Mexico’s nearshoring potential undermined by climate and security risks
by Jess Middleton,
US-China tensions and the dual impacts of the Covid-19 pandemic and Russia-Ukraine war have prompted many businesses to ‘nearshore’ their supply chains into more reliable markets.
With a shared land border and preferential trade access with the world’s largest economy, Mexico has long been hailed as the likeliest beneficiary of this new era of supply chain diversification.
Recent data suggests this might be becoming a reality. Earlier this year, declining imports from China saw Mexico become the primary source of goods entering the US, and the country saw a record USD29bn in foreign direct investment in the first half of 2023.
Figure 1: Mexico has overtaken China to become the biggest source of imports into US
While this may sound positive for Mexico, several interconnected factors could prevent the country from fulfilling its nearshoring potential. In this article, we have utilised data from our suite of 170+ global risk indices to unpack some of the major issues that could hinder investment into Mexico, from water stress and widespread security risks to mounting regulatory instability.
Water scarcity a major challenge in northern Mexico
Water is a basic need for industry the world over. It plays an essential role in manufacturing processes, such as cooling, and serves as a key component in a host of products. It also fuels the agricultural sector, which in turn provides the raw materials needed in a variety of industries.
But data from our Water Stress Index shows that Mexico ranks among the 50 most water stressed nations on earth. At the subnational level, 20 of the country’s 41 cities with a population over 500,000 fall within the highest risk category of the index, including Monterrey (Nuevo León), Chihuahua (Chihuahua) and Tijuana (Baja California). This figure could grow to 23 by 2040, according to our data covering a ‘business as usual’ emissions and socioeconomic pathway.
Figure 2: Water stress risks run highest in Mexico’s arid north
The issue has already had an impact on several major projects in the country’s arid north, a region long seen as a potential investment hub due to its proximity to the US. In 2020, a major beer producer was forced to halt construction on a $1.4bn brewery in the border city of Mexicali (Baja California) on water scarcity grounds. And in February, President Andrés Manuel López Obrador (AMLO) flagged a lack of water as a potential barrier to plans for a $5bn Tesla ‘gigafactory’ in the northern state of Nuevo León.
These concerns coincide with growing fears that Mexico is failing to build the energy infrastructure needed to aid any potential investment boom, with the country ranked as the highest risk in the Americas on our Energy Security Index. At the same time, government policies have limited the progress of renewable energy. Focus has instead been placed on fossil fuel-dependent state electricity, resulting in a lack of the green energy needed to attract investment from companies with net-zero pledges.
Violence and unrest threaten transport networks
Crime is another factor that will weigh on any foreign business contemplating a foray into Mexico. The country ranks as the 10th highest risk globally in our Crime Index, and performs significantly worse than other potential offshoring hotspots such as India (ranked 104th) and Vietnam (132nd).
Some 29 of the 41 Mexican cities assessed as part of our analysis fall within the highest risk category of the index, which measures the prevalence of homicides, property crime and theft in a given location.
While Mexico has longstanding challenges with criminality, issues such as mounting cargo thefts are emerging as a direct threat to the country’s nearshoring potential. Data published by the Mexican government shows that there were 6,626 violent cargo truck hijackings in the country between January and October this year, up 6% from the same period in 2022. This has already impacted the operations of several major companies, with the likes of Coca-Cola and Ford reporting cargo hijacking incidents in 2022.
Figure 3: Crime risks prevalent throughout Mexico
Recent research undertaken as part of a collaboration between Verisk Maplecroft and the Institute of the Americas showed that the threat posed to logistics networks by violent crime could be compounded by mounting unrest.
Mexico ranks as the 5th highest risk country globally in our Civil Unrest Index, with blockades and protests threatening to disrupt the movement of goods and personnel. This is a particular issue on commercial highways around major urban hubs such as Mexico City, Guadalajara (Jalisco) and Hermosillo (Sonora). Indeed, data from our Industry Risk Analytics shows that road transportation ranks among the most exposed sectors to civil unrest risks in Mexico, alongside agriculture, airlines and water utilities.
“Relocating to Mexico will likely prove more costly than expected given the high economic impacts of insecurity,” says Senior Americas Analyst Arantza Alonso. “Businesses will need to allocate a significant share of their budgets to pre-emptive security measures and adapt their operations to mitigate potential risks.”
2024 election crucial for investment outlook
While challenges such as water scarcity and security risks will continue to weigh on investor sentiment, Mexico’s presidential elections, scheduled for June 2024, will be crucial in determining the country’s long-term investment prospects.
Mexico’s governance and regulatory environment has been dogged by turbulence over the past five years. Indeed, since AMLO came to power in December 2018, the country has seen a sharp increase in risk on several our political indices, including Regulation, Government Effectiveness, Respect for Property Rights and Resource Nationalism (where the country has seen the largest increase in risk globally over the past five years).
This instability is seen as a major hurdle to overcome if the country is going to secure more foreign investment, with several of 2024’s presidential frontrunners looking to distance themselves from the policies of the current administration.
"AMLO has demonstrated that, when needed, he can influence legislators to move forward with his political agenda,” adds Alonso. “Constant changes in policy have increased operational costs for the private sector as they struggle to keep up with new regulation, while insufficient clarity in the implementation of policy has eroded legal certainty and exacerbated operational risks for investors.”
Challenges to be overcome if Mexico is to capitalise on nearshoring opportunity
With a combination of relatively low labour costs and proximity through a shared border, Mexico will continue to serve as an attractive option for companies looking to cater to the US market. But for those looking to bolster their resilience by nearshoring their supply chains, our data shows that a foray into Mexico could see companies swap one set of challenges for another.
“Without an abrupt change in its security strategy, greater investment in renewable sources of energy and a shift towards greater regulatory certainty, Mexico risks wasting its nearshoring potential,” adds Alonso. “The next president will have to act quickly to repurpose Mexico’s efforts and financial resources to ensure that the country makes the most of its opportunity to attract foreign investment.”