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Investors strengthen the US and Mexican supply chain

Investors strengthen the US and Mexican supply chain

Although shifting production from North America to Asia allowed companies to reduce costs, it weakened both the regional and Mexican supply chain.

China stood as the preeminent world supplier of ventilators, face masks, and medical equipment during the early months of the global coronavirus pandemic. This ignited alerts in the United States, the country with the most diagnosed cases and deaths from COVID-19. As a result of this event, the need to strengthen the regional and Mexican supply chain became, in many instances, a matter of survival.

Over the past 20 years, trade treaties have been, in addition to market size, a major determining factor in attracting outside investment to North America.   NAFTA, which has recently been replaced by the United States-Mexico-Canada Free Trade Agreement (USMCA), was a key incentive for American, European, and Asian companies to disburse million-dollar sums to open new factories in the Mexico and the region during the 1990s and early 2000s.

But over the next decade, U.S. companies decided to pursue opportunities to cut their costs by establishing facilities in Asia.  As a result, they invested hundreds of millions of dollars in the development of new suppliers, while setting up factories primarily in China, but also in other low-cost countries such as Bangladesh, Taiwan, and India. Consequently, Asia became the world’s manufacturing factory for electronic components, clothing, automotive components, and medical devices, among many other things, for North America.

Although the strategy allowed companies to reduce costs in the short term, it also left a fragile regional and Mexican supply chain, which over the past decade faced disruptions.   An example of this happened in 2012 when a tsunami off the coast of Japan affected the supply of automotive components to North America. This caused shutdowns at Nissan and Honda More recently the global supply chain broke completely after the closure of dozens of plants, not only in Asia, but also in Europe, because of the coronavirus pandemic.

“The pandemic saw a major emergence of the US and Mexican supply chain because of a lack of components coming from China,” notes José López Portillo. López Portillo is the founding partner and director of Pedralbes Partners, a firm dedicated to advising investors interested in reaching the Mexican market.

These pandemic-caused supply chain ruptures, observes López Portillo, combined with Donald Trump’s administration-led policy of ‘making America great again’ by strengthening the regionally essential US and Mexican supply chain.

“Mexico has an opportunity to attract investment from various sectors due to the proximity to the United States and the certainty generated by the entry into force of the USMCA,” he says.

The firm he represents, that has recently made an alliance with CDI Global that allows him to expand his network to Asia and Europe, now receives “greater interest” from foreign companies for making mergers and acquisitions in Mexico.  Interest is centered mainly in “traditional sectors”, such as manufacturing, the chemical industry and food and beverages.  Firms are acting to strengthen their US and Mexico supply chain.

Recently, for example, Volkswagen announced a $233 million investment to nearly double the production of its engine plant in Silao, Guanajuato, and supply three plants – two in Mexico and one in the United States – amid a stricter USMCA that now requires this component to be manufactured in North America and also have 75% regional content in material inputs.

It is anticipated that a change in emissions policy under Joe Biden’s administration, which will most likely place an emphasis back on renewable energy, including electrified vehicles, could also attract investments from battery manufacturers interested in providing vehicle plants in North America.

The consultancy started the year with several investment projects, but after the arrival of the pandemic, virtually all projects were frozen. “One of them resumed in June and it is believed that it will wrapped-up by the end of 2020. Now you can see greater dynamism. New opportunities have begun to emerge in October and November,” explains the founding partner and director of Pedralbes Partners.

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