Nearshoring is a strategy in which a company moves all or part of its production closer to the final consumer, reducing costs and avoiding logistical setbacks. In the last couple of years, many businesses around the world have started to look at this as an alternative, primarily to avoid supply chain issues.
But what triggered nearshoring?
Tariffs imposed by the United States in 2018 have caused some businesses to look for alternative markets to reduce costs.
The United States-Mexico-Canada Agreement increased regional value content requirements for products to be considered to be made in North America, giving producers an incentive to relocate their supply chains.
The rapid spread of COVID-19 led to closing of borders globally, which impacted the availability of goods and delivery times during a time when the demand for various products increased.
The availability of containers and the increase in the cost of transport, especially maritime, have raised transportation costs by more than 500%.1
The outbreak of the war in Ukraine limited the supply of raw materials, which forced businesses worldwide to look for alternative suppliers.
These developments have been seen as once-in-a-generation opportunity for Mexico—one that can supercharge the country’s economic growth across different sectors. In fact, nearshoring can help Mexico add an additional 3% to its GDP in the next five years.2
Efforts to cash in on this opportunity are already underway in Mexico. According to a survey from Mexico’s Central Bank, nearshoring is starting to materialize (figure 3). However, business opinion reveals that the impact of nearshoring will unfold gradually and can be perceived only from 2024 onward.3
Nearshoring is yet to result in any significant increase in foreign direct investment (FDI) in Mexico, as evidenced by near-similar FDI levels before and after the pandemic.4 However, there are some trends that could indicate that may change. In 2022, for example, new investments represented 48% of total FDI into Mexico, the highest since 2013.
According to our analysis, there are primarily two types of groups that are reallocating to Mexico. The first group is integrated with American companies that already had operations in Mexico and are now expanding their capacity. The second group comprises Chinese companies that are seeking the benefit of producing in North America while avoiding the high costs of labor and reducing the risks of disruptions in the supply chain.5
Although it’s transportation equipment that has received the bulk of manufacturing FDI, in recent years other sectors have grabbed investors’ attention as well, such as electrical accessories and appliances, and communications and computer equipment. Considering many of these sectors suffered logistic problems during the pandemic, the increase in FDI may likely be capital that is simply being relocated.
Higher demand from the global market has caused an acceleration of manufacturing production in Mexico. In 2022, it grew 5.2% annually, significantly higher than the previous 10-year average (+2.3%).6
Some of the manufacturing industries that have performed the best have also been among those that have attracted the most FDI in recent years.7 The cities bordering the United States (primarily, the Northern regions of the country) have witnessed a more rapid uptick in manufacturing activity compared to other regions.8
Despite showing signs of recovery in recent years, private investment has not surpassed prepandemic levels9—an indication that nearshoring is still likely in its early stages in Mexico.
One of the factors that could hinder FDI inflows into Mexico is related to the rule of law in the country. According to a Central Bank survey, almost 80% of business persons consider the current state of rule of law in Mexico an obstacle to Mexico receiving the desired amounts of investments. To take advantage of the opportunities offered by nearshoring, it may be important to reinforce the domestic sources of growth and generate conditions that favor investment.
Based on a Deloitte study, most of the nearshoring activity in Mexico is focused in the auto sector and concentrated mainly in the northern region.10 The region's potential is beginning to be reflected in the occupancy rate of industrial parks, which are running at maximum occupancy levels in many cities along or near the US border.11
Nearshoring in Mexico is an emerging trend that could consolidate the country as an international logistics hub.
Considering the process of enabling manufacturing plants can be extremely slow, disbursements are progressive and many of these projects may take a long time to show results. To take advantage of opportunities offered by nearshoring, Mexico may need to improve its business environment, work to solve electricity and water supply issues, increase investment in infrastructure, and generate incentives for investment.
According to our analysis, if the nearshoring opportunity is seized12:
Yan Carriere-Swallow, Pragyan Deb, Davide Furceri, Daniel Jimenez, and Jonathan D. Ostry, “Shipping cost and inflation,” International Monetary Fund Working Paper, March 2022.
View in ArticleEconosignal data.
View in ArticleBanco de Mexico, Regional economic report: July-September 2022, 2022.
View in ArticleBanco de Mexico, “Components of foreign direct investment in Mexico,” accessed June 30, 2023.
View in ArticleBanco de Mexico, Regional economic report.
View in ArticleThe authors would like to thank, Cecilia Montaño, lead partner of Foreign Trade and Customs, Deloitte Mexico; Xavier Ordoñez, supply chain lead partner, Deloitte Consulting Mexico; Erick Calvillo, growth lead partner, Deloitte Mexico; and Miguel Angel del Barrio, growth lead partner, Marketplace Mexico Central America, Deloitte Mexico.
Cover image by: Meena Sonar
