Nearshoring: Keys and Opportunities for Growth in Mexico

Nearshoring, transferring business processes from distant locations to countries closer to the market, is a trend that is gaining momentum: nearly two-thirds (64%) of respondents to McKinsey’s latest annual ‘Supply Chain Pulse Survey’ reported efforts to regionalise their supply chains, a notable increase from 44% in 2022. Factors driving this shift include soaring fuel costs, inflation and the impact of geopolitical conflicts on major trade routes.

The recent BBVA Spark Innovation Masterclass focused on the keys, opportunities and challenges associated with nearshoring. Moderated by Teresa Martín Hernández, Director of Open Innovation at BBVA Spark Mexico, the session featured insights from Patricio Castillo, head of nearshoring at BBVA, who explored how this evolving production model could provide a unique boost to the Mexican economy.

The unstoppable rise of nearshoring

The COVID-19 pandemic exposed the vulnerabilities of long-distance supply chains. As highlighted by Castillo, the Global Supply Chain Pressure Index (GSCPI), developed by the U.S. Federal Reserve, hit unprecedented levels as a result of the pandemic. This index, which tracks transportation costs and manufacturing indicators, showed over four standard deviations above its average value between 2020 and 2022.

“There is stress in supply chains, in the labour force and in the labour market”, Castillo noted during the event. “We’re seeing a trade war between China and the United States, with tariff disputes and restrictions. Recently, conflicts in Ukraine and the Middle East have further exacerbated these pressures, driving up prices”.

The advantages for the supply chain

According to Castillo, nearshoring offers several key benefits across different dimensions of proximity:

• Geographic. Shorter distances translate to reduced logistics costs, shorter lead times and the advantage of operating within similar time zones. This allows for a more agile response to customer demands and operational efficiencies.
• Economic. Geographic proximity enables higher standards and quality control throughout the production process. It also reduces costs and minimizes the risk of disruptions in the supply chain. Additionally, it helps lower waste and emissions, aligning with ESG criteria and the increasing environmental consciousness of companies and consumers.
• Cultural. Being closer fosters stronger connections and smoother coordination across various business processes. This includes language, understanding of customs and political and historical ties.

Mexico’s appeal

Countries like the United States have started to reshape their supply chains in response to recent disruptions. In the first quarter of 2023, mentions of ‘reshoring’ in S&P 500 companies’ earnings calls surged by 128% compared to the same period in 2022. Mexico, as Castillo highlighted, is emerging as a key trading partner for the US.

In 2023, Mexico surpassed China as the top exporter to the US for the first time since 2013, and this trend continues into 2024, according to the latest data from the U.S. Census Bureau. Trade agreements like the North American Free Trade Agreement and the more recent United States-Mexico-Canada Agreement (USMCA) incentivise US producers to relocate their supply chains to Mexico. “Mexico is exceptionally well-connected; it holds one of the highest numbers of global agreements and treaties”, Castillo noted.

Several indicators underscore Mexico’s growing appeal: “Foreign direct investment (FDI) has remained relatively steady, with a compound annual growth rate (CAGR) of 1% from 2017 to 2023, according to data from the Ministry of Economy and INEGI. In contrast, exports have seen a CAGR of 5.4% over the same period. The reinvestment by many companies signals a positive trend”, Castillo explained during the Innovation Masterclass. The United States has been the primary source of investment in Mexico, accounting for over 50% of the country’s investment flows in the first quarter of 2024. Additionally, a notable increase in FDI is being recorded, with more than 143 public announcements of investments totalling $45.464 billion during the first half of this year alone.

Mexico’s strengths in sectors such as automotive and electronics, a young and skilled workforce, competitive manufacturing advantages and the development of productive and logistics infrastructure all contribute to its attractiveness as a nearshoring destination. Castillo emphasised that entities like BBVA aim to foster this growing interest by “supporting these foreign companies in Mexico and providing the financial services they need”, as well as by “helping Mexican businesses integrate into international supply chains”. This support will “not only encourage these companies but also boost the Mexican economy”.

However, challenges remain for this growing trend, such as security concerns, technological and energy infrastructure issues and legal uncertainties due to potential political changes. Despite these barriers, Castillo stressed the importance of advocating for and celebrating Mexico as a business partner: “We need to highlight the passion and drive of Mexican entrepreneurs to stay here and succeed, especially in these uncertain times”.