By Taufeeq Khan Marcos.
What is nearshoring?
The Policy Department for External Relations of the European Union defines “nearshoring” as the process of a company locating or relocating its manufacturing operations to a country “close” to its home country [6]. Under this definition, “close” refers not only to the geographical distance between the countries, but also to their similar economic, cultural, and political alignment [2]. The definition derives from the original term “offshoring,” which refers to the opposite process, which is: “the practice of moving operations overseas, usually by companies from industrialised countries to less-developed countries, with the intention of reducing the cost of doing business” [11]. It is relevant to underscore that nearshoring differs from “reshoring” as the latter strictly refers to the return of previously offshored activities to the home country.
It is tempting to assume that nearshoring is manifesting due to the geopolitical fragmentation on the global stage. Nevertheless, the rise of nearshoring, as opposed to the previous offshoring trend, does not necessarily mean that globalisation is being rolled back. This relocation of investment and industrial operations rather hints at restructuring priorities as companies look beyond cost-benefit analysis for decision-making [5]. In this way, they seek to reap the benefits of doing business abroad in a more congruent manner. For instance, Mercedes-Benz and BMW have announced new investments in Eastern Europe, as the region not only offers lower labour costs but also strategic connectivity [15] [20].
Recent trends in Mexico
One of the biggest winners of the nearshoring trend is Mexico, having attracted around $29 billion in foreign direct investment during the first semester of 2022 [16], with most of it coming from the United States, but also from Spain, Canada, and Japan [9]. Investments can be grouped into two categories. On the one hand, there are American companies, already established in the country, who wish to expand their capacity. On the other hand, there are European and Asian investors that seek to reap the benefits of doing business in the region [14].
A series of events have facilitated this shift. Among the most important are [3] [19]:
- The signing of the United States-Mexico-Canada Agreement – the updated version of the North American Free Trade Agreement NAFTA – increases regional value content requirements for producers.
- The United States trade war with China has pushed companies to establish in alternative markets, such as Mexico, due to the higher costs of importing caused by the increased tariff rates on foreign products.
- The COVID-19 pandemic led to the closing of borders globally, forcing investors to rely on local markets.
- The Russia-Ukraine war and the general increased price of containers have disrupted international supply chains.
In a recent interview, JPMorgan Chase CEO Jamie Dimon commented that he sees Mexico as a prime nearshoring and business hub, placing it at the forefront of global investment destinations. “If you had to pick a country this [Mexico] might be the number one opportunity,” said Dimon [1].
Nuevo León, a success story
Nuevo León, a northeastern state in Mexico, has been able to capitalise on this trend, concentrating 76% of the total nearshoring FDI in Mexico [4]. In fact, from 2017 to 2022, foreign direct investment inflows more than doubled (see graph below).
Graph produced by the author based on data from the Ministry of Economy of Nuevo León [13].
Companies from diverse sectors, such as automotive, appliance manufacturing, and information technology, have all chosen Nuevo León as their investment destination due to its privileged geographical location, availability of industrial infrastructure, and educated workforce [10] [17]. Earlier this year, the electric vehicle manufacturer Tesla announced its plans to construct in Nuevo León the largest and most technologically advanced gigafactory in the world, planning to invest over $5 billion USD and expecting to create at least 5,000 new jobs [12].
During the inauguration ceremony of the business summit “Mexico’s Industry Supply Chain 2023”, held in the state’s capital city of Monterrey, Governor Samuel García invited attendees to capitalise on the investment opportunities offered by the state and emphasised on the growth potential that nearshoring could bring to the region [8]. The event was attended by more than 500 companies from Mexico and a dozen other nations, which held business meetings, conferences, and networking events [8].
Next steps for Mexico
Mexico’s Deputy Finance Minister Gabriel Yorio pointed out that if current trends of foreign direct investment are sustained, the Mexican economy will continue to grow at a rate of 3.5% during 2024 [7]. To fully take advantage of the benefits that nearshoring can provide to Mexico, however, it will be vital to implement a series of policies that target specific shortcomings. For instance, Mexico should further facilitate access to global markets, capital, and technology by boosting investments in digital infrastructure, developing its human capital, promoting customs regulatory advances, and supporting investment promotion agencies [18].
Edited by Justine Peries.
Disclaimer: The views expressed in this presentation are solely the views of the author, and do not reflect the views of any institutional stances.
References
[1] Bloomberg Television, director. Dimon Sees Mexico as a ‘Huge’ Opportunity for JPMorgan. 2023. YouTube, https://www.youtube.com/watch?v=7eA-i5wUNHo. Accessed 16 December 2023.
[2] A Dictionary of Human Resource Management. “Nearshoring.” Oxford Reference, 2001, https://www.oxfordreference.com/display/10.1093/oi/authority.20110803100226581. Accessed 16 December 2023.
[3] Drenik, Gary. “Why Nearshoring Is Closer Than Ever: How Mexico Is Becoming The Next Big Thing In Global Markets.” Forbes, 23 March 2023, https://www.forbes.com/sites/garydrenik/2023/03/23/why-nearshoring-is-closer-than-ever-how-mexico-is-becoming-the-next-big-thing-in-global-markets/?sh=67046cd6354b. Accessed 16 December 2023.
[4] EGADE Business School. “Nearshoring to strengthen global value chains in Mexico.” EGADE Business School, 26 September 2023, https://egade.tec.mx/en/blog/nearshoring-strengthen-global-value-chains-mexico-report. Accessed 16 December 2023.
[5] El-Erian, Mohamed. “From near-shoring to friend-shoring: the changing face of globalisation.” The Guardian, 9 March 2023, https://www.theguardian.com/business/2023/mar/09/from-near-shoring-to-friend-shoring-the-changing-face-of-globalisation. Accessed 16 December 2023.
[6] European Parliament. “Post Covid-19 value chains: options for reshoring production back to Europe in a globalised economy.” European Parliament, March 2021, https://www.europarl.europa.eu/RegData/etudes/STUD/2021/653626/EXPO_STU(2021)653626_EN.pdf. Accessed 16 December 2023.
[7] Gazcón, Felipe. “Prevé Yorio que economía mexicana crecerá en 2023 entre 3.5 y 3.6 por ciento.” El Financiero, 29 November 2023, https://www.elfinanciero.com.mx/economia/2023/11/29/preve-yorio-que-economia-mexicana-crecera-en-2023-entre-35-y-36-por-ciento/. Accessed 16 December 2023.
[8] Gobierno de Nuevo León. “Invita Samuel García a capitalizar ventajas que ofrece el ‘Near Nuevo León’.” Gobierno de Nuevo León, 16 August 2023, https://www.nl.gob.mx/boletines-comunicados-y-avisos/invita-samuel-garcia-capitalizar-ventajas-que-ofrece-el-near-nuevo. Accessed 16 December 2023.
[9] Hernández, Enrique. “Estiman que inversión de Japón en México aumentaría 66% en 2024 por nearshoring.” Forbes México, 13 December 2023, https://www.forbes.com.mx/estiman-que-inversion-de-japon-en-mexico-aumentaria-66-en-2024-por-nearshoring/. Accessed 16 December 2023.
[10] Murray, Christine. “The city where Mexico’s nearshoring hype is becoming reality.” Financial Times, 26 November 2023, https://www.ft.com/content/445a2ca2-931b-4556-b735-a9d70f5e7b44. Accessed 16 December 2023.
[11] O’Leary, Christopher. “Offshoring.” Encyclopaedia Britannica, December 2023, https://www.britannica.com/money/offshoring. Accessed 16 December 2023.
[12] Recio, Kevin. “Gigafactory de Tesla en Nuevo León será la más grande del mundo.” Milenio, 6 December 2023, https://www.milenio.com/politica/comunidad/gigafactory-de-tesla-en-nuevo-leon-sera-la-mas-grande-del-mundo. Accessed 16 December 2023.
[13] Secretaría de Economía. “N.L. Inversión Extranjera Directa Trimestral.” Secretaría de Economía, 2023, http://datos.nl.gob.mx/n-l-inversion-extranjera-directa-trimestral/. Accessed 16 December 2023.
[14] Tapia, Patricia. “Nearshoring se fortalece: detectan más de 100 proyectos en México.” Forbes México, 5 December 2023, https://www.forbes.com.mx/nearshoring-se-fortalece-detectan-mas-de-100-proyectos-en-mexico/. Accessed 16 December 2023.
[15] Telling, Oliver. “Demand for Europe factory space rises 29% amid ‘nearshoring’ rush.” Financial Times, 12 June 2023, https://www.ft.com/content/802bd45c-d420-418a-8ba4-db1e3f643d31. Accessed 16 December 2023.
[16] Torres, Noe. “Mexican businesses warmed by glow of ‘nearshoring’ dawn.” Reuters, 6 November 2023, https://www.reuters.com/world/americas/mexican-businesses-warmed-by-glow-nearshoring-dawn-2023-11-06/. Accessed 16 December 2023.
[17] Velasco, Perla. “Monterrey Solidifies its Position as Mexico’s Nearshoring Hub.” Mexico Business News, 23 October 2023, https://mexicobusiness.news/trade-and-investment/news/monterrey-solidifies-its-position-mexicos-nearshoring-hub. Accessed 16 December 2023.
[18] World Bank. “Global Economy Trends in Nearshoring and Green Industry Can Help Boost Growth in Latin America and the Caribbean.” World Bank, 4 April 2023, https://www.worldbank.org/en/news/press-release/2023/04/03/global-economy-trends-in-nearshoring-and-green-industry-can-help-boost-growth-in-latin-america-and-the-caribbean. Accessed 16 December 2023.
[19] Zaga, Daniel, and Alessandra Ortiz. “Nearshoring in Mexico.” Deloitte, 13 July 2023, https://www2.deloitte.com/us/en/insights/economy/issues-by-the-numbers/advantages-of-nearshoring-mexico.html. Accessed 16 December 2023.
[20] Zeneli, Valbona. “Western Balkans ‘nearshoring’ can turn the region into a strategic asset for the EU.” Atlantic Council, 28 September 2023, https://www.atlanticcouncil.org/blogs/new-atlanticist/western-balkans-nearshoring-strategic-asset-eu/. Accessed 16 December 2023.
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