Lack of clean energy curbs Mexico nearshoring

Mexico should be attracting more investment as US-based firms look to shorten their supply chains, but a lack of reliable power is a problem, writes Rebecca Conan

Mexico has seen a surge in nearshoring investments over the past two years as companies look to bolster supply chains interrupted by the Covid-19 pandemic and pressured by the US-China trade war. But a lack of clean electricity investment because of President Andres Manuel Lopez Obrador's statist energy policy is hampering the arrival of more of these investments.

Foreign direct investment (FDI) in Mexico increased by 12pc last year to $35bn, according to the economy ministry, largely driven by companies looking to relocate their supply chains closer to the US and Canada.

The trend covers sectors from automotive to textiles and electronics and is forecast to increase following January's commitment between the US, Mexico and Canada to relocate 25pc of their Asian imports to North America.

But despite Mexico's "historic" nearshoring opportunity given its proximity to the US, low labour costs and qualified workforce, the massive exodus of capital from China in recent years has mainly remained in the Asian region, according to Spanish bank BBVA. One of the main barriers to fulfilling the "Made in Mexico" potential is a lack of electricity infrastructure, as well as efficient, stable and clean electricity sources, BBVA says.

Lopez Obrador's statist energy policy has squeezed out private-sector investment, particularly in renewable energy, while state-owned CFE has failed to invest in new capacity or much-needed transmission and distribution infrastructure.

As a result, the generation sector has reported negative economic growth since 2018, making "the national grid incapable of responding efficiently to a strong expansion in industry", BBVA says.

And as international companies commit to decarbonisation, the need to secure clean energy will begin to affect nearshoring decisions.

"US investors are looking for clean energy as part of their relocation decisions, but it is getting harder to secure it at an accessible price as there has been a reduction in investments in these projects," the president of Mexican textile association Canaintex, Rafael Zaga, tells Argus.

Around 7GW of new non-conventional renewable energy capacity was built through long-term power auctions during the previous Mexican administration, but much of that capacity has already been contracted.

Hit the north

Most nearshoring investment is going to northern Mexico, a region with access to cheap and abundant pipeline gas from the US, some of the best solar and wind capacity in the country and business-friendly state governments.

US group Tesla announced in March that it will build a $5.1bn car manufacturing plant in Nuevo Leon, continuing a recent uptick in nearshoring investments in the state, which attracted 12.4pc of Mexico's FDI last year.

Northeast Mexico has sufficient excess generation to cover an increase in industrial activity, according to grid operator Cenace. But transmitting the electricity to new industrial parks requires more investments in power lines and other distribution infrastructure.

A lack of distribution infrastructure in Nuevo Leon, and elsewhere in the country, means that companies looking to set up industrial plants must invest in power lines to bring in electricity. Delays to securing electricity interconnections are also hampering the development of industrial complexes and companies suffer repeated power outages even once connected, Zaga says.

The government has pledged to build up to five 1GW solar parks and transmission lines under its Sonora Plan to help meet industrial demand.

Mexico foreign direct investment