Transcript
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Speaker: Hi, good morning, good afternoon, everyone.
Speaker: Thank you so much for joining us.
Speaker: We are going to discuss about this phenomenon of nearshoring to Mexico, which has become a key trend and a key theme for the Mexican Economic Outlook.
Speaker: I will be joined by two persons that are very close to the theme and that can share with us
Speaker: a lot of color on what has been happening over the last few months about this theme and especially on what can we expect going forward and the relevant themes behind this.
Speaker: Firstly, we have Eduardo Ramos, who is a Senior Consultant in Public Policy and Affairs and International Trade at De La Calle Madrazo Mancera.
Speaker: And we are also joined by our HSBC Mexico CEO, Jorge Arce.
Speaker: So, Eduardo, Jorge, thank you so much for being with us today.
Speaker: Thank you.
Speaker: Thank you, everyone.
Speaker: It's a privilege to be sharing this with you.
Speaker: Let me start by saying something about reassuring.
Speaker: And it is very clear that there were certain structural conditions and some political events and emergency situations that favor reassuring in Mexico.
Speaker: And that's very clear.
Speaker: The structural one, and this would be very obvious for everyone, it's the technological changes that basically allow
Speaker: the firms to reduce the segments of the global value chains.
Speaker: And certainly that's a key issue problem that allows nearshoring, not only in Mexico, but in other places.
Speaker: But also it is very clear that the US-China trade and technological war was another important element that foster nearshoring in terms of the necessity to have reliance on the value chains.
Speaker: Lastly, but not less important, the political regional initiatives.
Speaker: Of course, one of the most important ones in Mexico relates to the USMCA.
Speaker: However, I have to say the following.
Speaker: We're talking about nearshoring, but let me say what it is not.
Speaker: does not mean the relocation of all the investments from one region or country to another, say Asia or China into Mexico or North America.
Speaker: That's not nearshoring.
Speaker: And nearshoring neither is the relocation of complete value chains from one place to another.
Speaker: Normally, this relocation takes place in segments.
Speaker: That is, segments of the value chains are going to move from one place to another where these countries where they are relocating are competitive.
Speaker: Otherwise, they wouldn't be moving.
Speaker: So this is kind of important because otherwise we can have the sense that the whole value chains are going to move completely with all their segments from one place to another, and that's not the case.
Speaker: We need to have into account also, and I assume at the bank you look at this every day, that nurturing could be costly and in some cases it's impractical to serve some other markets.
Speaker: We cannot move everything into Mexico or North America to serve, for example, Asian markets.
Speaker: That could not work.
Speaker: So that's important to say.
Speaker: And something that reflects this is that, for example, with China, when we say that relocation is taking place and things are moving from China into other places, it is true that in some cases this is not taking place.
Speaker: Some value chains or segments of the value chains remain in China, even
Speaker: with the tariffs that the US has imposed into China.
Speaker: So this would be an example that not all the value chains or their segments could be moving from one place to another.
Speaker: Certainly, Mexico has the right context to benefit from new shoring.
Speaker: And the economic context is a little bit challenging in the sense that the US economy is slowing down.
Speaker: The good news is that we won't have a recession, but we're going to have a soft landing.
Speaker: And basically this means because the high integration between Mexico and the US economy, what this means is it will be a little bit more difficult for Mexico to increase its participation in the US economy.
Speaker: But this is happening regardless of the fact that industrial activity in the US, regardless of the fact that US imports are slowing down.
Speaker: So then to finalize, ensuring I believe that it's an historic opportunity for Mexico, but certainly the country has challenges.
Speaker: There is evidence that this is happening, but the country would have to make things right in order to take advantage of the opportunity.
Speaker: Thank you.
Speaker: Thank you so much, Eduardo.
Speaker: Very, very clear.
Speaker: So now, Jorge, any initial remark you would like to make?
Speaker: Thank you, Jose Carlos.
Speaker: Thank you, Eduardo.
Speaker: I agree with Eduardo's comments more.
Speaker: I think it's important also to put a context of where Mexico is, what is near shoring, and what is Mexico's economy look like.
Speaker: For the last 30 years, Mexico has turned itself around into an import-export country.
Speaker: in which you have the ability to export import inputs and produce inputs locally and export to the world thanks to over 40 something treaty agreements.
Speaker: The most important obviously the what we used to know as NAFTA now is just MCA with its updated version.
Speaker: And no country is more open than Mexico.
Speaker: So we created this ecosystem in logistics, factories, workers, that is geared to export to the world and to trade with the world.
Speaker: So nobody buys more from the U.S. than Mexico and nobody sells more to the U.S. than Mexico.
Speaker: But that is also the case with other trading partners throughout the world.
Speaker: So Mexico has turned itself during the last 30 years into this export powerhouse.
Speaker: Within this basis, we are more than able to benefit from reallocation of supply chains or production facilities that we call it now nearshoring, which are coming from other parts of the world that really never invested in Mexico in a substantial manner as they are doing now.
Speaker: What is happening is within this context, Mexico can capture that opportunity and we see that we are capturing it.
Speaker: So the opportunity here is not relocate supply chains, relocate operations, relocate factories from Asia, China into Mexico, but to work in coordination and have the opportunity to be more efficient to serve your markets and your clients.
Speaker: And that's the primary accelerator of investment in Mexico that we've seen this year, for example, that's
Speaker: This year, we're going to see probably an excess of $40 billion in foreign direct investment, which will be the record of records.
Speaker: That's clear evidence that Mexico is benefiting from this trend.
Speaker: And it's local companies already producing in Mexico, but also a new entrance producing in Mexico to sell to the world.
Speaker: Excellent, Jorge.
Speaker: Thank you.
Speaker: Eduardo, maybe if you can elaborate a bit, for example, on what kind of evidence would you be seeing in the last few months or what kind of evidence can we start to look more clearly in the next few months?
Speaker: Maybe we can kick off with that.
Speaker: Perfect, Mr. Carlos.
Speaker: Let me consider one variable, and I think it's accurate evidence that NeuroSharing is happening.
Speaker: And then I can mention some other ones in which we, and Jorge has mentioned some of them.
Speaker: And we can say that this new showing is happening clearly.
Speaker: Let me take just as a reference the starting of the trade war between China and the US.
Speaker: And just take as a reference the participation that Mexico has in US market and also the participation that China has in US market.
Speaker: Certainly, this participation has fallen for China.
Speaker: And in those percentage points, this fall represents almost eight percentage points since between 2018 and 2023.
Speaker: Most of this fall took place between 2018 and 2022.
Speaker: The fall between these years, 2018 and 2022, was of almost 5 percentage points.
Speaker: That's the fall that China had in its participation in US imports.
Speaker: Now, in contrast, between 2018 and 2023,
Speaker: Mexico has increased its participation in US imports in almost two percentage points.
Speaker: Now, a way to measure, so to speak, this new shoring, and once again, this is just one indicator, is somehow how Mexico has
Speaker: taking advantage of this fall of China's participation in US imports and taking that participation.
Speaker: And maybe that's the main indicator that Nishon is happening in Mexico.
Speaker: Yeah, that's very clear, Eduardo.
Speaker: Thank you.
Speaker: And maybe now that you mention all of this and this evidence that is starting to be a bit more clear with some macro indicators, maybe, Jorge, we can move with you.
Speaker: You have been traveling the country in the last couple of years to meet many of our national customers, and you have also had conversations with global customers today.
Speaker: And it seems that the concept about nearshoring that was one year ago, two years ago, is very different to the one that we have now, right?
Speaker: In the sense that two years ago, it was kind of a nice story that if everything was going to be okay, probably it was opportunity.
Speaker: But now it seems that when you talk to either local or global customers, Nearsharing has become kind of a key part of the narrative, key part of their plans, of their operation plans for the next one, two, three, four years.
Speaker: So maybe it's a good opportunity to ask you, what's the sentiment you have perceived from these customers recently in the meetings that you have had?
Speaker: How do you think they are incorporating that?
Speaker: And any color you might give us to probably get some sentiment from customers?
Speaker: Okay.
Speaker: There are two phenomenons playing.
Speaker: The first one is that, and this is the easiest one that we're all aware of, is that Mexico is
Speaker: such an important, very important of
Speaker: US and Canada, that it has specialized its economy in certain sectors that has strong competitive advantages and that it's a world leader.
Speaker: Also, we have seen in Mexico the development of a complete new industry that never exported before, which is the agricultural sector.
Speaker: So in Mexico, we're seeing a lot of the production of berries coming into Mexico and obviously avocado, tomatoes.
Speaker: So Mexico is going to export
Speaker: in agricultural products this year, $77 billion.
Speaker: Okay, that makes them one of the top exporters of agricultural products in the world that never happened before.
Speaker: In the other side, on the near shore end, we're seeing companies, middle-sized companies that used to have or continue to have manufacturing production in China, in Southeast Asia, coming to Mexico to look for local contractual manufacturers.
Speaker: to put their own plans, to co-invest, because they want to produce kitchen utensils to sell to the typical retailers in the U.S. Different types of companies that are coming to Mexico to set up production, to sell an just-time inventory to retailers that they are looking for.
Speaker: So that...
Speaker: It's new, okay?
Speaker: And they come to Mexico and they say, well, we might not be able to source stainless steel of this quality in North America, but we can import it from China or from Germany.
Speaker: Well, Mexico can import that almost free of tariffs.
Speaker: But the end product probably is going to be made in Mexico to sell in Black Friday into the US, you know, just in time inventory basis.
Speaker: So we are seeing different players that we never saw before.
Speaker: And that's where the strength of foreign investment is coming.
Speaker: That's where we are seeing the growth in exports and different type of exports.
Speaker: Excellent.
Speaker: I mean, talking about this sentiment, talking about this evidence, the next natural question would be, for example, given what you were mentioning about what is nearshoring and what is not, in this context, for example, of about having different phases of developments according to every specific sector that we have in Mexico,
Speaker: In your point of view, which are the sectors that probably can benefit the most or which are the sectors that probably have an edge over the rest of the sectors?
Speaker: Absolutely.
Speaker: And look, obviously we have the competitive advantage to produce cars and auto parts.
Speaker: We have met with a lot of CEOs from global companies from Asia, Europe and the U.S.,
Speaker: when they come to Mexico and they say that there is no better place to produce cars than in Mexico.
Speaker: Why?
Speaker: Because we have the ecosystem, we have done it for the last, well, in scale for the last 70 years, but to do our next sporting driven auto sector for the last 30.
Speaker: So critical mass, you develop a lot of expertise, you develop a workforce, a relationship with unions that are so important right now, you see what's happening in the US.
Speaker: So there is no better place to produce a car and most profitable.
Speaker: There are companies in the US that credit Mexico to have saved the companies for their production here after the crisis, the economic crisis.
Speaker: But we don't see in the headlines something that is happening every year that all the large producers of cars in the world are increasing their investment in Mexico and using Mexico to invest as a platform for global platforms.
Speaker: And that will continue.
Speaker: And that has developed local suppliers of parts.
Speaker: So we export much more parts than finished product.
Speaker: And that has developed those producers of parts
Speaker: auto parts also produce other things for other industries.
Speaker: So we are talking about the medical sector, medical devices, appliances.
Speaker: So we have developed this expertise in metal works, in certain appliances and auto parts that is
Speaker: the main driving force of manufactured exports.
Speaker: But also heavy industry is producing in Mexico.
Speaker: A lot of new companies that used to produce in Mexico, certain products are expanding their production.
Speaker: And that's when some of our Asian clients come to Mexico and says, I need this plastic.
Speaker: I need this supplier that can
Speaker: shape this aluminum piece in this way and I need these compressors, where can I find them?
Speaker: And they say, yeah, you can find them here and here and here.
Speaker: So right now we used to have clients that only produce pumps.
Speaker: Now we're producing end products like lawnmowers.
Speaker: So this sophistication is only happening in Mexico because it's openness, obviously the geographical closeness to the US, but also it's because it's so easy to invest in Mexico.
Speaker: No, you don't have exchange controls, the pesos free tradable, you can hedge, you can do many other things.
Speaker: There's plenty of financing, local and international to put something in Mexico.
Speaker: So that's an additional derivative that people don't see that has been created in the last 30 years.
Speaker: Excellent.
Speaker: Thank you, Jorge.
Speaker: As in every opportunity or big trend, such as the one that we are seeing with nearshoring, of course, there are also some challenges, some things that can be done a bit better in order to speed up some of the investment.
Speaker: There are some things that can be updated in order to try to be a bit more aligned with the dynamics that we are seeing now.
Speaker: So maybe we can start with you, Eduardo.
Speaker: I mean, from your point of view, what are
Speaker: these challenges that the Mexican economy has currently in order to improve the dynamic.
Speaker: If you can give us like the big picture and your main challenges from your point of view would be appreciated.
Speaker: There are very many, but basically maybe one of the most important ones relates to energy, availability of energy.
Speaker: And this is not energy just in general.
Speaker: We need sufficient, competitive and clean energy.
Speaker: It's obvious that we need sufficient energy, but we need clean energy because of all the commitments that countries and enterprises have in terms of producing with clean energy.
Speaker: And of course, as we have this process of electrification of the economy,
Speaker: This is going to be more the case in the future.
Speaker: So this is maybe one of the most important challenges that we have.
Speaker: Maybe the second one relates basically to human capital.
Speaker: We do have a lot of qualified workforce that even that real salaries have increased, we're still competitive in the world.
Speaker: But in any case, if we need to bring
Speaker: these segments of the value chains that are more technological intensive, we have a challenge to reskill and upskill our workforce.
Speaker: And so that's maybe the second challenge that I would mention.
Speaker: And the third one, we also have a challenge in terms of logistics and infrastructure.
Speaker: This includes industrial parks and it's amazing the demand that they are having in terms of space.
Speaker: The availability of parks is reducing, even though they're increasing capacity.
Speaker: So, and these rents are going up.
Speaker: So, we have a challenge there together with that of infrastructure, transportation infrastructure also.
Speaker: I would stop there.
Speaker: We have others, but I would say that these are the three most important ones.
Speaker: Excellent, excellent.
Speaker: Jorge, maybe we can go with you with a question that we have about regional performances, right?
Speaker: But I mean, if you can share a bit of your thoughts and color on...
Speaker: How do you see, for example, this regional performance?
Speaker: Because it seems that the focus is starting to shift towards some southern states.
Speaker: A couple of months ago, there were some fiscal incentives announced in order to try to develop this Isthmus-De Tehuantepec corridor that is
Speaker: pretending to connect the east and west of the country and work as an inter-oceanic corridor to be there.
Speaker: So would you say that only the northern states of the country are dominating this story?
Speaker: Because we have already heard some actual investment cases in some southern states.
Speaker: So, I mean, any thoughts, any insight you have on that at the regional level?
Speaker: Well, I think that's one of the biggest challenges that Mexico has faced for generations and generations is the how unequal development has been between center northern states and some of the coasts and southern Mexico.
Speaker: So Mexico is probably two or three countries in one.
Speaker: And this is one of the challenges that the country has.
Speaker: So what we see, obviously, is central Mexico.
Speaker: Mexico City, for example.
Speaker: Mexico City is a great story.
Speaker: We see an ecosystem of fintechs and technology companies and movie production companies.
Speaker: Even us, for example, we are doing near-shoring.
Speaker: We have moved.
Speaker: We have about
Speaker: 2,500 jobs in Mexico City that service HSBC globally.
Speaker: And we not only do like low value added services, we do over 600 services that some of them are highly skilled data analytics and how we use that data to provide services to our clients.
Speaker: It's not just only transactional and
Speaker: and mechanical.
Speaker: It's real engineering, real things.
Speaker: So the central part of Mexico, which we call it the Bajillo, and even the Guadalajara region on the occidente, and that's a particular area that's doing really well also because agriculture is growing at rates that you cannot see even in the most dynamic areas of Asia.
Speaker: Okay?
Speaker: northern part of Mexico is saturated.
Speaker: Most people are moving further south for certain things.
Speaker: And those cities in central Mexico tend to be developed.
Speaker: Because when you go to Mexico, you not only want to have cheap labor, electricity, or logistics, you want to have
Speaker: your executives to live in a city that has a cultural life, schools, and those cities in the northern part of Mexico, the west, central Mexico, they are better here.
Speaker: But there is good incentives to go to southern Mexico.
Speaker: So we see that a lot of things are happening that are going to help develop the south, further develop the north, and change what we do as a country, depending on where you are located.
Speaker: Thank you.
Speaker: Thank you, Jorge.
Speaker: Well, we are now out of time.
Speaker: I just want to thank you both for being with us.
Speaker: I think this was a very productive discussion.
Speaker: So for the moment, thanks so much to both of you and thank you everyone for joining us.
Speaker: Thank you for joining us for this episode of Emerging Market Spotlight.
Speaker: We hope you enjoy the discussion.
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