Nearshoring: How We ́re Doing Month by Month | Monthly Newsletter #10

2024 Investment Announcements

The Ministry of Economy (ME) reported that from January 1^st through September 2024, 209 investment announcements were made, totaling an estimated $64.703 billion dollars. These announcements were made in addition to the $110.744 billion announced in 2023. The ME indicated that this amount is expected to flow into the country over the next two to three years, and could create 99,709 new jobs.

The larger part of the planned investments have been made by companies from the following countries: The United States (with 46% of the total amount), followed by Germany (11%), and Spain (8%). However, according to the ME, China, Argentina, France, and Portugal are among the leading countries looking to invest in Mexico, particularly in the automotive, natural gas, and fertilizer sectors.

As seen in the past, the manufacturing sector is the primary economic sector, and accounts for 56% of FDI announcements, followed by construction at 12%, commerce at 11%, mass media at 10%, and transportation at 8%. Within the manufacturing sector, notable industries include beverages, automobiles, auto parts, iron and steel, and electronic components.

The leading states attracting investment are: Querétaro (11%), Nuevo León (11%), Veracruz (10%), and the State of Mexico (10%). Noteworthy new public announcements include: Constellation Brands, beer ($4.6 billion), Iberdrola, power plants ($4.6 billion), and Stellantis, automobiles ($1.6 billion).

How´s the Trade Balance Doing? – August

In August 2024, a trade deficit (exports minus imports) worth $4.868 billion was recorded, compared to a deficit worth $1.278 billion in the same month of 2023. Thus, for the January – August 2024 period, the trade balance logged a deficit worth $10.438 billion, compared to a deficit worth $8.428 billion in the same period last year.

In August 2024, exports logged an annual -1.0% drop due to a -26.6% decrease in oil exports and a 0.6% increase in non-oil exports. Within non-oil exports, those directed to the US increased by 2.2% year-on-year, while those directed to the rest of the world decreased by -7.7% year-on-year. By type of merchandise, exports of manufactured products rose by 0.6% and were driven by increases in machinery and special equipment for various industries (15.5%), miner-metallurgy products (4.2%), professional and scientific equipment (4.1%), and food, beverages, and tobacco (3.3%). In contrast, automotive exports recorded an annual -3.3% decline, due to a -0.7% decrease in sales to the US and a -17.4% drop in sales made to other markets. Thus, in the first eight months of 2024, the total value of exports reached $406.091 billion, which entailed an annual growth rate of 3.6%. During the same period, exports were composed of 89.5% manufactured goods, 4.8% oil products, 4.0% agricultural goods, and 1.7% non-oil extractive products.

Imports, on the other hand, increased 5.7% year-on-year in August 2024. This figure was driven by an 8.8% annual increase in non-oil imports and was partially offset by a -26.0% decline in oil imports. By type of good, imported consumer goods decreased by -1.3% year-on-year; there was an 11.7% increase in non-oil consumer goods and a -49.8% drop in oil consumer goods (gasoline, butane and propane gas). Meanwhile, intermediate goods rose by 8.2% compared to the same

Location, Location, Location

Despite the fact that several challenges and hurdles remain in place in the current economic environment – which could affect the appetite for investing in Mexico – it’s important to remember that the country’s main attraction regarding Nearshoring investments is its geographical location. Proximity to the US translates into significant decreases in transportation costs and time required compared to other regions like Asia and South America. For example, although it varies by destination, shipments exiting Mexico and entering the US can take less than 10 days, whereas shipments from China take between 18 and 32 days, and around 20 days from Brazil.

This, combined with other advantages, such as the trade agreement, lower labor costs, cheaper rent, and infrastructure that´s cohesive with the US market, explains why there´s been strong demand for industrial property in recent years.

According to CBRE, in the first half of 2024, demand for industrial property associated with Nearshoring was 1.2 million square meters, which is a 39% increase compared to the same period last year; and it´s worth pointing out that 57% came from expansions by existing companies, while 47% came from new companies.

Industrial occupancy stands at 97%, which is a high level; this figure also reveals the fact that demand has increased at a faster pace than the supply of industrial real-estate. Average rent has also been rising. We cannot rule out the possibility of a slowdown regarding demand for industrial real-estate, given the current scenario – political changes in Mexico and the US could be creating more uncertainty, in addition to the pause in some production projects. However, in the short and medium term, we believe occupancy will remain at solid levels.

Currently, the area that is under construction in the industrial market totals 4.1 million square meters, which is 6.2% of the total. It’s estimated that 65% of said construction corresponds to built-to-suit or pre-leased spaces, meaning that only the remaining 35% are speculative spaces. In an unfavorable scenario, where speculative space remains vacant, the vacancy rate would rise from 3.1% to 5.3%, which is still low. If we further stress the scenario and assume that all currently under-construction space remains vacant, the vacancy rate would rise to 9.3%, which is still a good level.

Thoughts on Nearshoring

Recently, the narrative revolving around Nearshoring has weakened due to idiosyncratic events and the electoral uncertainty in the United States. Some significant flagship announcements have been put on hold, contributing to a lesser outlook regarding the relocation of value chains. Additionally, new investments are lacking momentum and have even declined, while everything seems to hinge on the growth of reinvested profits, which is largely explained by an increase in the capacity of existing companies.

However, it´s undeniable that Mexico has become the United States´ main trading partner and holds a privileged position regarding exports. Even though the current outlook conveys uncertainty, we believe that Mexico maintains a dominant position compared to other markets; starting with its skilled and accessible workforce, as well as industrial real-estate that has much more competitive costs than in the southern part of the United States. Furthermore, we think that the challenges facing investors in Mexico are similar to those encountered in other emerging markets, such as certain Asian and Latin American countries; one of the keys to attracting more investment is the profitability of productive projects, although due to the current context, costs could increase due to higher risk premiums.

The opportunity is significant, especially for attracting other networks beyond the ones that already exist, such as the auto parts and automotive or electrical sectors. Although we believe that Mexico is gradually becoming a slightly more sophisticated market, as we have moved beyond the “maquila” (assembly plant) model to become a manufacturing and logistics country, the challenge Mexico faces is to become a dominant player in the value-added products sector.

The challenges are considerable; there is a lack of electrical, water, and logistical infrastructure, as well as a need for faster growth regarding industrial real-estate, since its supply has not increased as fast as demand.