Key Takeaways
- Evidence suggests that nearshoring in Mexico is progressing slowly, with the initial impact most noticeable through an increase in private non-residential construction to expand production capacity among the traditional manufacturing hubs.
- S&P Global Ratings believes the next stage of nearshoring will involve attracting more foreign manufacturers and increase production, which will face significant obstacles, including reliable supply of clean energy, water, and specialized labor availability, among other factors.
- In a scenario in which nearshoring were to boost Mexico's GDP growth to 3%, manufacturing output growth pace would have to be double what it was in the decade before the pandemic.
Last year, we analyzed the potential impact of nearshoring on Mexico's economy, and how it fits within our rating assessments on the sovereign and corporate levels (see "For Mexico, Nearshoring's Potential Benefits—And Obstacles—Are Significant", published April 4, 2023). We now take a look at how much progress has been made in advancing nearshoring in Mexico. In our view, nearshoring is progressing slowly, as relocation of manufacturing by foreign companies into Mexico has so far been limited. The obstacles to accelerate the pace of nearshoring are meaningful: a sufficient supply of clean energy, water, and labor to meet higher manufacturing needs, among other factors. In a scenario in which nearshoring to bolster Mexico's GDP growth to 3%, manufacturing growth would have to double from what it averaged in the decade before the pandemic.
The First Stage Of Nearshoring: An Increase In Non-Residential Construction In Manufacturing Hubs
This has been the main impact on the economy so far, mostly in the north and center/Bajio regions of the country, geared toward lifting production capacity. This has mainly involved expanding existing and constructing new industrial parks and warehouse facilities. Greater investment in such construction is evident across the main manufacturing regions of the country. Non-residential construction output is 43% above its pre-pandemic level. Public investment in flagship projects, such as the "Tren Maya", which is not related to nearshoring activity, has contributed to this rise in non-residential construction. However, private-sector investment in construction has soared by slightly more than 20% in 2023, the largest expansion pace in recent history (see chart 1).
Chart 1
The Next Stage Of Nearshoring Will Be More Difficult
This will involve attracting more foreign manufacturers to Mexico, ultimately increasing total manufacturing in the country. Foreign direct investment (FDI) data suggests the number of manufacturing companies relocating to Mexico has been relatively small so far. Most of the FDI has been from companies that already had operations in the country through reinvestment of their profits (see chart 2).
Chart 2
There are several potential challenges that could deter foreign manufacturers to relocate to Mexico in the coming years.
- Energy: Ensuring sufficient and reliable supply of energy, especially clean energy. Energy policy will be an important issue in the upcoming general election in Mexico that will take place on June 2. We expect broad continuity in energy policies, which means the sector will remain highly centralized, and private-sector participation limited. More investment is needed to expand the country's clean energy supply.
- Water: Currently, 11 Mexican states face high water stress, and without adaptation to climate change, as many as 20 of the country's 32 states will face high exposure to related-stress in the coming years (see "More Mexican States Could Face Water Stress By 2050", published on April 4, 2023).
- Human capital: Finding the sufficient amount of qualified labor could also be an obstacle for firms to relocate to Mexico. The manufacturing sector already employs over 16% of total workers, and firms report facing difficulties filling some of their more specialized labor needs. Some advances have been made in streamlining specialized schooling in manufacturing hubs.
- Security: The crime rate in Mexico remains high, taking a toll on business activity. Some firms have reported being subject to extortion. High levels of insecurity increase the cost of doing business in Mexico.
- Trade policy: While we do not expect a material shift in strong trade linkages between the U.S. and Mexico, there is a degree of uncertainty regarding potential changes to trade policy after the November 2 U.S. election. The USMCA is up for review in 2026. Mexico's imports of Chinese goods have increased in recent years (see chart 3), with many of these as intermediate goods that end up in the U.S. market. This could be a subject of discussion before or during the USMCA review, as the U.S. government has in the recent past pursued trade policies that restrict Chinese content in its imports of manufactured goods.
Chart 3
Potential Signs Of Nearshoring In The Computer And Electronics Components Sector
Among Mexico's manufacturing sub-sectors, there are some signs that nearshoring could be taking place in the production of computer and electronic components. Since 2022, the sector has been growing significantly faster than in the last decade (see chart 4), and capacity utilization is much higher than in the broader manufacturing sector (see chart 5). Mexico's computer and electronics components sector could be benefiting from some of the measures that the U.S. has taken over the last couple years, such as the Inflation Reduction Act and the CHIPS Act. Those measures could encourage foreign firms that operate in this segment to relocate to Mexico in order to benefit from the supply-chain linkages between the U.S. and Mexico in that sector. However, Mexican imports of electronic components from China have been growing significantly in recent years, accounting for more than 2% of Mexico's GDP. This suggests nearshoring-related activity is likely involving Chinese manufacturers increasing their presence in Mexico. This could be subject to potential trade-related policy sanctions by the U.S., as previously discussed.
Chart 4
Chart 5
How Much Does Nearshoring Need To Advance To Have A Meaningful Impact On GDP Growth?
We expect Mexico's manufacturing sector, which accounts for 22% of GDP, to remain the main driver of economic growth. In the 10 years before the pandemic, GDP growth averaged 2.4%, and 0.6 percentage points of that was driven by manufacturing output growth. If nearshoring were to raise Mexico's GDP growth to 3%, this would mean that manufacturing growth would have to be double what it was in the decade before the pandemic. In other words, manufacturing growth would have to average 5.6% every year, compared with 2.8% in the recent past. Doubling this pace would require addressing some of the challenges mentioned, especially those related to ensuring a reliable and sufficient supply of inputs of energy, water, and labor.
Chart 6
This report does not constitute a rating action.
| Chief Economist, Emerging Markets: | Elijah Oliveros-Rosen, New York + 1 (212) 438 2228; elijah.oliveros@spglobal.com |
| Contributor: | Bhavika Bajaj; bhavika.bajaj@spglobal.com |
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