Relocation will increase production | Article

David Ordaz

The reorganization of global supply chains and the relocation of companies, mainly from Asia, will lead to annual growth of industrial production in Mexico of up to 5%, according to the latest study from consulting firm Deloitte.

The move, which will also create new investment, expand existing ones and create specialized employment, is currently in its early stages; however, its rapid development will increase Mexican exports to $50 billion annually, as well as a 10 percent increase in Mexico’s exports. annual increase in foreign direct investment (FDI).

The manufacturing sector grew 4% in 2022 compared to 2021 and reached levels 10% higher than in 2005, according to the report.

When observing the volume of foreign direct investment in the first half of the year, of the $29.041 million recorded, 7% corresponded to new investments and almost 80% corresponded to reinvestments.

“While these numbers call into question whether new companies are moving to Mexico or not, we think this is because some of these nearshoring announcements are at an early stage, and that the largest investment costs will occur in the coming years,” says the report.

Elsewhere, industrial warehouse occupancy grew 19% annually in the first half of the year, exceeding the peak level achieved in 2017.

Additionally, the relocation of Mexican manufacturing plants will add an additional 2.9 percentage points to GDP over the next five years.

It is worth noting that in the study “Sustainable Manufacturing: From Vision to Action”, the consultancy explains that investments in sustainable funds are constantly growing and indicates that consumers are increasingly aware of their purchases and are directing their investments to sustainable funds.

Due to this, the demand for sustainable production will increase due to growing concerns about climate change.

Although our country has such strengths as the current scenario due to nearshoring, rising wages, its dominant role in T-MEK and attracting investments, labor productivity is one of the major concerns as it has remained almost unchanged since 2005.

Today, that trend in the manufacturing sector appears to be reversing, with productivity up 4% in 2022 over 2021 and now 10% above 2005 levels.

“In fact, investment in machinery and equipment that improves efficiency and production capacity is growing in a way not seen since 2011. In the first half of 2023, they grew by 20% compared to the same period last year,” he said.

At the government level, there continues to be a shortage of public and private resources for capitalization, such as infrastructure, energy mix, water and natural gas, technology hubs, skilled labor, and improved security, among other factors. “Policies that promote stability and ensure fair application of the law will be important,” the report says.

A few days ago, the Mexican government issued a decree establishing tax incentives for companies wishing to move to any part of our country in order to increase investment due to the phenomenon of nishoring. These benefits consist of an accelerated investment deduction that ranges from 56% to 89% in 2023 and 2024. In addition, an additional 25% deduction is guaranteed for 3 years on employee training costs with a focus on human capital development.

These incentives will be provided only to exporting companies belonging to 10 sectors and will be available in all states and municipalities in the country, extending the window of opportunity by one year for interested companies.

The ten key sectors of the Mexican economy that are eligible for these incentives are: semiconductors, automotive, electrical and electronics, medical and pharmaceutical equipment, agribusiness, food for humans and animals, and others.

Manufacturing exports are one of the engines of the Mexican economy, as 62% of our country’s trade comes from manufacturing companies, generating one-fifth of Mexico’s formal employment.

According to the National Council of Export Manufacturing Industries (Index), in the current nearshoring environment, investments are estimated at about $50 billion, of which 60% will reach the manufacturing industry.