After years of outsourcing manufacturing to China for the abundant and cheap labor, global firms are moving closer to the United States to shorten the supply chain. Mexico is hopping with new investment, and it’s bound to grow more.

When Elon Musk, the boss of Tesla, announced in March that his electric carmaker will build an assembly plant in northern Mexico, it didn’t come as a total surprise. His company had been in talks for several months on a location for the investment of an initial $5 billion. The choices were Canada, Mexico or the United States.

The decision to build on the outskirts of Monterrey, a big industrial city not far from Tesla’s headquarters in Austin, Texas, is the latest by companies to put supply centers closer to or within the United States. This trend of nearshoring, or shortening the supply chain, has been gaining since 2020. Factory closures during the pandemic, rising US-China tensions and the Ukraine war have all disrupted the movement of goods, labor and raw materials. Firms have had to run factories below capacity, hurting profits.

The result is that more companies are building factories and distribution centers in the Americas to supply the world’s biggest economy.

“America as a dominant microeconomic power is going to bring a lot of production close to shore or onshore,” says Hari Hariharan, chairman and CEO of NWI Management, a New York-based hedge fund focused on emerging markets. “If you’re not part of the nearshoring, reshoring, onshoring, you’re missing one of the greatest opportunities in life.”

f you’re not part of the nearshoring, reshoring, onshoring, you’re missing one of the greatest opportunities in life.


Maher Al-Haffar, CFO of Cemex, Mexico’s largest building supplies maker, says that he expects “a massive nearshoring or onshoring away from China and into the Americas.”

It’s already happening. The global supply disruptions coupled with new US tax incentives for electric vehicles, batteries and other products manufactured in North America have helped speed up the nearshoring trend, including the Joe Biden administration’s Inflation Reduction Act and push to green the economy. Canada, Mexico and the United States have also agreed to make the three countries through their free trade agreement, USMCA, a major source of clean energy, and also to strengthen supply chains for critical minerals, EV batteries and semiconductors. This is expected to increase trade already topping $1.5 trillion per year between the countries.

Mexico stands to benefit from the surge in nearshoring thanks to its lower labor costs, growing workforce, ample and strong manufacturing capabilities, and the ability to ship cargo fast and affordably across the border into the United States. This is making it more attractive than China, which since the 1970s had lured US manufacturers to shift production there for the lower wages, tax advantages and other cost savings. Yet with a steady increase in manufacturing wages in China, manufacturers have shifted to lower-cost manufacturing countries. Of these, Mexico has some of the lowest labor costs along with India and Vietnam, according to the Reshoring Institute, a research firm.

The movement to Mexico is palpable, with many industrial parks in northern Mexico running out of room.

“The market has sold out and you have to be on a waiting list to actually have access,” Al-Haffar says.

Tesla’s move into Mexico follows that of rivals BMW, Ford and General Motors. Many of the facilities will be for supplying the burgeoning electric vehicle market in the United States. New electric vehicle sales there are expected to surge to 4.7 million, or 29.5% of all new car sales in 2030, from 500,000, or 3.4% of sales, in 2021, according to data compiled by EVAdoption, a market research firm.

NWI’s Hariharan estimates that foreign direct investment in Mexico from the United States is poised to surge for making computer chips, as well as for infrastructure and renewable energy.

Mexico’s total foreign direct investment is expected to reach $40 billion this year, led by nearshoring, according to an estimate by HSBC México. That would be up 14% from $35.2 billion in 2022 and the second highest on record after touching $51 billion in 2013, according to HSBC estimates and World Bank data.

This is not a surprise. Mexico is the fourth-largest auto parts maker in the world, and Tesla already gets 20% of its components from some 100 suppliers in the country.

Chinese firms are even setting up in Mexico for the tax advantages. Hisun Motors is one. The Chongqing-based maker of golf carts and dune buggies recently opened a plant in Saltillo, Coahuila to export to the United States at a 2% import tariff, far less than the 27% levied on such vehicles brought in from China, says Jorge González, co-CEO of Brownsville, Texas-based The Nearshore Company, which helps to relocate firms to Mexico.

Gonzalez estimates that for every one US company in the northern state of Nuevo León, there are 30 Chinese firms. More than 400 companies plan to relocate to Mexico from Asia, he adds.


The shift in the global supply chain is creating a wide range of opportunities. Houston, Texas-based investment firm Alloy Capital, for one, is providing five-year loans of between $5 million and $25 million to companies seeking capital to meet the demand produced by nearshoring, from making and supplying parts to managing inventories and storing goods in warehouses.

The returns? Between 15% and 20%, says Javier Zorrilla, managing director of credit at Alloy.

Rodolfo Spielmann, founder and managing partner of São Paulo, Brazil-based South Patagonia Capital Investments, says that nearshoring has been attracting more investment from firms like Canada’s Brookfield and CPP Investments and United Arab Emirates-based Mubadala for the returns in the low mid-twenties.

The real estate sector is also profiting. The returns of real estate investment trusts, or REITS, are running above 10% for property development, and the capitalization rate on an acquired property is between 6.5% to 7.5%, says Alberto Chretin, CEO of the Mexican REIT Terrafina.

Terrafina has formed a joint venture with an international pension fund that has a key long-term relationship with PGIM Real Estate, a division of US insurance and investment group Prudential Financial, to invest an initial $200 million to take advantage of the nearshoring opportunities in Mexico, he adds.

Javier Llaca, chief operating officer of Mexican REIT Fibra Mty, says his firm plans to invest $250 million on new acquisitions this year after already buying 46 industrial properties for $662 million. He says he expects to pull in investment returns of around 8%.

Photo: Javier Llaca


Mexico isn’t risk-free for nearshoring, however. A big concern for investors is the country’s shaky relationship with the United States. Mexico’s support or sympathy for Cuba, Nicaragua and Venezuela is a source of conflict with the United States, which has sanctions on those three governments for authoritarianism and civil rights abuses.

These conflicts could lead “Washington to say, ‘Mexico is not our friend, Mexico is not our ally,’” warns Tony Payan, director of the Center for the United States and Mexico at Rice University’s Baker Institute for Public Policy.

Crime is another problem. Insecurity in northern Mexico, including from drug cartels and criminal groups focused on contraband, kidnapping and theft, has pushed up the crime and murder rates in northern states like Baja California, Chihuahua and Tamaulipas. The number of murders in Mexico totaled 143,532 in the first four years and three months of President Andrés Manuel López Obrador’s term, close to the previous six-year term of former President Enrique Peña Nieto, when it totaled 157,158, according to government data.

Payan warns that the crime rates and fragile Mexico-US relations could push some companies to set up operations elsewhere, such as in Arizona, California and Texas or in Vietnam and Thailand, for better infrastructure and security, as well as incentives like subsidies to open plants and lower taxes.

Alabama and Tennessee, for example, have been competing for a BMW plant by offering the automaker incentives such as free land, investment in universities for training, and the waiver of state taxes.

“Mexico is somewhat behind” in such strategies, Payan says.

While Mexico is attracting more nearshoring, some of the operations will be basic manufacturing processes, with the more advanced processes getting done in the United States, he adds.

The crime can’t be ignored in cities like Matamoros on the border with Brownsville, Texas. Matamoros is considered one of the most dangerous cities for crime and kidnapping in the state of Tamaulipas. Companies are seeking to move to safer places such as Nuevo León or Monterrey, says Rodrigo Montes de Oca, a research scholar at the Baker Institute Center for the United States and Mexico.

“Many Texan businessmen have an appetite” for investing in Mexico, he says. “However, the questions they always ask us are if Mexico has the infrastructure to install a plant, how the security is in border states like Tamaulipas, Coahuila, Nuevo León and Chihuahua, and if there is a reliable supply of energy and water.”

Agreements can be reached, of course. In the negotiations with Tesla, the Mexican government warned of a water scarcity in Monterrey, where a growing population has reduced its availability.

Tesla finally vowed to use recycled water at its plant.

“They are going to help,” Mexican President López Obrador said when announcing Tesla’s investment plans. “I am satisfied with what was achieved because it means more investment for Mexico and more jobs.” LF