For Mexico’s Sheinbaum, the Race Is On to Harness Nearshoring

(Bloomberg) -- The pieces are in place for Mexico to take off as a manufacturing mecca. US-China tensions have opened the door for an export surge. Companies are lining up for power permits in once-barren areas. Bidding wars are breaking out for industrial space.

The country, however, is still waiting for a cascade of foreign investment to bolster its economy. 

Even as Mexico surpassed China to become the top exporter of goods to the US last year, the country’s economic growth is slowing — and the promise of so-called nearshoring has yet to be fully fulfilled. Some of that stems from companies awaiting the outcome of the presidential election to the north and its effect on trade policy. But it also reflects long-running challenges that have held back the Latin American nation from becoming a bigger force, from electricity shortages to political turbulence.

“It’s things like not having access to affordable, consistent, clean energy,” said Shannon O’Neil, senior vice president at the Council on Foreign Relations and author of . “It’s ongoing insecurity. And it’s the political uncertainty that’s been introduced into the business climate.”

New President Claudia Sheinbaum wants to make sure that Mexico doesn't squander its moment. The environmental engineer-turned-politician campaigned on boosting infrastructure development and supporting nearshoring — the trend of companies setting up industrial space in Mexico to have closer access to the US market. But her party pushed forward one of the biggest judicial overhauls the nation has ever seen, making corporate leaders and foreign investors question whether they’ll have legal certainty to invest in the country.

Already, Mexico’s economic growth is expected to slow to an estimated 1.5% in 2024, according to a Citigroup Inc. survey of more than two dozen analysts, down from 3.2% in 2023. Since 2022, foreign direct investment flows have mostly come from reinvestments by companies already operating in Mexico, rather than fresh bets, said Felipe Hernandez, who covers Latin America for Bloomberg Economics.

“There was a strong increase in investment after the pandemic,” Hernandez said. “But the momentum was lost this year, even if investment remains high.” 

For Mexico’s nearshoring dreams to become a reality, few factors are more important than who ends up leading its biggest trading partner. Republican nominee Donald Trump has vowed levies on foreign imports, calling tariffs “the most beautiful word in the dictionary.” He said last week he’d use tariffs to defend the US dollar’s reserve currency status, sending the Mexican peso down as much as 1.7% after the remarks.

Elon Musk, a Trump backer, has said Tesla Inc. is holding off on building a planned factory in the Monterrey area because he wants to see how the US election shakes out. BYD Co., the Chinese electric-vehicle maker, has been scouting locations for a Mexico plant but is delaying an announcement to see the outcome of the race.

“I'm very concerned on the rhetoric from Trump about putting a lot of tariffs on vehicles manufactured in Mexico,” said Alberto Chretin, the former chairman and chief executive officer of industrial real estate investment company Terrafina. “That could trigger some negative results for the US and Mexico.”

The outcome of the election will also be pivotal to negotiations in a 2026 review of the United States-Mexico-Canada Agreement, the trade deal signed under Trump in 2020. The former president has said in a second term he’ll seek to restart a renegotiation of the pact rather than just a review. Vice President Kamala Harris, the Democratic presidential candidate, was one of 10 senators to vote against the USMCA, saying it didn’t go far enough to protect workers’ rights. 

Sheinbaum named former Foreign Minister Marcelo Ebrard economy minister, putting a seasoned politician in charge of the talks. Ebrard is betting that the shifts in the geopolitical agenda create incentives for North American countries to strengthen the regional bloc and reduce their reliance on imports from China and other parts of Asia, a message that could play well with either Trump or Harris.

“I think that we have more resources right now in order to be successful in the negotiation,” he said in an interview with Bloomberg Television’s David Westin. “We need to upgrade the USMCA. It’s not only about free trade, but it’s about what can be done together in order to be more competitive.”

At home, Sheinbaum’s ruling coalition, aided by majorities in both chambers, is plowing through a series of changes to the constitution. Behind closed doors, some business leaders have expressed concern that it will remove checks and balances in the government and lead new firms to pause before pledging new investments. 

Since Sheinbaum’s inauguration on Oct. 1, her team has been looking to assuage investor concerns about the impact of the judicial overhaul, which was proposed by her predecessor, Andres Manuel Lopez Obrador. On her third week in office, she convened the leaders of about 240 Mexican and foreign companies at the National Palace and reinforced that the changes to the judiciary seek to curb corruption and “strengthen the rule of law.”

Beyond politics, Mexico faces home-grown hurdles. Security is the “first thing investors ask us about,” Sergio Arguelles, the CEO of industrial park operator Finsa, said at a BloombergNEF event this month. Annie Cheng, general manager of Leoch Battery’s two plants in Saltillo, Mexico, said her biggest challenges have been retaining talent and the long waits to receive government permits, including those to import and export goods.

Access to electricity is a top concern for industrial real estate owners. Lopez Obrador changed regulations to cement state control of the power industry, stopping public auctions for electricity generation and capping private sector involvement. The nation’s transmission and distribution capacity hasn’t kept up with demand, especially in the north, leading some parts of the country to experience widespread seasonal blackouts. Red tape often means that industrial parks that build their own electricity substations have long waits before the facilities can operate.

Sheinbaum has promised to nearly double the amount of renewable energy capacity on Mexico’s electricity grid, but after years of limited private investment it’s unclear how the new administration will attract investment at the president’s ambitious timeline.

Sheinbaum plans 100 new industrial parks across the country, and has also reiterated the need for investment to be matched by social infrastructure. She said in an April interview with Bloomberg News that connectivity — through ports, highways, the increase of cargo rail, passenger rail, and internet — will be a flagship of her administration. Her team also is launching a digital agency that will seek to reduce drastically the number of regulatory hurdles for companies looking to move to Mexico.

Even amid the uncertainty, warehouses have been at the center of some of the country’s largest deals over the past years. Prologis Property Mexico in August acquired Terrafina for $2.8 billion after a six-way bidding war. Earlier this month, Mexican trucking firm Grupo Traxion agreed to buy logistics operations including transport and warehousing.

And there’s no shortage of nearshoring evangelists who say the opportunity is only just beginning. Top Latin American steelmaker Ternium SA recently announced plans to double its investment in its Pesqueria, Monterrey, facilities to roughly $7 billion.

With a property at 437 hectares (1,080 acres), it’s clear the company isn’t waiting around: Cranes and construction crews are hard at work building industrial plants that will produce cold-rolled, raw and galvanized steel for industries including auto and appliance makers. It’s next to an existing hot-rolling mill. 

Ternium also is investing in a steel mill, with the goal of integrating the company’s supply chain in the area. 

“Nearshoring will continue, independent of who wins the US elections,” Ternium CEO Maximo Vedoya said at the BloombergNEF event. “Both of the candidates know strengthening the region benefits all three countries. Now is the time to invest in Mexico and invest in North America.”

©2024 Bloomberg L.P.