By Kathryn Hamilton
Supply chain dynamics, increased demand for “just-in-case” products, and a shift in where goods are assembled are three key drivers in a movement toward growing the manufacturing sector closer to home. NAIOP hosted an executive summit this month in Scottsdale, Arizona, to explore challenges and opportunities, and to hear from the developers, end users and experts who are influencing the trend and shaping the future.
Here are takeaways from the event:
Globalization Isn’t Affecting Every Country the Same
In the last 40 years, only 25 countries in the world saw trade double or more between 1980 and today; in contrast, 89 countries saw trade stay the same or decrease. In short: globalization is not a juggernaut that affects everyone equally. In North America, about 40% of trade happens between U.S., Mexico and Canada, down from a one-time high of 50% in the 1990s.
The Supply Chain is Smaller than We Think – and It’s Moving
When the manufacturing of a good moves abroad, past shifts have shown that it typically only shifts roughly 4,500 miles away; however, a once-in-a-generation shift in global supply chains has resulted in increased activity of supply chains changing borders. Over the last four decades, only 1-2% of supply chains had drastically moved, but in the last three years, up to 35% have moved or are in consideration to be moved. It’s an unusual fluidity and a huge opportunity for countries who haven’t been at the top of the heap.
Politics and Policies are Driving Sourcing Decisions
The single biggest factor for sourcing decisions across most sectors is policies, either geopolitics or industrial. This isn’t exclusive to the U.S. as similar policies are in being established in Europe, China, India, Brazil and elsewhere, but it is a change over the last four years when market forces were driven by sourcing decisions – labor, the price of logistics and sale prices. Pre-pandemic, trade between the U.S. and China was around 24% of all U.S. imports; today, it’s less than 14% and has dipped to below 10% in some months. This downward trajectory is expected to continue, and maybe accelerate. This huge opportunity for other countries, including Mexico, Vietnam, Thailand and India. Mexico could be the biggest winner given its location, deep ecosystem of suppliers and industrial base, and benefits of the USMCA trade agreement.
The Mexico Advantage
Four primary industries are moving toward Mexico: automotive, aerospace, medical and electronics. The size of Mexico’s industrial market is roughly 900 million square feet, around the same size as Dallas-Ft. Worth, and it’s growing by approximately 65 million square feet year-over-year. There are currently 72 industrial parks in development in the country, and investors are betting on nearshoring and building facilities to accommodate the expected demand. In the last two years, Mexico has captured 2% of U.S. market share, while China has lost 9-10%.
Relationships Matter
Mexico hasn’t been as proactive in marketing and attracting different sectors compared to other global manufacturing giants, but this is expected to be a priority of the country’s new president. Changing presidential administrations on both side of the border give fresh opportunity for negotiation, just in time for the review of the U.S.-Mexico-Canada trade agreement that will be revisited in 2025 and up for renewal in 2026.
Mexico Can Serve as a Gateway
The U.S. doesn’t have many free trade agreements; those that exist are only with 10% of the globe’s gross domestic product (GDP). Conversely, Mexico has 40 free trade agreements that cover 60% of GDP. With little expectation of a free trade agenda happening in the next Trump presidential administration, Mexico can be a platform to reach Latin America and other counties, including Europe. The Suez Canal’s extended closure is cutting capacity and precluding ships from reaching East Coast ports (which have also experienced strikes in 2024 and could again in January 2025). This, combined with the overwhelmingly busy U.S. West Coast ports, means that ports in Mexico that aren’t currently experiencing high volume capacity and are well-connected intermodally to rail and truck networks could be hugely desirable.
Challenges for Mexico Around Safety, Water and Energy
Ninety percent of Mexico has water stress that limits consumption, and 91% of the country’s industrial parks have grappled with power supply failures. A significant lack of investment in the country’s energy sector has resulted in an insufficient ability to meet growing domestic demand created by the nearshoring of supply chains. Energy infrastructure growth has become a financial burden on developers who must make substantial investments to connect to the grid, driving up their own costs and negating overall competitiveness. Security is another critical challenge, including keeping factory workers safe, protecting properties and the goods inside, and maintaining safe transportation of goods via train or truck as they travel across the country and cross the U.S. border.
Mexico’s Labor Advantages are Strong
Mexico is seeing full employment in the border states of Monterrey and Tijuana. Women’s participation in the Mexico economy is below 40%, which is lower than Costa Rica, Columbia and Brazil. This is a huge opportunity to recruit and retain women in the labor force.
Where Nearshoring/Reshoring is Happening in the U.S.
As of August 2024, there have been more than 400 major manufacturing announcements in the U.S., totaling nearly $500 billion in investment, adding 270 million square feet and creating nearly 300 million new jobs. U.S. manufacturing spending has surged and has hit a 10-year high of $124 billion – up 18% over the year and 122% over three years. The South leads the nation in construction spending, followed by the West, Midwest and Northeast.
