Let´s Talk About Nearshoring 5.0 | Quarterly Newsletter #3

FDI in México

Mexico received $31.096 billion USD in Foreign Direct Investment (FDI) between January and June 2024, the highest figure for a first semester on record. This FDI figure logged a +7.1% increase compared to the $29.041 billion USD reported in the 1H23, according to the Ministry of Economy.

By components of Foreign Direct Investment, a review of the first half of 2024 highlights that $30.288 billion came from profit reinvestment (1H23: $22.609 billion), $909 million from new investments (1H23: $2.135 billion), and -$101 million from intercompany accounts (1H23: $4.297 billion). It´s worth pointing out that by the end of the second quarter of 2024, profit reinvestment reached a new all-time high. On this occasion, the Ministry of Economy provided detailed figures, revealing that the $33.874 billion in profit reinvestment, while $3.586 billion were outflows related to dividend payments, resulting in the previously reported $30.288 billion balance. As for new investments, there were +$717 million in new companies, +$481 million in capital contributions, and -$289 million from company cancellations.

Additionally, the US positioned itself as Mexico´s main investment partner, accounting for 44% of total inflows. However, there is noticeable diversification in the origin of investments and their participating sectors. During 1H24, the 10 countries with the largest investments in Mexico accounted for 90% of FDI, with notable contributions from countries like Germany (13%), Japan (10%), and Canada (8%). By state, there was a reconfiguration of investment locations throughout the country, with 84% of the recorded FDI comprised in 10 states, the most prominent being: Mexico City (46%), Nuevo León (7%), Baja California (6%), State of Mexico (5%), and Guanajuato (4%). Lastly, a detailed analysis of FDI by sector revealed that Mexico is a hub for specialized manufacturing with an increasing need for capital to develop its industries. In this regard, 54% of the 1H24 inflows were concentrated in the manufacturing sector, primarily in transportation equipment, beverages and tobacco, chemicals, computer equipment, and food. On the other hand, financial services, mining, and transportation accounted for 15%, 10%, and 8%, respectively.

Foreign Direct Investment figures are good news; even though the majority stems from profit reinvestment, they reinforce Mexico’s strategic position as a preferred investment destination over other economies. Additionally, the transparency provided by the Ministry of Economy allows for a more detailed assessment, which shows that new companies continue to enter the country. However, it´ll be important to know if historical data on these companies will be generated in order to gauge the Nearshoring phenomenon in greater detail. Looking ahead, we don’t rule out a slight moderation in inflows, especially since the divestment of Iberdrola assets from the sale of 13 plants has yet to be recorded, as well as other temporary factors, such as the US presidential elections. Nevertheless, for 2024, the consensus estimates FDI to amount to around $37.7 billion, compared to the $36.058 billion received in 2023. If this forecast is met, FDI would increase approximately 4.5% from the previous year, marking the highest figure on record.

2024 Investment Announcements Update – Ministry of Economy

The Ministry of Economy (ME) reported that from January 1^st to July 31^st of 2024, 166 investment announcements were made, with an estimated total $48.035 billion USD. These investments were made in addition to the $110.744 billion USD announced in 2023. The ME noted that this amount is expected to enter the country over the next two to three years, potentially creating 75,481 new jobs.

The main countries of origin are: The US, accounting for 46% of the total amount, followed by Germany with 14%, and Argentina with 9%. However, according to the ME, China, France, and Portugal are emerging among the top countries interested in investing in Mexico, particularly in the automotive, natural gas, and fertilizer sectors.

As seen in the past, the leading economic sector is manufacturing, which represents 53% of FDI announcements, followed by commerce with 14%, transportation with 11%, mass media with 10%, and construction with 7%. In manufacturing, key sectors include beverages (41%), automobiles (15%), auto parts (15%), iron and steel (10%), and electronic components (2%).

The leading states in attracting investment are Querétaro (14%), State of Mexico (10%), and Nuevo León (9%). Notably, and according to the ME, the most optimistic expectations for job creation by state are in Querétaro (11%), Coahuila (11%), and San Luis Potosí (9%).

The main new public announcements are the following: Mota-Engil and Duro Felguera for the construction of a fertilizer plant ($1.2 billion USD), Mars Petcare for animal food manufacturing ($196 million USD), and Harman for auto parts manufacturing ($115 million USD).

However, it´s worth noting that some of the investments announced this semester do not necessarily pertain to Nearshoring (and are not even foreign direct investment, although the ME counts them as such), such as the investments announced by Femsa and Nemak.

A Closer Loock

Much has been argued both for and against Nearshoring. There are some questioning the phenomenon, as it seems that FDI has remained relatively stable, or grows moderately – though, as we have said in the past, it´s reaching all-time highs. Moreover, in light of new investments, there has been very little change. However, when we evaluate FDI by sector, we can see that sectors directly linked to Nearshoring have experienced significant growth. Considering Nearshoring announcements from 2023 to date, most of them pertain to the same sectors that have benefited significantly, such as machinery & equipment, and the automotive and manufacturing industries.

While Mexico has become the United States´ top trade partner, imports made by the world’s leading market have recorded heterogeneous figures. Imports from Mexico have shown a trend of sustained growth, while imports from the rest of the world have recorded some setbacks.

The biggest challenge for Nearshoring is to diversify into other sectors rather than merely becoming America´s manufacturing hub. The possibility of redirecting investments towards Mexico in sectors other than manufacturing and the automotive sector could be the trigger that changes the structure of Mexico´s economy in the long term.

The manufacturing and financial services sectors accounted for 69% of FDI in the first half of 2024, with 48% of this corresponding to the transportation equipment industry.

Increasing Investment in Power Generation is Key for More Industrial Parks

The industrial real estate sector remains vibrant due to the demand for space from companies interested in setting up in Mexico or those already established looking to expand operations. According to CBRE, by the first half of 2024, demand for industrial space related to Nearshoring was 1.2 million square meters, which was a 39% increase compared to the same period of last year. Mexico´s northern states have accounted for 77% of this demand, primarily in the following markets: Monterrey (25%), Ciudad Juárez (24%), and Saltillo (17%). The automotive sector accounted for the largest share of industrial space transactions, accounting for 38% of the total amount.

By country, CBRE estimates that demand stemming from Nearshoring from 2019 to the first half of 2024 has mainly come from investments by Chinese companies, accounting for 48% of the required space, followed by American companies with 21%.

Looking ahead, the sector´s outlook remains positive. In this regard, the new Mexican government’s plan for 2024-2030 includes the construction of 100 industrial parks. Meanwhile, the Mexican Association of Industrial Parks (AMPIP for its acronym in Spanish) has announced that its members are currently building 72 new industrial parks, and for the 2024-2030 period, the AMPIP is proposing a program for the construction of 128 industrial parks, equivalent to 21 million square meters and an investment ranging from $6.2 billion to $8.6 billion dollars.

The main challenge in the sector is the need for increased investment in power generation, although market participants also mention other limitations: Water availability and the complexity and time required for permits, land use, private investment in electricity transmission/generation, among others.

Global FDI for the First Quarter of 2024

In Q1 2024, global FDI flows totaled $462 billion, according to data made known by the Organization for Economic Cooperation and Development (OECD). This figure is 1.0% below the level recorded in the first quarter of the previous year but 78% above the amount observed in the last quarter of 2023.

By country, the top five were: The US ($76.044 billion), the Netherlands ($22.040 billion), Brazil ($21.049 billion), Mexico ($20.313 billion), and Germany ($19.008 billion). Notably, China’s FDI flows logged significant weakness, dropping from $107 billion in Q1 2022 to $23.556 billion in Q1 2023 and to $10.197 billion in Q1 2024, only about 10% of the amount reported two years ago.

Mexico ranks among the top global recipients of FDI; however, we know that a large part of this corresponds to profit reinvestment rather than new investments. When analyzing data from countries that disclose this information, we find evidence suggesting this may be a global phenomenon, as there has been a decline in the share of new investments in Q1 2024 with respect to the total. For instance, in the US, new investments accounted for just 20% (Q1 2023: 57%); in the Netherlands, 6.5% (Q1 2023: -1.5 times due to asset divestment); and in Mexico, 3.0% (Q1 2023: 6.9%). The countries in the top five with the highest percentages are Germany with 63.4% (Q1 2023: 1.8 times) and Brazil with 32.9% (Q1 2023: 32.9%).

It’s possible that the uncertainty tied to the number of electoral processes at a worldwide level is tempering global foreign direct investment flows. This is further compounded by the protectionist plans of Republican candidate Donald Trump, should he win the US election. These plans include: 1) A 10% tariff, though more recently he has mentioned it could be as high as 20%; 2) an additional 60% tariff on China’s economy, with the possibility of applying more tariffs on other countries; and 3) incentives for US industries to resume production in the US or for foreign companies to relocate to the country, among other measures. On the other end of the spectrum, the plans recently put on the table by Democratic candidate Kamala Harris to raise corporate taxes from 21% to 28% could potentially strengthen the case for Nearshoring in Mexico.

Nearshoring Challenges

We have repeatedly pointed out that Nearshoring must be accompanied by well-organized infrastructure in water and electricity, a skilled workforce, as well as transportation infrastructure and industrial policies. In this regard, it´s relevant to mention a recent study carried out by the Mexican Institute for Competitiveness (IMCO for its acronym in Spanish), which reviewed around 21 factors related to the labor market, basic inputs, housing, and the regulatory environment across various states in the country to understand the opportunities and challenges faced in different regions.

The IMCO´s findings highlight the following:

1. Labor Market: The states with the greatest potential to add more people to the labor force are Guanajuato, Tlaxcala, Sinaloa, and Durango, while Baja California and Jalisco have a limited available population within the economically inactive population (those who are neither working nor seeking employment but would accept a job if offered). Additionally, states like Jalisco, Nuevo León, and Michoacán have the highest levels of English proficiency, while the lowest levels are found in Coahuila, Chiapas, and Oaxaca.
2. Housing and Basic Services: The states with the highest annual housing construction figures, reflecting adequate housing infrastructure, are Quintana Roo, Nuevo León, and Aguascalientes, while the lowest are Chiapas, Campeche, and Oaxaca. In terms of public transportation, there is notable disparity between Mexico City and the rest of the country, with the capital having nearly 3,000 transportation units per million inhabitants, while the rest of the country ranges from 126 to 767 units per million. The states with the most infrastructure, at around 160 units per million, are Chihuahua, Zacatecas, and Colima.
3. Infrastructure: In this area, basic inputs such as affordable and reliable energy and water supply were considered, according to the IMCO. For water, the number of industrial wastewater treatment plants relative to the amount of water allocated for such use was analyzed. The most favorable figures were found in Campeche and Baja California Sur, while the lowest were in Veracruz, Nayarit, Chihuahua, Coahuila, and Mexico City. Regarding energy supply, the most affordable prices were in Baja California, Sonora, Sinaloa, and Chihuahua, while the highest prices were in Baja California and Quintana Roo.
4. Rule of law and regulatory framework: This criteria analyzed which government programs that support businesses were most prevalent in the country´s states, with Sinaloa and Yucatán standing out, while Hidalgo and Morelos had few programs.

The Hubs of Well-Being

This analysis is brought up in relation to one of the proposals put forward by Mexico´s next president, Claudia Sheinbaum, regarding the “Hubs of Well-being,” which she presented in the National Chamber of the Transformation Industry of Nuevo León and the Mexican Banking Association earlier this month.

• Border Strip: Integrates strategic sectors such as semiconductors, logistics, tourism, electronics, and medical devices. It runs through Baja California, Sonora, Chihuahua, Coahuila, Nuevo León, and Tamaulipas.
• Baja California Gulf: The strategic sectors included in this segment are semiconductors, energy, tourism, and agribusiness. It encompasses Baja California and Baja California Sur.
• Sonora Plan: Two key sectors stand out in this area: energy and electromobility/automotive. Only the state of Sonora is involved.
• North: Focuses on electromobility and automotive, as well as agribusiness. It runs through Chihuahua, Coahuila, Nuevo León, and Tamaulipas, similar to the Border Strip.
• Northwest: Will promote sectors such as energy and agribusiness and runs through three states: Sinaloa, Durango, and Zacatecas.
• Bajío: Leverages the regional focus on electromobility and automotive, tourism, and information technologies. It passes through San Luis Potosí, Aguascalientes, Querétaro, Guanajuato, and Hidalgo.
• Pacific: Encompasses strategic sectors, including logistics, agribusiness, and tourism.
• AIFA: The Felipe Ángeles International Airport (AIFA for its acronym in Spanish) will promote sectors such as logistics, agribusiness, medical devices, and the pharmaceutical industry. It includes the State of Mexico, Morelos, Mexico City, Hidalgo, Querétaro, and Tlaxcala.
• Center: Incorporates sectors such as electromobility and automotive, agribusiness, and electronics. It passes through the State of Mexico, Morelos, Mexico City, Hidalgo, and Tlaxcala.
• Gulf: The sectors to be incentivized in this region are energy and agribusiness. It includes Chiapas and Guerrero.
• Isthmus of Tehuantepec: Would develop the energy, agribusiness, and logistics sectors. It runs through Oaxaca, part of Veracruz, and Tabasco.
• Campeche Plan: Focused on agribusiness, located in Campeche.
• Maya: Integrated sectors are energy, tourism, and agribusiness.
• Southern Border.

Deficit in Government Investment

Possibly the greatest short-term challenge is investment in infrastructure. In the current administration, we have observed a decrease in investment in specific sectors, such as: i) Education, ii) electricity, and iii) drinking water. The investment assessment is conducted at the end of each year and adjusted for inflation to allow for an accurate over-time comparison.

We believe this is cause for concern; and addressing the decline in education, electricity and water sectors should be the new administration´s main priority. According to our calculations, this figure was slightly above $110 billion pesos in the first five years of each administration; however, we have observed a cut since the Peña Nieto administration, bringing it to nearly $80 billion pesos – and a near 90% drop in the current administration.

Regarding the electricity sector, there have been two consecutive quarters of declining investment, which is one of the main drivers for Nearshoring´s development. Additionally, it´s compounded by a situation in which installed capacity and transmission networks are under stress due to increasing demand and extreme weather events. Moreover, when reviewing construction in the electricity sector for generation and transmission in the country, we find that it has been declining during the current administration´s time in office. Comparing 2024 with the last figure of the Peña Nieto administration (2018), there is nearly an 80% decrease in construction. Investment in energy has significantly decreased since 2018, which has led to increased electrical service interruptions, and has created a bottleneck in FDI.

With this context, we also see reduced investment in the drinking water sector. Various organizations have warned that investment needs should be around $90 billion pesos annually for the next ten years to address future water crises, according to estimates from the Mexican Chamber of Construction. In the “other areas” category, we include investments from various ministries, meaning that most of the prioritized projects of the current government, such as the Mayan Train, AIFA Airport, and Dos Bocas Refinery, among others, are considered in this category; these have shown almost no change compared to the previous administration.