Mexico – A Promising Sourcing Destination for US Procurement Organizations
Published on 26 Jul, 2023
With the global supply chain disruptions, countries are looking to develop strong supply base near to them. For the US, Mexico has emerged as a strong contender. Many drivers contribute to the country being a preferred option. The number of collaborations and trading transactions between the two countries rose in the past year, and this will only increase further. In this article, we discuss why sourcing from Mexico is an attractive option for large US organizations to procure key categories such as metal & electronics components, automotive parts, and other manufacturing products.
The pandemic coupled with Russia-Ukraine war, as well as other major geopolitical challenges led to significant disruptions in the global supply chains. Supply–demand gaps, labor shortages, and other operational factors have created bottlenecks leading to high order backlogs. Organizations worldwide are facing the impact, as the cost of raw materials, energy, and other operational costs substantially increased over the last 2–3 years.
Therefore, in these uncertain conditions, procurement organizations are looking for stable and predictable supply chain and sourcing options. To streamline the supply chains, many organizations are now choosing to localize manufacturing capacity in nearby locations with partners who are reliable, safe, and secure. The US has identified Mexico as a great destination for nearshoring.
Strong economic growth, large contribution of the manufacturing sector, high FDI inflows, established infrastructure and telecom network, and easy border connectivity with the US are few main drivers enabling the US companies to consider Mexico. Further, key regulatory initiatives, such as USMCA Act (revised version in 2023), are focused on building resilient, secure, and integrated supply chains in North America enabling Mexico a promising sourcing destination for the US procurement organizations.
Why Mexico?
Strong Economic Growth with Rising Contribution from Manufacturing Sector
According to World Economics Data, the Mexican economy, which grew for the sixth quarter in a row in Q1 2023, is currently the 14th largest economy with a gross domestic product (GDP) of USD 1.41 trillion in 2022, which is expected to grow 3–5% in 2023. Key drivers, including growing manufacturing activity, tourism, and inflows of foreign investment and remittances, pushed Mexico’s GDP 3.9% in annual terms in Q1 2023.
The manufacturing sector currently represents >18% of Mexico’s economy with well-established industries such as electronics and automotive. This growth is supported by increasing manufacturing of IT hardware and new opportunities related to the electric vehicle supply chain and other green technologies.
This strong manufacturing landscape has pushed the intention of more than 400 US companies to relocate from Asia to Mexico in 2022. In 2023, the Mexican Association of Private Industrial Parks (AMPIP) expects that ~450+ global organizations shall move to Mexico by 2024–25. This nearshoring activity by US companies has potential to boost the growth of Mexican manufacturing exports to the US from USD 455 billion today to an estimated USD 609 billion in the next five years.
Additionally, Mexico’s Business Confidence Index recently posted an upshift from 99.3 in 2020 to 101.1 in 2023, signaling a shift from pessimistic outlook to an increased confidence in near future business performance – indicating a strong positive investment sentiment of companies to consider it as an alternative for sourcing.
The overall strong contribution of the manufacturing sector to GDP followed by improved ranking on the business confidence, has allowed US companies to think of Mexico as a great opportunity for sourcing.
Strong FDI Inflows Led by the US
Foreign direct investment (FDI) inflows into Mexico substantially increased since the pandemic to the highest level in a decade, distributed across various states and sectors of the economy. Greenfield FDI into Mexico rose to a record of more than USD 40 billion in 2022. Manufacturing projects alone grabbed USD 23.8 billion last year. Automotive companies had the largest share of these investments with a focus on increasing manufacturing capacity in the region. Other sectors, such as electrical equipment and computers, are witnessing considerable growth in FDI.
Mexico has become a favorable destination for nearshoring projects for US companies that contributed around 50% of the total FDIs in recent times. Key investment announcements by international organizations such as Tesla’s Gigafactory (USD 5 billion) in Nuevo León and BMW’s Lithium Battery Assembly plant (EUR 800 million) in San Luis Potosí further demonstrated the optimistic mindset toward the Mexican economy. In addition to the US investments, Chinese companies are making substantial investments and setting-up plants in Latin America, including Mexico, allowing them to get duty-free access to the US as well as benefitting the Mexican economy.
Strong Trade with the US
Manufactured products account for 80–85% of total Mexico’s exports, followed by oil and oil products 5–10%, while the agricultural sector accounts for 3–4%. The US is the main trading partner of Mexico accounting for 70–75% of total exports and 35–40% of total imports. Others include China, Japan, Germany, etc. In 2022, trade between Mexico and the US increased to USD 718 billion giving Mexico a trade surplus of USD 187 billion.
In the first four months of 2023, trade between Mexico and the US reached USD 263 billion, establishing Mexico as the primary trading partner for the US. This milestone has reflected a real transformation in the sourcing dynamics of the global economy — away from sourcing from low-cost countries, such as China, with greater efficiency but having fragile supply chains to something more subtle ones.
Strong growth in economy and exports, growing manufacturing sector, business confidence index, favorable demographics, and supportive regulatory initiatives, such as the USMCA act and other multiple free trade agreements, make Mexico an attractive and reliable sourcing alternative for the US organizations. With China’s downfall as a global supplier, the country is expected to become a large turnkey manufacturing and sourcing destination in the next 5–10 years.
