Mexico’s manufacturing is thriving; the logistics behind it not so

The state of Nuevo León in Mexico has been making great strides in attracting foreign investors this year.

On 10 October, Optimas OE Solutions, an American manufacturer of screws, nuts, bolts, and other fasteners, announced plans to build a cold-forming plant in Monterrey, the region’s capital. 

The new factory is intended to minimise supply chain risks and is set to open in the second half of 2024. Of the addition, Optimas CEO Daniel Harms said: “Our expanding localisation strategy enables us to be more agile with our manufacturing and sourcing capabilities for industrial customers and suppliers.”

The good news kept coming in. The same day, another US-based company, Genie, which produces work lifts and platforms and is owned by Terex, inaugurated its $140m plant in Ciénega de Flores, just 34km north of Monterrey. 

During the inauguration, the Governor of Nuevo León Samuel Garcia said the state is looking to develop 240 new industrial parks, all equipped with the necessary infrastructure. 

Nuevo León, which has an area just shy of 65,000km², ranks 13^th in size among Mexico’s 31 states. Yet, between January and June 2023, it managed to attract $2.79bn in foreign direct investment (FDI) projects, according to Mexico’s Ministry of Economy.

The region – lying on the border with the US – is one of the many in Mexico taking advantage of a recent spate in tensions between the US and China. With Washington aiming to bring home its supply chains or nearshore them across the border, Mexican officials have been looking into ways to attract foreign investors. 

On 11 October, Mexico signed a new decree promising large tax breaks for international companies, including an 86% tax deduction for companies producing electric vehicles and an 89% deduction for business machinery and equipment used to research and develop goods domestically. 

Nevertheless, challenges remain. The country’s infrastructure and the logistics behind the transport of locally manufactured goods are struggling, according to Jose Cobos, global sales director at freight forwarder Nowports.

“We are seeing a lot of bottlenecks, especially in ports, for example, because our infrastructure is not prepared to handle such volumes,” Cobos says, referring to the goods that now have to be produced and taken out of Mexico. “So one of the things that the government has to do is develop the infrastructure – not just ports, but roads as well.”

In a meeting with American and Mexican business leaders in July 2022, Mexico’s President Andres Manuel Lopez Obrador said his country was expecting to receive $40bn worth of US investment over the following two years.

The country’s investment climate, already plagued at the time by decades of corruption and crime, was going for a major facelift to appease investors and businesspeople as companies were looking into nearshoring options across the US southern border.

This year, between January and mid-November, Mexico recorded 482 inbound greenfield FDI projects. Approximately 201 were in the manufacturing sector, according to GlobalData’s FDI Projects Database, 24 more than the total number of projects recorded in 2022 and 74 more than in 2021 as a whole. 

Overall, Mexico’s Economy Ministry says FDI in the country reached $18.6bn in the first quarter of 2023.

“Mexico is going to be one of only a small handful of countries that will report a positive growth in greenfield investment activity in 2023,” comments Glenn Barklie, head of FDI services at GlobalData.

“While we are estimating the number of greenfield projects globally to decline by around 25% with most countries negatively impacted, Mexico is a rare shining light in an otherwise dark and gloomy investment environment. Investment activity in Mexico will finally surpass pre-Covid-19 levels.”

FDI projects in logistics have also seen significant growth, albeit from a smaller base, as companies from around the world aim to strengthen their supply chains in the Americas region. The government in Mexico City has recorded 39 new investments so far this year, 15 more than the number reported between January and December 2022. 

Barklie notes: “While it is good to see more foreign companies establishing logistics and warehousing operations in Mexico, manufacturing and sales operations account for almost two-thirds (64%) of inbound FDI projects into Mexico.”

“For a country that wants to continue to be a manufacturing hub, it desperately requires upgrades to its infrastructure to help companies get goods from A to B. Be that internally within Mexico or exports to neighbours or the wider world.”

Several prominent companies have announced plans to invest in the country. In the shipping sector, APM Terminals – a container terminal operating company based in the Netherlands – has committed to investing $140m to expand its port terminal in Lazaro Cardenas. Once completed, the expansion will allow for more than one million TEUs to be processed annually, turning Lazaro Cardenas into a major shipping hub in Latin America.

Alongside the Lazaro Cardenas terminal, four other Mexican ports are undergoing expansion and refurbishment.

But the question of how Mexico’s government plans to handle exports goes beyond expanding road and port terminals. Cobos says infrastructure investments are “long-term” projects which will not happen overnight. 

For investments to pay off, he says, road safety must be ramped up.

“It’s important for the private sector to develop some private initiatives to improve efficiencies,” Cobos explains. “And what are those initiatives that the private sector can do without huge investments? One of them is safety and security.”

Land transport remains the backbone of Mexican freight. Around 83% of all domestic goods were transported by roads in Mexico in 2020, according to a report published by Luis David Berrones-Sanz, professor of logistics and supply chain management at Autonomous University of Mexico City.

For goods transported to the US, that figure was 61% in 2011. Berrones-Sanz tells Investment Monitor the number is unlikely to have changed since. 

“I believe that the infrastructure can be improved and make Mexico more competitive,” he says. “Faster port traffic and, in general, more efficient transportation services.”

However, road violence in Mexico continues to pose threats to investors and limit investments in specific regions across the country. According to Crimen en Mexico, a platform that maps out crime incidence rates based on government data, car robberies accompanied by violence remain high, especially in the southern part of Mexico.

In September 2023, the federal states of Mexico and Morelos had the highest annual rates of violent car robberies, with 70 and 121.8 incidents per 100,000 people reported, respectively.

The statistics, however, change when it comes to non-violent car robberies. Baja California – a federal state bordering the US – had the highest annualised rate of car robberies without violence in September 2023, which stood at 231.1 per 100,000 people.

Berrones-Sanz says the problem lies in “crime and corruption”.

“Either they steal your merchandise, or SAT (the Tax Administration Service) extorts you,” he continues. He explains that Carriers in Mexico avoid transporting specific merchandise such as cars, metal products, or US-manufactured products, across the country’s territory.

In 1989, country officials launched a private toll road programme, which commanded roughly $13bn over five years. Many carriers prefer transporting goods via private toll highways, Cobos notes. He says companies in Mexico are investing heavily to improve safety in transporting goods. 

“For example,” he says, “They are investing in equipping trucks with GPS systems, or having GPS on the cargo they transport, driving on private highways instead of public highways.”

In addition to safety, Cobos mentions the need to digitalise cargo services. Nowports uses a platform to centralise international trade operations. Cobos says the goal is to deliver a “full digital experience” to their business customers when booking transport and getting price quotes for air, land, or sea deliveries of goods. 

“If you’re able to track and trace your cargo at any time, you will improve efficiencies and be better by forecasting the arrival time of your cargo to the border and so on,” Cobos says.

Yet, the road ahead remains complicated. According to GlobalData's estimates, Mexico’s economy will expand by 2.9% in 2023 and 1.6% in 2024. In 2015, inward FDI, including US companies setting up business in Mexico, was responsible for 44% of the country’s GDP. 

As trade and business between the US and Mexico grows, safe roads and ports are at risk of overcrowding. 

Cobos says the next step is to connect all the stakeholders involved in the logistics process.

“You need to deal with transport companies, shipping lines and government institutions. There are a lot of stakeholders involved,” he explains. But that won’t be easy.

“Not a lot of [stakeholders] are investing in digital transformation. So one of the main challenges ahead is how do we connect all the stakeholders in our system to offer a full digital experience to our customers.”