Mexico on top thanks to friendshoring

In Mexico, Claudia Sheinbaumwith over 57% of the votes, against 29 for Xóchitl Gálvez and 10 for Máynez, has become the first female president of a country with a rapidly growing economy, thanks to friendshoring.

The latest electric vehicle (EV) manufacturing hot spot, in fact, is nowhere near the high-tech hubs of Silicon Valley or Shenzhen. It is, explains Lisa Thompson, Equity Portfolio Manager at Capital Group, a city in northern Mexico called Santa Catarina, near Monterrey. It is here that Tesla announced that it will build its first EV production plant in Mexico, a so-called “gigafactory” expected to cost $5 billion and which, according to local development officials in the state of Nuevo León, will be inaugurated next week.

Rapidly growing Mexican economy

The factory represents a huge win for Mexico's fast-growing economy, but it is just the latest in a series of global trade victories that have pushed the Mexico to overtake China and Canada establishing itself as the number one trading partner of the United States. In 2023, for the first time in decades, the United States purchased more goods from Mexico than anywhere else in the world.

Mexico has benefited probably more than any other country from tendency towards friendshoring, a term that derives from offshoring and translates a conscious political decision to encourage trade with neighboring countries at a time when geopolitical tensions are increasing around the world.

This is a turning point for Mexico. China has been the United States' number one trading partner for about a decade. Before that it was Canada. It is therefore a big change. Over the next few years, we expect Mexico's position to continue to improve, given the advantages it offers to companies looking to access the US market. These advantages, Thompson explains, include an affordable, skilled workforce, strong infrastructure in the North, and easy access to relatively inexpensive U.S. oil and natural gas.

In fact, not long after that Tesla announced the decision to build a new Electric Vehicle factory in Mexico, one of its main competitors, the Chinese company BYD, said he plans to follow suit by locating the same industrial area in Nuevo León. Northern Mexico has long been a renowned location for automobile assembly. There are factories Ford, General Motors, BMW, Daimler, Toyota and Honda. According to the Mexican Association of Automobile Manufacturers, more than 75 percent of cars assembled in Mexico are exported to the United States.

The industrial renaissance

In addition to friendshoring, says Lisa Thompson, the most popular investment theme in Mexico is “industrial renaissance”or the relaunch of large-scale industrial spending after decades of poor investment. This trend bodes well for companies in the construction, heating and air conditioning, as well as transportation and related businesses. This is an exciting turning point for the emerging markets like Mexico and India, because it represents an expansion of opportunities. It's no longer just China, but China plus one, from English “China plus one”reference is made to the strategy followed by many multinationals who seek to diversify their supply chains. They are not abandoning China, but they are adding capacity elsewhere. Furthermore, Chinese companies are among the main players in this strategy, motivated by the same reasons as US and European companies. The days when the world could rely on a single source of low-cost production are over. Diversified supply chains are no longer a luxury, but a need.

Economic and market pressures

The changes are clearly evident in the Mexican economy, which has grown at a rapid pace in recent years, offering the companies that operate there numerous benefits. L'MSCI Mexico Index rose more than 40% in 2023, outpacing the S&P 500 Index of U.S. stocks by as much as 14 percentage points. In the past, the Mexican economy has tended to grow more or less in line with that of the United States, with modest average growth of 1%-2% of GDP per year for the last two decades.

What's interesting is that the Mexican economy has grown at two to three times the rate in recent years. One reason is the recovery from COVID, of course. But another important catalyst has been the growing level of trade with the United States and the reformulation of free trade agreements between the United States, Mexico and Canada. This is one of the main reasons why Mexico's GDP is growing much faster than its long-term trend.