Mexico, a longstanding hub for nearshoring, stands at a crossroads in 2024 as security issues, including the Mexico travel warning, cast a shadow over its economic landscape. The intersection of security concerns and nearshoring decisions raises a fundamental question for companies evaluating the viability of Mexico as an outsourcing destination.
According to the Citizen Council for Public Security and Criminal Justice, a Mexican NGO, half of the ten most violent cities in the world are in Mexico. And this is just the tip of the iceberg that we analyze in this article about nearshoring in Mexico and the security problems of the country.
Mexico’s Current Security Landscape
While this country represents a destination with great growth opportunities for many U.S. companies, doing business in Mexico also entails various risks. Some of the most relevant aspects are:
- Crime
- Drug cartels
- Forced disappearances
- Kidnapping of cargo trucks
This last crime is undoubtedly one of the most alarming for nearshoring in Mexico. According to data published by the Mexican government, in 2023, there were 6,626 violent kidnappings of trucks on the country’s roads, representing a 6% increase compared to the previous year.
Safety in Mexico is a great point to consider before starting to work in the country. According to Cargo Kidnapping Data in Mexico, 85.5% of the recorded kidnappings during the first nine months of 2023 took place in three states: State of Mexico, Puebla, and Michoacán, namely, in the vicinity of Mexico City.
Of all the kidnappings, 1% of them were recorded in states bordering the United States, which is a relief for manufacturing companies in Mexico looking to take advantage of proximity to the nation for nearshoring.
Widespread violence in the country
Crime is another factor of great concern when mobilizing personnel, building plants, importing materials, and doing business in Mexico. Crime in the country is on the rise, and this represents one of the biggest challenges for the local government to gain the trust of investors and Mexican manufacturers.
According to the consulting firm Maplecroft and its Crime Index measuring the frequency of murders, property crimes, and robberies, Mexico ranks 10th among the countries at the highest risk, far surpassing other countries that also present opportunities for offshoring. At this point, many companies are probably wondering if it is worth working with maquiladoras in Mexico.
Importantly, the Institute of the Americas showed that the threat posed by violent crimes to companies’ logistics networks could worsen if necessary measures are not taken soon to improve the task of manufacturing in Mexico.
For Mexico’s manufacturing industry, it is convenient for international companies to look at the country as a growth opportunity. The government is genuinely concerned about trying to solve its internal conflict and the win-win situation is so evident that 8 out of the 10 states receiving the least foreign investment are underdeveloped.
Mexico’s 2024 Elections and Violence
Presidential elections will be held in Mexico in June, and it is very likely that for the first time in history, a woman will occupy the presidency. Does this represent hope for the improvement of safety in Mexico? It’s difficult to determine, but some think otherwise.
Tony Payan, director of the Baker Institute’s Center for the U.S. and Mexico, believes that the election year will bring political violence, assassinations, and threats. The current government has generated strong movements in the Sinaloa and Jalisco cartels, and according to polls, Claudia Sheinbaum from the current ruling party will continue with security policies.
If a drastic change in decision-making from the presidency is not generated regarding the security issues, Mexico could continue to experience a constant increase in violence, affecting international investments and the business of nearshoring to Mexico. So far, the number of homicides has risen to 30,000 in the last year, with over 100,000 people reported missing at present.
And in the face of all this: Is Nearshoring in Mexico still a viable option?
The Mexican economy is growing, and the peso, the currency of the country, is at one of its best moments in recent history. According to the financial institution Monex, nearshoring and the manufacturing companies in Mexico are expected to boost economic growth by 2.1% in 2024, indicating that the business will continue to be a latent trend.
One key advantage of nearshoring in Mexico lies in the continued competitiveness of labor costs compared to China. Since 2008, the trend of shifting production to Asia has been reversing, with a notable increase in labor costs in China prompting a return to North America.
This shift directly impacts the manufacturing sector, prompting factories with narrow profit margins to swiftly relocate to other competitive nations. The US-Mexico-Canada Agreement (USMCA) incorporates a regional wage adjustment. Despite this enhancement, manufacturing wages in Mexico remain competitive, making it an attractive nearshoring destination for businesses aiming to balance cost-effectiveness with quality production.
Other issues threatening nearshoring in Mexico
While widespread violence represents one of the main risk factors for investors seeing the country as an option, other elements come into the equation of doing business in Mexico. Some of them are:
- Water scarcity: In states like Nuevo Leon, the reduction of water supply poses a significant risk for both the population and large companies.
- Electric power supply: The lack of investment in electrical infrastructure affects rural areas in many states, hindering economic growth and the development of normal life.
- Pollution and mobility: Nuevo Leon, Mexico City, and the State of Mexico have high levels of pollution that often force governments to impose restrictive mobility measures.
- Political volatility: Various states in the country experience political instability at the government level, with constant differences between executive and legislative powers that hinder decision-making.
As businesses navigate Mexico’s challenges, the nearshoring landscape undergoes a transformative phase in 2024. The intertwined nature of security and nearshoring decisions requires a holistic approach. While Mexico’s historical advantages as a nearshoring destination persist, companies must weigh them against the backdrop of evolving security dynamics.
