Since 2018, growing geopolitical tension between the world’s two largest economies, triggered by the trade war, has prompted a re-evaluation of globalization. The pandemic, which caused ongoing disruptions in the existing global supply chain, has amplified the realignment and the need to manufacture products closer to a nation’s own soil. In 2021, the US imported approximately $390bn from Mexico, which represents three-quarters of the South neighbor’s total export, or 30% of its $1.3trn GDP. With its cheap labor and proximity to the US, Mexico is expected to benefit from the theme of “Nearshoring”.
Earlier this month, we took a trip to Mexico’s manufacturing hubs and visited facilities operated by local and multinational companies to learn about the opportunities and challenges that Mexico is facing. Here is what we learned:
- The wage difference is massive: an experienced worker in the US earns $17-20 per hour, whereas, in Mexico, it is $5 a day.
- Multinational companies (i.e. LG and Bosch) are expanding their existing footprints in Mexico driven by recent US policies such as the Inflation Reduction Act (IRA).
- Industrial real estate has been booming over the past two years. The manufacturing hubs with good infrastructure and electricity access are almost full. Monterrey’s vacancy rate is at historical low of 2%. In certain places in Saltillo, the rate is 0%.
- Since 2020, current policymakers had returned to a nationalized and centralized energy policy. Politicians are pulling back electricity developments. Major transmission projects have been delayed/canceled.
- Managements call out under-invested infrastructure and shortage of electricity as the bottlenecks for capital-intensive businesses to come. Companies have to build generators (substations, transmission) themselves and face pushback from the government.
- A change in the energy policy is unlikely to happen under the current administration (next election 2024).
- Early signs of softness across various manufacturers. Zebra Pens operates at 30% utilization. Over the past three months, management saw a decline in orders from Walmart and Staples. Whirlpool runs at 60% utilization. Marinera reallocated its assembly line to two from three shifts (lowered capacity by 30%).
- Higher than expected robotic adoption. The facility of Nemak, an EV battery parts supplier, is 85% automated.
“This means that” Corporations are rethinking their supply chain strategy and shifting focus from “Just in time” (efficiency) to “Just in case” (certainty). Unfortunately, lack of infrastructure and power remains the obstacle for a major “Nearshoring” wave to Mexico. In the near term, we expect Mexico’s economy to see headwinds as US consumers shift their purchasing habits from products to services. However, automation is happening, driven by the need for lower costs and growing productivity. We will watch closely for future opportunities as the situation develops.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
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