Existing Companies In Mexico In The Steel, Copper Mining And Transportation Sectors Will Also Be Among The Biggest Beneficiaries Of Nearshoring
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Opportunities in nearshoring
Nearshoring is defined as the practice of transferring a business operation to a nearby country, especially in preference to a more distant one. The default example provided on Google is: “the nearshoring of manufacturing facilities to Mexico.” Although the practice can happen in any economy, Mexico has received the greatest attention, given its proximity to the US.
Latin American economies have a number of advantages over competitors in terms of access to the US market. Primary amongst these are the free trade agreements that Mexico, Chile, Peru and Colombia have with the US. The USMCA offers preferential access to the US market for Mexican manufacturers. The US Inflation Reduction Act (IRA) is of primary benefit to Chile and Mexico as they have the free trade agreement that the IRA requires for companies to benefit from proposed tax credits. An additional advantage that countries in Latin America and elsewhere have is the China+1 strategy among manufacturers. This is viewed as of particular benefit to Mexico given the lower wages, transport costs and shorter supply chains.
This array of advantages has led to a surge in foreign direct investment (FDI) into Latin America and in particular Mexico in recent years. In the January – June 2022 period, FDI into Mexico rose to a decade high. The US dominates Mexican FDI, accounting for almost 50%11 over this period, with auto and auto parts representing the biggest share of investment. The fastest growth in FDI over the period was from Hong Kong and South Korea.
In addition to proximity, one of the biggest advantages Mexico offers manufacturers is labor cost, both relative to the US and one of its biggest competitors for FDI: China. Average hourly wages in Mexico are US$3, compared to US$7 for coastal cities in China. This compares with almost US$30 in the US.
The USMCA has a number of provisions to limit a hollowing out of US manufacturing in favor of Mexico, particularly in the auto sector. One of these provisions is for wages in Mexican auto plants to be at least 45% of those in the US manufacturing sector to maintain tariff free access. This implies an hourly wage in Mexico of US$14, double that of coastal cities in China. However, the cost of transportation and tariffs still makes auto manufacturing in Mexico more attractive relative to China.
The IRA is also likely to result in nearshoring of commodity sourcing from China to Latin America, in particular Chile. One of the requirements of the IRA is for at least 40% of the value of critical materials in an EV battery to be sourced domestically or from countries with which the US has a free trade agreement by 2024. Copper foil and lithium stand out as two commodities where Chile is likely to capture market share from China as manufacturers switch to producers which benefit from free trade agreements. Brazil will also be a beneficiary as it is a supplier graphite, which is dominated by China. Existing companies in Mexico in the steel, copper mining and transportation sectors will also be among the biggest beneficiaries of nearshoring. In particular, those that are the suppliers to the manufacturing and auto sector. One company that stands out as a potential beneficiary is Ternium, Mexico’s biggest steel producer.
