Let´s Talk About Nearshoring 6.0 | Quarterly Newsletter | December 2024

FDI in Mexico

Mexico received $35.737 billion USD in Foreign Direct Investment (FDI) between January and September 2024, marking the largest figure for the first nine months of a year on record (excluding the extraordinary investment from Grupo Modelo’s sale in 2013), according to data from the Central Bank of Mexico. In this context, FDI increased by 1.5% compared to the same period last year, when it totaled $35.227 billion, as reported in the balance of payments for the third quarter of 2024. Similarly, in 3Q24, FDI amounted to $3.217 billion, nearly matching the $3.086 billion recorded in the same quarter of the previous year.

By FDI components for the January-September 2024 period, $30.745 billion entered the country as reinvested earnings, compared to $29.965 billion recorded in the same period of 2023. Meanwhile, new investments totaled $2.060 billion during the first nine months of 2024, below the $3.788 billion recorded in the same period last year. Lastly, intercompany accounts recorded inflows totaling $2.932 billion, compared to $4.473 billion in the comparable period.

At the end of the third quarter of 2024, it´s worth noting that reinvested earnings remained at all-time highs despite recording an outflow worth -$225 million in 3Q24. Additionally, during the July-September period of this year, Mexico’s FDI was primarily driven by intercompany account funds amounting to $2.931 billion, which accounted for 91.1% of the third quarter´s FDI. It’s important to keep in mind that intercompany accounts refer to funds lent by a foreign parent company to its subsidiary in Mexico, as well as investments made in fixed assets on behalf of manufacturing companies using foreign capital. FDI figures are mixed. On one hand, amounts continue to reach all-time highs, driven by reinvested earnings, which reinforces Mexico’s strategic position as a preferred investment destination over other economies. However, new investments account for only 5.8% of total FDI and may close the year at just $3 billion ($2.060 billion as of 3Q24). Lastly, for the entirety of 2024, the consensus estimates FDI will total around $37.7 billion, compared to $36.296 billion recorded in 2023. If this year’s forecasts are met, FDI would increase approximately 3.8% year-over-year, marking the highest figure on record.

Global FDI in the First Half of 2024

In the first half of 2024, global foreign direct investment flows totaled $802 billion, according to data from the Organization for Economic Co-operation and Development (OECD). During this period, the OECD reported an 80% increase in FDI inflows, primarily driven by substantial divestments and reinvestments made in countries like the Netherlands and Luxembourg. Excluding these countries, however, FDI decreased by 14% during the first half of 2024. This highlights a certain degree of volatility in global FDI, with international economic uncertainty, restrictive monetary policies, and geopolitical conflicts impacting investment decisions.

By country, Mexico ranked as the third-largest global recipient of FDI, attracting approximately $36 billion in the first half of 2024, trailing only the US, which received $288 billion, and Brazil, which received $65 billion. In comparison, new investment flows in advanced economies rose by 36%, while they fell by 28% in emerging markets, including Mexico. Similarly, in the US and the Netherlands, new investments also logged significant declines. For example, in the Netherlands, FDI flows were highly volatile, shifting from a negative flow of -$195 billion in 2023 to just $4 billion in the first half of 2024. Globally, equity capital investments within the OECD (excluding Luxembourg and the Netherlands) dropped by 50%, signaling a more cautious investment environment, in which economies increasingly rely on reinvestments and intercompany transactions to sustain FDI flows.

Regarding China, OECD data shows that the Asian giant logged a marked decline in FDI flows during the first half of 2024, even tumbling to -$14.9 billion. This drop was mainly due to the repayment of intercompany loans and the repatriation of earnings by foreign investors. This setback occurred amidst rising geopolitical tensions and uncertain economic policies, which have weakened investor confidence. Additionally, new investments in China declined significantly, with a 28% drop in announced capital expenditures, indicating reduced interest in fresh investments. By sector, investment in manufacturing and discretionary consumer goods contracted by more than 50% compared to the previous semester, indicating concerns about the country’s economic slowdown. Despite the sustained decline in new projects and foreign capital inflows, China remains a key global investor, logging a record $70 billion in outbound FDI flows during the same period.

Looking ahead, several significant challenges are expected regarding the future of global FDI, which is set against a backdrop of economic and geopolitical uncertainty. Geopolitical conflicts and economic rivalry between major powers like the US and China have eroded investor confidence, particularly affecting emerging economies. Additionally, there is a global trend toward greater reliance on reinvested earnings and intercompany transactions rather than new investments, limiting fresh capital inflows and the establishment of new networks. This trend, combined with more restrictive policies in strategic sectors and heightened regulation of technology transfers, poses a challenge to the increase of global FDI flows. Lastly, according to the OECD, emerging economies face additional difficulties, such as inadequate infrastructure and unstable regulatory frameworks, which hinder their ability to attract sustainable and diversified investments.

Industrial and Commercial Construction Remains Strong

In 2023, construction was one of the most vibrant sectors in the country. The construction sector expanded 15.4% while the economy grew at a rate of 3.3%, meaning it expanded 4.7 times faster than the overall economy. Much of this growth was driven by public infrastructure plans associated with government projects, which posted an impressive surge of 64.9%. This was followed by the building construction sector, linked to private projects, which rose 7.1%, according to GDP figures.

This year, the construction sector has started to lose momentum, growing by 9.9% in 1Q24, then by 9.0% in 2Q24, and eventually stalling at 0.6% in 3Q24. Among subsectors, public infrastructure rose by 38.8% in the first quarter, then by 3.7% in the second, before falling sharply to -20.1% in the third. Meanwhile, building construction increased by 4.8%, 11.4%, and 8.9%, respectively, during the same periods. This highlights that, although overall construction is clearly slowing, there is a segment within the sector that continues to record strong figures.

Through the latest survey, a closer look at the construction sector revealed that construction related to industrial and commercial buildings—part of the building construction category—has consistently expanded at double-digit rates since January 2022, with the exception of February and March 2023. This provides further evidence of the sustained momentum in construction tied to the development of industrial property.

Solid Demand for Industrial Property, Though it Logged a Slight Slowdown

According to CBRE, net demand for industrial property in Mexico’s key markets totaled 3.1 million square meters (m²) by 3Q24. If this trend continues (around 1 million m² per quarter), there would be a lower absorption compared to 2023, when net absorption was 5.0 million m².

Meanwhile, the industrial vacancy rate by 3Q24 stood at 3.5%, up from 2.2% at the end of 2023, indicating a slowdown in net absorption, particularly in specific markets like Ciudad Juárez, where the vacancy rate rose to 7.6% from 3.7% at the end of 2023. This increase can also be attributed to speculative supply entering the market. However, despite the slight rise in vacancy, it remains low. As a reference, between 2019 and 2020, the vacancy rate in key industrial markets ranged from 5% – 6%, which are still considered “healthy” levels.

On another note, according to CBRE, demand for property associated with Nearshoring reached 1.7 million square meters by 3Q24, pointing to a 14% increase compared to the same period last year; 39% came from new companies, while 61% was driven by the spread of existing businesses.

Monterrey accounted for 28% of the total demand for property, followed by Ciudad Juárez with 17%, and Saltillo with 15%. By sector, the automotive industry continues to lead regarding demand for property, as it accounted for 33% of demand from new companies, followed by Machinery and Tools with 33%, and Household Appliances and Electronics with 17%. As for already-established companies, 42% of demand came from automotive companies, while 39% came from Household Appliances and Electronics.

In conclusion, demand for property remains solid, although it´s increasing at a slower pace. On the other hand, most of the demand for property comes from already-established companies. In this sense, in 2019 and 2020, nearly 100% of the demand associated with Nearshoring came from new companies, so we may be witnessing the effect of the expansion of these already-established companies. Regarding growth, there are 3.0 million square meters under construction in the 13 main industrial markets, accounting for 5.3% of the total inventory. Therefore, we will continue seeing moderate growth in supply, suggesting that occupancy will remain at healthy levels, at least in the short and medium term. We cannot rule out that uncertainty regarding trade negotiations between Mexico and the US could delay investment decisions for some companies.

How´s the Trade Balance Doing? – October

In October 2024, a trade surplus worth $371 million dollars was recorded, meaning exports exceeded imports, compared to a deficit of $396 million in the same month of the previous year.

In October, exports amounted to $57.671 billion, with $55.288 billion USD coming from non-oil exports, and the remaining amount coming from oil-related exports. Total exports increased 11.2% compared to October 2023, with non-oil exports increasing 13.5%, and oil exports decreasing 24.2%. The decline in oil exports is explained by a lower price of oil in Mexico, $13.92 USD, lower than the price logged a year ago; additionally, there was a decrease in the amount that was exported (by approximately 200,000 barrels per day).

Within non-oil exports, agricultural exports increased by 3.1%, mineral extraction exports rose by 57.1%, and manufacturing exports increased by 13.2%. Within the manufacturing sector, automotive exports increased by 6.1%, while non-automotive exports rose 17.6%. Regarding the endpoint of non-oil exports, 84% were sent to the United States, while the remaining 16% went to other countries. Regarding goods exported to the United States, automotive exports increased 7.2%, and the rest increased 17.7%. When reviewing exports to the rest of the world, the rise was driven by non-automotive exports, which increased 18.1%.

Meanwhile, imports totaled $57.3 billion USD in October, logging a 9.7% increase compared to the same month in 2023. Consumer goods accounted for $8.242 billion, intermediate goods for $43.621 billion, and capital goods for $5.437 billion. Within the first two categories, oil-related imports decreased 27.2% and 14.9%, respectively, while non-petroleum imports increased 8.1% and 13.7%, in the same order.

Thus, for the January-October 2024 period, a trade deficit worth $10.646 billion USD was recorded, similar to the $10.295 billion deficit logged in the same period of the previous year. With these figures, we estimate that the trade balance could close with a deficit worth around -0.3% of GDP for the entirety of 2024, similar to what occurred last year.

Trade Relationship Between Mexico, the US, and China

The trade relationship between Mexico, the US, and China has been an important matter of analysis and debate in recent years. In this regard, Mexico has played a crucial role in international trade due to its geographical position and trade agreements, especially in the context of trade tensions between the world’s two largest economies. Consequently, some US analysts and officials have raised concerns that Mexico may be functioning as a bridge for Chinese goods to enter the US market, bypassing tariffs imposed on China. These concerns center on the possibility of Chinese products being assembled or slightly modified in Mexico and then exported to the US under the terms of the United States-Mexico-Canada Agreement (USMCA).

An analysis of Mexico’s trade balance highlights the origin of these concerns; however, we found no sufficient evidence in the data to assert that Mexico is serving as a bridge for Chinese products to enter the world’s largest market. In 2023, the US was Mexico’s largest trading partner, as it was the main destination for Mexican exports and the primary source of most of Mexico’s imports. Notably, exports to the US have increased their share of Mexico’s trade balance, rising from 80% between 2013 and 2019 to 83% in 2023, while imports from the US declined from 47% between 2013 and 2019 to 43% in 2023. Meanwhile, China has remained as Mexico’s second-largest trading partner, accounting for 19% of Mexico’s total imports (vs. 17% between 2013 and 2019); however, exports to China account for only 2% of the total amount (vs. 2% between 2013 and 2019). Thus, trade with China has remained at levels similar to those seen before the pandemic and the trade war between the two largest economies in the world. However, regarding the US, a divergence is evident between exports and imports, which could be one of the reasons for concern for the US government.

More specifically, in 2023, imports from China amounted to $114.1 billion, compared to $83.0 billion in 2019 (+37.5%) and $118.6 billion in 2022 (-3.8%). With this context, the main goods imported from China by Chapter of the Harmonized System Code are as follows: Chapter 85 (electrical machinery, equipment, and parts), Chapter 84 (nuclear reactors, boilers, and mechanical appliances), Chapter 87 (automobiles), Chapter 39 (plastics and articles thereof), and Chapter 90 (optical instruments and apparatus). Compared to 2019, there was significant growth logged among these goods, except for optical instruments and apparatus, which declined by -36.5% in 2023. Nonetheless, the rest of the goods recorded significant double-digit growth, with automobile imports exhibiting an extraordinary 165.4% increase.

Year-to-date trends and shares in Chinese imports have remained similar to those seen in previous years. In this regard, the most recent data (from September 2024) shows that the Chapter on machinery, appliances, and electrical equipment continues to be the most significant in trade relations between Mexico and China, worth $3.5 billion. Within this Chapter, most imported items correspond to telephones (19%), machinery, appliances, electrical materials, and their parts (10%), integrated electronic circuits (7%), among others.

Regarding Mexican exports, those directed to the US amounted to $490 billion in 2023, compared to $370 billion in 2019 (+32.2%) and $472 billion in 2022 (+3.7%). The main goods exported to the US by Harmonized System Code Chapter were Chapter 87 (automobiles), Chapter 85 (machinery, appliances, and electrical equipment), Chapter 84 (nuclear reactors, boilers, and mechanical appliances), Chapter 94 (furniture, surgical and medical equipment, etc.), Chapter 8 (edible fruits and nuts), and Chapter 22 (beverages, spirits, and vinegar). Notably, some of these products overlap with goods imported from China; however, export volumes are significantly higher than imports, which suggests that exported goods are domestically produced or have considerable value added in Mexico. For instance, automobiles, the leading export product, increased 29.4% since 2019, reaching $129 billion in 2023—nearly 13 times the value of imports from China in this category. Overall, while there are elements justifying concern, such as the rise in imports from China and Chinese investment in Mexico, current data suggests there is insufficient evidence to conclude that Mexico serves as a bridge for triangulating Chinese goods into the US. These current trends are in line with international trade patterns and Mexico´s increasing role as a competitive manufacturing hub in the region.

Lastly, US President-elect Donald Trump has announced the implementation of special tariffs (25%) on all imports from Mexico and Canada, along with a 10% increase on existing tariffs for Chinese imports. These measures and claims have heightened tensions in the trade relationship between Mexico and the US, leaving Mexico in a precarious position as it seeks to balance its relationship with the US while managing its trade ties with China. This situation has sparked debates about the need for Mexico to adopt a more active and pragmatic foreign policy in order to navigate through a complex international environment.