Mexico: The epicenter of nearshoring and foreign investment opportunity

 

Nearshoring is bringing transformational change to Mexico with many multinational companies evaluating the advantages of relocating supply chains into the country.

Mexico’s strategic location is seen by many to offer significant benefits in mitigating supply chain risks, bringing production closer to the end consumer, reducing operating costs, and improving logistical efficiencies.

Although it may seem that this phenomenon is relatively recent – a consequence of the COVID-19 pandemic and the geopolitical conflicts in recent years – for some time now the public and private sectors in Mexico have been trying to boost economic growth by developing specific regional policies to make them attractive locations for FDI.

For example, in 2016 the government enacted the Federal Law on Special Economic Zones (SEZ), which aim to regulate the establishment and operation of these special zones in economically under-developed regions of the country, such as the Isthmus of Tehuantepec.

Although those attempts did not fully succeed, the current government revived the so-called Interoceanic Corridor of the Isthmus of Tehuantepec (CIIT), which is now moving ahead with the aim of connecting the Pacific Ocean with the Gulf of Mexico, with a focus on development in the states of Oaxaca and Veracruz.

In addition to addressing poverty and the grey economy in these states, the government seeks to take advantage of “…the Isthmus’ position to compete in global markets for the mobilization of goods, through the combined use of various means of transportation” (National Development Plan 2019-2024).

In recent months new measures were introduced by the federal government to push this forward. On June 5th, a Decree was published granting fiscal benefits and administrative support to those who hold a concession title or own lands within the Corridor and engage in the following productive activities:

Semiconductors, electrical and electronics, automotive (electromobility), auto parts and transportation equipment, medical devices, pharmaceuticals, agribusiness, electric power generation and distribution equipment (clean energy), machinery and equipment, information and communication technologies, metals and petrochemicals.

The new fiscal incentives announced include:

• 100% discount on the Income Tax (ISR) for the first three years of operation and 50% in the following three years.
• Accelerated depreciation of investments, consisting of an immediate deduction of 100% of the original amount of the investment of new fixed assets.
• Exemption form Value Added Tax (VAT) on the sale of goods, provision of independent services, or temporary use of goods.

On June 20th the government published calls for public tenders to obtain concession titles for a two years-term for the use and exploitation of lands located along the Corridor. Companies interested in participating in these public tenders had to fill out a pre-registration form during the last week of June, under which they will be allowed to participate in the CIIT ‘orientation session’ to be held on July 26 to 27.

While these measures have sparked interest among the investment community, further action is still needed to make the Interoceanic Corridor a truly significant development hub.

In this regard, it is important to note that the Decree of June 5th states that the federal government may encourage state and municipal governments to grant additional fiscal incentives including, for example, exemption from payroll or property taxes or fees related to the land acquisition and business registration.

Moreover, under the National Development Plan 2019-2024, the government is committed creating “free zones to attract private sector investment, which will be equipped with infrastructure and ensure the supply of energy, water, digital connectivity, and other basic inputs to meet the needs of companies and the working population”.

Business groups are actively advising government on what these further measures should look like. For example, the CEEG, CCE and AmCham have expressed the need for the government to do the following:

1. Undertake reforms to provide further legal certainty for investors.
2. Invest in infrastructure and connectivity to ensure productive linkages.
3. Develop better training and skills development for the regional workforce.
4. Promote a stronger SME supply chain ecosystem.
5. Engage with Chambers of Commerce, Bar Associations & Professional Associations.
6. Create a ‘One Stop Shop’ so that companies have a single point of contact through which to engage all three levels of government, simplifying investment processes.

For companies to succeed in this new Mexican era, it is important for them to have all the local knowledge possible, understand the complex economic and political landscape, count on the best support and right interlocutors that can engage with key stakeholders. Each market has its own peculiarities and Mexico is no exception. The country has plenty of opportunities, but also challenges, and overcoming those are crucial to succeed.

Engaging with the right authorities and being able to link business interests with the current and next administration’s public policy agendas are key to succeed in this endeavour. At Speyside we have been supporting companies around the globe for more than 25 years overcoming challenges and helping them navigate in emerging markets successfully. We are excited about the future of FDI into Mexico.

The “Mexican moment” has arrived, and it is time to seize it.

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