Nearshoring: How We’re Doing Month by Month #05 | Monthly Newsletter | April 2024

2024 Investment Announcements – Ministry of Economy

The Ministry of Economy reported that from January 1^st to March 15^th, 73 investment announcements were made, totaling an estimated $31.512 billion dollars. Additionally, the Ministry pointed out that said amount is expected to enter the country in the next two or three years and will lead to the creation of around 39,192 new jobs.

In the published statement, we highlight that, of the new investment announcements made in the first months of 2024, $18 billion would come from the US, 57% of the total amount; and despite investments being smaller in terms of economic relevance, there´s interest to invest from countries such as China, Taiwan, France, and Switzerland, among others.

By economic sector, the vast majority of announcements correspond to the manufacturing sector, with 54% of the total amount, equivalent to $17.145 billion in this industry; mass media with 16%; trade with 15%; and transportation with 14%. It´s important to point out the fact that 99% of investment announcements are located in these four economic activity branches.

IMPORTANT NOTE: The Ministry of Economy is including investments announced by FEMSA, WALMEX, and Nemak, among other companies, and in our opinion, these investments are not necessarily related to the relocation of production chains. We highlight the following points:

• As part of its FORWARD strategy, FEMSA will invest approximately $170 billion pesos (around $9 billion USD) in Mexico over the next five years, equivalent to 70% of its total estimated Capex for the same period. While it´s true that FEMSA has a 49% stake in the Coca-Cola bottler (foreign capital), FEMSA’s capital is mostly Mexican. Therefore, we consider that such investment is misclassified as Foreign Direct Investment, and in any case, only investments related to the bottling business should be included in the announcements.
• Nemak announced in its guidance that it will make Capex investments of between $380-$395 million dollars in 2024. The announced Capex for 2024 is a decrease compared to the investment made in 2023, which was $537 million dollars. Nemak operates in 15 countries, and has 38 total plants. The company did not provide a breakdown of its Capex by geography, but it should be kept in mind that, like FEMSA, its capital is Mexican, so it should not be categorized as FDI.
• Meanwhile, Walmex reported that it estimates $34.5 billion pesos worth of Capex in 2024, a 20% increase compared to 2023. Of the total amount, about 45% will be allocated to renovations and maintenance of existing stores, 29% to the construction of new stores, 15% to expanding and modernizing the supply chain, and the remaining amount to e-commerce and technology projects. In this case, it´s worth noting that this company does have foreign capital, but it should be categorized as profit reinvestment.

In our opinion, not all the investments published by the General Direction of Foreign Investment of the Ministry of Economy correspond to investments that truly address: i) Nearshoring, as this was initially the objective of these publications, and ii) Foreign investment, as is the case with FEMSA and Nemak.

How’s the Trade Balance Doing? – February

In February 2024, the country’s trade balance (exports minus imports of goods) recorded a deficit worth $585 million dollars, compared to a $1.889 billion dollar deficit in the same month of 2023. In the first two months of the year, the trade balance logged a deficit worth $4.899 billion dollars. In the same period of the previous year, the deficit was $5.995 billion dollars.

In February 2024, we observed a 13% annual increase in exports, reflecting a 12.9% increase in non-oil exports and a 15.7% increase in oil exports. Regarding non-oil exports, those directed to the US increased 13.7% y/y and those channeled to the rest of the world increased 8.4% y/y. By type of good, exported manufactured products amounted to $45.048 billion dollars, logging an annual 13.3% increase. In this regard, the most significant progress was observed in exports of professional and scientific equipment (31.8%), automotive products (26.9%), textile products (16.6%), food and beverages (11.4%), and electronic equipment (7.7%). It´s worth noting that the annual increase in automotive product exports was the result of a 28.5% increase in sales to the US and a 18.6% hike in those directed to other markets. In the January-February period of 2024, total exports amounted to $92.678 billion dollars, and logged a 5.9% annual increase.  

Regarding imports, February 2024 figures recorded an annual 9.7% increase by totaling $51.306 billion dollars. This growth is mainly explained by an annual 13.9% increase in consumer goods imports; while intermediate goods were 7.9% higher than those reported in February of the previous year. Additionally, capital goods imports increased by 18.9% y/y, maintaining the significant growth trend they had been recording in recent months, as a result of Nearshoring needs. During January-February 2024, imports were made up as follows: intermediate goods 75.1%, consumer goods 14.7%, and capital goods 10.2%.

From Globalization to Regionalization

In 2022, Foreign Direct Investment in the United States amounted to $5.2 trillion, increasing by $216.8 billion, a historic figure. This was the result of strategic promotion by certain states in the country to attract new investments. The fragmentation of supply chains has had a clear winner: The United States.

Considering the FDI announcements made from 2023 through first two months of 2024, they total over $120 billion dollars (excluding investments from FEMSA and Nemak). If carried out, FDI would grow considerably either through profit reinvestment or new investments. Although the majority comes from profit reinvestment, and this category is not necessarily related to nearshoring, this also shows that existing companies continue to see potential to expand their installed capacity in Mexico in order to serve the international or local market.

According to a report published by McKinsey & Company, of all the announcements made since 2023 until now, about $41 billion dollars correspond to new investments in the country, which will mainly be reflected in the infrastructure and automotive sectors, and will come from the United States, China, and Europe. In case this carries through, this would represent a growth potential of 4x in the coming years in the new investments category. These new investments account for 44% of the announcements made by the Ministry of Economy, while the rest corresponds to currently established companies, according to McKinsey. Another point to highlight, according to this firm, is that all Asian countries represent more than the share of announcements coming from the United States – and account for more than one-third. Evidence of the nearshoring phenomenon is gradually emerging, although as mentioned earlier, it all takes time to materialize.

For Mexico, this is occurring despite the enormous challenges that have been pointed out, such as the lack of infrastructure (roads, bridges, ports, fiber optics, etc.) and public safety; although, as we have pointed out, the gears are turning. Clearer evidence of this is the historically low vacancy levels in the country’s main clusters.

But to better capitalize on this unique opportunity, investment must accelerate, in addition to boost state efforts to receive and attract new investments by simplifying processes and facilitating investment attraction. Furthermore, an industrial policy must be implemented to promote economic spillover, improve access for Mexican suppliers to integrate into supply chains, generate employment, and thus enhance Mexico’s growth in the coming years.