Nearshoring Opportunities

Effects of nearshoring: Years ago, manufacturing in China was cost-effective, compensating for the challenges and inconveniences of moving operations to such distant locations. Now, labor costs in Mexico are more efficient and lower than those in China. However, even if manufacturing costs in Mexico and China were the same, Mexico would be more advantageous when considering sending finished products to the US market. Companies can offer same-day or next-day deliveries upon placing an order. Shipping from Mexico is much more economical and flexible. This contrasts with shipping products from China, which is generally limited to filling 40-foot containers or paying high premiums for smaller quantities.

The proximity and ability to visit Mexican facilities as opposed to traveling to China would entail at least a full day of round-trip travel and incur higher costs and advanced planning to obtain visas. The time zone proximity also streamlines communication from the US, as Mexico is at most three hours ahead or behind, making emails and calls more efficient.

In terms of favorable trade agreements, thanks to the USMCA and Mexico's IMMEX/Maquiladora program, US companies can save on tariff rates when importing and exporting goods to and from Mexico.

These operational factors suggest that M&A activity and appetite for target companies based in Mexico should increase. At the EGADE Business School's Center for Innovation and Entrepreneurship, we are releasing this report to enhance the understanding of transactions and provide guidelines and trends that are valuable to the business sector.

Deals in Mexico

JAN 2023

• Cemex, S.A.B. de C.V. announced the acquisition of Shtang Recycle LTD and of assets from Atlantic Minerals Limited / Buyer: Cemex, a Mexican company that produces and distributes construction materials / Targets: Assets from Atlantic Minerals Limited, produces materials for the construction industry / Shtang, provides recycling services of construction, and excavation waste
• Agrofibra closed the acquisition of assets, furniture, and real estate from Gear and Rube Alimentos / Buyer: Agrofibra, Real Estate Investment Trust (FIBRA) focused on the agribusiness sector / Target: Assets, furniture, and real estate from Gear and Rube Alimentos, specialized in the production, packaging, and distribution of tomatoes
• Grupo Bimbo, S.A.B. de C.V. announced the acquisition of S.C. Vel Pitar S.A. / Buyer: Grupo Bimbo, produces and distributes bakery products / Target: Vel Pitar, produces bakery products

FEB 2023

• Emergent Cold LatAm closed the acquisition of Qualianz / Buyer: Emergent Cold LatAm, offers warehousing and logistics services. /
  Target: Qualianz, provides cold and dry logistics solutions
• InterProtección announced the acquisition of Segurify / Buyer: InterProtección, operates as an insurance broker / Target: Segurify, operates as an insurance broker
• Plerk announced the acquisition of Minu Servicios S.A.P.I. de C.V. / Buyer: Plerk, operates a digital membership employee benefits platform /
  Target: Minu Servicios, operates a benefits and compensation platform focused on financial health

MAR 2023

• Holcim Ltd. announced the acquisition of Ferretería Indar / Buyer: Holcim, manufactures construction products / Target: Ferreteria Indar, operates as a wholesaler of hardware materials
• Fibra Mty, S.A.P.I. de C.V. closed the acquisition of Portafolio Industrial “Zeus” / Buyer: Fibra Mty, operates as a real estate investment trust
  Target / “Zeus” Industrial portfolio, composed of 46 industrial buildings
• Bombardier, Inc. announced the acquisition of the electrical wiring and interconnection systems business in Queretaro from Latecoere /
  Buyer: Bombardier, manufactures aircraft structural components / Target: Electrical wiring and interconnection system business located in Queretaro, Mexico

Nearshoring, reshoring, allyshoring, friendshoring

Nearshoring. Reshoring. Allyshoring. Friendshoring. Recently, these concepts have been increasingly mentioned in the media. But what do they mean? And why are they currently topics of interest?

Nearshoring is a practice in which a company outsources to another company located in a nearby geographic location, rather than in a distant or faraway country (offshoring), in order to provide supplies or products at a lower cost than available in the contracting company's home country. Reshoring is when companies choose to "bring" their supply chain closer from a distant country (such as China) to closer countries or even the same country as the contracting company. Allyshoring and friendshoring refer to the outsourcing of companies located in countries with positive economic, ideological, and diplomatic ties with the home country of the contracting company.

The COVID-19 pandemic had a significant impact on companies' supply chains, especially those dependent on foreign suppliers, and in the particular case of products from China, the impact was even more pronounced due to the strict quarantines imposed by the Chinese government, combined with other factors such as growing gaps between China and the United States, have caused several international companies to reduce or eliminate their dependence on suppliers in that country, opting for suppliers located closer and in countries with better commercial and diplomatic relations.

Mexico has been one of the countries that have benefited the most from this reshoring phenomenon, not only because of its obvious geographic location but also of its participation in several free trade agreements (including the USMCA and the Pacific Alliance) and its highly skilled workforce, making it the ideal candidate to capture this demand.

The impact that nearshoring has on Mexico is remarkable, as having foreign companies looking for suppliers located in Mexico increases demand for products and services, which translates into the creation of new jobs and businesses, an increase in sales for existing companies, and the migration of foreign companies to Mexican lands. This last point has been documented by several media outlets, including the New York Times in its podcast The Daily, episode "Why 'Made in China' is becoming 'Made in Mexico'": hundreds of Chinese companies are already setting up in industrial parks around the country, investing billions of dollars in the process.

The Mexican mergers and acquisitions (M&A) market is also being impacted by this dynamic: a large number of foreign companies are opting to seek local businesses to acquire and thus avoid the complexities and time involved in starting activities from scratch in a new country. The industries that could see the most M&A activity in the short and medium term are those related to manufacturing, design, distribution, transportation, and other B2B services.

In conclusion, while nearshoring may be a recently coined term, activities related to the term are not a new topic for Mexico. There are several global macroeconomic and geopolitical factors that are catalyzing the entry of foreign companies into the Mexican market through organic means, including the creation of new plants, distribution centers, and service centers, as well as through M&A. The benefits for the economy and development of the country related to this phenomenon are considerable, and the big winners will be those who are most prepared and willing to open their doors to these opportunities.

The author of this report is Carlos Hernández Goudet, Managing Director de Seale & Associates.

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