Structural challenges, particularly weak rule of law, could undermine Mexico’s nearshoring opportunity
Firms will undoubtedly face operating challenges in Mexico, as they will in competing emerging markets, and it will be important to take these challenges into account when building strategic plans. However, the country remains incredibly well positioned to attract investment in coming years, and MNCs remain bullish on market opportunities, not only in manufacturing but also in the realm of human resources and talent, particularly the opportunity to build people hubs and shared service centers in the country.
Overview
- Elon Musk announced that Tesla will be opening a plant to produce electric vehicles (EVs) in the Mexican state of Nuevo Leon, with a planned investment of around US$ 10 billion. Other large investment plans include US$ 1 billion from BMW, which is also planning to produce EVs in northern Mexico.
- As China-US tensions increase and European manufacturing costs soar, Mexico is positioned to increase its role in global manufacturing. Not only is overall manufacturing investment slated to rise, but also the industry is shifting away from centering on low value-added products like textiles and into more sophisticated industrial goods, including EVs, where investment is buoyed by US tax breaks tied to the USMCA.
Our View
Despite slow growth, market expectations for Mexico are high, not only as global dynamics shift in the post-pandemic, post-Ukraine invasion context, but also given the country’s stable economic fundamentals, trade interconnectedness, strong levels of foreign investment, and resilient currency. Still, while structural challenges such as insecurity, weak rule of law, and high labor informality have not deterred investor interest in Mexico, they could undermine investment appetite down the line. A recent poll with FrontierView clients signals that the rule of law is perhaps the most important potential deterrent to investment. Recent news surrounding President Andres Manuel Lopez Obrador’s (AMLO’s) efforts to shrink the role of the Instituto Nacional Electoral (INE) could compound these concerns amid worries of democratic erosion. In the shorter term, regulatory uncertainty could undermine the nearshoring opportunity. While AMLO eventually set aside his stated concerns to approve Tesla’s investment into Nuevo Leon, he continues to meddle heavily into Mexico’s energy sector, where private investment into renewables has collapsed during his term. With the 2024 presidential election approaching, increased statist policies from the AMLO administration could weaken Mexico’s ability to capitalize on current investment interest.
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