As supply chain friend-shoring gathers pace, one country has proven especially welcoming 

Mexico stands on the brink of a “lifetime opportunity”, the Bank of America boldly declared in November, as the country looked set to take on China in the manufacturing market. According to the bank, global supply chain crises, the country’s free trade agreements and a breakdown of US-China relationships have culminated in Mexico’s “best growth opportunity for the next 10 years”.

Following the long-time trade war which has choked US-China relations where both countries placed wide-reaching tariffs on goods, the UN has estimated approximately $27bn of lost trade will be captured by Mexico – the largest amount by any single country.

And it isn’t just talk: change is already in motion. The food, basic metals, mining, pharmaceutical and automotive sectors are projected to invest the most in the country, the latter a vital strategic part of North America’s strategy to de-couple its supply chains from the East and set up locally. Automotive giant Ford has invested $260m in its new global technology and business centre in Mexico, while Volkswagen was reported to be investing an eye-watering $763m in its electric vehicle plant.

“There is mainly an upside [to investing in the country], as North American manufacturers have a history of working cross-border with both Canada and Mexico, from raw materials through semi-finished goods to finished goods. Mexico will represent a key area of growth, representing one-third of new employment, particularly in automobile and food manufacturing,” Flávio Barreiros, managing director and LatAm supply chain lead at Accenture, tells Supply Management.

While Central America is already a hotspot for manufacturing certain automotive parts, with manual labour costs that are competitive with China, it will have to raise its profile and capacity in more specialist production, such as advanced components and electric vehicle supply chains, in order to fully capitalise on the breakdown of the US-China relationship.

So, why Mexico?

Speaking to Mexico’s Senate in November 2022, economy minister Raquel Buenrostro Sanchez proclaimed: “More than 400 North American companies have the intention to carry out a relocation process from Asia to Mexico.” This, she said, was “a sign of the importance of the United States-Mexico-Canada Agreement” (USMCA). Coming into force in 2020, USMCA established a free trade corridor between the countries, opening up a wealth of opportunities for businesses and supply chains.

And the figures show it is working. In 2016 before trade agreement talks began, US imports from Mexico stood at $293.5bn. In 2021, they totalled $384.6bn – a 31% increase, with the US’s top imports including machinery and mechanical appliances (36.7%), transportation equipment (24.8%), and agricultural goods (10.1%).

The timing was fortuitous. As the pandemic and China’s zero-Covid response catapulted shipping costs to record highs, buyers found their transport options cut off, as goods were stuck in container backlogs and air freight was virtually non-existent. Faced with high costs and extreme lead times, the appeal of nearshoring supply chains to minimise logistical and geopolitical risk picked up steam – and there was Mexico, reachable by land transport offering delivery in mere days, not months.

“When we think about the logistical advantage, being so close to the US and Canada means any goods produced in Mexico can be put on a truck and delivered anywhere in the US within five days with predictability of cost and predictability of delivery, and that allows a simplification of the supply chain, reduction of working capital and predictability in terms of costs,” says Jeremy Bliss, head of subsidiary banking Latin America at HSBC Mexico.

And it’s not just US companies that are interested in the country. Chinese firms are increasingly looking to Mexico in an effort to access North American markets. According to the Mexican Secretariat of Economy, Chinese investment increased from $154m in 2016 before Donald Trump became president, to $271m a year later, when Trump threatened tariff changes. China-based companies quickly set up shop or made investments in Mexico, reaching an astonishing $492.5m in 2021, as the country sought ways to stay close to American consumers.

If you want cost savings, look elsewhere

Clearly, Mexico has an important strategic role due to its location; however, if you’re looking to relocate purely to cut costs, think again. “What we’re seeing is that executives and senior leadership, especially at multinational corporations, are having to realise that it’s not all about cost reduction,” German Dominguez, president of the Mexico Sourcing Group, says.

“If your only strategy with nearshoring is to save money, then forget about it. This is about competitive advantage. It’s about supply chain flexibility.” The true benefits of reshoring to Mexico, Dominguez says, is the opportunity to create resilience and add long-term durability to supply chains. If you’re prioritising low costs, “you’re stepping on a dollar to pick up a cent”.

“People are terrified of three things with China,” adds Dan Harris, attorney at law firm Harris Bricken: tensions between the country and Taiwan, its Covid-19 response, and rising prices and shipping costs. “And those three together have caused people to say, I’ve got to diversify. I’ve got to get out, and they’re willing to pay more to be in Mexico.”

Harris says: “People are finally waking up to the idea of Latin America. Even in the last six months, people are saying, I want to go into Mexico because I want to be selling more into Latin America. Or I want to go into Colombia, or Peru. People are starting to look at Latin America as a market.”

Barreiros adds that the rise of Mexico also requires a shift in how companies view the entire region. “North America must be viewed as a wider, interdependent, manufacturing cluster of the US, Canada and Mexico – orchestrated with the broader intent of securing efficient supply chains serving the North American population.”

Can anywhere be “the new China”?

As geopolitical tensions grow and trade is increasingly performed along ideological lines, is Mexico set to be a winner of the East-West manufacturing divide? It already is, Harris argues. However, what that doesn’t mean is that Mexico – or Latin America as a whole – is going to be a threat to China’s position any time soon.

“Manufacturing is increasing,” Harris says. “But what’s holding back Mexico, Colombia, Peru and Brazil are their governments. They’re not as foreign business friendly as China, or Vietnam. So, the sky’s the limit, but will they hit that limit? Probably not. I am optimistic and think Mexico’s firms will do very well over the next five or 10 years. But I’m not prepared to say it will do unbelievably well, because that will take more.”

Simply put, nowhere is likely to be the new China. Instead, as Mexico sees its automotive manufacturing rise, as India increases its share in tech supply chains, and Vietnam profits from low-cost labour, it will be a devolved model, one with several “new Chinas”.

And, fundamentally, let’s not forget that the appeal of these new manufacturing hubs comes from China’s weaknesses exposed by successive disruptions, rather than the appeal originating from these upcoming regions on their own merit.

“America and China are like a couple that want to get divorced, but can’t afford it,” Harris says. And what would happen if the West got a sudden divorce from China? “It would be two countries jumping off a cliff. So they’re going through a slow divorce, which is healthier for everybody.”

And as Dominguez says, it’s important to remember that while the world scoops up business from China, this still only represents a fraction of its manufacturing base. So while China may be losing its dominance over global manufacturing, it is still China and its policies are still influencing the configuration of global supply chains.