Nearshoring Stakeholders: Winners and Losers in the Mexican Capex Race

Will this be the END of the China entrepreneurial model?

?End of the Story:?

MNCs in Mexico are either ramping up or doubling down.? ?

Long-established incumbents have been the most active expanders in Mexico, largely because they are the only ones who can make incremental moves using their existing assets.?

Deep-pocketed Fortune 500s are breaking new ground with big projects that target the US market.? They will find that construction in Mexico doesn’t move at “China speed”, and most new projects will take at least 2 years to go from final decision to first delivery.? ??

Chinese private companies are very busy setting up their presence in Mexico, but the US is likely to impose political and bureaucratic impediments to their progress.? (The only thing that US policymakers agree on is “China Bad”.)?

Mexican partners and sources are set to be big winners, but the trend is going to benefit existing industry leaders.? Many Old China Hands find negotiating with local Mexican partners to be time-consuming and confusing. ?Sourcing continues to be a bigger challenge in Mexico than in Asia.

Missing from the mix is the SME category that did so well in China.? Mexico is different, and many entrepreneurs & startups find the pace too slow and the ecosystem not suitable (due to a lack of contract manufacturing).? They have been waitin’ & seein’ since the end of 2018, and now run the risk of being shut out of the North American Trade Bloc.

Good Enough Relations with the US?

Last week we did a scenario analysis to look at 5 years of Mexico’s possible & plausible futures.? The verdict:? “good enough” relations with the US are vital to maintaining Mexico’s attractiveness to investors.? That means that US-Mexican relations have to stay good enough to keep the USMCA flow of goods rolling from Maquiladora factories to US customers - but that might not be simple or cheap over the next 5 years.? The new price of ?USMCA trade advantages might just be Chinese FDI into Mexico.? Mexico and China are both big fans of setting up Chinese operations targeting the US market.? The US – less so.

Stakeholder Analysis:? Winners and Losers in Mexican Nearshoring

Let’s move to the next phase of our BEA (business environment analysis) and look at the stakeholders involved in nearshoring to Mexico.? I’ve made a simple list that will allow us to get the discussion started, and we can be more nuanced later.

Mexican FDI Archetypes

1.????? Incumbent MNCs

2.????? Green fielding? MNCs

3.????? PRC State companies

4.????? Mexican Partners

5.????? SME nearshorers & entrepreneurs

1.????? Incumbents:?

·?????? Definition:? Leaders who already dominate the marketplace.? ?Old China Hands and other newcomers to Mexico have to remember that the US auto industry has been producing in Mexico since 1925.? Companies like GM, Toyota, Nissan, and Stellantis (et.al.) have established strong, integrated networks in Mexico that are fully integrated with US HQs.

·?????? Examples:? Toyota.? GM.? Dell.? Ford.? Nissan.?

·?????? Strategy: ?Increase capacity to serve the North American market.?

·?????? Superpowers:? They are the only ones who can expand incrementally. ?Their operations are already in place, so they can squeeze buildings into existing lots.? They can also acquire cheaper second/third-tier spaces for warehousing, vehicles, etc.?? These are Mexican insiders with great networks and deep pockets.?

·?????? Metrics: They will have the biggest & fastest marginal boost to output.? In raw output and sales, they will have a two-year head start.

·?????? What this means to you: ?Modern Mexican manufacturing has been driven by the US auto industry since 1994 when NAFTA went into effect.? For Old China Hands, this is a double-edged sword.? ?Getting access to these production chains as a primary or secondary supplier can power your business to new heights. ??But incumbents are terrible to compete with – and new entrants to Mexico will find themselves duking it out with GM and Toyota for land, resources, and talent.?

2.????? Greenfielders

·?????? Definition:? These are big MNCs selling into the US that are now spending big to be close to commercial PoEs (Ports of Entry). ??These companies are spending their way into the North American Trade Bloc, and they are getting it right.? These moves are a direct response to geopolitical shifts and a growing trend among MNCs to split supply chains into “compliant” (with US sanctions) and “non-compliant” (largely China-based) production centers.? They have the budget, the plan, and the approvals.? It will probably take two years to go from the press release to full operations. ??

·?????? Examples:? Unilever, Tesla, Mercedes

·?????? Strategy:?? Follow the successful path of the Maquiladora model.? ???

·?????? Superpower:? They know what works – and who works.? They have the funds to back their play.

·?????? Metric:? They’ll bank the biggest FDI numbers, and they will have the biggest production increases in 2 years or so (when they come online).? ??

·?????? What this means to you:? ?Mexico, believe it or not, has the best infrastructure in the world.? The detail is that it only extends to the inside of the factory gate of these new MNC nearshorers.? That’s the main reason they want to locate on the border.? Once the trucks leave their brand-new, cutting-edge, meticulously managed factories, they want to spend as little time in Mexico as possible.? For you, these newcomers are going to act just like established Maquiladoras.? Great to sell to, terrible to compete with.?

3.????? Chinese State-approved Companies.?

·?????? Definition:? Chinese companies that execute state/party policy while engaging in normal business.? Firms such as Hisense and BYD are private companies but receive guidance from the CCP.?? It is common for large Chinese firms to require 1st & 2nd tier suppliers to locate nearby.

·?????? Examples:? BYD, Hisense, Lingong

·?????? Strategy:? Avoid US rules & restrictions, access US markets.?

·?????? Superpower:? State support. ?Chinese firms draw strength from their China-based networks and do their best to build value-adding networks when moving abroad.?

·?????? Metric:? Measuring China’s progress in Mexico should be about the number of new business registrations, amount of FDI, or value of output – but it will be about tariffs and entity lists. ?You can measure Chinese success by their ability to thwart US policy.

·?????? What this means to you:? ?Unfortunately, there will be less positive spillover from Chinese FDI into Mexico than was originally hoped.? Part of this is due to US pressure to limit Chinese access to the USMCA trade privileges.? It also appears that Chinese operations favor setting up their own infrastructure and locating away from main population center.? In other words, ?Mexico’s network of Chinese managers is inaccessible to most of us.? No backdoor access to contract manufacturing for YOU!

4.????? Mexican Sources

·?????? Definition:? There are generally two classes of Mexican sources. ?1:? Artisans.? Small runs, high quality,? high maintenance (relationships).??? 2:? 1st and 2nd ?tier in key supply chains, like auto, aerospace, and electronics.?

·?????? Examples:? Nemak, Grupo Antolin.?

·?????? Strategy:? Under the Maquiladora model, everyone keeps doing what they are already doing – they just do more of it.? No new territories, no new types of jobs (unless driven by HQ w/ new machines/materials/processes, and few new players.? ?

·?????? What this means to you:? This is where SMEs and entrepreneurs should slot it, but as we’ll find out – there has been friction.?

5.????? Bootstrappers.? SMEs, entrepreneurs, and innovators.

·?????? Definition: Produce cheap in China, sell dear in the US. ?The China manufacturing boom had two classes of international managers.? Of course, the MNCs were vital to China’s growth as a global production base.? But China also developed a contract-manufacturing ecosystem that allowed entrepreneurs (i.e.: marketers) to leverage Chinese networks to compete with famous brands in the most sophisticated marketplaces.? China made it possible for marketers to produce without knowing anything about production.? Mexico doesn’t do this.?

·?????? Examples:? Every pet accessory or yoga accessory seller ever on Amazon.

·?????? Strategy:? Exploit contract manufacturing and other people’s networks to cobble together an ad-hoc manufacturing process.? A big part of their strategy was piggybacking on larger runs and accessing other people’s economic property.

·?????? What this means to you:? SMEs and entrepreneurs have a special challenge in Mexico.? ?In China, people like to say, “Anything is possible, but nothing is easy”.? In Mexico they are more likely to say, “we've observed a 1.5% variance between the targeted operational results and the actual outcomes.? Your call with QA has been scheduled for 1:30 Central Time.”

Final Word:? The North American Trade Bloc is skewing heavily towards the Fortune 500.?

China’s manufacturing boom of the 2000s was much more inclusive.? In 2015 if you walked into the Canton Fair with a rough design scrawled on a bar napkin and US$5,000 in your pocket, not only could you get a prototype and production contract, but there would be 5 guys fighting for your business. ?Mexican managers like established brands and proven business models.?

Entrepreneurs and serial start-ups got used to China-time, where everything seemed to happen all at once.? Mexico requires research, up-front investment, and long waiting times.? With all that working against Mexico, why should investors even consider setting up here?? Costs, time to market, and geopolitics.?

The Mexican Manufacturing Model may also be the future.? You may not care about geopolitics – but geopolitics cares about you. ?The China model (make cheap in China, sell dear in the US and Europe) is probably coming to an end.? Make sure you have options.?