Nearshoring tide growing in Mexico

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Before 2020, anyone suggesting to a manufacturer’s board of directors that they ditch China for Mexico would likely have been shown the door, possibly to the sounds of laughter.

No one’s laughing now.

That was pre-pandemic—when China’s grip on outsourcing was uncontested and had been since the early 2000s—before China’s zero-COVID policies and the labor shortages they caused knocked global commerce sideways. Before then, most companies (and consumers) were willing to take whatever hits on quality they needed to because the sticker price on Chinese goods was always low enough to compensate.

Then COVID-19 created such worldwide shipping delays that even companies long entrenched with a make-it-in-China mindset began formulating what’s come to be known as nearshoring—the movement of suppliers much closer to the North American OEMs they support.

Diplomatic and trade tensions between the U.S. and China have only quickened businesses’ relocation to other nations ready with the necessary workforces and technology. Vietnam and India have emerged as key players here, but for North American manufacturers looking for profitable alternatives to China closer to home, Mexico is the obvious choice.

Customers Are Calling

One city already poised at the forefront of this trend is Monterrey. The capital of the state of Nuevo Leon, Monterrey stands only 150 miles from the U.S. border and is the traditional industrial hub of Mexico. No wonder, then, that Ohio-based Welded Tubes Inc. (a subsidiary of Lock Joint Tube) recently announced it would build its newest greenfield tube plant there.

The 55,000-sq.-ft facility, scheduled to open in Q2 2024, will manufacture tubing between 7 mm and 2-7/8 in. OD on a brand-new Italian MTM tube mill, mainly for the automotive, appliance, and ATV markets.

Welded Tubes plans to employ 35 to 40 people at this first phase of the new facility, which President Joe Frandanisa is careful to point out is an expansion of the company’s workforce, not a relocation of jobs.

Frandanisa said the company would like to open a second tube mill in the not-so-distant future for making larger-diameter products. But for now, he detects a lot of potential to serve automotive customers with Mexican-made, small-diameter tubing, especially in dual-phase materials such as DP600 and DP980.

“We see a lot of onshoring from China coming back to Mexico,” Frandanisa said. “We were involved in a lot of conversations with Tier 1 and Tier 2 automotive suppliers who quite frankly need our product. It looks like a tremendous opportunity for us.

“There’s a lot of automotive down in Mexico due to labor, due to some free trade issues, and it just made sense for Lock Joint/Welded Tubes to take a look. Our current customers that we ship to that are really looking forward to us moving down.”

Frandanisa said his company currently ships about 30 trucks worth of metal every month from Ohio to customers in Mexico. With the plan in Monterrey, Welded Tubes is joining a growing chorus of companies singing a new song, and more loudly the longer diplomatic and trade disputes keep the U.S. and China on the outs with each other.

“With the onshoring, I think a lot of people after COVID realized that the supply chain had flaws,” Frandanisa noted. “Those flaws stuck out really badly, and I think customers and consumers were willing to spend a little bit more for products—but they couldn’t get them. So, I think the onshoring started little by little, [and] Mexico makes a lot of sense.

“And, with the focus on climate, a lot of people are concerned about the carbon footprint of what we’re doing with boats coming from China and trucks coming out of the U.S. and all around, so all of those inputs led us to open up the facility down in Monterrey.”

Missing the Moment?

Just how much sense American companies think Mexico makes remains to be seen. While talk of onshoring has been surging, the actual foreign direct investment (FDI) numbers have yet to match the hype, according to Dr. Luis Torres, a senior business economist with the Federal Reserve Bank of Dallas who did his PhD dissertation on the shock suffered by Mexican maquiladoras (factories focused on manufacturing goods for export out of Mexico) when China entered the World Trade Organization in 2001.

In an April article written with Dallas Fed analyst Aparna Jayashankar, Torres noted that U.S.-based FDI to Mexico remained relatively flat from 2015-2022 at about $15 billion dollars annually. That accounts for 42.6% of Mexico’s total FDI, making the U.S. far and away Mexico’s top FDI source (the EU is second at $4.3 billion, Canada third at $3.8 billion).

Torres wonders why the numbers aren’t showing a bigger bump, given rising antipathy toward China and the existing U.S.-Mexico ties. He could venture some guesses, though, chief among them a lack of clear industrial policy leadership from Mexico City.

One recent piece of evidence stands out to Torres: President Andrés Manuel Lopéz Obrador’s 2018 decision to scrap construction of the new Mexico City international airport begun by his predecessor, Enrique Peña Nieto. Obrador decided instead to convert a former military base 26 miles north of Mexico City into a new airport, which opened in March 2022 but is not served by commuter rail and currently handles only a fraction of the traffic authorities were hoping it would.

“The [discontinued] airport was going to be one of the top airports in the world,” Torres said. “If they would have allowed that airport to go through, it was going to be a major hub for Latin America. But that gives you an indication of the policies there.

“This is a great moment for Mexico, but unfortunately, I think right now the policies from the federal government are not there,” Torres added. “I think that’s affecting them. It’s the lack of policies by the federal government to attract those investments and take advantage of the moment.”

The Lure of Monterrey

Almost half of U.S.-based FDI to Mexico is directed toward manufacturing, and manufacturing-heavy Nuevo Leon has long been a hub in northern Mexico, drawing a hefty $4.4 billion annually, or more than 29% of Mexico’s total.

While maquiladoras once dominated the U.S.-Mexico manufacturing conversation, the trend now includes businesses like Welded Tubes locating more facilities just across town from customers also operating in Mexico. And while maquiladoras traditionally have been lower-tech operations in border cities such as Tijuana and Reynosa, Monterrey has the luxury of the Tecnológico de Monterrey (the MIT of Mexico). That means top-level local engineering talent and the higher-tech businesses that tend to follow—businesses like Lenovo and Tesla that continue to make headlines for the region.

A savvy local government doesn’t hurt.

“I think the state governments have done a better job sometimes than the federal government in promoting foreign investment,” Torres said. “A perfect example is the state of Nuevo Leon. They’ve done a great job.”

For Welded Tubes’ part, though some of the product being produced in Monterrey will come back to the U.S., the main idea is to produce and supply locally there.

“It’s going to make a lot of sense for helping our customers save on freight,” Frandanisa said.