Mexico’s Industrial Hubs Grow as Part of Trade Shift Toward Nearshoring

Date: Thursday, February 2, 2023
Source: Wall Street Journal

MEXICO CITY—Companies from around the world are moving production and equipment to Mexico as they seek a manufacturing hub closer to the U.S., part of a broader shift in global trade.

Some companies are relocating from Asia, while others are investing millions of dollars to raise output of goods that are exported tariff-free to the U.S.

Economists and executives say supply-chain disruptions, prolonged Covid-related shutdowns in China, soaring shipping rates and geopolitical uncertainty caused by Russia’s invasion of Ukraine are fueling the nearshoring trend.

In Tijuana, home to one of the world’s largest export manufacturing hubs for televisions and electronics, industrial parks are almost at full capacity, executives say. And in Ciudad Juárez, across the border from El Paso, Texas, recruiters are hiring workers for companies arriving or expanding operations at job fairs.

Mexico’s manufacturing-based economy, free-trade pacts including the U.S. Mexico Canada Agreement and proximity to the U.S. are among its attractions for investors, executives say. Labor shortages in the U.S. also are playing a role.

“Being able to hire enough people at our U.S. plants to support our growth was a real challenge. That was a major interest for us to open up a facility in Mexico,” said Sam Rosen, president of Ollin Plastics, the plastic molding unit of Minnesota-based ATEK Companies.

Ollin Plastics invested some $10 million to set up a plant in the industrial hub of Monterrey, where it began producing coolers for the U.S. market last year. It plans to expand there to make other plastic products.

Mattel Inc., the maker of Barbie dolls and Mega Bloks, expanded its Monterrey plant into its largest manufacturing facility worldwide with an investment of $47 million between 2020 and 2022.

The toy maker more than doubled its workforce to 3,500 at the plant as part of a global supply-chain restructuring to boost output and productivity, with immediate access to the U.S., the world’s largest toy market, said Roberto Isaias, Mattel’s chief supply chain officer. The company exports toys from Mexico to nearly 30 countries.

The Biden administration is encouraging regional production as part of its plans to shore up supply chains and bolster U.S. manufacturing. At the North American Leaders Summit in Mexico City in January, the U.S., Canada and Mexico agreed to strengthen regional supply chains and promote investment in industries such as semiconductors and electric vehicle batteries.

After a decline to $28.2 billion in 2020 during the pandemic, foreign direct investment in Mexico rose to $31.4 billion in 2021 and reached $32.1 billion during the first nine months of 2022, the most for the period since 2013. Of that amount, around $11.6 billion was in manufacturing, similar to 2021 levels.

The Mexican government says more than 400 companies currently have shown interest in moving production from Asia to Mexico.

“The relocation of multinational companies from Asia to Mexico to strengthen regional markets is a top priority for Mexico, it is something that Mexico and the U.S. and Canada are interested in,” Mexican Economy Minister Raquel Buenrostro said in a recent speech.

The enthusiasm comes even as President Andrés Manuel López Obrador has unnerved some foreign investors with his efforts to reclaim control of electricity generation in Mexico. The policies affect large industrial electricity consumers and have sparked trade disputes with the U.S., halted large electricity projects and kept billions of dollars in potential investments on hold.

Last year, the U.S. launched a trade fight with Mexico, saying Mr. López Obrador’s policies favoring the country’s state-owned utility and oil company at the expense of American businesses were putting billions of dollars of investment at risk. Mexican authorities are currently in talks with the U.S. government in an effort to avoid a USMCA dispute panel.

“There is a strong argument for the fact that nearshoring would be even stronger if it didn’t face the current headwinds it faces in the López Obrador administration,” said Ryan Berg, director of the Americas Program at the Center for Strategic and International Studies, a U.S. think tank.

Foreign energy companies have been locked in legal battles with the government over changes in electricity and hydrocarbon laws that give priority to state-owned Comisión Federal de Electricidad and Petróleos Mexicanos.

Mexico also has problems of government corruption, rule of law and public insecurity, which are a drag on decisions to switch investments to the country, said Jeffrey Schott, a senior researcher at the Peterson Institute for International Economics.

“The main obstacle to Mexico’s success in attracting new investment is homemade,” Mr. Schott said.

As demand for industrial space picks up, insufficient electricity infrastructure is limiting the speed at which manufacturers can move into Mexico, said Alberto Villarreal, managing director of Chicago-based Nepanoa, which does project management and consulting for U.S. companies setting up or expanding in Mexico.

“Mexico has an obstacle when it comes to utilities,” he said.

Nevertheless, along the border with the U.S., demand for industrial space is outpacing supply.

In Baja California state, only around 2% of space in industrial parks is available, said Román Caso, chief executive of San Diego-based Co-Production International, which provides industrial space, logistics and administrative services for export manufacturers in Mexico.

“There’s no construction being done that isn’t already sold,” Mr. Caso said.

Chihuahua, Mexico-based real-estate trust Fibra Nova, which develops and leases commercial property, plans to build a 239,400-square-foot plant in Ciudad Juárez for ZF Electronic Systems, a unit of Germany’s ZF Group, which supplies systems for vehicles and industrial technology, Fibra Nova said in a public filing with the Mexican Stock Exchange.

“The hottest points in the market are the border cities,” said Fibra Nova Chief Executive Guillermo Medrano. ZF Group didn’t respond to requests for comment.

Valcourt, Quebec-based BRP Inc., a maker of boats, snowmobiles and off-road vehicles, said recently it would build an additional boat manufacturing plant in the city of Chihuahua with an investment of around $165 million. The facility, its fourth in Mexico, is expected to start production in 2025.

Chinese electronics and appliance manufacturer Hisense Co., one of the world’s top producers of flat-screen televisions, bought a TV manufacturing plant in Rosarito, Baja California, in 2015. It later brought in suppliers and added processes, boosting production and helping Mexico become more than just an assembly operation.

Hisense said it is now developing an industrial park in Monterrey, investing $260 million for the production of refrigerators, washing machines, air conditioners and kitchen appliances for the U.S. market.

Cecilia Montaño, a Deloitte partner in Mexico City who specializes in foreign trade, said her team has advised companies on more than 30 projects in recent months to relocate production to Mexico. “Some companies are looking to be closer to their markets, with better positioned warehouses or distribution centers,” she said.

“This is an enormous opportunity for Mexico, one that only happens once in a generation,” said Carlos Capistrán, chief economist for Mexico and Canada at Bank of America. “It’s starting to happen, but we don’t know if it will be a home run or just a hit.”

[Read from the original source.]