Nearshoring an opportunity to expand metals capacity in Mexico: co-CEO

The arrival of the automotive original equipment manufacturer market and Chinese companies to Mexico is demanding more domestic metals to increase the regional value content in North America that the United States-Mexico-Canada Agreement requires, the co-CEO of The Nearshore Company said in a recent interview with S&P Global Commodity Insights.

Under USMCA — the North American free trade agreement that superseded NAFTA in 2020—75% of auto content must be made in the US, Canada, and Mexico to trade within the block.

"Since 2019, we saw that the North America region will become attractive for new investments," said Jorge González, the company's co-CEO.

Gonzalez said the nearshoring process can be seen in two waves—the first began after the imposition of tariffs on Mexican and Canadian aluminum and steel under the US Section 232 coupled with the US-China trade war.

Several companies that used to buy in China started to think in Mexico, and with the arrival of the pandemic, as supply chains were affected by the lockdowns, the idea of having suppliers closer to the plants was reinforced.

González pointed to three groups of companies that are already reallocating in Mexico. The first group is integrated by American companies that already had operations in Mexico and now are expanding their capacity. The second group is Chinese companies, and the third is companies mainly from the automotive industry.

"Chinese companies are seeking the benefit to produce in North America while avoiding the high costs of labor and reducing the risks of the government in China," González said.

The second wave, according to González, will be American companies bringing their operations from China.

"The main frustration is that domestic supply does not come close to what it already is in China," said González, explaining that there are more Chinese companies trying to move to Mexico, but struggling to find Mexican suppliers.

"We have two clients from the steel sector that import high volumes from Asia, Europe, and the US and both are looking for suppliers in Mexico, but there is no capacity," he said.

Another example is a steel distributor looking to have its first service center in Monterrey, with plans to open more facilities, González added.

Benefitting sectors

González explained the automotive sector has most benefited from nearshoring, particularly because of the regional value content, which at the same time is boosting the demand for metals and plastic injection molding.

The second is the medical sector, mainly in Ciudad Juarez and Tijuana, and the third is the semiconductor industry.

"For the latter, it can be said that it will not reach Mexico, however, it will be so large that it will require suppliers in Mexico, near Arizona and Texas where there will be some investments," González said.

On the other side, he pointed out some challenges that Mexico is facing and for which it may not be able to fully capture the nearshoring opportunity.

"Confidence and security are the two most important factors for investors to bet on Mexico. Otherwise, they will look to options like India, Vietnam, Thailand, and even the United States," said González.

For more than 20 years, The Nearshore Company has helped North American, European, and Asian manufacturing companies successfully establish reliable manufacturing operations in Mexico.