INSIGHT: Nearshoring to Mexico expanding major chem end markets

MEXICO CITY (ICIS)–Nearshoring is already happening in Mexico, and several key chemical end markets could continue expanding capacity in such areas as automobiles, appliances and aerospace.

• A nylon producer acquired a compounding unit in Mexico because its customers are expanding manufacturing capacity so they can be closer to customers in North America
• The trend will continue for the next few years at least
• Some constraints, such as available land in prime locations, could slow down nearshoring

NEARSHORING IS HAPPENING NOW
“Nearshoring is a reality as we speak,” said Martin Toscano, president and general manager of Evonik Industries de Mexico. He made his comments on the sidelines of the Plastimagen plastics trade show last week.

In 2022 Ascend Performance Materials closed on a compounding facility in San Jose Iturbide, Guanajuato state, Mexico, in response to customers nearshoring, said Steven Manning, global business director, engineering plastics, Ascend Performance Materials. He made his comments on the sidelines of the show.

The company has since established an initial commercial team and made additions to it in 2022 and in 2023.

For Evonik, it is selling products and technologies to companies that are expanding due to nearshoring, Toscano said. “We are seeing it in all of our segments.”

Some of these companies are expanding existing plants, he said. Others are new companies, many of which are from Asia.

Among the US companies, some would have considered China 20 years ago, he said. Now they are considering Mexico.

As far as how companies are nearshoring, Toscano is seeing a mix of strategies. Some are expanding their existing operations; others are creating joint ventures, acquiring existing space or contracting space.

RISING FID
One way to gauge nearshoring is to look at foreign direct investment (FID) in Mexico. The following chart shows Mexican FID in millions of dollars. The figures for 2023 are only for the first half of the year.

Source: Mexican National Commission of Foreign Investments of the Secretary of the Economy

FID in 2022 reached its highest level since 2013, and 2023 could very well catch up to 2022 during the second half of the year.

DRIVERS BEHIND NEARSHORING
Companies are moving manufacturing closer to their customers because they want more reliable and secure supply chains. Also, they want to reduce their exposure to geopolitical risk.

They are choosing Mexico because it shares a border with the US, and it has free-trade agreements with the US, Canada, the EU and many other countries, Toscano said.

Its labour costs are competitive and much of its population is of working age. Customs clearance is relatively easy when compared with other countries, he added.

Nearshoring is creating knock-on effects among companies in China, said Francisco Cifuentes, sales manager, specialty polymers Mexico, Solvay Mexicana. These companies want to continue servicing existing customers, so they are following them overseas to Mexico.

If these Chinese companies do not make the move, they could lose market share to competitors in Mexico.

CHALLENGES OF RESHORING
Mexico still has challenges. Among the biggest, Toscano listed security, energy, infrastructure and labour.

Economists surveyed by Mexico’s central bank have frequently listed security and public safety as the top hurdles to economic growth.

Toscano said security has become a cost of doing business in the country.

CONCERNS ABOUT RENEWABLES
Mexico has not invested enough to expand renewable power, said Adrian Duhalt, research scholar at the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs.

Toscano added that the danger is that foreign countries could adopt various policies that could make products manufactured by plants powered by fossil fuels less competitive than those manufactured by plants powered by renewable energy.

LAND SHORTAGES
Cifuentes of Solvay Mexicana warned about a Mexico running out of available industrial space for the most popular nearshoring destinations, such as Tijuana, Monterrey and Saltillo.

He does not see this as a problem now, but it could become one in the future.

NEARSHORING INDUSTRIES
Toscano of Evonik broke down the major chemical end markets that could see nearshoring in Mexico.

AUTOMOBILES
Mexico has decades of experience building Tiers 1-3 auto parts and automobiles, Toscano said. All of the major original equipment manufacturers (OEMs) are in Mexico.

Already, Mexico ranks among the world’s largest producers of parts for the automobile industry, he added.

Mexico’s parts industry has room to grow, Toscano said. The US imports $100bn worth of parts from countries outside of Mexico.

AEROSPACE
Mexico does not have a major international OEM building airplanes. However, Bombardier of Canada does have a plant in Mexico that makes rear fuselage.

Airbus makes emergency exit doors and bulk cargo doors for its single-aisle commercial aircraft families.

Toscano noted that Tier 1 and Tier 2 producers have plants in Mexico.

“We have all the value chain,” Toscano said. “This is another front where we see opportunities in the future.”

APPLIANCES AND PERSONAL CARE
Toscano sees both appliances as well as personal and healthcare as other nearshoring end markets.

Personal and healthcare consume large amounts of surfactants, many of which are made with ethylene oxide (EO).

Mexico EO production is currently constrained because of a shortage of ethane, which prevents its ethylene plants from running at full capacity.

Nonetheless, Toscano said that Mexican plants can import those surfactants from the US.

Mexico could resolve the shortage through imports of ethane from the US.

MEDICAL
Mexico has long produced medical devices that meet the strict requirements in the US.

Many of the companies that manufacture medical devices in Mexico are based in the US, so they are familiar with the country’s regulations, Toscano said. As a result, he does not see US regulations as being a major barrier for those companies.

Evonik expects that a large US or Chinese company will develop a large medical development centre in Mexico, said Alejandra Martinez, business director of healthcare, Evonik.

RESHORING OUTSIDE OF MEXICO
Some companies are looking beyond Mexico to expand operations, Martinez said. Already, four major medical companies are opening manufacturing sites in the Dominican Republic.

Plastimagen ended last week.

Insight by Al Greenwood

Thumbnail shows Mexican flag. Image by Shutterstock.