Nearshoring - A Tailwind, But Hardly A Quantum Leap For Mexico

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Nearshoring:
A tailwind, but hardly a quantum
leap for Mexico
Ociel Hernández
MX Head Research and Strategy
Pedro Uriz
Macro Chief Strategist
Susana Flores
Macro Strategist
Mexico City, 30 November 2022

(12:50 CT)
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A tailwind, but hardly a quantum leap for

Mexico
In this report we take a deep dive into the nearshoring phenomenon, describing the reasons behind its
relevance to the new world trade paradigm and the opportunities it represents for Mexico. We also explore
the challenges for Mexico to land a relevant share of the nearshoring trend and for this to become a true catalyst.
Nearshoring: a hot topic. Nearshoring is the practice of relocating previously offshored processes to a
neighbouring country. While this trend is not new, it has gained momentum since 2017 as the US-China trade war
and protectionist policies escalated. However, the outbreak of the COVID-19 pandemic and the Russia-Ukraine
conflict have added momentum to the nearshoring phenomenon.
Mexico’s competitive advantages can turn it into a preferred destiny for nearshoring demand for the
following main reasons: i) its geographical position and proximity to the US; ii) high degree of integration with
North American value chains; iii) a growing labour force at relatively competitive cost; iv) trade agreements; and
v) its strategic role in the US-China conflict.
Nearshoring is already taking place and benefitting Mexico, as evidenced by both economic and industrial real
estate data. So far, export growth has mainly been derived from lower value-added industries (that
underperformed in the previous business cycle) and nearshoring transactions have largely been concentrated the
northern states.
While we acknowledge Mexico’s competitive advantages, we identify relevant challenges to land a relevant
share of nearshoring demand in the upcoming years. In our view, secular underinvestment in infrastructure
may imply a significant drag on nearshoring sooner rather than later. In fact, limited access to land with
electricity represents the main obstacle for an acceleration in nearshoring, coupled with water scarcity in
northern states and, to a lesser extent, the deteriorating service level of the highway network and insufficient
capacity of railway services. Moreover, we believe it is still too early to tell whether ESG will represent a drag
or a lever for nearshoring in Mexico.
As such, we regard nearshoring as a tailwind, but hardly a quantum leap for the Mexican economy. We do not
minimise the potential impact of nearshoring on Mexican GDP (up to 0.4pp/year BBVAe) and opportunities it
offers for some sectors, such as industrial real estate, transport infrastructure, industrials, building materials and
banks. However, under the current institutional framework, and even though we anticipate a pickup in private
investment, we believe it is highly unlikely that public investment will increase enough to either end the secular
underinvestment cycle or its negative effects on GDP growth.
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Contents
Explore all document
Nearshoring: Top 5 FAQ The nearshoring trend
Evidence in Mexico ESG: Drag or lever?

E
S
G
The Mexican case: strengths Conclusion

and challenges
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Top 5 FAQs about nearshoring
1. What is nearshoring?
Nearshoring is the practice of relocating previously offshored processes (in distant locations) to a
neighbouring country. Nearshoring is not new, but its relevance has increased significantly since 2017 with the
escalation of the US-China trade war, the outbreak of the COVID-19 pandemic and the Russia-Ukraine conflict.
Public policy in Mexico has favoured the integration of nearshoring into global production chains since the
1960s and, given the current geopolitical backdrop and its partnership in the USMCA, the country is indeed a
potential destination for nearshoring activities.
2. Is it happening in Mexico?
Nearshoring is already noticeable at the macro-level in Mexico. In this first stage, it has translated into higher
exports and economic growth in relatively low-value added manufacturing sectors. This has offset the
stagnant performance of two of the largest manufacturing sectors transport and communications as well as
electric and electronic devices and equipment that are still affected by supply bottlenecks. Currently,
increased export demand has been mostly met with existing capacity rather than with new one and, as such,
FDI flows to the manufacturing sector do not show atypical growth to date. For its part, real estate data (i.e.,
industrial space absorbed by nearshoring demand) provides more evidence that nearshoring is taking place,
particularly in the northern border markets (Monterrey, Juarez, Tijuana and Coahuila).
3. ESG: Drag or lever?

Too early to know. Intuitively, getting production closer to consumption centres should be incrementally
positive from an ESG standpoint simply by reducing the carbon footprint of transporting the goods. However,
although we see nearshoring as a possible ‘ESG enabler,’ it will require companies to closely monitor the
impact on each of the three pillars to have a more holistic stance. In our view, the outcome of the USMCA
controversies in the energy sector will be key.
4. What are Mexico’s strengths and challenges in this context?

Mexico strengths include its proximity with the US, sound institutions, policies that have bolstered exports and
manufacturing, a competitively priced labour force and a strategic role in the Sino-American conflict.
Nevertheless, it also faces some significant challenges: secular underinvestment in infrastructure that, in our
view, could end up being a drag to land nearshoring opportunities. In addition, protectionism has also affected
the relationship of the USMCA partners and disputes among them have surfaced recently.
5. Is nearshoring the long-awaited quantum leap for Mexico?

Not in our view. We regard nearshoring as a tailwind that may bolster Mexican GDP by up to 0.4pp/year in the
next business cycle. Notwithstanding, and under the current institutional framework, we believe it is unlikely
that public investment will increase enough to either end the secular underinvestment cycle or its negative
effects on GDP.
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Executive summary
Nearshoring (the relocation of previously off-shored processes) is not new, but its relevance has increased
significantly since 2017, when the US made a more radical move towards protectionist measures that led to a
persistent trade war with China. The debate regarding nearshoring intensified with the outbreak of the COVID-19
pandemic, which disrupted supply chains and the Russia-Ukraine conflict, which has increased energy and fuel
costs.
The nearshoring trend represents an opportunity for Mexico due to its competitive strengths, its partnership in
the USMCA and the current geopolitical backdrop. In fact, nearshoring is a valuable opportunity to inject
dynamism to Mexico’s export manufacturing industry, which may imply a positive spillover for the rest of the
economy.
Nearshoring is already happening (and benefitting) Mexico, as evidenced by both economic and industrial real
estate data. So far, export growth has come mainly from lower value-added industries (that underperformed in the
previous business cycle) and nearshoring transactions have largely been concentrated in the northern states,
where vacancy rates have posted record-lows and various markets are sold-out.
While we acknowledge Mexico’s competitive advantages … such as its proximity to the US, sound institutions,
growing labour force at a relatively competitive cost and strategic role in the US-China conflict.
… we identify relevant challenges for Mexico to land a relevant share of nearshoring demand in the coming
years. In our opinion, secular underinvestment in infrastructure may represent a significant drag for
nearshoring sooner rather than later. In fact, limited access to land with electricity represents the main
challenge for an acceleration of nearshoring in current sold-out markets like Tijuana. Water scarcity is also a
worrisome factor in northern markets, particularly in Monterrey. The deteriorating service level of the highway
network and insufficient capacity of railway services also represent potential drags for nearshoring, although to
a lesser extent.
Furthermore, we believe that it is still too early to know whether ESG represents a drag or a lever for
nearshoring in Mexico. Potential benefits in the reduction of carbon footprint of transporting goods may be largely
offset by the absence of a well-articulated policy in the energy sector, an adverse outcome of the USMCA
controversies and a deteriorating rule of law due to rising organised crime.
To sum up, we regard nearshoring as a tailwind…assuming that manufacturing exports expand at an average
annual rate of 10% in the coming cycle, we estimate that nearshoring could bolster GDP by 0.4pp per annum. This
figure does not consider any further deterioration of non-exporting sectors or that nearshoring demand is
eventually offset by any of the bottlenecks addressed in this document. Growth tailwinds may be particularly
relevant for some sectors such as industrial real estate, transport infrastructure, industrials, building
materials and banks.
…but hardly a quantum leap for the Mexican economy. Under the current institutional framework, and even
though we anticipate a pickup in private investment, we believe it is highly unlikely that public investment will
increase enough to either end the secular underinvestment cycle or its negative effect on GDP growth.
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Chapter I. The nearshoring trend

To better understand the nearshoring trend, it is worth reviewing the historical context that has brought us to
where we are today. Trade has undergone several changes throughout history. Globalisation, understood as the
process of orienting companies to world markets and competition, while basing their operations on global
factors of production, made its appearance after World War II, when nations began to realise that reciprocal
cooperation was necessary for economic prosperity.
Globalisation developed with varying intensity since the end of the 19th century and gained relevance during the
last decades of the 20th century. Figure 1 shows some milestones that have shaped trade dynamics, leading to a
globalized, interconnected world that offers both opportunities and dangers.
Globalisation timeline (since 1945)
Source: WTO, the World Bank, OECD, World Economic Forum, the US Trade Representative and BBVA CER
Always looking out for competitive advantages that resulted in benefits, companies found that outsourcing certain
activities was indeed profitable. Here is where offshoring, reshoring and nearshoring strategies move centre stage.
An inherent element in the process of globalisation, and probably the most common one, offshoring, is the
practice of performing some business functions in a country other than the one where the products or
services are being developed or consumed, in more favourable economic conditions.
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Globalisation and the subsequent offshoring date from 1970s, but these processes began to gain momentum in
the early 1990s, with the creation of the World Trade Organisation (WTO), and later consolidated after China’s
accession to the same in 2001. The trend gained strength with the signing of 15 free trade agreements (FTAs) in
1990, and finally exploded: based on the latest OECD data available, in 2015 there were 279 FTAs in place between
189 countries, and global exports as a percentage of the world’s GDP have grown consistently since then.
Offshoring transformed formerly nationally-based manufacturing sectors and originated global value chains, but
large-scale offshoring to low-cost emerging countries has increased production costs in some of them. Recently,
the benefits of offshoring have been called into question, as its real cost might have been underestimated. This
debate gained strength in the aftermath of the 2008-2009 global financial crisis (GFC), as countries faced the
simultaneous collapse of their economies and the threats of being highly exposed to one single region. Since then,
reshoring, nearshoring and back-shoring have emerged as alternatives to resolving the complexities of offshoring.
For the purposes of this report, we define reshoring as the reverse decision to a previous offshoring process, that
is, the relocation of activities to the home country (back-shoring) or to a neighbouring country (nearshoring).
These concepts are not new, as some activities have returned to the home country because of some isolated
negative experiences with production abroad. However, reshoring (either through nearshoring or thorough back-
shoring) has gained relevance since 2017, when the US made a more radical move towards protectionist measures
that led to a relentless trade war with China. The debate regarding nearshoring and back-shoring intensified with
the outbreak of the COVID-19 pandemic, which disrupted supply chains all over the world and the effects of which
are still being felt. Cost factors, particularly labour and logistics, are key drivers of offshoring and reshoring
activities. Both trends will likely coexist, in our view, but the imposition of tariffs as a result of the US-China trade
conflict has fuelled interest in relocating existing supply chains.
Against this backdrop, Mexico has continuously been incorporating itself into global production chains over the
past 60 years. From the 1960s to the 1980s, with its integration to the US cycle, Mexico became a leading
destination for off-shore operations for U.S. companies. Because of this, the market share of manufactured
products in the US market started growing (see Figure 2). Mexico, the US and Canada signed the North American
Free Trade Agreement (NAFTA) in 1992, which further bolstered the competitiveness of Mexican manufactured
goods, but the 2001 crisis and China’s membership of the WTO took a toll on Mexican exports, as US companies
chose to off-shore activities to Asia. Since the global financial crisis, and given the heightening of the US-China
trade conflicts and increasing labour costs, Mexico’s market share in the US improved again, as US companies
began back-shoring and nearshoring activities to North America. Finally, the COVID-19 shock has pushed
companies to accelerate this trend, as global supply chains were severely affected during the pandemic.
Public policy has been a key driver of Mexico’s foreign trade, as the government has taken steps to bolster the
manufacturing industry on a permanent basis. Mexico entered into the Border Industrialisation Programme (PIF)
in 1965, a Mexico-US agreement to promote the establishment of manufacturing companies -known as
maquiladoras- in Mexico’s border states with the purpose of exporting goods to the US market. Under this
programme, maquiladoras obtained tax incentives in Mexico and specific export facilities in the US, which gave
them an edge over other manufacturers. At the dawn of the programme, maquiladoras were mainly low value-
added manufacturers that only gradually evolved into more sophisticated production operations. In 1989, a decree
that updated the framework for maquiladoras (Decreto para el Fomento y la Operación de la Industria
Maquiladora) was enacted to further integrate maquiladoras and local non-exporting industries, and to allow them
to sell some of their production in Mexico. An even more robust framework for regional integration was provided
by NAFTA, but its limitations prompted further government actions relatively quickly. As a result, a new decree to
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promote export manufacturing (IMMEX) aimed to provide a framework for the various manufacturing schemes in
force and flexibility to companies that wanted to produce in Mexico.
More recently, NAFTA was replaced by a new trilateral agreement between Canada, the US and Mexico known as
the USMCA. The renegotiation of NAFTA took place amid dwindling appetite for free trade policies as
disappointment with the model followed the Great Recession. The USMCA refreshed the NAFTA framework in
many ways, but overall it aims at reshoring activity to North America by increasing local content in key industries
such as the automotive sector. It also provides new dispute settlement mechanisms, which have been activated as
disputes between partners broke out soon after it came into force in 2020. While it is clear that North American
countries will continue deepening their ties, the USMCA is a more restrictive framework that may dent the regions’
efficiency in the medium term.
Mexico’s manufacturing exports market share in the US (%)
USMCA
16
IMMEX
14
12
NAFTA
10
8 China joins
the WTO Great Recession
6
2 Decree for the operation

of maquiladoras
0
2008
1997
2020
2021
2022
1981
1982
1983
1984
1985
1986
1987
1988
1989
1991
2013
2014
1990
1992
1995
1996
1993
1994
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2009
2017
2010
2011
2012
2015
2016
2018
2019
Market share 2022 forecast
Source: Comtrade and BBVA GMS&R
Off-, re-, back-, nearshoring

Not necessarily mutually excluding trends
Offshoring is the transfer of some business functions to a country different from that where the products or services
are being developed. Reshoring is the opposite: bringing certain activities back to the country of origin (back-shoring)
or to a nearby country (nearshoring). In our view, nearshoring and back-shoring will not mean the end of offshoring, as
all will coexist while nearshoring trends pick up the pace. Mexico was the first destination for the offshoring activities
of US companies. When China joined the WTO Mexico’s manufacturing market share suffered. Nearshoring is an
opportunity for Mexico to add new dynamism to its export manufacturing industry.
Go back to FAQ.
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Chapter II. Evidence in Mexico
Economic data suggests nearshoring is already benefitting Mexico
From a macroeconomic perspective, nearshoring should translate into export growth, investment (particularly
FDI), more manufacturing jobs and the ensuing spill-over effect of this increased activity on the rest of the
economy.
This boom is not new. As Mexico runs a structural trade

In the last business cycle, manufacturing activities were
deficit, the export-oriented manufacturing sector has the sub-sector that contributed the most to growth
sustained growth indirectly through job creation and Contribution of manufacturing to GDP growth in the previous
added value. In the last business cycle (2010-19), business cycle (2010-2019)
manufacturing activities were the sub-sector that
0.42
contributed the most to growth, with 41bp of the 2.7% 2.7 Other manufactures
annual average. Transport equipment production was 2.4

0.35
Beverage and tobacco
Computer equipment,
the mainstay, contributing 22bp. Other big contributors 2.1 communication,
measurement and
1.8 0.28
include the manufacturing of computer equipment, Services
electronic components
1.5 Food industry

communication, measurement and electronic 0.21
1.2
components (6bp) and the production of food and
0.9 0.14
beverages (11bp), although food production is more Transport equipment
0.6
oriented to local consumption and partially depends on Manufactures 0.07
0.3
absolute advantages. The manufacturing sub-sector has Others
0 0
been the main driver of formal private jobs creation in the GDP avg. growth 2010-2019 Manufacturing contribution
last 30 years, accounting for 27% of total employment,
Source: INEGI & BBVA GS&R
with wages averaging 4.5% more than the national mean.
Finding economic data to show nearshoring taking place is difficult, given the ongoing distortions caused by the
pandemic. Also, since the new cycle is still relatively young, high growth rates in some indicators may be due to an
after-crisis rebound effect more than to the presence of an additional growth catalyst.
In this cycle, the manufacturing sector has recouped its pre-pandemic trend, driven by growth above the long-
term trend of the beverage and tobacco industry, printing, plastic and rubber industries and the production of
electrical appliances, computer equipment, communication, and measurement and electronic components. The
manufacturing sector has grown the most in the northern states of Baja California, Chihuahua, Nuevo Leon and
Tamaulipas, as well as in Jalisco and Quintana Roo.
In the past 12 months through September, manufacturing exports have grown 6.6% YoY in real terms, above their
long-term trend. However, despite growing above its long-term trend, transport and communications as well as
electric and electronic devices and equipment, two of the largest export manufacturing industries as they account
for 50% of Mexico’s manufacturing exports, have been stagnant since the pandemic, affected by supply
bottlenecks. As such, the favourable export dynamics that we have seen recently are due to other manufacturing
industries.
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Manufacturing exports have grown 6.6% YoY in real Two of the largest export manufacturing industries
terms over the past 12 months through September have been stagnant since the pandemic Exports (real
Exports (real USD mn) USD mn)
550,000 200,000
450,000 150,000
350,000 100,000
250,000 50,000
150,000
0
Mar 99
Sep 09
Jun 11
Jun 97
Mar 13
Jun 18
Dec 93
Dec 00
Sep 02
Dec 07
Dec 14
Sep 95
Sep 16
Mar 20
Jun 04
Mar 06
Dec 21
50,000
Dec 07
Mar 13
Jun 18
Jun 97
Mar 99
Jun 11
Dec 00
Dec 93
Sep 95
Sep 02
Sep 09
Dec 14
Sep 16
Mar 20
Jun 04
Dec 21
Mar 06
Transport and communications equipment

Manufacturing exports Electric and electronic devices and equipment
Source: INEGI, Banco de México and BBVA GS&R Source: INEGI, Banco de México and BBVA GS&R
Overall, smaller industries that are growing above their long-term trend have a higher trade deficit. Figure 6 shows
nine manufacturing industries whose export activity suggests a rise in demand due to nearshoring. The trade
balance of the food and beverage industry shows a substantial improvement, so rather than higher demand due to
nearshoring, we may be seeing a sharp increase in its export competitiveness. A similar story may be developing in
the non-metallic mineral product manufacturing subsector.
Apparently, other industries are growing because of the increased added value contributed to other imported
products, although domestic demand could also be playing some part. We note that all of these industries are
growing more rapidly than they were at the close of the previous cycle (2017-19), and the reason is no doubt
increased foreign trade. Machinery and equipment exports are the most dynamic of the large sub-sectors, and
their performance also suggests increased demand resulting from near-shoring.
Manufacturing sectors growing above their long term trend

Change in 12 month Average annual 12 Average annual
Real annual avg. trade balance from month real activity 2017-19 real activity
export growth a year ago growth growth
(%) (USD mn) (%, IGAE) (%, IGAE)
Food and beverage 10.55 1,036 4.50 3.14
Textile, clothes and leather 9.30 -2,280 5.75 -1.56
Wood industry 8.99 -701 0.70 0.44
Paper, printing and editorial 16.89 -1,573 9.99 0.24
Chemical 16.38 -4,757 4.02 -2.57
Plastic and rubber 12.05 -2,074 5.71 1.65
Non-metallic mineral manufacturing 8.05 128 2.69 0.76
Siderurgy 40.71 -2,373 2.44 -1.97
Machinery and equipment for diverse industries 11.87 -484 4.64 3.45
Source: INEGI and BBVA GMS&R
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Sorting out all these effects is a complicated task because we do not have industry-level data on the flow of
intermediate imports to draw a correlation with manufacturing exports. Nevertheless, if we compare the
aggregate flows on both intermediate imports and manufacturing exports, we can see that the gap (trade balance)
between the two has narrowed dramatically. This could indicate a stagnation of higher value-added exports (as it
has occurred in the automotive industry due to supply-chain bottlenecks), but also that the recovery of
intermediate imports has been much steadier. This suggests that export sectors engaged in lower value-added
goods production are becoming more active. So, although it would be difficult to pin down all of this on
nearshoring, when looking at the data broken down into the industries in Figure 7, it would seem reasonable to
assume that these are the ones currently benefiting from increased demand.
Delving into the figures on gross fixed capital formation, The recovery of intermediate imports has been much
we can see a strong recovery in machinery and steadier than the recovery of manufacturing exports
equipment investment and a stagnation in construction Trade flows (real USD mn)
investment, which is equally noticeable in the housing
and non-housing segments. This once again suggests 500000
that there is increased demand in the manufacturing 400000
industry, but that it has not translated yet into higher 300000
construction investment, perhaps because of the 200000
relatively low value-added of an industrial building 100000
compared to a hospital or mall and the current glut of 0
industrial space. -100000
Jun 99
Jun 10
Feb 14
Oct 95
Dec 15
Oct 17
Dec 93
Dec 04
Jun 21
Aug 97
Oct 06
Aug 08
Aug 19
Apr 01
Feb 03
Manufacturing exports Apr 12

Intermediate non-oil imports
Source: INEGI, Banco de México and BBVA GS&R
We can see a strong recovery in machinery and The stagnation in construction investment is equally
equipment investment and a stagnation in noticeable in the housing and non-housing segments
construction investment Gross fixed investment index Gross fixed investment index (January 2020 = 100)
(January 2020 = 100)
120 140
130
110
120
100
110
90
100
80 90
70 80
60 70
Aug 22
Aug 18
Aug 20
Aug 21
Aug 12
Aug 13
Aug 14
Aug 15
Aug 16
Aug 17
Aug 19
60
Aug 13
Aug 14
Aug 20
Aug 21
Aug 22
Aug 12
Aug 15
Aug 16
Aug 17
Aug 18
Aug 19
Gross fixed investment Machinery and equipment

Construction Total construction Residential Non residential
Source: INEGI and BBVA GS&R Source: INEGI and BBVA GS&R
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Historically, manufacturing has been the main destination of FDI flows, especially in the transport equipment
industry, beverages and tobacco (in part due to heavy M&A activity), the chemical industry, the production of
computer equipment, communication, and measurement and electronic components, and the plastic and rubber
industries. In our view, a strong nearshoring trend should boost FDI flows above their long-term trend, but so far,
this has not happened. FDI flows to Mexico have accumulated to more than USD35bn in the last 12 months, and
although their short-term dynamic has been positive, they have not overshot their long-term trend nor recouped
their 2018 average (Figure 11).
Foreign direct investment to the manufacturing sector About half of the FDI flows have been destined to border states
has not been so dynamic because the aggregate flows of which the main benefited has been Nuevo León with inflows
of almost USD2bn FDI flows over the last year (USD mn)
remain weak by historical standards (Figure 12). Of the
2,500
more than USD11bn in foreign investment into the
2,000
manufacturing sector in the last 12 months, 80% has
been allocated to the production of transport equipment, 1,500
1,000
electrical appliances, computer equipment,
500
communication, measurement and electronic
0
components, plastic and rubber industries, the chemical
industry and the manufacturing of machinery and -500 Jalisco
Puebla
Tamaulipas
Chihuahua
Coahuila
Nuevo León
San Luis Potosí

Guanajuato
Baja California
Sonora
Mexico City
Aguascalientes
State of México
Queretaro
Rest of the states

equipment, which is partially consistent with the results
in Figure 18. About half of the FDI flows have been
destined to border states of which the main beneficiary
has been Nuevo León, with inflows of almost USD2bn.
FDI has supported the recovery of the manufacturing Border states Rest
sector in 2022, but it is difficult to isolate the possible Source: SE & BBVA GS&R
effects of a nearshoring boom from a rebound of
investment after tanking more than 10% in 2020.
FDI flows dynamic has been positive in the short term,

but they have not overshot their long-term trend or FDI flows to the manufacturing sector have not been as
recouped their 2018 average FDI flows (USD mn, 4QMA) dynamic as the aggregate flows FDI flows (as % of GDP)
60,000 4.5
50,000 4.0
40,000 3.5
3.0
30,000
2.5
20,000
2.0
10,000
1.5
0
1.0
Dec 12
Jan 17
Jul 13
Feb 14
Jun 16
Mar 18
May 19
Nov 15
Oct 18
Apr 22
Sep 14
Aug 17
Dec 19
Jul 20
Feb 21
Apr 15
Sep 21
0.5
0.0
Jun 12
Jun 21
Jun 10
Jun 17
Jun 18
Jun 11
Jun 13
Jun 14
Jun 15
Jun 16
Jun 19
Jun 20
Jun 22
Jun 00
Jun 02
Jun 03
Jun 06
Jun 08
Jun 09
Jun 01
Jun 04
Jun 05
Jun 07
Intercompany accounts of companies with foreign participation

Reinvested earnings
New investments of companies with foreign participation
Foreign direct investment
FDI destined to the manufacturing industries as % of GDP
Total FDI as % of GDP
Source: Banco de México and BBVA GS&R Source: INEGI, Banco de México and BBVA GS&R
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In the last 12 months, manufacturing jobs have grown at an average of 4.9% YoY, topping services employment
growth (2.3%) and more briskly than in the previous cycle (4.5% YoY on average). Almost half of the
manufacturing jobs created over the last year were in the northern states, mainly Coahuila (32,506), Nuevo Leon
(24,689) and Chihuahua (23,206), but also in Jalisco (32,039) and Guanajuato (16,868).
Banco de México recently conducted a business survey to investigate the impact of nearshoring on Mexican
companies in the past year and what they expect will happen in the next 12 months. Sixteen percent of the
companies surveyed said they have seen a rise in demand or in FDI due to nearshoring. In this group, the most
favoured have been export companies integrated into global chains (26.28%). Companies in north and central-
north Mexico have benefitted the most, and the greatest increase in demand has been from companies
established in the US and from Mexican export companies.
Over the last year, manufacturing jobs have grown Companies that observed higher demand or FDI due to
more briskly than in the previous cycle New IMSS nearshoring in the past 12 months (%) Banxico survey
affiliated manufacturing jobs (12 month sum)
35,000
Percentage of companies
30,000
25,000 National Total 15.96
20,000
15,000 Integrated to global
26.28
supply chains
10,000
5,000 By sector Rest of manufacturing 18.54
-
San Luis Potosí
Nuevo León
Puebla
Hidalgo
Coahuila
Yucatán
Tlaxcala
Jalisco
Chihuahua
México
Tabasco
Guanajuato
Baja California
Mexico City
Durango
Non-manufacturing 11.68
Querétaro
Exporters 24.84
Manufacturing by
export condition
Non-exporters 16.59
Source: IMSS and BBVA GS&R Source: Banco de México and BBVA GS&R
Banxico then used the data from the survey in an exercise to estimate the impact of nearshoring on production
with current installed capacity and on company investment. Generally speaking, the impact over the past year has
been a 2.2% increase in production with current capacity and a 1.4% rise in plant capacity acquisition. For the next
12 months, similar increases are expected. These results are consistent with economic data, which points at
increased demand being met mainly with existing capacity rather than by increased investment. See Banxico’s
document here.
In sum, the dynamism of the manufacturing sector has been good, with YtD average growth of 5.6% YoY,
resuming its long-term trend after the 2020 shock and its contraction since 2018 due to the slower external
demand. Nearshoring is in fact benefitting Mexico with increased export demand, which at this point has been met
mostly with current capacity. Investment may be starting to flow albeit at a moderate pace. So far, export growth
has mainly come from lower value-added industries, which were less dynamic in the previous business cycle.
We do not consider that this has so far translated into atypical incremental growth in Mexico, but rather offset the
effect of supply bottlenecks on Mexico’s most competitive sectors. When these sectors are able to obtain
components steadily, the effect of nearshoring on them will be evident, but it is not yet certain if all the additional
demand currently seen by lower value-added sectors is permanent or transitory. Data suggests that northern
states, which have a stronger manufacturing base, are benefitting the most. Nearshoring implies further
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consolidation of the Mexican export-based growth model. As we will explain below, while it is a positive tailwind,
history suggests that it is not a sufficient condition to bolster Mexico's potential growth.
Estimated output and investment increases in companies over 100 workers due to nearshoring (% chg) Banxico survey
Observed in last 12 months Planned in coming 12 months
Output with current Investment in Output with current Investment in
capacity capacity capacity capacity
National 2.2 1.4 2 1.5
Manufacturing 3 1.8 2.9 2.4
Global manufacturing oriented 3.6 1.8 3.4 3.1
Rest of manufacturing 2.4 1.8 2.4 1.6
Exporters 3.2 1.9 3.1 2.7
Non-exporters 2.5 1.6 2.4 1.6
Non-manufacturing 1.7 1.1 1.4 1
North 2.4 1.6 2.1 1.9
Center/North 1.9 1 2.2 1.6
Center 2.4 1.5 2 1.4
South 1.5 0.9 1.2 0.9
Source: Banco de México and BBVA GS&R
Real estate data further back the evidence

Real estate data provides strong evidence that nearshoring is happening. Real estate brokers report that
industrial space absorption for nearshoring activities has increased significantly, +1.5x between 2019 and 2021,
and we expect it to double YoY in 2022e (based on 1Q22 annualised data). Gross absorption hit record highs in
2021 on strong build-to-suit activity, sustained demand from logistics and increasing nearshoring activities. In
2022 gross absorption is expected to be similar to 2021, while net absorption will post record-highs. Nearshoring-
related demand has catapulted 2019-22e CAGR by 70% and now represents 41% of total demand for industrial
space (vs. 15% in 2019). These transactions are regarded as “Nearshoring-related demand” based on surveys
elaborated by the real estate brokers at the closing of leasing contracts.”
Mexican real estate: the industrial sector is booming Data point out that nearshoring is happening
(gross and net absorption, millions of m2) (thousands of m2)
5.2 5.1 4,000 45%
3,500 41% 40%
3,000 35%
2,500 30%
4.3 25%
3.7 2,000
21% 20%
1.8 1,500
18% 15%
1,000 15% 10%
500 5%
1.3
- 0%
2019 2020 2021 2022e*
2021
2020
2015
2017
2012
2016
2022e*
2013
2014
2018
2019
Non-nearshoring demand (000 m2)

Nearshoring demand (000 m2)
Net absorption Gross absorption % Nearshoring / Total demand (rhs)
* 1Q22 annualised. Source: CBRE, Fibra Prologis and BBVA CER estimates * 1Q22 annualised. Source: CBRE and BBVA CER estimates
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Auto parts, furniture, electric and appliances, and machinery and tools, among others, have captured nearly
90% of total nearshoring real estate transactions in 2021-1Q22.
Mexico: Nearshoring transactions in 2021 Mexico: Nearshoring transactions in 1Q22

Share of total industrial space leased for nearshoring-related Share of total industrial space leased for nearshoring-related
activities activities
Auto parts 9% Furniture

19%
High-tech 9%
Machinery & equipment Electric & appliance
Electric & appliance 8%

Auto parts 53%
Plastics
Furniture 50%
7% Machinery &
Others equipment 17%
5%
Metals High-tech
5%
4% 6%
Pharma 3% 5%
Source: CBRE Source: CBRE
Nearshoring is taking place in northern border states, particularly in the Monterrey, Coahuila, Juarez and
Tijuana markets, which concentrated around 90% of nearshoring demand (executed leasing contracts) in 2021.
Nearshoring-related demand by market in 2020-21

Mexican border states concentrate the bulk of nearshoring activity
Tijuana Juarez Coahuila

735,000 m
Gross absorption by
nearshoring activities
21% 17% 20% in 2021
8% 7% 4%
Monterrey
Chihuahua
52%
2% 45%
Queretaro
Aguascalientes
13%
2%
Guanajuato
National participation
Guadalajara Toluca
by Market
4%
2020 2021 1% 2%
1%
Source: CBRE and BBVA CER
Northern markets, the main beneficiaries of nearshoring, are sold out, with vacancies of less than 1% in
Tijuana, Juarez and Reynosa, or nearly sold out (Monterrey, with a 2-3% vacancy rate).
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Industrial real estate: Historic vacancy rates (%) and average rents (USD/sqm/month) in main markets since 4Q19
Vacancy Rates (%) Average rents (USD/sqm/month)
Market Vacancy is at record-lows (except for the Bajio Rents are increasing in the low-to-mid teens
region). range in sold-out markets in new leasing
contracts or renewals
5.5 5.8
5.0
2.2% 1.8%
Tijuana 1.0% 0.3%
4Q19 4Q20 4Q21 2Q22 4Q19 4Q20 4Q21 2Q22

Sold-out markets
4.9 4.9 5.0 5.4
1.9% 1.9%
Juarez 1.1%
0.2%
4Q19 4Q20 4Q21 2Q22 4Q19 4Q20 4Q21 2Q22
5.1% 4.8 5.2

4.2 4.3
1.9% 1.2%
Reynosa
0.3%
4Q19 4Q20 4Q21 2Q22 4Q19 4Q20 4Q21 2Q22
5.8% 5.1 4.8 5.0 5.5

3.8% 3.4%
Guadalajara 1.1%
Near to sold-out
4Q19 4Q20 4Q21 2Q22 4Q19 4Q20 4Q21 2Q22
7.2% 7.3%
4.7 4.4 5.1
4.6% 4.2
2.5%
Monterrey
4Q19 4Q20 4Q21 2Q22 4Q19 4Q20 4Q21 2Q22
6.3 5.7 5.9 6.2

5.1% 5.2% 5.3%
3.5%
Mexico City
4Q19 4Q20 4Q21 2Q22 4Q19 4Q20 4Q21 2Q22
6.8% 6.5%
4.6% 4.3% 4.5 4.1 4.2 4.2
Bajio
4Q19 4Q20 4Q21 2Q22 4Q19 4Q20 4Q21 2Q22
Source: CBRE and Colliers
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The Mexican industrial real estate segment is booming. The nearshoring wave of transactions in 2021-1H22
added to the operational momentum of the real estate segment, which had already benefitted from the
exponential growth in logistics and e-commerce activities in 2020-21.
Vacancies are at record lows. Vacancy dropped from a national average in the 5-7% range in 2019 to 2-3% as of
1H22, even considering the relative drag by the Bajio region, which currently has the least attractive dynamics in
Mexico (a 4-5% vacancy rate).
Rising rents reflect tight supply/demand dynamics... According to our estimates, rents under new contracts or
contract renewals are increasing at an attractive low-to-mid teens percent range in sold-out markets (northern
border and Guadalajara) and near sold-out markets (Monterrey and Mexico City), and at a high-single-digit to low-
teens percent in the rest of industrial markets.
…as well as a higher replacement cost due to high inflation in land and building materials. In order to maintain a
healthy 8-12% NOI yield, both speculative and build-to-suit projects must continue pushing rents higher in coming
months.
A paradigm shift for industrial rents in Mexico. The current spike in rents has changed the paradigm for rents in
the Mexican real estate segment, as prices used to behave on a sticky pattern, increasing below US CPI inflation
(1-3% range).
Nearshoring is happening in Mexico

Although it is still not a relevant catalyst for GDP
Nearshoring is already noticeable at the macro-level in México. In this first stage, it has translated into higher exports
and economic growth in relatively low value-added manufacturing sectors. This has offset the stagnant performance
of two of the largest manufacturing sectors, which remain affected by supply bottlenecks. Increased export demand
has been met with current capacity rather than new capacity. As such, FDI flows to the manufacturing sector have not
shown atypical growth, yet.
Furthermore, real estate data suggests that nearshoring is occurring. The recent wave of nearshoring transactions
has added to the (already attractive) operational momentum of the industrial segment. As a result, industrial space
vacancies are at record lows, as northern border markets are sold out or nearly sold out. With tight supply/demand
dynamics and higher replacement costs, rents have nowhere to go but up.
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Chapter III. ESG: Drag or lever?

ESG ratings key tenets Sustainable Competitiveness Index world map 2021
Score: 100-50 Score: 40-35

Score: 50-45 Score: 35-30
Score: 45-40 Score: 30-0
Source: FTSE Russell Source: GSCI, and SolAbility
There are not many expert reports available where the nearshoring/reshoring trend is analysed from an ESG
perspective. However, it is at least interesting to notice that in the latest Fortune/Deloitte CEO survey (Fall 2022
issue, fielded 28 September-6 October), neither ESG nor nearshoring/reshoring directly appeared among the top
priorities of a sample of 121 US CEOs, but were directly related to the two key anticipated issues: labour/skills
shortage and supply chain disruption.
Intuitively, our bias is towards a positive correlation between nearshoring and ESG, with the effect of bringing
production closer, and reducing the carbon footprint of the entire supply chain on lower transport times. However,
a deeper analysis may prove us wrong by just looking at the Global Sustainable Competitiveness Index (Figure 23)
that compares countries based on five ESG criteria (natural capital, resources efficiency and intensity, intellectual
capital, governance efficiency, and social cohesion), issued by reliable sources (World Bank, IMF, and various UN
agencies). Out of 180 countries, China ranked #33 back in 2021 (last report available), below the US (#30), but
way better than Mexico (#89), which is also lagging behind most of its regional peers (Costa Rica #28, Chile #38,
Peru #39, Brazil #52 and Argentina #55, to name the most significant; see Figure 73 in the Appendix for
reference). By specific metrics, Mexico ranks better than China for Natural Capital criteria (#97 vs. #134) and
Resource Intensity (#119 vs. #150), but it doesn’t fare well on Social Capital (#113 vs. #32), Intellectual Capital
(#57 vs. #2) and Governance Efficiency (#82 vs. #45). Going into more details and following three key ESG pillars
(Figure 22), we highlight the following:
 Environment/Energy mix. The gain of nearshoring from the E perspective of ESG principles is not that
obvious even if, according to the International Energy Agency (IEA) database, Mexico emitted in 2020 (last
year available) about 3.0 tons of CO2 per capita, representing 0.33kg of CO2 per USD in GDP terms, vs. China’s
7.1 and 0.69, respectively. However, we found the discrepancy to be rooted in the weight of industry, which
makes 29% of CO2 emissions in China vs. 15% in Mexico, whilst both countries appear to have an evenly
carbonised energy mix. Indeed, about 89% of the total energy supply (TES) in China comes from either coal,
oil, or natgas, a weight almost equivalent to that of Mexico with 87%. Although the former could be
disadvantaged by its higher exposure to coal (64% of total mix vs. 4% in Mexico) at the expense of natgas (8%
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vs. 46%), both countries’ efforts to reduce their carbon footprints are considered “highly insufficient” in the
Climate Action Tracker (https://climateactiontracker.org/).
 Environment/Transport. Intuitively, getting the production process closer to consumption centers should
help to improve the overall carbon footprint by reducing transportation. We believe, however, that the gain is
not that obvious considering that: 1. the nearshoring process is not linear, with a transitionary initial period
(that can take up to five years) that implies maintaining partial or full capacities in the offshore country, and
ramping up in the nearshore location; 2. transportation has only a limited contribution to the full carbon
footprint of a product, as for example, the weight in apparel ranges from 1% (according to
www.ethicalconsumer.org) to 6% (Levi’s and Nike’s reports); and 3. if the weight of transport in the total
footprint is limited, the modes of transportation themselves seem to have a marginal impact on total
emissions, with containerships (average capacity of 24,000 twenty-foot equivalent units, and maximum load
of 23.6tn) emitting only 5g of CO2 per ton-km vs. 80 for trucks, which represent about 70% of the US-MX
commercial traffic (Figure 24). Compared to train transportation, we estimate for instance that the
approximately 90 trains necessary to transport a load similar to that of a containership (576,000tn) from
Monterrey to Los Angeles (2,420km) would emit 48.8tn of CO2, 62% more than a ship between Shanghai and
the Los Angeles port (10,428km).
 Social. Improvement of the S metric through nearshoring is also not a given, even though we can see the
benefit of moving production back to a region where a certain set of laws and rules under the USMCA must be
respected. Indeed, even if Mexico is rated 3 on a 1-5 scale, reflecting regular violation of workers’ rights in the
International Trade Union 22 report, it actually ranks better than the US with 4 (systematic violations of
rights), and China with 5 (no guarantee of rights). Unlike China and the US, however, Mexico is still reported as
a country with significant child labour (in 2021, 6% of children aged 5-17 engaged in labour, with a majority of
girls, according to UNICEF). Similarly, nearshoring may imply some automation, i.e. a net destruction of jobs,
while according to the International Labour Organisation (ILO), 700mn workers of the 3.3bn working
population around the world already live in extreme/moderate poverty (income <USD3.20/day), and the
relocation of operations may hinder the economic development of regions.
 Governance. According to a Behind the Barcodes survey, c. 75% of 219 US apparel brands did not know the
source of all their fabrics or inputs. By reducing the distance, and facilitating controls, nearshoring could be
preferred by corporations to reduce this multilayered risk (operational, financial and reputational).
Emission by mode of transport (gCO2/ton-km) Global CO2 emissions by transport modes
435
A large vessel emits 1% of 74.5% of transport emissions
CO2 per ton-km of a plane come from road vehicles 2.2%
(5/435) and 14% of a
cargo train (5/35)
45.1% 29.4% 11.6% 10.6%
80
35 1.0%
5
Road (passenger) Road (freight) Aviation
Air Road Rail Shipping Shipping Rail Other
Source: Shell Source: OurWorldInData.org
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Chapter IV. The Mexican case: Strengths and

challenges
Strengths
Mexico’s vicinity with the US provides the former with an absolute advantage. Similar regional proximities can be
found in the other two productive regions: Germany with Poland and Japan with China. However, the Mexico-US
case is unique because both countries have had historically similar economic regimes (unlike Germany or Japan,
and their nearby countries), and neither Germany nor Japan were economic powerhouses as the US was.
The US and Mexico have strengthened substantially their trade relationship over the past 60 years, given their
geographical location and common border, but also the shorter transit times and shared time zones, the relatively
competitive cost of their labour force, and their trade agreements and reasonable respect for property and
intellectual property rights. The geopolitical context has accelerated the companies’ search for a more effective
and resilient production, which has positioned Mexico as the ideal platform for nearshoring. Below we provide
more insights on the case for nearshoring to Mexico.
Economic institutions
An additional strength is the development of strong economic institutions in Mexico over the past 30 years, such
as Banco de Mexico, whose autonomy has allowed for a transition to a macroeconomic stability regime. A
commitment to a free-floating exchange rate has prevented external imbalances. The austere fiscal stance since
the Tequila crisis and an active debt management policy have promoted the financial development of Mexico and
prevented a financial crisis. Finally, as we have mentioned before, the government has gradually put in place
policies to strengthen trade and bolster the manufacturing industry. Mexico partakes in 14 FTAs and 30
investment protection agreements in its pursuit to become one of the most open economies in the world.
Labour force
In terms of the labour market, Mexico has several advantages. Firstly, it will benefit from a growing economically
active population that will peak in the late 2040s (Figure 27). The median age of the Mexican worker is 37.6 years,
so the labour force is in its prime productive age. For reference in 2019, the median age of the US workers is 41.4,
for China the median is 41.6 and for Brasil 37.3, according to ILO data. Migrant flows from the rest of the Americas
could also provide an additional boost to the labour force, though Mexico is probably not yet ready to fully take
advantage of them.
Mexico’s labour costs remain very competitive. In the last 12 years, salaries in China have grown at a CAGR of 10%
vs. 3% in Mexico (and 2% in the US). In fact, since China’s adhesion to the WTO in 2001, the competitive
advantage vs. producing in the US, in terms of salaries, has decreased from 97% in 2002 to 82% in 2021, whereas
in Mexico, salaries were 78% cheaper back in 2002, and now they are 84% lower, thus increasing its appeal and
proving to be relatively more stable. Using the ILO PPP average monthly income dataset, we can see that not only
compared with China, but with other emerging economies that could also benefit from nearshoring, the average
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PPP income of manufacturing workers in Mexico remains quite competitive. One thing to consider, though, is that
some USMCA clauses require that 40-45% of vehicle content from North America be made by workers earning at
least USD16 per hour.
The average PPP income of manufacturing workers in

Mexico remains quite competitive not only compared
Mexico will benefit from a growing economically active with China, but with other emerging economies that
population that will peak in the late 2040s (millions) could also benefit from nearshoring (2017 PPP USD)
69 5000
66
4000
63
60 3000
57 2000
54
1000
51
48 0
Viet Nam
China
Thailand
Peru
Colombia
Chile
Malaysia
Argentina
India
Mexico
Sri Lanka
Brazil
Philippines
Pakistan
Panama
Cambodia
Singapore
El Salvador
United States
45
42
Jan 40
Jan 30
Jul 07
Jul 12
Jul 17
Jan 20
Jan 25
Jan 15
Jan 05
Jan 45
Jul 22
Jul 27
Jan 35
Jan 10
Jul 37
Jul 32
Jul 42
Jul 47
Jan 50
Observed EAP Projected EAP Avg. Ex. U.S. & Singapore
Source: CONAPO, INEGI and BBVA GS&R Source: ILO and BBVA GS&R
Production capabilities and market size
Mexico’s production has become increasingly complex in its push to become a trade-oriented manufacturing
economy. It produced low value-added goods at the start of the manufacturing industry boom in the 1960s, but
since then it has transitioned to high value-added products. In terms of economic complexity (a measure of a
country’s capabilities to produce high value-added products), Mexico is substantially more competitive than its
LatAm peers.
As it is a partner in the USMCA, Mexico’s internal market and access to other foreign markets (i.e. its market size)
are potentially similar to that of Korea and only smaller to that of China, India, the US and Brazil, all of them
countries with larger populations. This is another incentive to manufacture in Mexico.
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Mexico has a potential market size similar to that of

In terms of economic complexity, Mexico is Korea and only smaller to that of China, India, the US
substantially more competitive than its LatAm peers and Brazil, all of them countries with larger
Economic complexity index: a measure of a country’s populations Market size index= GDP + exports= internal +
capabilities to produce high value-added products foreign market
2.0 7
1.5 6
5
1.0
4
0.5
3
0.0
2
-0.5
1
-1.0
0
Sri Lanka
Peru
China
Thailand
Canada
Costa Rica
Colombia
India
Mexico
Argentina
Malaysia
Chile
Nicaragua
Philippines
Honduras
Panama
Brazil
Cambodia
Guatemala
Pakistan
Singapore
United States
El Salvador
Indonesia
Belize
Peru
Hong Kong
Thailand
Korea
Canada
Argentina
Colombia
Costa Rica
China
USA
India
Mexico
Malaysia
Chile
Sri Lanka
Nicaragua
Brazil
Philippines
Honduras
Cambodia
Pakistan
Indonesia
Guatemala
Panama
Singapore
El Salvador
Source: Observatory of Economic Complexity and BBVA GS&R Source: WEF and BBVA GS&R
Geopolitical tensions: The Chinese-American conflict and the risk of Europe’s

deindustrialisation
Geopolitical tensions coupled with the COVID-19 pandemic evidenced the need for more resilient supply chains.
Though not new, nearshoring has gained relevance in the current geopolitical context, where the US has
maintained and escalated a trade war with China since 2017. However, the pandemic showed the offshoring weak
spot: companies didn’t have visibility of first processes or knew the origin of all their raw materials. More
transparency is paramount in all the supply chain, and companies are gradually diversifying the output with
alternative input sources. The Russia-Ukraine conflict and the recent spike in commodity prices further
accelerated the quest for more visibility and more stability in production. The geographical position of Mexico
implies shorter shipping times that are three days on average (vs. 40 from China).
All the elements mentioned certainly strengthen the case of Mexico as a nearshoring destination, but we must
take them with a pinch of salt. On one hand, it is difficult to ascertain if the early demand after the recent shocks,
such as the supply bottlenecks and the zero COVID policy in China, are transitory or permanent. These tail risks
must be assessed (under normal conditions and now that there is an empirical benchmark) to determine the
tradeoff of relocating production permanently.
Even though the focus of nearshoring is currently transpacific trade, the shift may also be driven by extra-regional
factors, such as current circumstances in Europe. Indeed, the shenanigans of gas supply, as Russian pipeline flows
amount to as much as a third of EU’s demand, require that gas demand drops by up to 10% through austerity and
efficiency measures. It is still too early to quantify the impact, and diverging political agendas of EU members
make it hard to assess the full impact of this shortfall until at least 2025, when new liquefied natural gas
production will come on stream. The threat for most energy intensive industries is clear, especially steel, metals
(refining operations such as aluminum and zinc), and petrochemicals (fertilisers), for which Mexico can offer an
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attractive alternative. Similarly, the EU ban on sales of all internal combustion engine vehicles by 2035, could give
a new opportunity for automotive production hubs in Mexico to replace existing European capacities.
The Sino-American conflict has escalated over the past decade: the US remains the largest superpower, while
China’s stance as the main emerging power has firmed since the end of the Cold War. In addition to this, both
perceive themselves as Pacific powers and understand the relevance of controlling maritime routes, and both are
trying to consolidate further their political, economic and military influence through various initiatives. However,
applying a Cold War logic to this conflict may not be the best fit. The US-China economic ties run deep, and
therefore it does not necessarily follow that a protracted conflict leading to a severe cut of economic ties will
ensue.
Mexico plays a strategic role in this context as a strong trade partner of the US and China. Trade with China has
been accelerating since it joined the WTO, though flows are mostly one-sided (Figures 30 and 31). Non-oil imports
from China have grown from less than 1% in 1993 to 23% in the last 12 months, and Mexico’s trade deficit has
reached USD108bn. Mexican products have little comparative advantage in China, while imports from this country
have strategic relevance for Mexico’s manufacturing industry. Mexico imports lower value-added goods from
China and processes them to export them mainly to the US. Mexico’s non-oil trade balance with the US in
particular and the rest of the world overall continues growing, which underscores the importance of our
partnership with China.
In sum, in the face of heightened trade tensions between the US and China, Mexico is set to continue gaining from
being a trade “bridge” between the two. Its USMCA alliance provides Mexico with a unique advantage over other
potential nearshoring destinations, even if the agreement is more restrictive than its predecessor NAFTA. In terms
of foreign policy, Mexico needs to balance being a member of the North American bloc with maintaining a good
relationship with China, which may prove challenging should China-US tensions heighten.
Mexico’s non-oil trade balance with the US continues

Trade with China has been accelerating since it joined growing, which underscores the importance of our
the WTO (Trade flows USD mn, 12M summ) partnership with China (Trade flows USD mn, 12M summ)
500,000 250,000
400,000 150,000
300,000
50,000
200,000
-50,000
100,000
0 -150,000
Mar 13
Dec 07
Jun 97
Jun 18
Dec 21
Mar 99
Sep 09
Jun 11
Dec 00
Dec 93
Sep 95
Sep 02
Dec 14
Sep 16
Mar 20
Jun 04
Mar 06
Jun 10
Dec 04
Dec 93
Jun 99
Oct 06
Feb 14
Jun 21
Aug 97
Oct 95
Aug 08
Dec 15
Oct 17
Aug 19
Apr 01
Feb 03
Apr 12
Non-oil Exports to USA Non-oil balance

Non-oil balance with the US
Non-oil Imports from China Non-oil balance with China
Source: INEGI and BBVA GS&R Source: INEGI and BBVA GS&R
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Property and intellectual rights
In terms of protection of property and intellectual rights, the group of potential receivers of nearshoring
investment includes developed countries that fare well, and emerging economies with medium and low scores.
Mexico ranks in the middle, relatively close to China. Despite this, Mexico’s score may suffice to obtain some
nearshoring investment in tech-related industries as technology exchange between the US and China is growing
cold, particularly in the high-tech sectors.
In terms of protection of property and intellectual

rights, Mexico ranks in the middle, relatively close but
worse than China Property rights, 1-7 (best)
Intellectual property protection, 1-7 (best)
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0
Sri Lanka
Colombia
Philippines
Korea
Peru
Pakistan
Panama
Hong Kong
USA
Belize
Thailand
Canada
Costa Rica
China
Brazil
India
Argentina
Malaysia
Chile
Mexico
Nicaragua
Honduras
Singapore
Cambodia
Indonesia
Guatemala
El Salvador
Hong Kong
Belize
Thailand
Peru
Canada
Costa Rica
Korea
Colombia
USA
Malaysia
China
Chile
Sri Lanka
India
Nicaragua
Argentina
Philippines
Mexico
Honduras
Brazil
Singapore
Cambodia
Pakistan
Panama
Indonesia
Guatemala
El Salvador
Source: WEF and BBVA GS&R Source: WEF and BBVA GS&R
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Strengths that position Mexico as the ideal platform for nearshoring
Nearshoring Offshoring
Nearby countries, with shared time Proximity Overseas countries, with opposite
zone and common border. time zones.
US - Mexico Shipping US - China

methods
and
average
7 days 3 days 7 days 40 – 80* 5 days
2 days times days
5,000 Labor costs
4,000
3,000
2,000
1,000
-
Cambodia
Mexico
Peru
US
Viet Nam
Thailand
India
Argentina
Colombia
China
Malaysia
Sri Lanka
Chile
Philippines
Brazil
Pakistan
El Salvador
Panama
Singapore
Avg. Ex. U.S. & Singapore
Market size
Mexico’s internal market and access to other foreign markets (i.e. its market size) are potentially similar to that of Korea
and only smaller to that of China, India, the US and Brazil, all of them countries with larger populations.
8
7
6
5
4
3
2
1
0
China
Peru
Malaysia
Thailand
Belize
Costa Rica
Nicaragua
Colombia
Hong Kong
Canada
Korea
USA
Sri Lanka
Chile
Honduras
Philippines
Argentina
Mexico
Brazil
India
Singapore
Cambodia
Pakistan
El Salvador
Panama
Guatemala
Indonesia
Trade agreements, property and intellectual

Lack of visibility in regulatory offices, with
rights, development of strong economic Regulatory trade practices often questioned by
institutions like (Banco de México), austere
international participants.
fiscal stance and active debt management.
Geopolitical tensions
In the face of heightened trade tensions between the US and China, Mexico is set to continue gaining from being a trade
“bridge” between the two. Its USMCA alliance provides Mexico with a unique advantage over other potential nearshoring
destinations, even if the agreement is more restrictive than its predecessor NAFTA
Source: ILO, Freighlos and BBVA CER
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Challenges
Mexico is in a privileged situation, no doubt, but some factors of production require more competitiveness. Below
we explain some of the main challenges that need special attention if Mexico wants to promote structural changes
that can sustain the potential growth derived from nearshoring.
Economic policy: Investment, investment, investment
Since the 1990s, Mexico made a strong push towards more trade openness and continuous industrialisation. The
policies implemented to this end had an uneven outcome among sectors and regions, and failed to deliver higher
growth rates from a historical perspective (Figure 35). We have reiterated our view of Mexico’s economic
shortcomings despite being a globalised economy and why it has failed to escape the middle-income trap. The
answer, in short, is secular underinvestment.
The policies implemented to this end had an uneven outcome among sectors and regions, and failed to deliver
higher growth rates from a historical perspective GDP annual growth and trade as percentage of GDP (%)
12% 80%
9% 70%
60%
6%
50%
3%
40%
0%
30%
-3%
20%
-6% 10%
-9% 0%
1982
2020
1976
1988
1970
1972
1980
1984
1986
2008
2018
2002
1962
1964
1966
1974
1978
1990
1968
1992
1994
1996
1998
2000
2004
2006
2010
2012
2014
2016
GDP growth Average growth since the 60s Total trade as % of GPD, right axis
Source: INEGI, Jonathan Heath database and BBVA GS&R
In Figure 36 we can see that countries with higher investment have experienced higher GDP per capita growth
rates. Secular underinvestment is, in our view, the tendency of some emerging economies to invest less than it is
required to break out of the middle-income trap. Developed economies, such as the US and Canada, do not
require investment ratios as high as developing countries as their capital stock is already robust. Asian countries,
on average, have invested more than LatAm countries and experienced higher growth; China is the best example
of this. In fact, the increase in wages experienced by China is, despite all of its issues, the result of higher
productivity as its very large population was provided with better tools to produce. Stagnant wages in Mexico and
on average in LatAm are the result of subpar capital provision.
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Countries with higher investment have experienced higher GDP per capita growth rates Annual GDP per capita growth
and gross investment as percentage of GDP(%, average since 1991)
Source: World Bank and BBVA GS&R
Several factors have influenced low investment in Mexico. A good place to start is the depth of the crises taking
place from the late 1970s through the Tequila crisis. The financial component of several of those shocks led to a
fiscal stance that privileges stability above all. Paradoxically, the government has maintained an overreliance in
volatile sources of income, such as oil revenues, while only gradually increasing tax revenues. In this context, and
in the face of falling oil output since 2004, public investment has been very low and strongly focused on the energy
sector. As such, the quality of infrastructure is stagnant, in turn limiting private investment.
The fiscal stance has privileged stability above all Public investment has been very low and strongly
Public revenues as percentage of GDP (%) focused on the energy sector Public physical investment
as percentage of GDP (%)
30 6.0
25 5.0
20 4.0
3.0
15
2.0
10
1.0
5
0.0
0
Oct 09
Sep 98
Nov 01
May 11
Jul 95
Feb 97
Jul 14
Feb 16
Aug 06
Dec 12
Jun 22
Dec 93
Sep 17
Jan 05
Nov 20
Apr 00
Jun 03
Mar 08
Apr 19
Feb 97
Nov 01
May 11
Feb 16
Dec 93
Jul 95
Jul 14
Sep 98
Aug 06
Oct 09
Dec 12
Jun 22
Sep 17
Jan 05
Nov 20
Apr 00
Jun 03
Mar 08
Apr 19
Rest
Total Revenues Oil revenues Hydrocarbons
Tax revenues Other Physical public investment
Social security & CFE
Source: SHCP, INEGI and BBVA GS&R Source: SHCP, INEGI and BBVA GS&R
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The Mexican government tried to make up for this lack of investment with secondary policies, such as the
aforementioned IMMEX programme and its predecessors, which improved business conditions without spending
too many resources. But recently, the government has scaled down these efforts, even shutting down Mexico’s
business and investment promotion agency Promexico. Also, the recent push to repeal the liberalisation of the
energy sector has strengthened Pemex and CFE vis-à-vis other public spending priorities and other types of
infrastructure, a trend that seems unlikely to change until revenues are bolstered or private companies resume
investment in the energy sector. Given this, investment currently is merely recovering to its persistently
insufficient level.
Investment currently is merely recovering to its persistently insufficient level

Gross investment as % of GDP
28
24
20
16
12
8
4
0
Sep 08
Sep 13
Sep 14
Mar 18
Mar 10
Mar 11
Mar 12
Mar 13
Mar 14
Mar 15
Mar 16
Mar 17
Mar 19
Mar 22
Sep 01
Sep 02
Sep 03
Sep 04
Sep 05
Sep 06
Sep 07
Sep 09
Sep 10
Sep 11
Sep 12
Sep 15
Sep 16
Sep 17
Sep 18
Sep 19
Mar 21
Mar 20
Mar 08
Mar 02
Mar 03
Mar 04
Mar 05
Mar 06
Mar 07
Mar 09
Sep 20
Sep 21
Gross public fixed capital formation Gross private fixed capital formation
Variation in inventories Gross investment
Source: INEGI and BBVA GS&R
North America, a bumpy relationship between neighbors
We have been arguing that protectionism is on the rise globally, and it is actually a reason to consider nearshoring
production. The relationship between Canada, the US and Mexico has also been affected by protectionist
restrictions, as it is evident from the several disputes that have flared up since the birth of the USMCA in 2019,
notwithstanding its more restrictive nature.
Currently several consultations and panels involving trade and investment are underway, and it is very likely that
they will end with the country at fault being punished with tariffs. Until the political backlash against free trade
recedes – a process, which may take decades – the environment in which the partners trade will be less than ideal.
We do not foresee the end of the USMCA, just a bumpy road ahead as protectionism has paid political dividends in
the region.
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Access to electricity
In our view, limited access to electrified land is one of the main challenges for an acceleration of nearshoring
activities in Mexico. Below we mention three factors that explain our opinion.
Inconsistent energy policies in the last decade. The long-awaited 2014 energy reform, implemented through a
constitutional reform, allowed private sector investment in electricity generation (renewables, mainly) through a
market-friendly framework. The winds of transformation in the sector were short-lived as, starting in 2018,
President Lopez Obrador’s administration embarked on a series of attacks to private electricity generators and
aimed to implement regressive and nationalistic laws, which eventually led to an initiative for an energy counter-
reform. While this electricity bill was defeated in the Lower House in April 2022, the administration managed to
modify the rules for the dispatch of electricity, which has impacted private renewable players and self-generators
and resulted in numerous national and international disputes.
Lack of investment in electricity generation and the transmission network creates serious reliability risks for
the electric sector in the medium and long term. Investments in installed generation capacity and the national
transmission network have stalled since 2019. The execution of ambitious investment plans by SENER and CFE
has been slow, and projects have suffered significant delays. As a result, generation capacity (1.5% CAGR 2012-
22e) and the national transmission network (0.9% CAGR 2012-22e) have been unable to meet the sustained
expansion of electricity demand (3-3.5% CAGR 2012-22e).
Moreover, SENER’s forecast of electricity demand (CAGR 2022-36: 2.6%) not only implies sustained demand
growth, but also significant investment needs in the sector (or high risks if such investments do not
materialise). According to Comision Federal de Electricidad business plan 2022-26, total investment needs in
the sector amount to MXN582,288mn (c.USD30,000mn). Generation projects represent 49% of such amount,
while transmission and distribution represent 22% and 26%, respectively.
Mexican electric sector: Generation capacity, national Electricity demand 2022-36: sustained growth (and risks
transmission network and electricity demand* 2012-22e to the system) ahead (Thousands of GWh)
600
150.0
500 CAGR 2022-36e: 2.6%
140.0
130.0 400
120.0 300
110.0 200
100.0
100
90.0
0
2021
2020
2014
2022e
2012
2013
2015
2016
2017
2018
2019
2035e
2023e
2030e
2033e
2022e
2024e
2025e
2027e
2028e
2031e
2036e
2032e
2026e
2029e
2034e
Generation capacity Central East West

National transmission network Northwest North Northeast
Electricity demand Peninsular Baja California Baja California Sur
Mulege
*
Index 2012=100. Source: SENER, CFE and BBVA CER Source: Prodesen, SENER and BBVA CER
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As a result, service and reliability indicators of the system are deteriorating rapidly. In our view, the lack of
investments in the system is more tangible in the generation and transmission segments of the electric sector.
From the generation standpoint, electricity demand is not only growing, but the peak-consumption season is
becoming longer each year, which implies more demanding needs for CFE generation capacity.
Electricity demand: Higher peak levels and longer high- Demanding needs for CFE generation capacity reflect in
consumption seasons lower reserve margins SIN*
Maximum daily demand GWh 2021-22 Maximum daily demand in GWh and operating reserve margin in %
55,000 50
Peak in 2022:
53,000 Peak season 2022 48,921 50,000 45
45,000 40
48,000 Peak in 2022: 40,000 35
47,180 30
35,000
+3.7% 25
43,000 30,000
20
25,000 15
38,000 20,000 10
15,000 5
Peak season 2021 Reserve / Alert margin 6%
33,000 10,000 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
28,000 Maximum daily demand 2021 Maximum daily demand 2022
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec ORM 2021 % ORM 2022 %
Reserve / Alert margin Days operating below the
2021 2022 reserve / alert margin
Source: SENER, and BBVA CER *Sistema Interconectado Nacional. Source: SENER and BBVA CER
Furthermore, the operating reserve margin (the amount of generation capacity available to meet demand,
particularly at on-peak time lapses) has decreased particularly in the Baja California (sold-out industrial market)
and Baja California Sur markets where the system has been increasingly operating below reserve/alert margins.
Reserve margins in Baja California Reserve margins in Baja California Sur

Maximum daily demand in GWh and reserve margin in % 2021-22 Maximum daily demand in GWh and reserve margin in % 2021-22
4,000 35 700 40
3,500 30 600 35
3,000 500 30
25
2,500 25
20 400
2,000 20
15 300
1,500 15
10 200 10
1,000
Reserve / Alert margin 11%
500 5 100 5
Reserve / Alert margin 11%
- 0 - 0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Maximum daily demand 2021 Maximum daily demand 2022 Maximum daily demand 2021 Maximum daily demand 2022
ORM 2021 % ORM 2022 % ORM 2021 % ORM 2022 %
Reserve / Alert margin Days operating below the Reserve / Alert margin Days operating below the
reserve / alert margin reserve / alert margin
Source: SENER, and BBVA CER Source: SENER, and BBVA CER
From the transmission standpoint, the slow execution of investment plans has been reflected in increased
congestion and bottlenecks in various markets (mostly in the northern states and Yucatan Peninsula), as well as a
consistent decline in efficiency metrics.
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Electricity transmission: Longer interruption periods Increasing higher energy losses

System average interruption duration (SAIDI index, minutes) Energy not delivered due to interruptions longer than five minutes*
5 4.6 4.6 5,000

4.3
4 4,000
3.2 3.3
3 3,000
2.1 2.1 2.1 2.2
2 2,000
0.9 1.0
1 1,000
0 0
2022*
2020
2021
2020
2021
2022*
2017
2012
2017
2013
2014
2015
2018
2016
2019
2012
2015
2016
2019
2013
2014
2018
Source: CFE and BBVA CER * Due to failures in the transmission network. Source: CFE and BBVA CER
Electricity supply/demand and power transfer vary across regions and have major implications, particularly
for northern border markets. In our view, the currently sold-out market of Tijuana will continue facing serious
constraints to meet nearshoring demand (i.e. land with proper access to electricity), while the Monterrey, Juarez
and Coahuila markets have more room to accommodate nearshoring demand in coming months.
Electricity supply, demand and power transfer: Surplus/deficit varies significantly across regions
5
4
Thousands
3
MW
2
5.2
1
5.0
-- 4.8
Thousands
Northwest 4.6
MW
-370
4.4
2.8
Thousands
4.2
2.7
MW
4.0
2.6 Baja 0 North 12
2.5 California Northwest 10
2.4 -343 8
Thousands
Baja California 6
MW
-605 4
1
Baja North 2
California --
Sur Northeast 2.0

12
10 0 Northeast 1.5
Thousands
8
Thousands
2,240
MW
6 1.0
MW
4 352 209 0.5

West Peninsular
2
Central 652 --
--
West 8 Peninsular
276 -750 2,738
8 East 267
6
Thousands
4
MW
10
8
Thousands
2
6
MW
Supply (MW, Thousands) --

4
Central
2
Demand (MW, Thousands)
--
Power Transfer (MW) East
Source: SENER and BBVA CER
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Logistics infrastructure: The context
Infrastructure
Another consequence of secular underinvestment is the deterioration in the quality of infrastructure in Mexico, as
countries with higher investment as a percentage of GDP enjoy higher quality of infrastructure. Public investment
per capita not allocated to hydrocarbons has not increased for at least eight years, and as long as this trend
continues, quality will hardly improve. Therefore, while Mexico certainly is in a good position to receive nearshoring
investment, the deterioration of infrastructure represents a substantial bottleneck that dents competitiveness.
Currently, the focal point is not developing infrastructure to attract investment in the manufacturing sector, but
rather the focus remains mostly on hydrocarbons and the current government’s signature projects, which have
other scope. While it is true that the growth of infrastructure is beneficial regardless of the sector or purpose it is
intended for, the problem is that public investment at such low levels risks losing export competitiveness in a
relatively short period of time.
Countries with higher investment as percentage of GDP enjoy higher quality of infrastructure Gross investment as
percentage of GDP and quality of overall infrastructure (%, 1-7 best, 2014-2018)
HKG SGP
6.5
6 USA
Quality of infrastructure index
KOR
CAN MYS
5.5
PAN
5
CHL
LKA
CHN
4.5
MEX IND
GTM SLV THA IDN
4
BLZ HND
PAK KHM
CRI NIC
3.5
PER
ARG PHL
BRA
COL
3
12 17 22 27 32 37 42 47
Gross investment as % of GDP
Source: World Bank, WEF and BBVA GS&R
For many years, when it came to logistics, the supply-chain dynamic meant following the low-cost sourcing
caravan or finding the next cheapest place, with a focus on getting the right FOB (free on board), i.e. the point in
the supply chain where a buyer/seller assumes the responsibility (and cost burden) of the good being transported.
The pandemic evidenced a structural pivot for many industries, with digitalisation and other changes in customer
behavior meaning shortening supply chains, and cash regaining center stage. For example, a Textile World survey
for the apparel industry shows that the top priority of the business is now the speed to market (60%), with 80% of
overall production time (and factory costs) related to handling materials. Getting closer to end markets by
implementing automation seems to be the obvious solution.
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Now, it took years to develop transpacific supply chains and to achieve a high level of efficiency; substituting them
will require time. Disruptions followed the pandemic in terms of freight rates (Figure 50), while waiting times
(Figure 51) appear to be gradually normalising and will continue to decrease in coming years with the addition of
7.3mn TEU of new ship box capacities by 2025 (28% of existing capacity, according to DHL’s Ocean Freight
Market Update released in November).
Cost of containers (USD/FEU) Container ship dwell time (1990 base 1000)
14,000 4,000
12,000 3,500
10,000
8,000 3,000
6,000 2,500
4,000 2,000
2,000
1,500
0
1,000
30/6/11
30/6/15
30/6/12
30/6/16
30/6/17
30/6/13
30/6/14
30/6/18
30/6/19
30/6/20
30/6/21
30/6/22
500
0
1/6/21
1/10/12
1/2/16
1/6/11
1/6/13
1/6/15
1/6/17
1/6/19
1/2/12
1/2/14
1/10/14
1/2/18
1/10/18
1/10/16
1/2/20
1/2/22
1/10/20
1/10/22
World container index (USD/FEU)
Shanghain-Los Angeles container index (USD/FEU)
Source: Bloomberg Source: Bloomberg
The need to develop alternative and more resilient supply chains is now evident. An effort to this end is Biden’s
Executive Order #14017 on America’s Supply Chains, from 24 February 2021, to foster back-shoring with
international cooperation to “secure supplies of critical goods that we will not make in sufficient quantities at
home”, and, to some extent, the USD200bn package from the Inflation Reduction Act passed on 16 August 2022.
But to be able to capture the trend, the role of logistics infrastructure is likely to be crucial if Mexico wants to take
part in the nearshoring trend.
According to the World Bank Infrastructure Index, an evaluation of infrastructure based on several efficiency
factors, Mexico ranked 51 (out of 160 globally) below the US (14), Canada (20) and China (26), but better than
most other LatAm countries (#3). The study was done in 2018, after Peña’s administration USD38bn programme
to deploy 211 infrastructure projects, so it is likely that some ground was lost in the past four years, whilst its
progression compared unfavourably to key Asian or other LatAm countries.
Finally, according to the G20’s Global Infrastructure Outlook initiative, Mexico requires USD1.0tn of investment in
its infrastructure in 2015-40, considering the current trend, given a potential investment gap of USD544bn
(USD111bn to date) mainly attributable to roads (USD464bn). The base scenario contemplates a 2.3% GDP
growth, with a deficit that may widen to USD616bn and a +0.4% nearshoring impact.
Highways
Land transport is the main means to move goods in Mexico. Mexico’s total trade (exports and imports) has
grown at a CAGR 2010-21 of 5%, but the most notable increases have taken place in China (CAGR 2010-21 of 6%)
and the European Union (CAGR 2010-21 of 4%). Although the CAGR 2010-21 of the US-Mexico trade is only 1%,
the US has maintained its position as Mexico’s main trade partner, with 65% of total trade in Mexico.
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Mexico total trade1 by country or region (since 2010)

1,200
1,000
11%
10%
10%
800
10%
7%
10%
9%
10%
10%
9%
8%
9%
8%
8%
9%
8%
600
8%
8%
8%
8%
8%
8%
8%
8%
400
65%
66%
65%
65%
67%
66%
67%
66%
67%
67%
67%
67%
200
-
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
North America Pacific Alliance Central America
European Union European Free Trade Association Japan
Panama China Others
1
Exports and imports in USDbn. Source: National Trucking Chamber (Canacar) with information of the Ministry of Economy
Most of the trade is transported by road, comprising 55% of the traded merchandise’s value in USD, followed by
sea (27%) and railway (9%) networks. In terms of weight, around 70% of the tons traded are carried by ground
transportation and the remaining 30% through sea and air.
Mexico total trade1: Breakdown of means of Mexico total trade1: Breakdown of means of
transportation in value (2021, in USDmn) transportation by weight (2021, in millions of tons)
Others Air
2% 7%
Sea
27% 56%
30% 70%
14%
Rail Road
9% 55%
Ground Transportation Sea and air Road Rail
1
Exports and imports in millions of tons. Source: National Trucking Chamber 1
Exports and imports in millions of tons. Source: National Trucking Chamber
(Canacar) (Canacar)
Specifically, traded goods between the US and Mexico are mostly moved by road or rail. The relevance and deep
integration between the US and Mexican supply chains can also be seen in the number of border crossings, which
has grown at a CAGR of 3% since 2010. The crossings at the north border (to the US) comprise 98% of the total
border crossings. Nuevo Laredo, Tijuana and Ciudad Juarez are the most relevant borders, accounting for 61% of
the total crossings, and have grown at CAGRs of 5%, 3% and 2%, respectively.
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Total trade between Mexico and the US by means of

transport (since 2014, in USDbn) Number of border crossings (millions, since 2010)
600 10
500
16%
18% 8
18%
16%
18%
18%
400
19%
18%
6
300
17%
84% 4
82%
82%
84%
200
82%
82%
82%
81%
2
83%
100
0
0
2020
2021
2011
2015
2017
2010
2012
2013
2016
2014
2018
2019
2014 2015 2016 2017 2018 2019 2020 2021 1H22
Roads Rails Border crossings (north) Border crossings (south)
Source: National Trucking Chamber (Canacar) with information from the Source: National Trucking Chamber (Canacar) with information from the
Ministry of Economy Ministry of Economy
The highway network works well, but some tranches require improvement. Mexico’s highway network is
comprised of 401,366 km of federal and state (free and toll) roads. It has expanded at a CAGR of 1% in the last
decade. Fifteen main corridors connect the whole country from north to south (longitudinal axis) and east to west
(transversal axis), mostly 24,261 km of federal roads that are free (66%) or toll highways (34%).
The Ministry of Infrastructure, Transport and Communications (SCOT) assigns each network tranche a service
level that goes from A to E, a classification that describes the operating conditions of transit flows according to
factors like speed, travel time, transit interruptions, and others. A-B levels correspond to stable and free traffic
flow, as vehicles can circulate at a relatively freely determined speed, while a C level implies certain restrictions to
choose speed or change lanes. Ideally, this should be the poorest level of Mexican highway operations, but some
tranches also suffer from unstable, slow speed traffic flow (levels D and E). All these service levels depend on the
traffic dynamics and ranges defined for each tranche.
The service level of the highways integrating the 15 main corridors is mostly satisfactory, with 54% of the network
operating at an A or B level, 26% at a C level and 20% lower than that. While in both cases free and toll roads are
mostly B-rated, the proportion of A-level service is higher in toll roads, whereas C-level service is more common in
free roads. In our view, this has to do with concessions, as private operators have adequately maintained and
improved toll roads over the years.
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Service level of the highways integrating the 15 main Service level of the highways integrating the 15 main
Mexican corridors Mexican corridors (federal free vs. toll roads)
E
6% A
D 16%
5%
14% 17%
30%
8%
4%
13%
34% 39%
9% 26%
C B
26% Federal free Federal toll
38%
A B C D E
Source: National Trucking Chamber (Canacar) with information of the Source: National Trucking Chamber (Canacar) with information of the
Ministry of Economy Ministry of Economy
The five corridors connecting Mexican states with the US border have more truck traffic, around 27% of the traffic
breakdown, well above the average 18% in other highways. Consequently, the traffic in the highways within these
corridors has grown at a CAGR of 4% in the last decade (vs. 3% national average). These five corridors include:
Mexico-Nogales with access to Tijuana. Connects Mexico City with Sonora through the State of Mexico,
Michoacan, Jalisco, Nayarit and Sinaloa.
Queretaro-Cd. Juarez. Connects Queretaro and Chihuahua through Guanajuato, San Luis Potosi,
Aguascalientes, Zacatecas and Durango.
Mexico-Nuevo Laredo with access to Piedras Negras. Links Mexico City to Tamaulipas through Queretaro,
Hidalgo, Coahuila, and Nuevo Leon.
Veracruz-Monterrey with access to Matamoros. Connects Veracruz with Tamaulipas through Nuevo Leon.
Mazatlan-Matamoros. Links Sinaloa to Tamaulipas through Durango, Coahuila and Nuevo Leon
Average traffic breakdown of logistics corridors in Service level in highways connecting Mexican states with
Mexico the US border
B
8% 7% B B
65% 74% C
27% 18%
5 corridors connecting with the Other 10 corridors

US border
Trucks Passenger vehicles Other
Source: Ministry of Infrastructure, Transport and Communications Source: Ministry of Infrastructure, Transport and Communications
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Main corridors of the Mexican highway network
Length Level of Traffic CAGR Post-COVID 19

Corridor (km) service Traffic breakdown 2011-21 recovery
Transpeninsular Highways of Baja 79% cars, 16% trucks,
― 1,950 B 2.7% 91%
California 5% other
― Mexico-Nogales with access road 65% cars, 27% trucks,
2,734 B 2.9% 105%
to Tijuana 8% other
― 63% cars, 30% trucks,
Queretaro-Ciudad Juarez 2,090 B 3.4% 98%
7% other
― Mexico-Nuevo Laredo with access 62% cars, 32% trucks,
1,816 C 4.0% 100%
road to Piedras Negras 6% other
Longitudinal
― Veracruz-Monterrey with access 67% cars, 22% trucks,

1,123 C 3.6% 98%
road to Matamoros 10% other
Puebla-Oaxaca-Ciudad Hidalgo 761 C 1.3% 98%
8% other
Mexico-Puebla-Progreso 1,397 B 2.5% 104%
7% other
Peninsular Highways of Yucatan 1,665 B 3.9% 97%
8% other
Pacific Coastal Highways 1,626 C 2.2% 98%
11% other
… 67% cars, 26% trucks,
Mazatlan-Matamoros 1,7S49 C 5.3% 103%
7% other
… Manzanillo-Tampico with access 70% cars, 22% trucks,
2,096 C 4.3% 104%
road to Lazaro Cardenas 8% other
B* 69% cars, 25% trucks,
Transversal
… Highlands 892 6.5% 103%

E** 6% other

Mexico-Tuxpan 512 C 3.7% 101%
6% other
Acapulco-Veracruz 1,335 B 1.7% 96%
8% other
Transisthmian Circuit 901 B 2.0% 96%
8% other
*Includes the Arco Norte highway. **Excludes the Arco Norte highway. Source: National Trucking Chamber (Canacar), Ministry of Infrastructure, Communications
and Transport and BBVA CER
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As Figure 61 shows, most of the traffic in highways around Mexico has already recovered to pre-pandemic levels,
but corridors with higher truck exposure have outperformed the corridors where greater proportion of cars transit.
Thus, not only the cargo exposure has fuelled the traffic growth in the last 10 years, but also drove a faster
recovery after the pandemic. The Highlands corridor (where the Arco Norte highway is included), heads the list,
with a CAGR 2011-21 of 6.5% and a traffic already 3% above the pre-pandemic levels. Arco Norte began
operations in 2016 and rapidly gained relevance as a cargo-exposed highway, which mainly explains the positive
performance of the region. The Highlands corridor performance is followed by the corridors that connect the
relevant ports or cities with the US, with the Mazatlan-Matamoros, Manzanillo-Tampico and Mexico-Nuevo Laredo
traffics also fully recovered and with an average CAGR 2011-21 of 5%. These post-COVID-19 recoveries signal that
cargo logistics have accelerated in recent months, a trend that is expected to continue in the near future.
Despite the different service levels of each highway, we think that the highway network works relatively well.
Nonetheless, investments will be required in order to prevent the deterioration of the service if demand
grows. Toll roads tend to provide better service levels, since private operators have spent capital in maintenance
to preserve the quality of the service. Thus, we think that new public biddings and increasing the concessions
could be favourable to meet nearshoring increasing transport needs.
Rails
Mexican railways network
Source: SCT
The rail network in Mexico is made up of 29,914km of lines, out of which 17,643km are operated under the scheme
of private concessions (50Y, with 30Y exclusivity rights, to be renewed automatically). The six corridors to the US
are located in Calexico, Nogales, El Paso, Eagle Pass, Laredo, and Brownsville.
People familiar with the sector have acknowledged there is much interest in nearshoring, and admit that the trend
could potentially drive railways’ topline growth. However, they would not give concrete hard numbers or
estimates, as nearshoring is at an early stage, at best.
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We also identified a series of challenges for the industry. First, the capacity of railway services is insufficient to
cope with a surge in demand. For instance, transpacific shipping traffic totals 300mn TEU per year, as a single ship
can transport 18,000 containers vs. 14.1mn containers transported by Class I carriers in the entire USMCA region
in 2021, or 25% of total.
Secondly, based on the G20’s survey already mentioned, the Mexican rail network is suffering from
underinvestment, albeit to a lesser extent than energy or roads. Still, this deficiency implied a USD14bn gap in
2015-40, out of a total package of USD37bn required. And the challenge is even bigger considering the difference
in terms of financing costs: according to Damodaran’s analysis from January 2022, Mexico’s Baa1 Moody’s rating
implies an adjusted default swap of 1.36% (vs. 0.6% for China), an equity risk premium of 5.82% (4.94%) and a
country risk premium of 1.58% (vs. China’s 0.7%).
Finally, a third main risk for nearshoring is rooted in insecurity. According to the figures from the 2021 Cargo Theft
Report (issued by TT Club Insurer, Tapa EMEA, and BSI), Mexico ranks third, only behind Brazil and India, in terms
of risks, with 5% of volumes lost/stolen. On average, 36 trucks are robbed every day, while according to the SCOT
there were 5,028 train robberies in 2021 and 10,143 acts of vandalism, that caused losses for more than USD5bn
(excluding security costs by major railway carriers, representing 1.5-2.0% of sales).
Airports
Air transport accounts for only 7% of the total trade in Mexico. However, 49% of total cargo is carried through the
Mexico City International Airport (AICM). The AICM is not only the largest airport in Mexico, but also the main hub
to connect the Mexican airport network with the rest of the world. Despite government actions to manage the
rapid growth in airport logistics, infrastructure and space limitations have led to saturation, resulting in a poor
passenger experience, inefficient operations, higher costs and deteriorating service quality.
In our view, the AICM saturation could undermine not only the potential benefits of an increasing number of
passengers coming to Mexico as a result of nearshoring, but also the growing cargo dynamics. As such, we believe
that a strategy aimed at promoting regional hubs is required. The three private airport operator groups have
successfully prepared their main airports for capturing incremental growth, but we think that a combined effort of
airports, airlines, cargo airlines and government is needed to fully boost the potential of the regional hubs.
Total cargo handled by airport (YtD 2022) Avg. runway op. capacity rate1 in selected airports (2021)
6%
4%1%1%
3%
4%
3%
6% 49% 80%
7% 35% 44% 22%

18% 9% 23% 17%
Mexico City
Monterrey
Hermosillo
Tijuana
Guadalajara
Juarez
Reynosa
Guanajuato
16%
Mexico City Guadalajara Monterrey Queretaro
Tijuana Cancun San Luis Potosi Toluca
Hermosillo Chihuahua Others
Average operating capacity rate of the runways
Source: Ministry of Infrastructure, Communications and Transport 1

The result of dividing average operations per hour in each airport by the
runway capacity per hour. Considers only the operating hours of each airport.
Source: Airport operators information
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In terms of investment, we think it should be focused on alleviating the AICM saturation, since private operators
have announced ambitious expansions and plans as part of their Master Development Programmes (MDPs), in the
airports that coincidentally, in our view, would benefit the most from the nearshoring trend, not only as a result of
a higher number of passengers but also from increased cargo activity.
Total trade in Mexico1 by country or region (since 2010)

% of total % of total
Passengers cargo Investment investments
(in millions, handled in announced considered
Airport Operated by 2021) Mexico (MXN mn) in MDPs MDP period Description
Modernisation and expansion of
the airport with a second runway
Guadalajara GAP 12.3 16% 6,331 40% 2020-2024
which would increase the operating
capacity by 50%
Two phase-expansion that would
increase capacity from 11.9mn
Monterrey OMA 8.3 7% 8,167 56% 2021-2025
passengers per year to 15.5mn by
YE25
Construction of the new terminal
Tijuana GAP 9.7 3% 2,981 19% 2020-2024 building, which might increase
current infrastructure by 82%
Expansion and modernisation of
the terminal, which would more
Cd. Juarez OMA 1.5 1% 1,162 8% 2021-2025
than double capacity from 0.9mn
passengers to 2.1 in FY23
Hermosillo GAP 1.6 1% 292 2% 2020-2024
Guanajuato GAP 2.1 0.2% 302 2% 2020-2024
Expansion of the terminal, which

Reynosa OMA 0.4 0.1% 298 2% 2021-2025 would triple capacity to service
970,000 passengers per year
Source: Airports operators
Water scarcity
Mexico’s southeast regions account for over two thirds of the available renewable water, whereas the north,
central and northwest have the remaining 33%. Per capita water availability is seven times higher in the southeast
than in the rest of the regions. In fact, according to the National Water Commission (Conagua), the availability of
water per capita is worryingly low in some regions like the Baja California peninsula, the Rio Bravo basin, the
Lerma-Chapala-Santiago tributary and the valley of Mexico.
The percentage of water used compared with the renewable water resources is an indicator of the water stress in a
country. The degree of stress can be very high, high, medium, low and with no stress. According to the United
Nations Organisation, a percentage above 40% is an indicator of a high or very high degree of water stress.
Nationwide, Mexico has a water stress of 19%, which is considered low, but the percentage varies across its
different regions.
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Water stress in Mexico (2019)
High stress
South border 2%
South Pacific 5%
Central Gulf 7%
Yucatan Peninsula 17%
National 20%
North Gulf 21%
North Pacific 41%
Lerma-Santiago-Pacifico 46%
North Central basins 48%
Balsas 52%
Rio Bravo 76%
Northwest 85%
Baja California Peninsula 90%
Waters of the Mexican Valley 129%
Source: Conagua
All of Mexico’s states at the US border have high water stress, but Baja California and Sonora head the top 10 list
of México’s highest water stress ratios. By segments, agriculture, public supply and industry account for 95% of
the total use of water in Mexico. Although industry accounts for only 4.9% of total volumes assigned, this user
group has shown the fastest growth rate in the last decade, with a CAGR 2009-19 of 3% above the 1% of
agricultural users or 1.5% of public supply volumes.
As nearshoring demand so far has concentrated on the northern states of Mexico, and since this trend would
expand industry activity levels, we think that urgent investments (after those required in the electric sector) are
paramount to provide some relief in terms of water scarcity to the six border states.
Evolution of water volume consumption by user groups

Water stress in Mexican states at the US border (2019) (base 100, since 2009)
High stress Relative lower stress

140
114%
130
102%
46%
120
110
59% 100
90
47% 80
48% 70
60
2009
2013
2014
2019
2010
2011
2012
2015
2016
2017
2018
Agriculture Public supply Industry
Source: Conagua Source: Conagua
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Connecting the dots
A bittersweet aftermath. Using the cross of real estate dynamics and infrastructure variables, we conclude that
relevant regions for nearshoring face serious investment needs in order to capitalise growth opportunities.
We think that Juarez and Hermosillo are the two markets where the inertia can explode the most, given the
better access to land, electricity and roads’ quality.
Nearshoring potential in Monterrey and Tijuana (preferred markets for nearshoring transactions so far) will be
limited by increasing water scarcity and a deteriorating service level in highways in the former and by limited
access to land with electricity and scarce water, in the latter.
While non-border markets (Guadalajara, Bajio and Mexico City-metropolitan area) offer better access to land,
electricity and water, the longer distance to the US border may weight on companies’ decisions to close
nearshoring transactions in these regions. Moreover, low service levels in most of the highway network in the area
(particularly in Bajio and Mexico City-metropolitan area) and insecurity (Bajio, mainly) would represent a drag to
land nearshoring opportunities.
Trending nearshoring markets heat map

Real estate:
Supply / Demand Average airports
dynamics Highways service operating capacity
State (vacancy rate) Electricity level Water stress % rate1
Nearshoring regions avg 2.0% Deficit B 82% 30-40%
Border cities
Juarez 0.2% Surplus B 46% 18%
Hermosillo 7.0% Balanced B 102% 17%
Monterrey 2.5% Surplus C 47% 2 23%
Tijuana 0.3% Deficit B 114% 35%
Non-border cities
Guadalajara 1.1% Deficit B 31% 44%
Bajio 4.3% Deficit C 106% 22%
Mexico City-metropolitan area 3.5% Deficit C 93% 80%

Average daily operations per hour/capacity of operations per hour. 2Data as of 2019. Water stress classification corresponds to empirical evidence in 2022.
1
Source: CBRE and Colliers, Ministry of Infrastructure, Communications and Transport, SENER, Conagua, airports operators and BBVA CER
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Public security
Finally, the rule of law has become a challenge, Organised crime, 1-7 (best)
particularly as public security has deteriorated due to Organised crime has become an additional deterrent of investment
in Mexico mainly for local companies
organised crime, which has extended its operations
beyond drug trafficking to extortion and robbery, among 7
others. As such, insecurity has become an additional 6
deterrent of investment in Mexico mainly for local 5

companies. According to a survey conducted by INEGI, 4
47% of the companies in Mexico perceive insecurity 3
when moving their products along industrial corridors, 2
and the figure increases to more than 70% in the states 1
of Oaxaca and Michoacan. Also, 50% of companies 0
perceive insecurity when transporting their products on Hong Kong
Belize
Canada
Costa Rica
China
Thailand
Peru
Korea
USA
Colombia
Chile
Nicaragua
Malaysia
Sri Lanka
India
Argentina
Brazil
Philippines
Mexico
Honduras
Pakistan
Panama
Cambodia
Singapore
Indonesia
Guatemala
El Salvador
highways, a figure that jumps to more than 60% in the
states of Puebla and Zacatecas. Companies perceive that
the probability of being a victim of theft of merchandise
Source: WEF and BBVA GS&R
transported by vehicle is 25% nationwide, which certainly
hinders the manufacturing progress in some parts of Mexico. Figure 81 shows the cost on business exacted by
organised crime (a lower number indicates higher costs). Not surprisingly, Mexico ranks among the lowest in the
sample. Strengthening the rule of law also requires resources, which again, if the tax framework is not improved,
are unlikely to be sufficient.
Moreover, according to the National Security System, there were 4,261 truck robberies in Mexico during the 1H22,
a 2% increase from the 1H21 figure. However, the number of robberies with violence has consistently grown in the
last decade, from 75% in 2011 to 87% in 1H22, the highest level. Official statistics could be undercounting the real
figure, but the trend is clear. The northern states face less truck robberies than the central states, according to the
government, where the State of Mexico, Puebla and Michoacan account for 85% of total violent truck robberies in
1H22.
Evolution of truck robberies (since 2011) Breakdown of truck robberies (since 2011)
17%
15%
18%
28%
25%
15%
17%
13%
14,000 36% 19%

15%
13%
15%
15%
100%
3% 22% -4% -18%

12,000 2%
0%
10,000 31%
-1% -9% -8%
8,000
-100%
6,000
87%
87%
85%
85%
85%
85%
85%
83%
83%
82%
-200%
75%
72%
4,000
-300%
2,000
0 -400%
1H22
2018
2021
2020
2011
2012
2013
2014
2015
2016
2017
2019
2018
2020
2021
2011
2012
2013
2014
2015
2016
2017
2019
Total Total robberies (YoY var.) With violence Without violence
Source: National Security System Source: National Security System
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Conclusion
Is nearshoring the long-awaited quantum leap for Mexico?

Nearshoring is not new; however, it began to gain traction since 2017, when the US turned to a more protectionist
tone that led to a persistent trade war with China. The debate regarding nearshoring further intensified not only
with the outbreak of the COVID-19 pandemic that made evident the fragility of the supply chains, but also by the
Russia-Ukraine conflict that increased energy and fuel costs.
Given its competitive strengths, the nearshoring trend represents an opportunity for Mexico, that overall enjoys
a privileged proximity to the US that has enabled it to create a solid partnership in the USMCA region and where its
position gains relevance amid the current geopolitical backdrop (US-China trade conflict). In fact, we are
convinced that nearshoring is a unique opportunity to bolster Mexico’s export manufacturing industry, which may
imply a positive spillover for the rest of the economy.
Nearshoring is already happening and benefitting Mexico, as evidenced by some key economic indicators.
Export growth has materialised and come mainly from lower value-added industries (which underperformed in the
previous business cycle) which has offset the effect of supply bottlenecks on Mexico’s most competitive sectors.
In our view, when these sectors stabilise, the effect of nearshoring on them will be evident, but it is not yet certain if
all the additional demand currently seen by lower value-added sectors is permanent or transitory. We also believe
that investment may be starting to flow albeit at a moderate pace, where northern states, which have a stronger
manufacturing base, are benefitting the most.
This is further backed by industrial real estate data, as nearshoring demand has posted a 70% 2019-22 CAGR
and now represents 41% of total demand for industrial space (vs. 15% in 2019). Nearshoring transactions have
taken place mostly in northern states, where vacancies have posted record-lows and various markets are sold-out
(Tijuana, Juarez and Reynosa) or near sold-out (Monterrey).
And while we acknowledge Mexico’s competitive strengths… such as its proximity to the US, solid institutions, a
growing labour force at relative competitive cost and a strategic role in the US-China conflict.
… we identify relevant challenges to land a relevant share of nearshoring demand in coming years. In our
opinion, secular underinvestment in infrastructure may represent a relevant drag for nearshoring sooner
rather than later.
We identify a serious threat coming from limited access to land with electricity. In our opinion, the lack of
investment in electricity generation and the transmission network creates serious reliability risks for the electric
sector in the medium and long term. Since electricity demand is not only growing, but also the peak-consumption
seasons are becoming longer each year, CFE generation capacity will need to be increased in order to prevent
jeopardising the system.
Water scarcity may be an issue in various preferred nearshoring markets. All of Mexico’s states at the US
border have high water stress, but Baja California and Sonora head the top 10 list of México’s highest water stress
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ratios. As nearshoring demand so far has concentrated on the northern states of Mexico, urgent investments
(after those required in the electric sector) are paramount to provide some relief in terms of water scarcity.
The third challenge relies on consistent underinvestment in the logistics infrastructure network. Most trade
between the US and Mexico is carried out through the road and rails network. While the highway network functions
relatively well, we identified that the deterioration of the service level in some highways is critical in some
states like Nuevo Leon or the Bajio region, in routes that connect with the US border. Thus, while the network
may satisfy current needs, in our view, investments will be required to maintain or improve the capacity levels if
demand were to grow substantially. Moreover, the rails network is also suffering from underinvestment, albeit
to a lesser extent than energy, water or roads. Still, this deficiency implies threats to increasing demand in
transport logistics.
Additionally, as public security has deteriorated due to organised crime, which has extended its operations beyond
drug trafficking to extortion and robbery, among others, insecurity has become an additional deterrent of
investment in Mexico mainly for local companies.
Moreover, since the birth of the USMCA in 2019, several consultations and panels involving trade and investment
have gained relevance. As such, while we do not foresee the end of the USMCA, we acknowledge that
protectionism has paid political dividends in the region, which may eventually inhibit nearshoring
transactions in Mexico.
Finally, we think that it is too early to know, whether ESG may represent a drag or lever for nearshoring in
Mexico. As we learnt, intuitively getting production back, or closer, to consumption centres should be
incrementally positive from an ESG stance only by reducing the carbon footprint of transporting the goods.
However, our analysis suggests nearshoring is a far more complex endeavour, with positive elements coming from
a more transparent supply chain and regulations under the USMCA framework, but with neutral to negative
factors including the energy mix and the net destruction of jobs from automatisation of the production process.
In summary, we acknowledge that nearshoring may be a tailwind… Assuming manufacturing exports expand at
an average 10% annual rate in the coming cycle, we estimate that nearshoring could bolster GDP by 0.4pp
annually. This figure does not consider further deterioration of non-exporting sectors or that nearshoring demand
is eventually dragged by any of the bottlenecks addressed in this document.
…with growth opportunities particularly relevant for some sectors such as industrial real estate, transport
infrastructure, industrials, building materials and banks,
…but it is very unlikely to represent a quantum leap for the Mexican economy, in our view. Notwithstanding
that we anticipate a pickup in private investment, as seen in previous events with a more widespread effect on the
economy (as proved by NAFTA and the Energy Reform in 2014), we believe that under the current state of public
finance, it is unlikely that public investment will increase enough to end secular underinvestment. Thus,
like the aforementioned events, nearshoring is very unlikely to translate into higher growth.
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Appendix
ESG ratings
70
US #30
60 China #32
Mexico #89
50
40
30
20
10
Sao Tome and Principe
Madagascar
Dominican Republic
Nicaragua
Norway
Nepal
Mongolia
Turkmenistan
Benin
Syria
Sweden
Finland
USA
Italy
Uruguay
Chile
Albania
Belarus
Guyana
Egypt
Djibouti
Switzerland
France
Estonia
Japan
Croatia
Netherlands
Belgium
Iceland
Ireland
Austria
Germany
New Zealand
Portugal
United Kingdom
Slovenia
Romania
Malta
Hungary
Canada
Greece
Mauritius
Bulgaria
Sri Lanka
Fiji
Ghana
Samoa
Brunei
Kenya
Kiribati
Laos
Indonesia
Tonga
Turkey
Thailand
Ethiopia
Tajikistan
Bangladesh
Kazakhstan
Suriname
Cote d'Ivoire
Burma
Micronesia
Oman
Guinea
Angola
India
Mali
Papua New Guinea
Jordan
Azerbaijan
Niger
Gambia
Comoros
Mauritania
Bahamas
Bahrain
Haiti
Yemen
Lebanon
Somalia
Denmark
Luxembourg
Latvia
Lithuania
Zimbabwe
Uganda
West Bank and Gaza
Liechtenstein
South Korea
Slovakia
Czech Republic
Spain
Costa Rica
China
Poland
Peru
Serbia
Paraguay
Bhutan
Australia
Singapore
Russia
Colombia
Georgia
Israel
Bolivia
Ecuador
Belize
Cyprus
Brazil
Argentina
Armenia
Panama
Venezuela
North Macedonia
Malaysia
Ukraine
Bosnia and Herzegovina

Timor-Leste
Montenegro
Dominica
Maldives
El Salvador
Cameroon
United Arab Emirates
Cuba
Kyrgistan
Moldova
Uzbekistan
Mexico
Sierra Leone
Vanuatu
Namibia
Morocco
Cambodia
Botswana
Gabon
Senegal
Grenada
Iran
Saudi Arabia
Rwanda
Honduras
Togo
Algeria
Nigeria
Afghanistan
Zambia
Vietnam
Philippines
Tanzania
Seychelles
Eswatini
Burkina Faso
Jamaica
Malawi
Tunisia
Kuwait
Qatar
South Africa
Lesotho
Guatemala
Guinea-Bissau
Trinidad and Tobago
Liberia
Mozambique
Pakistan
Sudan
Chad
Burundi
Libya
South Sudan
Eritrea
Solomon Islands
Democratic Republic of Congo
Equatorial Guinea
St. Kitts and Nevis
Republic of Congo
Central African Republic

LatAm Countries
Source: FTSE Russell
Morningstar global mapping

Belgium 23.87
Austria 23.77 Czech Republic 3 0.34
Denmark 21 .42
Germa ny 21.38 Hungary 26.93
Finland 19.73
Swit zerland 23.14 Poland 2 8.25
Netherlands 17.86
Norway 24.27
Canada 23.43
Sweden 20.91 Rusia 3 3.42
Ireland 21. 24
U.K. 23.20
United States China 27.47
Portugal 21 .72
22.56 S. Korea 28.51
Spain 20.76 Greece 26.48
Turkey 30.30 Japan 24.92
Mexico 27.68 Colombia 2 8.26 Israel 2 9.37
France 19.40 Hong Kong 20.13 Taiwan 20.62
Brazil 3 0.01 Italy 22.35 Philippin es 27.18
India 27.73 Thailand 26.97
Peru 34.09 Pakistan 42.95
Qatar 32.18
Indon esia 3 0.31
Saudi Arabia 3 4.79
Malaysia 2 8.56
U.A. Emirates 27.42
Singapo re 25.40 Australia 24.03
Chile 2 9.50
South Africa 25.89

New Zealand 26.38
17.86 - 22 .00 22.01 - 24.03 24.04 - 27.42 27.43 - 3 0.00 30.01 - 42.95
Source: MorningStar
Economic Freedom of the World Index

Overall
ranking Business regulations Infrastruture International trade Legal system Corruption
Economic Credit market, Electricity Trade Legal
Freedom of Global labour, and Ease of output, Freedom to competition, system, and Rule Corruption
the World innovation business strating kWh/million trade and market property of perception
Country Index index regulations business population internationally scale rights law index
USA 6 3 5 48 9 62 1 20 19 25
Canada 9 17 6 3 5 48 13 11 12 11
Mexico 68 55 79 83 66 67 14 93 106 124
China 124 14 130 25 45 112 3 86 72 78
Source: Cato Institute, Fraser Institute, Economic Freedom of the World, Global Innovation Index, and Transparency International
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CAGE model for nearshoring decisions

Factor Cultural Administrative Geographical Economic
Attributes of distance Languages Colonial links Physical distance Difference in PPP
between outsourcers Religions Economic unions Time zones Difference in cost/quality of:
and outsourcees Social norms Political situation Common borders Natural resources
Institutional weakness Sea access Financial resources
Infrastructure links Human resources
Infrastructure
Main drivers for Hidden costs related to Corruption, custom Logistical costs Production cost advantages
the decision language barriers, tariffs, and other comprising (closer to traditional trade
diverging cultural trade barriers transport, specialisation theories)
values, tec. inventories, etc.
Source: Latin American Journal of Trade Policies
World Bank Logistics Performance Index

2010 2012 2014 2016 2018
Country Rank Score Rank Score Rank Score Rank Score Rank Score
Mexico 50 3.05 47 3.06 50 3.13 54 3.11 51 3.05
USA 15 3.86 9 3.93 9 3.92 10 4.07 14 3.89
Canada 14 3.87 14 3.85 12 3.86 14 3.93 20 3.73
China 27 3.49 26 3.52 28 3.53 27 3.66 26 3.61
LatAm
Chile 49 3.09 39 3.17 42 3.26 46 3.25 34 3.32
Panama 51 3.02 61 2.93 45 3.19 40 3.34 38 3.28
Brazil 41 3.20 45 3.13 65 2.94 55 3.09 56 2.99
Colombia 72 2.77 64 2.87 97 2.64 94 2.61 58 2.94
Argentina 48 3.10 49 3.05 60 2.99 66 2.96 61 2.89
Ecuador 71 2.77 79 2.76 86 2.71 74 2.78 62 2.88
Costa Rica 56 2.91 82 2.75 87 2.70 89 2.65 73 2.79
Paraguay 76 2.75 88 2.48 78 2.78 101 2.56 74 2.78
Peru 67 2.80 60 2.94 71 2.84 69 2.89 83 2.69
Uruguay 77 2.75 56 2.98 91 2.68 65 2.97 85 2.69
Honduras 70 2.78 105 2.53 103 2.61 112 2.46 93 2.60
El Salvador 86 2.67 93 2.60 64 2.96 83 2.71 101 2.58
Guatemala 90 2.63 74 2.80 77 2.80 111 2.48 125 2.41
Bolivia 112 2.51 90 2.61 121 2.48 138 2.25 131 2.36
Guyana 140 2.27 133 2.33 124 2.46 85 2.67 132 2.36
Venezuela 84 2.68 111 2.49 76 2.81 122 2.39 142 2.23
South East Asia

Thailand 35 3.29 38 3.18 35 3.43 45 3.26 32 3.41
Vietnam 53 2.96 53 3.00 48 3.15 64 2.98 39 3.27
Malaysia 29 3.44 29 3.49 25 3.59 32 3.43 41 3.22
India 47 3.12 46 3.08 54 3.08 35 3.42 44 3.18
Indonesia 75 2.76 59 2.94 53 3.08 63 2.98 46 3.15
Philippines 44 3.14 52 3.02 57 3.00 71 2.86 60 2.90
Cambodia 129 2.37 101 2.56 83 2.74 73 2.80 98 2.58
Bangladesh 79 2.74 n.a. n.a. 108 2.56 87 2.66 100 2.58
Source: World Bank
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Gas prices US/Europe (USD/Mmbtu) US/Mex good transport by mode

40 100%
90%
30 80%
70%
20 60%
50%
10 40%
30%
0 20%
10%
1/12/18
1/4/20
1/8/20
1/4/21
1/8/21
1/4/22
1/8/22
1/12/17
1/8/19
1/12/19
1/12/20
1/12/21
1/8/17
1/4/18
1/8/18
1/4/19
0%
1996
1999
2006
2009
2016
2019
2008
1994
1998
2003
2000
2001
2004
2010
2011
2013
2014
2018
2020
2002
2012
1995
2015
1997
2005
2007
2017
Henry Hun (USD/Mmbtu) Road transport Railway transport
Europe NatGas reference price (USD/Mmbtu) Air transport Maritime transport
Source: Bloomberg Source: SCT
US Google search trend (5Y) Mexico Google search trend (5Y)

120 120
100 100
80 80
60 60
40 40
20 20
0 0
19/7/18
19/7/22
19/11/18
19/11/17
19/3/18
19/3/19
19/11/19
19/7/19
19/3/20
19/3/21
19/3/22
19/11/20
19/11/21
19/7/20
19/7/21
19/7/21
19/11/21
19/3/18
19/11/17
19/11/18
19/7/18
19/3/19
19/3/20
19/11/19
19/7/19
19/7/20
19/11/20
19/3/22
19/3/21
19/7/22
Nearshoring Offshoring Backshoring Nearshoring Offshoring Backshoring
Source: Google trends Source: Google trends
DISCLAIMER

Corporate &
Investment Banking
Comparative logistics dynamic
Source: McKinsey
DISCLAIMER

Corporate &
Investment Banking
References
 Garrido, C. (2022). México en la fábrica de América del Norte y el nearshoring. CEPAL
 Rudolf, P. (2020). The Sino-American World Conflict. SWP Research Paper. German Institute for International
and Security Affairs.
 Banco de México (2022). Box 2 - Opinión Empresarial sobre la Relocalización de las Empresas hacia México.
Report on Regional Economies April - June 2022.
 The Global Sustainable Competitive Index, published in October 2021and issued by SolAbility
 Fall 2022 Fortune/Deloitte CEO Survey, fielded 28 September-6 October 2022 and published in October
2022, gathered by Deloitte Development LLC.
 2022 ITUC Global Rights Index, published in September 2022 by the International Trade Union Confederation
 Child Labour, published in June 2021 by the UNICEF
 Ocean Freight Market Update, issued in November 2022 by DHL
 Club Cargo Theft Report, issued in February 2022 by TT and BSI
 Reporte trimestral de seguridad del cuatro trimester 2021, issued in February 2022 by the SCT
DISCLAIMER

Nearshoring - A Tailwind, But Hardly A Quantum Leap For Mexico

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Property of BBVA 12-Dec-22

BBVA Investment Strategy

Mexico City, 30 November 2022

BBVA Investment Strategy

A tailwind, but hardly a quantum leap for

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Explore all document

Nearshoring: Top 5 FAQ The nearshoring trend

Evidence in Mexico ESG: Drag or lever?

The Mexican case: strengths Conclusion

BBVA Investment Strategy

Top 5 FAQs about nearshoring

3. ESG: Drag or lever?

4. What are Mexico’s strengths and challenges in this context?

5. Is nearshoring the long-awaited quantum leap for Mexico?

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Chapter I. The nearshoring trend

Globalisation timeline (since 1945)

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Mexico’s manufacturing exports market share in the US (%)

2 Decree for the operation

Market share 2022 forecast

Source: Comtrade and BBVA GMS&R

Off-, re-, back-, near- shoring

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Chapter II. Evidence in Mexico

Economic data suggests nearshoring is already benefitting Mexico

This boom is not new. As Mexico runs a structural trade

annual average. Transport equipment production was 2.4

1.5 Food industry

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Transport and communications equipment

Manufacturing sectors growing above their long term trend

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Manufacturing exports Apr 12

Source: INEGI, Banco de México and BBVA GS&R

Gross fixed investment Machinery and equipment

BBVA Investment Strategy

San Luis Potosí

Rest of the states

FDI flows dynamic has been positive in the short term,

Intercompany accounts of companies with foreign participation

BBVA Investment Strategy

BBVA Investment Strategy

Real estate data further back the evidence

Non-nearshoring demand (000 m2)

BBVA Investment Strategy

Mexico: Nearshoring transactions in 2021 Mexico: Nearshoring transactions in 1Q22

Auto parts 9% Furniture

Electric & appliance 8%

Source: CBRE Source: CBRE

Nearshoring-related demand by market in 2020-21

Tijuana Juarez Coahuila

Source: CBRE and BBVA CER

BBVA Investment Strategy

4Q19 4Q20 4Q21 2Q22 4Q19 4Q20 4Q21 2Q22

4.9 4.9 5.0 5.4

4Q19 4Q20 4Q21 2Q22 4Q19 4Q20 4Q21 2Q22

5.1% 4.8 5.2

4Q19 4Q20 4Q21 2Q22 4Q19 4Q20 4Q21 2Q22