The Emerging Role of Latin America in Nearshoring

At the onset of the pandemic in early 2020, with changes in geopolitics, supply chain configuration and consumption quickly arising, the world-reshaping trend of nearshoring emerged. Nearshoring, or moving production facilities closer to major consumption markets, positioned Latin America, and in particular, Mexico, as one of the main beneficiaries of this manufacturing shift to increase proximity to the US markets.

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Indicators now show that nearshoring execution has begun as, empirically, industrial property vacancy rates are at an all-time low and developers are challenged to keep up with the incredibly strong demand, particularly in the states of Mexico that border the United States.

To get more hands-on knowledge and statistics, Newmark Global Corporate Services (GCS) interviewed Francisco Gonzalez, Executive Director of the National Auto Parts Industry (INA), one of the main sectors of the Mexican economy benefiting from nearshoring.

Of the nearly 1,000 member companies in INA, Gonzalez cited recent growth of 100 new members within the last year, indicating rising nearshoring activity in the Mexico market. The membership increase indicator does not include businesses being nearshored by current members which likely accounts for an even larger nearshoring activity number.

“These 100 new members are the main companies interested in associating with us, although we are also seeing interested companies from India, Malaysia and Singapore,” said Gonzalez.

“According to INDEX, the National Council for Export Manufacturing Industry in Mexico, around 75% of all nearshoring manufacturing to Mexico have located in the Northern region.”

He also mentioned that these companies have different areas of specialty such as metal mechanic, plastic and chip production. “We haven’t seen huge production numbers from these specialty production companies because they are still setting up their facilities or ramping up” but they are in a definite ascent.

Historically, in terms of intermediate goods, Mexico has depended on imports from Asia to incorporate into its production processes for the auto parts industry. In this case, Gonzalez mentioned that INA is not seeing an increase in imports from Asia.

“On the contrary, we are seeing more companies setting up shop here to sell to the United States, Mexico and Canada Free Trade (USMCA) region” in lieu of simply increasing their exports to Mexico.

Fueled by the technological change for electromobility within the automotive sector, investment is on the rise for imports of capital goods like machinery and equipment, according to INA’s internal surveys. INA estimates that around 20% of the auto parts sector’s output is related to the production of electric vehicles (EVs).

The shift toward EV production, then, suggests the nearshoring effects on Mexico, namely increases in exports and industrial output, are likely to show positive impacts in the first half of 2025 due to the time required to establish operations and ramp up production in the market. Companies arriving to the country have traditionally brought their suppliers to the country as well, contributing to an increase in industrial production in the midterm. The new entrants are expected to develop local supply chains within their first four years of arriving to Mexico, which bodes well for continued development thereafter.

According to INDEX, the National Council for Export Manufacturing Industry in Mexico, around 75% of all nearshoring manufacturing to Mexico have located in the Northern region. However, as the supply of industrial buildings and talent start to decrease further and the demand costs begin to rise, the rest of the country will eventually share in the nearshoring benefits.

We foresee nearshoring to continue south to parts of Central America, namely: Guatemala, Honduras, Costa Rica and Panama, and likely Colombia as well. These Latin American countries share free trade agreements with Mexico and the United States, making their products potentially compliant with respect to rules of origin, avoiding tariff barriers and allowing them to be incorporated into other products in their end markets.

We expect the development of more industrial infrastructure in Central America, the incipient beginnings of a speculative industrial market given the time pressure to set up production operations, and an increase in the linkages between the value chains of the Tier 1 auto parts sector in Mexico to potential Tier 2 and 3 suppliers relocating to the Central American market. One example is the development of harnesses production, but we also expect automotive textiles and other assemblies to seize on the opportunity.

One of the main Site Selection criteria is workforce availability and, while there is a large labor pool residing in Latin America, great challenges still need to be addressed. Several countries offer Special Free Trade Zones as an important incentive by lowering the corporate tax burden. These types of incentives need to be part of the overall package that complement the investment in necessary technical labor skills development and infrastructure deployment to provide a compelling story for companies seeking efficiency gains and less competition in less saturated markets.

About Francisco González
Mr. Gonzalez currently is the Executive President of the National Auto Parts Industry Association of Mexico (INA), he is also part of the Outward Investment Council at COMCE, the Mexican Private Sector body promoting trade and investment. He is a former Director General of the Mexican Export Import Bank (Bancomext) and ProMexico (the now extinct organization in charge of FDI promotion); he also served as Ambassador of Mexico to Germany.

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