshoring is already taking place and benefitting Mexico, as evidenced by both economic and industrial real estate data. So far, export growth has mainly been derived from lower value-added industries and transactions have largely been concentrated in the northern states.

In sum, while we acknowledge Mexico’s competitive advantages, we identify relevant challenges to land a relevant share of nearshoring demand in the upcoming years. In our view, secular underinvestment in infrastructure may imply a significant drag on nearshoring. In fact, limited access to land with electricity represents the main obstacle for an acceleration in nearshoring, coupled with water scarcity in northern states and, to a lesser extent, the deteriorating service level of the highway network and insufficient capacity of railway services. Moreover, we believe it is still too early to tell whether ESG will represent a drag or a lever for nearshoring in Mexico.

As such, we regard nearshoring as a tailwind, but hardly a quantum leap for the Mexican economy. We do not minimise the potential impact of nearshoring on Mexican GDP (up to 0.4pp/year BBVAe) and opportunities it offers for some sectors, such as industrial real estate, transport infrastructure, industrials, building materials and banks. However, under the current institutional framework, and even though we anticipate a pickup in private investment, we believe it is highly unlikely that public investment will increase enough to either end the secular underinvestment cycle or its negative effects on GDP growth.