MEXICO CITY—Mexico’s nearshoring appeal attracted inward foreign direct investment (FDI) flows of around $36 billion in 2023, their highest level in 18 years, compared to around $14 billion in 2006.
Analysts say the upward trend will likely continue if the next nationalistic administration can shore up investments amid a scarcity of water and energy. And, Tesla Motors is geared up to be part of the next FDI wave.
However, Mexico’s success in attracting investments comes as the country remains beholden to foreign sources of energy, including from U.S. upstream E&Ps.
Mexico’s domestic production will be insufficient to cover national demand through 2032, according to Mexico’s Energy Secretariat’s (Sener) estimates. Despite higher expected production from Petróleos Mexicanos (Pemex), Mexico will continue to rely on Permian Basin gas imports from the U.S. or other destinations.
A lack of energy is also likely to temper or slow future nearshoring investments, as well as those related to numerous Mexican LNG exports projects on Mexico’s Pacific Coast.
“There is no possible way to reconcile this stubborn ideological adherence to state monopoly in energy with the need for greater investment that could materialize under the window of opportunity afforded by the nearshoring phenomenon,” Mexico Energy Forum President Roberto Salinas León told Hart Energy.
Policy changes for domestic production policy are unlikely under president-elect Claudia Sheinbaum Pardo.
She and Mexico’s outgoing President Andrés Manuel López Obrador, both of the Morena Party, agree on continued support to state-owned Pemex and the Federal Electricity Commission (CFE).
Oil producer Pemex is the world’s most indebted company and a major contributor to Mexico’s federal coffers. A recent heat wave has tested the electrical grid, which relies heavily on gas supply from the Permian.
Salinas also said Mexico faces the challenge of being unable to keep up with overall electricity demand without new private investment in production, transmission lines and distribution, which all fall under the watch of the CFE.
“Nearshoring opportunities will lose out to other investment regimes capable of supplying affordable and reliable electricity inputs. No reliable electricity? No Tesla, no Amazon, no new nearshoring investments. Perhaps even Mexico Pacific [LNG],” Salinas said.
Salinas blamed “political dinosaurs” for undermining national sovereignty and self-sufficiency.
U.S. investor opportunities
Last year, Tesla CEO Elon Musk announced his company would invest $5 billion to build the electric car maker’s next gigafactory in Santa Catarina in the Nuevo León state in northern Mexico. Tesla picked the northern industrial state for cost reasons, including workforce availability and the presence of key parts suppliers.
Erick Sánchez Salas, Rystad Energy’s vice president of business development, told Hart Energy that it’s too early and difficult to predict what opportunities will materialize for U.S. investors. Sánchez said cabinet nominations from Sheinbaum need to be watched as they’ll signal where she wants to go with her policies.
“The reality is that during the soon to end administration, investments in power generation, transmission and oil and gas production fell consistently,” Sánchez said. “This, in the context of a global and Mexican energy demand continuously growing, should open the space for models in which the Mexican government could associate for receiving extra funds to cover the lack of investment and financial resources needed.”
Mexico recently surpassed Canada to become the U.S.’ largest trading partner, according to data from the Section of Economic Affairs of the Embassy of Mexico to the U.S.
China is Mexico’s third largest trade partner.
Mexico’s geographic location south of the U.S. and its role within the United States-Mexico-Canada Agreement (USMCA)—which went into effect July 1, 2020, and supplanted the North America Free Trade Agreement (NAFTA)—offers Mexican producers of goods and services direct access to the U.S. and Canada.
Mexico’s cheap labor is facilitating a nearshoring boom that is already helping to support an uptick in industrial, commercial and service building construction. And China understands this far too well, which has set off alarms in Washington.
For FTI Consulting Senior Managing Director Pablo Zárate, the private sector’s participation in Mexico is all too important.
“When you look at the fiscal constraints that both Pemex and the [Sheinbaum] administration face, it’s clear that there is no way in which she will be able to make progress on her broader economic objectives, such as advancing nearshoring, without [the private investment],” Zárate told Hart Energy.
Inward FDI continues to rise
Last year saw a record amount of inward FDI for Mexico without the assistance of any one-off or outlier developments to skew the figures, according to data published by BMI, a FitchSolutions company.
Mexican states attracting between $5 billion to $10 billion in 2023 included the northern regions of Sonora, Chihuahua and Nuevo León. States in the center of the country that attracted similar amounts included Jalisco and Mexico. Only Mexico’s capital, Mexico City, attracted inward FDI that exceeded $10 billion in 2023.
During 2006-2023, inward FDI only surpassed the $35 billion mark on two other occasions: in 2013 and 2022. However, those years included one-off developments related to the sale of beer producer Grupo Modelo and the recapitalization of national airline Aeromexico, as well as the merger of television giants Televisa and Univision, respectively, according to BMI data.
Diana Alarcón, chief advisor and international affairs coordinator with Diálogos por la Transformación, the consultative group that shaped then presidential candidate Sheinbaum’s policy agenda, believes FDI inward flows will continue and improve along with nearshoring growth.
Alarcón, speaking during a May 23 webinar with the Atlantic Council, said many companies are interested in investing in Mexican clean energies such as green hydrogen and fertilizers. Alarcón said there was also potential to develop environmental sectors in Mexico.