• Wed. Apr 24th, 2024

Banorte to unleash Mexico’s potential through nearshoring

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Author: Carlos Hank-González, Chairman of the Board of Directors, Grupo Financiero Banorte


The technological advances and the surge of globalisation during the 1980s and 1990s popularised the strategy of offshoring, which led businesses to relocate aspects of their production and operations to foreign countries, aiming to lower costs. The advent of the internet, improved transportation networks, and enhanced communication capabilities allowed companies to seamlessly work with counterparts all over the world. The liberalisation of emerging economies increased opportunities for foreign investment and trade, enabling companies in industrialised nations to benefit from the low labour and production costs in developing countries, while simultaneously building up a presence and a customer base in other parts of the world.

As the 21st century progresses, however, an increasing number of companies are questioning the merits of offshoring in favour of the concept of nearshoring, which brings business processes, services, and manufacturing operations closer to the main consumption centres. Whereas offshoring was designed to lower costs and boost profits, nearshoring suggests that it may be more cost effective to stay closer to home.

The benefits of nearshoring
Geographical proximity reduces transportation costs and allows for more nimble and easily managed supply chains. Additionally, countries that are closely situated may share similar regulatory and legal requirements that make it simpler to navigate. They may also be culturally similar, overlapping in areas such as language, lifestyle, and traditions, which can improve communication and understanding. As a result, nearshoring is also commonly known as friendshoring or ally-shoring.

Recent world events have provided a clear illustration of the benefits of nearshoring. The Covid-19 pandemic demonstrated how quickly a virus can bring the manufacturing world to a halt, wreaking havoc on production timelines and supply chains long after the danger has passed. And the increase in disruptive extreme weather events is causing the world to rethink the wisdom of having operations spread widely throughout the world. Bringing operations closer to their target destination is a strategic way to reduce the risk of delays in production and bottlenecks in delivery, mitigating the impact of global events on a company’s bottom line.

As the trend of nearshoring catches on, developing countries in Eastern Europe and Southeast Asia stand to benefit. Given its closeness to the US, Mexico is poised to capitalise on the nearshoring boom more than any other nation. At Banorte, we recently published a research note that calculates the potential gains of nearshoring for Mexico at $168bn of additional non-oil exports in the next five years, which represents an increase of nearly 30 percent from current levels.

Why Mexico?
Geographical proximity to the US is not the only factor that makes Mexico an attractive destination of investments and relocation. According to the 2020 Census, 67 percent of the population of Mexico are of working age, which is significantly higher than the world average. That means that there are 78.9 million people who are potentially available to work in new factories and processing centres. This arrangement of population provides a competitive edge to companies who are looking to relocate.

As of today, Mexican exports to the US represent 81.8 percent of total exports. The main goods being sent abroad are passenger vehicles, auto parts and goods vehicles, computers, monitors and projectors, electrical wires, telephones, medical devices, tractors, and furniture. Mexico has the infrastructure and know-how to remain the main trading partner of the US. Moreover, existing economies of scale are a competitive advantage of the country.

Preparing for this new paradigm
Companies have already begun to recognise the benefits of relocating their supply chains to Mexico given the nearshoring story. In 2022, the US Manufacturing Leadership Council conducted a survey of 260 business executives in American-based corporations of varying sizes.

When executives were asked what potential supply chain changes they anticipated by 2030, approximately nine percent expected more offshoring, 27 percent expected an increase in onshoring (production within the US), another 27 percent said they were not expecting significant change, and more than 35 percent reported an expectation of increased nearshoring.

But Mexico may not have to wait until 2030 to see concrete change derived from nearshoring. Bloomberg has reported that Tesla is preparing to build a billion-dollar plant in Mexico. Likewise, BMW has said that it will invest €800m into its existing plant located in the Mexican state of San Luis Potosi. The tides have begun to turn.

A significant opportunity for Banorte lies in the economic activity generated by the realisation of these investment announcements. Once the newly established plants become operational, there is substantial potential not only in terms of credit, but also in providing a comprehensive range of financial services. These services may include intelligent treasury products, cash management, insurance, and more, with a primary focus on serving commercial segments, SMEs, and retail customers.

Furthermore, Banorte has been actively engaging and incorporating international companies with local operations into its customer base through our international desk. The number of such international clients has witnessed significant growth in recent months. Leveraging partnerships and relationships with various stakeholders, including international banks, specialised consultants, legal and shelter firms, we have observed an increasing number of companies seeking industrial spaces across different hubs. This presents notable opportunities for Banorte, especially considering our strong footprint and physical presence in these areas.

The nearshoring boom
Considering this strong momentum for the Mexican economy, Banorte will be the bank of nearshoring. It has already begun preparing for the future. Banorte’s research department has identified that the types of businesses most likely to grow due to nearshoring include: agricultural goods and livestock, chemicals and plastics, apparel and accessories, basic metals, machinery and equipment, and electronics. The financial group, which currently employs more than 30,000 people, is positioning itself at the forefront by adding 1,200 jobs within the country, which will specifically support these growing industries.

Banorte has been actively engaging and incorporating international companies with local operations into its customer base

Nearshoring is an exceptional opportunity for Mexico, specifically for the North and centre, as many of these new opportunities are located in these regions. Leading Mexican states in terms of exports to the US include Chihuahua and Nuevo León, with recorded exports of $73bn and $53.2bn, respectively.

These states are followed by the central and western states, collectively known as the ‘Bajío’ region in Mexico. This region is highly regarded as a crucial agricultural and industrial hub within the industry.

Banorte has strategically positioned itself in these regions, boasting a strong presence. Approximately 56 percent of its branches and around 52 percent of its loan portfolio are concentrated in these areas. This significant presence is well-aligned with the potential for economic growth in these regions. Additionally, Banorte has established robust financial relationships within these locations. The recent addition of new talent further enhances our capacity to strengthen existing client partnerships and provide support to both SMEs and emerging businesses, driven by the trend of nearshoring.

Simultaneously, Banorte is building technological capabilities to create fully digital environments to provide comprehensive financial services to the newly established companies, once they are operational in the country. The influx of nearshoring opportunities is predicted to cause a rise in migration from the country’s south to its northern states. In turn, this will spur the need for more mortgages and small business loans in the region. As a local bank, I believe that Banorte Financial Group is uniquely situated to support these local investments.

Challenges await
In Banorte’s Zoom nearshoring report, we have outlined a ‘four-helix’ model that will engage the government, the private sector, educational institutions, and society to ensure that Mexico realises the full potential that nearshoring has to offer. These four entities will need to work together to improve public infrastructure, foster public and private policies that incentivise investment, improve on rule of law indicators, invest in human capital, raise competitiveness and productivity, and integrate states and regions which are not currently part of supply chains that specialise in attending foreign markets.

The opportunities and challenges facing Mexico at this juncture are intense. But since its founding in 1899, Banorte has been adept at anticipating the twists and turns ahead, pivoting as the situation requires to ensure growth and forward momentum. To combat Mexico’s low rate of banking penetration, the bank has invested in key strategic alliances with digital disruptors to introduce new payment method innovations to the country’s market. Myriad awards and accolades demonstrate its ability to navigate through dynamic economic landscapes with prudence and insight.

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