Why Mexico Is Becoming the Leading Destination for Automotive Companies
Introduction: Nearshoring – Coming to a Place Near You
Globalization has faced significant geopolitical challenges in recent years, including the US-China trade dispute, the COVID-19 pandemic, and the war in Ukraine. These events have driven companies to reassess their global production footprints, leading to a trend towards nearshoring—moving manufacturing closer to major markets, particularly the US and China.
Why Mexico?
Mexico stands out as a prime nearshoring target due to several competitive advantages:
- Labor Costs: Nominal hourly wages are significantly lower than in China, and electricity costs are around two-thirds of those in China and Vietnam.
- Investment Attraction: Mexico received $43.9 billion in foreign direct investment (FDI) in 2023, ranking it in the top 15 globally. It has overtaken China as the leading recipient of US FDI outflows, with annual outflows approaching $10 billion.
- Proximity to US Markets: The country’s close proximity to the US offers low transportation costs and transit times.
- Trade Agreements: Mexico has signed 12 free-trade agreements involving over 50 countries, enhancing its trade relations.
Survey Insights
A survey conducted by Roland Berger in 2023 among US and Mexican automotive industry managers revealed:
- Nearshoring Trends: 78% of respondents have conducted, are conducting, or are assessing nearshoring to Mexico.
- Best Fit Components: Assembly operations are the best fit for nearshoring to Mexico, followed by wiring, chassis, and body structures.
- Key Advantages: Mexico offers a 35% total landed-cost advantage over China, making it more cost-effective for automotive components with high import value to the US and a solid existing supplier base.
Challenges and Opportunities
While Mexico presents numerous opportunities, it also faces challenges:
- Security Concerns: High levels of corruption and drug cartel activities pose security risks.
- Public Services: Poor public services and limited industrial space exacerbate operational challenges.
- Track Record: Limited experience in nearshoring, particularly in maximizing the potential of trade agreements like NAFTA.
Conclusion
Despite these challenges, Mexico remains an attractive nearshoring option due to its unparalleled access to US markets. The trend towards nearshoring is expected to accelerate, with significant FDI inflows anticipated in 2024.
Key Data Points:
- Foreign Direct Investment (FDI): $43.9 billion in 2023, ranking Mexico in the top 15 globally.
- US FDI Outflows to Mexico: Approaching $10 billion annually.
- Labor Cost Advantage: Nominal hourly wages are significantly lower than in China, with electricity costs around two-thirds of those in China and Vietnam.
- Survey Findings: 78% of respondents are assessing or planning nearshoring to Mexico, with assembly operations being the best fit.
- Cost Advantage: Mexico offers a 35% total landed-cost advantage over China.
