What Mexico Needs to Do to Attract More Nearshoring Investment
In a recent article for Mexico Business News, the economist Alejandro Saldaña discussed the nearshoring phenomenon in Mexico and how it is expected to reshape the Mexican economy in the coming years. In the article, Saldaña recalls the results of the IMD 2023 World Competitiveness Ranking, where Mexico fell to the 56th place (out of a total of 60 countries). This, of course, puts a damper on the numerous announcements about the arrival of foreign companies to Mexico.
But not all is negative, as Mexico is expected to continue benefitting from nearshoring due to its geographic proximity and its industrial relationship with the United States, as well as its free trade agreements with 50 countries, including the U.S. and Canada (USMCA). Its relatively low cost for production and abundant labor supply are also important elements to consider.
What does Mexico need to do to attract more nearshoring investment and continue showing the world that the high occupancy rate in industrial parks and the constant announcements of companies settling in the country is a trend that will only keep on growing? There is indeed a lot of work to be done, but there are four specific actions that will be crucial in attracting foreign companies.
Guaranteed Law Enforcement
One of the factors that can hinder foreign direct investment in Mexico is related to the rule of law in the country. According to a survey conducted by the Central Bank, nearly 80% of entrepreneurs believe that the current deficiencies in the rule of law are an obstacle for Mexico to receive the desired investment in nearshoring. To benefit from nearshoring, it will be extremely important to strengthen the internal sources for growth and create conditions that favor investment.
Improve the Electrical Infrastructure
On the other hand, the government must strengthen its transmission and distribution networks to ensure the effective transport of energy generated by new projects created by nearshoring. This is one of the most pressing challenges to be addressed in terms of energy infrastructure. In recent years, electricity distribution networks have grown at a rate of less than 1% annually, leading to infrastructure saturation and congestion on transmission lines.
Fortunately, the CFE recently announced important expansions and reinforcements of the network to facilitate the integration of its new power generation projects.
The lack of investment in electrical distribution networks has meant that the industrial and service sectors have become the main players in supporting and expanding them in areas that need development. However, Mexico needs a strategic plan to prepare for the growth expected from nearshoring. The plan must accelerate the development of the network projects mandated by SENER and create a close collaboration between private companies and the government. This collaboration will make it possible to implement energy generation and transmission projects throughout the country in the shortest amount of time. The goal is to channel the investments and the opportunities that arise with the success of this production model.
Read also: The scenario for Mexican SMEs in nearshoring
Modernizing Infrastructure
While Mexico has made significant improvements in infrastructure development, some areas still lack the necessary infrastructure to support advanced manufacturing operations. Companies must carefully evaluate the infrastructure in their chosen locations to avoid disruptions. The best areas are also the most expensive, such as Monterrey, Tijuana, and Ciudad Juárez. Mexico has a lot of low-cost areas, but they are generally underdeveloped. With the arrival of these new projects, the state and federal governments need to start working on the renewal of roads, ports, airports, etc.
Enhancing Public Safety
When moving commercial operations to Mexico, companies take stock of safety factors, with extortion being one of the most pressing concerns when it comes to public safety. Most of these crimes occur when a criminal group makes a phone call to the company’s managers and demands money in exchange for “protection” or to avoid any damage. Companies operating in Mexico must analyze the implications of this situation in terms of the safety of their employees and the financial impact of these payments. The federal government must work at all levels of authority to reduce the influence of criminal groups in some areas of the country.
At Advance Real Estate we are aware of the challenges that Mexico needs to overcome for more companies to identify the country as the perfect destination for nearshoring investment. We do whatever it takes to ensure that our properties meet all of our client’s needs.
Information Sources:
- https://www2.deloitte.com/us/en/insights/economy/issues-by-the-numbers/advantages-of-nearshoring-mexico.html#:~:text=To%20take%20advantage%20of%20opportunities,and%20generate%20incentives%20for%20investment.
- https://mexicobusiness.news/finance/news/unlocking-potential-nearshoring-mexico
- https://www.forbes.com/sites/garydrenik/2023/03/23/why-nearshoring-is-closer-than-ever-how-mexico-is-becoming-the-next-big-thing-in-global-markets/?sh=1fc97599354b
- https://www.americanindustriesgroup.com/blog/manufacturing-in-mexico-energy-sector-challenges-and-opportunities-blog/
- https://www.fticonsulting.com/insights/articles/nearshoring-mexico-where-opportunities
- https://www.cmc-consultants.com/blog/nearshoring-to-mexico-opportunities-and-challenges#:~:text=Infrastructure%20Challenges%3A%20While%20Mexico%20has,chosen%20locations%20to%20avoid%20disruptions.
