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Mexico’s Border Bonanza Shows U.S. Importers Looking Outside China

Mexico’s economy appeared to limp into 2022. But factory-filled states along the U.S. border are thriving, with the country’s exports surpassing $80 billion in the first two months of the year.

Due to strong U.S. demand and a revival of the auto sector, investors are moving in and banks are getting ready to finance new projects. Exports of non-petroleum goods grew almost 27% in February compared with the year earlier. If you’re interested in cars, toys, or medical supplies, there’s probably a company ready to ship through the world’s busiest border.

Mattel, the maker of Barbie dolls and Hot Wheels toy cars, announced in mid-March plans to make Mexico the site of its biggest plant in the world, a $47 million consolidation and expansion project that includes a 200,000-square-foot facility with some 3,500 workers.

Mexico’s Exports

The five Mexican states responsible for the biggest chunk of exports are all along the border. Monterrey-based Grupo Financiero BASE, which does half of its lending in the state of Nuevo Leon bordering Texas and includes among its clients everyone from orange growers to budget mobile-phone makers, expects that exports will grow another 6% in 2022.

“It’s a year of big opportunities,” Julio Escandon, BASE’s chief executive officer, said in a recent interview. “Because of the pandemic and probably the situation in Ukraine, the supply chain that comes from Asia is moving to Mexico.”

There’s a whole set of businesses that provide secondary projects, such as the makers of covers for jacuzzis or the seats of autos. Cars were scarce in part because of chip shortages that pushed up prices, but in February exports had grown by 32% from the year before, suggesting some of the worst missing-parts problems had been resolved.

Big Chunk

Battery maker Contemporary Amperex Technology is considering a Mexico plant to supply Tesla, though the deal is not yet closed. A series of votes at car production plants that slotted in new union representatives also suggests that labor conditions might become fairer, under pressure from the U.S. to respect trade agreement rules.

The rest of the country has been more slothful in its recovery, with a 2% expansion expected for 2022 according to a Bloomberg survey, but Escandon’s projections for the northern states are more optimistic.

“The demand from the United States does not stop growing. There’s an expansion of plants, but the existing warehouses are not enough for this level of growth,” he said.

A Logistical Nightmare

Climbing Congestion Costs | A measure of U.S. supply-chain pressures rose to a record, adding to already stiff inflationary headwinds from logistics amid dwindling warehouse space and unprecedented inventory costs. The Logistics Managers’ Index advanced for a third straight month in March, reaching 76.2 from 75.2 in February. “Continued inventory congestion has driven inventory costs, warehousing prices, and overall aggregate logistics costs to all-time high levels,” the report stated. “This is putting even more pressure on already-constrained capacity.”

Source: Bloomberg

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Mexico could benefit from China’s exclusion from supply chains

The chunks metal being worked on do not look terribly special. But the factory of Aerospace, a chemical-processing firm in Tijuana, hints at Mexico’s importance to global supply chains. These are components, from tray tables to door parts, for aircraft made by companies including Boeing, Cessna and Lockheed Martin. BAP applies surface treatments to the pieces, from submerging them in big vats of chemicals to meticulous work done by hand, before shipping them north.

Mexico has long been a hub for manufacturing. Toyota, a Japanese carmaker, has had a plant in Tijuana since 2002. Honeywell, an American industrial giant, opened one in 2010. But increasingly the country is moving into higher-value processes. It now accounts for 3-4% of aerospace imports to the United States, up from 1.5% in 2010. By contrast China’s share, which was the same as Mexico’s a decade ago, is now just 1%. American sanctions on China and tariffs on Chinese goods explain much of this change, as well as rising wages in China and the difficulty of doing business there. The trend has accelerated recently. Pandemic-induced border closures, increased freight costs, and consumers’ demands for instant gratification have all nudged firms around the world to consider shortening their supply chains.

“This is a golden opportunity for Mexico,” says Helen Wang, a consultant. The country has some natural advantages, not least a long land border with the United States. Mexico is party to fully 23 free-trade deals. Manufacturing wages are lower than in China. A survey this year by the American Chamber of Commerce of Shanghai found that a fifth of its members were considering moving some work out of China; more than a third of those who were thinking of moving were looking to Mexico.

In Tijuana the mood among many Mexican businesspeople is optimistic. Several big firms have expanded recently. Panasonic, a Japanese electronics company, opened a plant in 2018 to make cables for aerospace. Other companies are diversifying into logistics and distribution. In September this year Amazon, an e-commerce giant, opened a warehouse there, though the company denied that it would use it to serve customers in the United States.

In addition to aerospace, the manufacturing of medical devices and other electronics is booming. “We are doing things [in Mexico] that once would have had to be done in Japan or Germany,” boasts Eduardo Salcedo, the manager of the local operations of Össur, an Icelandic medical-devices company. “We have guys running a million-dollar machine with their right hand and another one with their left hand.”

Chain reaction

The result is that the richest part of the country, by the border, is becoming even better off. “Northern Mexico is growing at similar rates to Asia,” says Luis de la Calle, a consultant who used to work at Mexico’s economy ministry. Elsewhere, however, the picture is mixed. FDI fell from 3.1% of GDP in 2018 to 2.3% in 2019, compared with 3.7% in Brazil or 6.2% in Vietnam.

And despite its proximity to the United States, Mexico has its shortcomings. Business parks provide world-class facilities but the infrastructure outside—from roads to ports—is of poor quality, says Mr de la Calle. Businesses complain of problems obtaining inputs. The likes of Panasonic and Össur import many of the materials they need. Similarly Össur nearly pulled out of Tijuana because it could not find a company to apply chemical processes to its products, which include prosthetics. (BAP eventually stepped in.)

Some of the causes of Mexico’s problems are outside its control. When the government of the United States talks about “near-shoring”, it really means onshoring, says Bill Reinsch of CSIS, a think-tank in Washington. It can be protectionist in negotiations with Canada and Mexico. USMCA, the revised trade deal agreed in 2020 between the three countries, is stricter than its predecessor, NAFTA—indeed it was negotiated in part to preserve manufacturing jobs in the United States.

But Andrés Manuel López Obrador, Mexico’s populist president, has not helped. In 2018 his administration replaced one of the most business-friendly (if corrupt) governments in Mexico’s history, that of Enrique Peña Nieto. Mr López Obrador, in contrast, seems to enjoy unnerving investors.

Soon after taking office he cancelled a new airport for Mexico City, after the diggers had been working for three years, at a cost of at least $5bn. In 2020 he also pulled the plug on a $1.4bn investment in a new factory by Constellation Brands, an American brewer, which was near completion. He has weakened independent regulators by absorbing them into government or slashing their budgets.

Mr López Obrador is also reversing his predecessor’s opening of the energy industry to private firms and favouring inefficient state-owned outfits. Along with making electricity dirtier and less reliable, this sends forbidding signals to investors. In November the boss in Mexico of General Motors (GM), an American carmaker, said the company would not invest further in the country without laws that promote renewable energy. Earlier this year GM had said it would invest more than $1bn to make electric cars in Mexico from 2023. Last year Tesla, a leading maker of such cars, considered opening a factory in Mexico but opted instead for Texas. Although Tesla did not explain its reasons, Elon Musk, its boss, has grumbled about the Mexican government’s closure of some of the factories of its suppliers during covid-related lockdowns.

Mexico risks “shooting itself in the foot” by not taking advantage of shorter supply chains, says Michael Camuñez, who started a series of meetings to boost the economic relationship between Mexico and the United States during Barack Obama’s administration. (Mr López Obrador and President Joe Biden relaunched this “economic dialogue” in September.) Unfortunately it is Mr López Obrador who has his finger on the trigger and, if his past treatment of foreign investors is any guide, seems likely to pull it. 

This article appeared in the The Americas section of the print edition under the headline “Missing links” in the economist

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