After years of traveling to Boston and London for talks with hedge and pension funds, Carlos Capistrán is holding more meetings in Atlanta, Houston and Los Angeles. The head of Canada and Mexico economics at Bank of America is discussing something relatively new: how to open factories in Mexico. Investors ask him about Mexico’s political situation, the performance of the peso and the central bank’s management of interest rates. They are keen to move operations to Mexico from Asia, helping to take advantage of a nearshoring trend to supply the United States.
Several companies are already benefiting from nearshoring. Chicago-based train manufacturer FreightCar America went from losing $18,000 on each rail freight car it made to earning more than $6,000 per unit after closing its two US plants and opening a facility in the border city of Coahuila, Mexico.
“That plant today gives them much more profitability than what they had in the United States,” says Alfonso de los Ríos, co-founder and CEO of Mexican logistics company Nowports.
He says that much the same is happening in the automotive industry, with more plants setting up in Coahuila.
The nearshoring boom can be seen in the numbers. Mexico attracted $32.9 billion in foreign direct investment in 2023, of which 48% came from Canada and the United States, according to the Ministry of Economy.
ROSIER OUTLOOK
Prospects are looking brighter for Mexico not only for nearshoring, but for political reasons. Mexican President Andrés Manuel López Obrador, or AMLO, will end his six-year term this year, and the June 2 presidential election is expected to put the first woman in charge of the country through 2030.
“The new six-year term is promising because in the end what we have seen has been a six-year term of AMLO where there have been quite a few challenges for private companies and for renewable energies,” says Cristina Martín, vice president for Latin America at France-based HDF Energy, a maker of hydrogen infrastructure for decarbonizing the industrial, heavy mobility and power sectors.
The change of government will mean “more projects and greater openness for renewable energies,” she says.
HDF Energy plans to invest $2.5 billion to build seven green hydrogen plants in Mexico, a project that likely will gain support from the next administration. Claudia Sheinbaum, a leading contender of the ruling leftist party for the presidency, has suggested that she will seek to increase the share of renewable power generation to as much as 50% of the total by the end of 2030. Xóchitl Gálvez, a businesswoman who is another favorite in the race, has called for opening the energy sector to private investment and promoting renewable energy.
Both candidates “know very well that these investments have to come in some way from private parties, so I think the market is going to accelerate a lot,” Martín says.
Gálvez and Sheinbaum are expected to unveil the plans for their administrations, including energy policies, after March 1, when the official campaign period starts.
FOOT ON THE BRAKES, FOR NOW
The uncertainty about the election has made it a sort-of waiting game to understand the proposals and how they will affect investments in the power sector, as well as the infrastructure, manufacturing and the services sectors needed to fuel nearshoring.
Alejandro Capote, head of corporate and investment banking at Santander México, says most of the big decisions on investments and fundraising will be made after the election in Mexico and the November 5 election in the United States.
“The first half of the year is going to be very good, and the second half of the year is going to be a little uncertain” in terms of local bond issuance, he says.
Juan Gonzalo Flores, country manager of the International Finance Corporation, in Mexico says the elections could put a brake on investment until the results are known. “Whoever is sitting in the White House affects [sentiment] a lot, but it will also depend on the negotiating capacity that Mexico has and above all from the new female president,” Flores said.
IFC expects its financing in Mexico to exceed $1 billion in the fiscal year 2024, with $500 million planned to go to green projects related to nearshoring.
Every investor coming to Mexico asks for renewable energy “because large buyers in the United States and Canada have impositions from their authorities that what they buy is produced in a way that is friendly to the environment and social issues,” Flores added.
Between January and October 2023, only 22% of the energy produced in Mexico came from renewable sources, while the remaining 78% came from fossil sources, according to data from the Mexican Institute for Competitiveness, or IMCO.
CHALLENGES
The main challenges for the next president will not only be to negotiate with the next US leader, but also to adjust to running the state with a smaller budget, says Víctor Gómez, head of analytics at IMCO. The next administration will have less money to invest in new projects unless it “presents a broad tax reform at the beginning of the term,” he says.
A public deficit of 4.9% of GDP is proposed for 2024, which implies that the next administration will have to implement a cut of three points of GDP in current spending by 2025, Gómez estimates.
“The next president will have to resort to fresh resources other than those provided by the public sector unless there is a major tax reform,” he says.
WILL THAT PRIVATE INVESTMENT COME?
With Sheinbaum, there will be more openness for private investment, “but always hand in hand with public companies,” Gómez says. On the other hand, with Xóchitl Gálvez the public sector will be less active, he adds, and that will make room for more opportunities for the private sector.
Lorenzo Berho, CEO of Vesta, a Mexican industrial real estate developer, says that Mexico has an advantage when competing for foreign direct investment. Mexico has 30 years of experience in investing in its manufacturing and supply chains to ship goods to the United States and Canada through the North American Free Trade Agreement, now the United States-Mexico-Canada Agreement.
“This puts Mexico in a great spot for future growth,” Berho says. “There are tensions in Ukraine, and there are several companies that do not want to continue investing in China, and even Taiwan may be a risk. For that reason, companies must come to North America. Some will come to the United States, some will go to Canada. But there is so much opportunity in Mexico.” LF
