Marc Levinson

Tag: Nearshoring

  • Nearshoring in Mexico Is Mainly an Aspiration

    There’s been much talk about “nearshoring,” the idea that manufacturers are reducing risk in their supply chains by bringing production closer to their end markets. Mexico is supposedly one of the big winners from this trend, as companies by the score are said to be building factories there to serve the U.S. market. Much of this investment ostensibly comes from Chinese firms that want to make things in Mexico to circumvent U.S. tariffs and trade sanctions on imports from China.

    The data, though, show scant evidence of a Mexican manufacturing boom:

    • Industrial production in Mexico has risen only 7% over the past six years. Moreover, industrial growth has been dominated by petroleum refining, favored by the government and protected against foreign competition. Output in sectors such as paper, chemicals, and basic metals has flatlined, and manufacturing of transport equipment–the target of much foreign investment–has been growing by less than 1% per year. Traditional industries such as furniture and textiles have been shrinking.
    • Fixed investment is up sharply since a slump in 2020, but nonresidential construction and imported vehicles account for almost all the growth. Investment in machinery and equipment–the sorts of investment needed to open new factories–looks strong only because it looked so weak between 2018 and 2021.
    • Foreign direct investment set a record in the first quarter of this year, but almost all of that came from foreign companies reinvesting the profits of their Mexican operations. Very little new direct investment came into the country, and almost none of that money came from China.
    • The number of trucks crossing the border appears to be at a record level.

    What’s going on? One plausible explanation is that much of Mexico’s boom in nonresidential construction involves warehouses. The inventories of U.S. manufacturers and wholesalers are high, by historical standards. It’s often cheaper for them to import goods through the ports of Los Angeles and Long Beach and truck them to warehouses in Mexico than to store their stuff in the United States, so developers are building vast amounts of warehouse space in northern Mexico. The increase in cross-border truck traffic may be due to this merchandise moving back and forth rather than to exports of goods churned out by Mexican factories.

    Nearshoring, at least in Mexico, seems to be more of an aspiration than a reality, at least for now. Claudia Sheinbaum, who is to be sworn in as president on October 1, may need to make some major policy adjustments if she hopes to change that.

  • Nearshoring Is Hard to See

    Last week I was in Mexico City to speak at the Logistics World Summit, an annual event that draws thousands of truckers, freight forwarders, manufacturers, and software vendors to the soon-to-be-renamed Citibanamex Center. The topic on everyone’s mind was “nearshoring,” the much-touted shift of manufacturing from Asia to Mexico so as to reduce supply-chain risk. Real estate experts insist there’s a mass movement underway as foreign manufacturers seek factory sites convenient to the U.S. border. Trade and transportation data, however, paint a different picture. If nearshoring is underway, it is not yet visible in the numbers.

    In my talk, I pointed out that increased concern about supply-chain interruptions plays to Mexico’s advantage as a location for manufacturers targeting the North American market. But for all the talk of nearshoring, manufacturers seem reluctant to plunge in. This hesitation, I think, has to do with some real-world problems that have grown worse in recent years. Concerns about security are mounting all over the country. Electricity prices are high, despite government subsidies. Renewable energy is in short supply, deterring investment in factories to serve companies that face pressure from customers or regulators to reduce greenhouse-gas emissions in their supply chains.

    Moreover, Mexico seems unprepared for things to come. Factories in Mexico have increasingly used inputs from China to assemble goods for the U.S. market; given geopolitical tensions, it’s a good bet that Washington will crack down on imports of such products. And in the automotive sector, where Mexico’s role in international supply chains is most prominent, exports of auto parts are under threat as electric vehicles capture a larger share of the vehicle market in the United States and Canada. Recent announcements of a new Tesla assembly plant near Monterrey and a BMW battery plant in San Luis Potosí have obscured the fact that an electric vehicle contains thousands fewer parts than an internal combustion vehicle of similar size. The supply chains that funnel Mexican-made pistons, fuel injectors, catalytic converters, and other parts to points north are likely to decline rapidly over the next few years.

    Geography offers Mexico great opportunities as manufacturers and retailers rethink their supply chains. So far, though, it isn’t taking much advantage of them. Unless the Mexican government makes some big changes, nearshoring may be slow to develop.