Mexico: A Hot Spot for ‘Shoring’
Key findings
- The geographic proximity of Mexico to the U.S. positions it well to capitalize on the growing trends of nearshoring and friendshoring.
- Mexico has become one of the top global destinations for foreign companies’ investment in industrial operations.
- Both Mexican companies and foreign companies operating in Mexico have a significant footprint in industries such as capital goods, materials, automobiles and components, and food and beverage.
Mexico is particularly well-positioned to capitalize on the increasingly popular strategies of nearshoring and friendshoring, in particular for U.S. companies, but other foreign companies too. Its geographic proximity to the U.S., an existing deep trade relationship established under NAFTA (now replaced with USMCA)[1] and the potential to further grow as a global manufacturing hub suggest the time is right to revisit Mexico's role in the investing landscape. In this blog post, we assess Mexico's economic ties with the U.S. and the rest of the world, including other emerging markets (EM).
Mexico has developed solid economic ties with the US
In early 2023, Mexico became the largest trading partner of the U.S., surpassing China, a striking milestone.[2] As of December 2023, companies in the MSCI Mexico Investable Market Index (IMI) derived nearly 11% of their revenues from the U.S., placing Mexico among the top five EM countries in terms of U.S. economic exposure. Notably, the MSCI Mexico IMI's revenue exposure to the U.S. exceeded its exposure to its Latin American peers (not shown in the following exhibit), reflecting Mexico's strategic positioning in trade initiatives.
Mexico ranked high among EM in US economic exposure
Based on MSCI Economic Exposure data as of Dec. 29, 2023. Markets are represented by the respective MSCI Investable Market Index. Economic exposure at an index level is calculated as the constituent weight times the revenue exposure of the constituent (or company). Of the MSCI Mexico IMI's revenues attributed to the U.S., 72% is based on actual company-reported data, and the remaining 28% is estimated using the MSCI Economic Exposure data methodology.
Two of the largest Global Industry Classification Standard (GICS®)[3] industries in Mexico — namely, food and beverage and materials, which jointly constitute more than a third of the index's weight by industry — have enjoyed substantial revenue growth from U.S. sources in recent years. Most of the revenue surge in these two industries has occurred since the onset of the COVID-19 pandemic, a period characterized by increased global supply-chain pressures as measured by the Federal Reserve Bank of New York's Global Supply Chain Pressure Index.[4] These growing pressures are likely a contributing factor to Mexico's benefiting from the nearshoring trend.
Revenues from US sources surge in key industries in Mexico
Based on MSCI Economic Exposure data. We show only the GICS industry groups for which the MSCI Mexico IMI derived more than USD 1 billion from U.S. sources, as of December 2023.
Foreign investment in Mexico has been strong
In addition to U.S. companies, companies domiciled in many other nations have opted to leverage Mexico's North American location by increasing their investments and presence in the country.[5]
We used MSCI GeoSpatial data[6] to learn which foreign companies had set up their manufacturing, industrial and warehousing facilities (collectively referred to as industrial operations) in Mexico as of December 2023. Mexico's attraction to foreign companies places it sixth among countries for companies that have set up industrial operations abroad, and second to China among emerging markets. For U.S. companies, Mexico ranked fourth in global destinations for industrial operations, and ahead of China.
Mexico was among top global destinations for industrial operations
Based on MSCI GeoSpatial data as of Dec. 29, 2023. The 20 countries shown have the highest number of foreign companies with industrial operations in that respective country.
More US companies had facilities in Mexico than in China
Based on MSCI GeoSpatial data as of Dec. 29, 2023. The 20 countries shown have the most U.S. companies with industrial operations in that respective country.
Foreign companies are investing in some of the same industries as domestic Mexican companies, such as capital goods, materials, automobiles and components, and food and beverage. These foreign companies' industrial operations leverage and reinforce Mexico's position as a global manufacturing hub.
Foreign companies' industrial operations had big footprint in Mexico
Based on MSCI GeoSpatial data as of Dec. 29, 2023. We show the top 10 industries by number of foreign facilities. Foreign facilities for industrial operations include manufacturing, industrial and warehousing/distribution centers.
Mexico, like many emerging markets, faces economic, social and governance challenges, and addressing these issues will be crucial for potential investors. Within the context of an evolving geopolitical landscape, Mexico is increasingly being recognized as a strategic location for foreign companies' industrial operations as well as for the emerging strength of its domestic companies. Monitoring how Mexico seizes this opportunity can provide valuable insights for investors.
1 The North America Free Trade Agreement, or NAFTA, effective from Jan. 1, 1994, was replaced on July 1, 2020, with the United States-Mexico-Canada Agreement, or USMCA.2 Luis Torres, “Mexico seeks to solidify rank as top U.S. trade partner, push further past China,” Federal Reserve Bank of Dallas, July 11, 2023.3 GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.4 The Global Supply Chain Pressure Index integrates transportation-cost data and manufacturing indicators to provide a gauge of global supply-chain conditions. The index shows that “[s]upply chain disruptions have become a major challenge for the global economy since the start of the COVID-19 pandemic.” “Global Supply Chain Pressure Index (GSCPI),” Federal Reserve Bank of New York.5 Maya Averbuch, “Mexico's Foreign Investment Surges 48% as Nearshoring Booms,” Bloomberg, May 22, 2023.6 The MSCI GeoSpatial dataset contains information on physical assets owned or operated by public companies, including elements such as spatial and nonspatial attributes — for example, geographic coordinates — and types of activity carried out at the facility.
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