What Do Nearshoring Executives Need To Understand About Mexico?

Right now, many analysts see Mexico as poised for success. As tension mounts between the United States and China and global companies look to build new supply chains that avoid dependence on China, Mexico looks favorably positioned.

Political risk analyst Ian Bremmer recently explained, "Mexico benefits significantly from [being in the] right place [at the] right time given what's happening geopolitically."

Mexico benefits from its geographic proximity to the U.S., it’s well established export-oriented industrial sector, and its inclusion in the US-Canada-Mexico trade deal. Ford, Tesla, Audi and BMW have all emerged as major players in Mexico’s automotive sector.

"Who are you going to invest towards if you're not investing in China? Mexico is the country that stands to benefit the most,” Bremmer explained.

Total, Mexico received over $35 billion in foreign direct investment in 2022, a 12% increase over 2021.

But, Mexico also poses important challenges for potential investors. Current president Andres Manuel Lopez Obrador is an erratic populist who demonstrates little interest in discussing or promoting Mexico’s manufacturing hubs.

Foreign executives doing due diligence on potential investment projects in Mexico need to understand the array of political risk factors that affect nearshoring companies. After all, the Economist Intelligence Unit classifies Mexico as an undemocratic “hybrid-regime” rather than a full democracy. Mexico currently sits among the worst countries in the world in terms of corruption and institutional frailty. Violent crime in Mexico is at an all-time high.

To discuss what’s ahead for Mexico’s industrial sector, I reached out to Ryan Berg, Director of the Americas Program at the Center for Strategic & International Studies, a Washington D.C.-based think tank.

Nathaniel Parish Flannery: Tesla’s recent announcement of a plan to build a multi-billion dollar factory in Mexico has created a lot of media attention. I’m wondering— what three adjectives would you use to describe Mexico's position right now as a nearshoring destination?

Ryan Berg: Mexico’s position as a nearshoring destination is unpredictable, uncommitted, and yet untapped in its potential. While most everyone recognizes Mexico’s potential as a nearshoring destination, based both on shared values and pure geography. One of Mexico’s biggest advantages is that it is so close geographically to the U.S. That potential remains largely untapped. One of the largest hindrances is Mexican President Andrés Manuel Lopez Obrador himself. Not only has Lopez Obrador pursued a strategic uncoupling from the United States in many realms, his policymaking shows occasional erraticism, pushing trade tensions with the United States to levels unseen in many years. Examples of this include his signature move to reverse key elements of Mexico’s 2013 energy reform, prioritizing the state-run utility company, banning GMO corn, upending contracts previously signed with oil and gas companies, and nationalizing lithium, to say nothing of a cozy relationship with Russia and the parroting of Putin’s language about the war in Ukraine. Lopez Obrador has also been unwilling to put the proverbial “open for business” sign out in front of Mexico. Thus, much of the nearshoring interest in Mexico is occurring in spite of Mexico’s government’s policies, rather than because of them.

Parish Flannery: What grade would you give President Lopez Obrador for his nearshoring promotion policies?

Berg: I would give Lopez Obrador a C- on his nearshoring policies. The nearshoring moment in Mexico is occurring in spite of Lopez Obrador, not because of him. In fact, I believe there’s a strong counterfactual case to be made—were it not for Lopez Obrador, nearshoring to Mexico would be even stronger. We are seeing nearshoring occur mostly with companies already in Mexico’s market. In other words, companies that have operations in Mexico already are interested in doubling down on the country to build redundancy and resiliency in their supply chains. By contrast, Mexico does not display a high level of greenfield investment. That is to say, companies that do not have a presence in Mexico, yet could have one, are comparatively less interested in this investment. Lopez Obrador’s policies have deterred many and convinced them that the waters are less than inviting. For instance, reversing Mexico’s energy sector opening and prioritizing dirtier, more expensive energy through the state-run utility company has convinced many that ambitious environmental, social, and governance goals cannot be met in Mexico. Further, Lopez Obrador’s pet projects such as a budget-busting oil refinery in his home state of Tabasco, or an environmentally catastrophic train through lush jungle, have convinced others that he is not a good steward of the country’s resources and unable to listen to advisers around him. Finally, recent legislation referred to as Plan B, which guts Mexico’s independent electoral institution, has given investors fresh reason to worry that shared democratic values—which, along with geography, form the basis of Mexico’s case for nearshoring—may be dissipating.

Parish Flannery: Recently I’ve been looking at data on cargo truck hijacking in Mexico. Official government statistics document nearly 35,000 truck hijackings during Lopez Obrador’s government. On a scale of 1 to 10, how much do security issues in Mexico affect foreign companies setting up nearshoring operations?

Berg: I think the security situation in the country is front and center of nearshoring decisions, especially since Lopez Obrador does not have much by way of a security policy at all. It’s at least an 8 or 9 out of 10. In this case, security means more than just security of property rights and contracts, although it is those things, too. Security also means physical security, as well as commercial and industrial security. Save for Brazil, Mexico suffers from more highway and train robberies per year than any other country in the Western Hemisphere. In Mexico, there were over 7,500 violent cargo truck hijackings in 2022. This represents more than 20 trucks per day and yearly losses in cargo totaling around $5 billion. Within Mexico, more than 80 percent of all goods are transported by road or by rail, and the country’s thick network of both highways and railways constitutes some of the main arteries north toward the United States. In short, much of the infrastructure that will help Mexico attract nearshoring investments is also falling prey to sophisticated criminal organizations. Thus, any company looking to nearshore must consider the physical security of their goods as they pass along the network of roads and highways toward the United States. Among other reasons, without greater physical security of goods, Mexico’s nearshoring moment could be scuttled.

Additional reading: Mexico’s President Does Not Know How To Fight Crime.