If this year was when companies realized just how difficult it is to rely on China for their business success, 2023 may be the year Latin America steps in to fill that void
Javid Group is an Arizona-based company that helps foreign companies overcome the legal, fiscal, and regulatory hurdles of starting operations there. Before 2022, Javid worked with two or three clients a year. But in 2022, it has worked with six clients setting up shop in the country, and already has four lined up for the first quarter of 2023.
“What we’re seeing coming into Mexico, it’s unheard of,” Joshua Rubin, vice president of business development at Javid, told Fortune. “From my line of business and the people I've been talking to, this is not going to be ending anytime soon.”
Nearshoring, or expanding business in countries with a close proximity to a company’s customer base, has taken off over the past year, as COVID lockdowns, supply chain snarls, and geopolitical uncertainty disrupted operations for the world’s traditional manufacturing hubs. China, long-considered the factory of the world, is no longer as reliable after its zero-COVID policy disrupted operations at factories making Tesla and Apple products, among many others.
The difficulties of maintaining global supply chains has pushed more and more companies to cast their nets closer to home this year, and experts say that China’s loss could be a massive gain for the Americas. In 2022, 400 North American companies were exploring moving their operations from Asia to Mexico, economy minister Raquel Buenrostro said in November. And in early 2023, the U.S. and Mexican governments will present joint plans to encourage more companies to move their businesses from Asia to Mexico, highlighting benefits and incentives.
The big lesson for manufacturers in 2022 was: “I don't want to put all my eggs in one basket. I don't want to trust everything in Asia,” said Rubin. In 2023, it will be all about putting their new plans in motion.
“We’re going to start seeing companies diversify the way they’re operating,” he said. “We’re going to be seeing an increase of companies that used to have 600 or 700 people operating in Asia start to say, ‘You know what, I'm going to keep 100 or 200 in Asia, I'm gonna put another 100 or 200 in Mexico and maybe I'll bring another 100 into the U.S.’”
Experts tell Fortune that the process could not only accelerate growth and development in Latin America, but help further advance U.S. political interests by keeping China’s influence in the region at bay.
“Nearshoring is going to be a continued subject of conversation,” Ryan Berg, director of the Americas Program at the Center for Strategic and International Studies told Fortune. “The urgency of getting nearshoring to Central America is very, very high. It’s now. It’s immediate. It’s not in five years or 10 years from now,”
With hundreds of companies looking at setting up shop in Latin America and billions already invested, countries are gearing up for a potential windfall over the next decade.
A clear winner from the nearshoring wave is undoubtedly Mexico, due to its proximity to the U.S. and relatively cheap labor, but it isn’t only U.S. companies interested in moving there. European companies including automakers Volkswagen and Continental, as well as tire maker Pirelli, have already announced plans to invest and establish manufacturing plants in Mexico in 2023, while Javid’s Rubin says one of his biggest clients is from Switzerland, as manufacturers look to be closer to their U.S. customer base.
In 2022, Mexico’s manufacturing sector grew 5%, exceeding its pre-pandemic size, and the current conditions represent the “best growth opportunity for the next 10 years,” Bank of America economists wrote in an October research note.
“In Mexico, they’re saying, ‘we’re open for business, we’re ready to operate,’” Rubin said.
He added that bilateral plans from the U.S. and Mexican governments are set to facilitate the nearshoring push in 2023, including agreements to modernize ports of entry as well as telecommunications and infrastructure, including roads, railways, and airports. Over the summer, Mexico President Andres Manuel Lopez Obrador said U.S. companies were planning on investing $40 billion in the country between now and 2024, which he said will improve the country’s reputation among investors globally and place Mexico at the forefront of global supply chains.
But with lower labor costs and relative proximity to the U.S., other Latin American countries aren’t far behind.
The Inter-American Development Bank (IADB), the largest developmental finance institution servicing Latin America and the Caribbean, announced in June that nearshoring efforts could add $78 billion in export value across Latin America by 2025 for everything from pharmaceuticals to renewable energy components.
“Mexico is the obvious place because of the geographic proximity, and the fact that the trade agreement that Mexico has with the United States is the most up to date,” Berg said. But he added that “there are a lot of opportunities that aren't being exploited in Central America.”
Export values in the seven Central American countries excluding Mexico—Belize, Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica, and Panama—are forecasted to rise by more than $3 billion by 2025, according to the IADB. In South America meanwhile, export values in Argentina will rise by almost $4 billion, and nearly $8 billion in Brazil.
But nearshoring’s story in 2023 isn’t just about Latin America’s gain, it’s also about China’s loss, as many companies are already starting to wind down their interests in the country.
China’s COVID situation is part of the reason business confidence in the country recently fell to its lowest point in nearly a decade, and close to twice as many U.S. companies have decided to cut their investments in China in 2022—more than 60 companies—compared to last year, according to an October survey from the Shanghai branch of the U.S. Chamber of Commerce, an organization that assists U.S. companies operating in China.
China began lifting its zero-COVID policy earlier this month, although health experts have warned the reversal could lead to widespread and uncontrolled COVID outbreaks, which have already taken a toll on business operations in the country.
“So many companies experienced shortages and difficulties in getting parts from China. Shipping delays, increasing costs, all these things which exposed that risk in their long global supply chains,” Rosemary Coates, executive director of the Reshoring Institute, a non-profit and non-partisan consultancy for companies seeking to expand their operations in the U.S., told Fortune.
China’s zero-COVID policy that locked down several factories this year has already prompted prominent companies including Apple to consider moving at least part of their production out of the country, reportedly seeking to expand manufacturing operations in Vietnam and India next year. Nearly a quarter of European companies operating in China were also considering leaving the country earlier this year, according to a EU Chamber of Commerce survey, the highest proportion in a decade.
Other companies have cut back on operations in China, including Tesla, whose Shanghai gigafactory announced earlier this month it would suspend production of its Model Y vehicle through the end of the year, as part of a larger 30% cut in planned production for the model amid falling demand in China. Tesla is reportedly also finalizing plans for a new electric vehicle manufacturing plant in northeastern Mexico to be announced before the end of the year, according to Bloomberg.
Companies nearshoring to the Americas could also come back to hurt China politically, as more U.S. investment in Latin America could stand in the way of China’s massive investment plans in the region as part of its sweeping Belt & Road Initiative, Berg from CSIS said.
He argued in a report earlier this month that nearshoring in Central America was the best and most effective way for the U.S. to counter China’s growing influence in Latin America. Over the past decade, China has scored big political wins in the region by swaying Nicaragua, Panama, El Salvador, and the Dominican Republic to switch allegiances from Taiwan to China through investments in new infrastructure projects or shipments of COVID-19 vaccines.
“The more we leave [Latin American countries] out to dry, the more they might be tempted by China's overtures that they'll make all these big crazy investments in infrastructure, because that's really their main mechanism for wooing countries away from Taiwan: the volume of of investments that they can make,” Berg said.
While nearshoring is expected to shift focus away from Asia towards the Americas, four experts Fortune spoke with agreed that companies might be diversifying their manufacturing, but few are thinking about abandoning their operations in China altogether.
“We are seeing a nearshoring of manufacturing returning back to the States, but not at 100% capabilities,” Javid’s Rubin said. “The world cannot manufacture without Asia, China, Vietnam, Malaysia, Korea.”
Part of Asia’s staying power as a manufacturing hub is an easier access to raw materials than many countries in Latin America. Chinese companies dominate global extraction and production markets for critical raw materials, especially for rare earth minerals used to manufacture solar cells and batteries for electric cars. Even though China only accounts for around one third of global rare earth mining, the country controls 60% of global production and 85% of processing capacity.
“It's absolutely a challenge,” the Reshoring Institute’s Coates said in reference to competition with Asia over raw materials. “This is one of the highest exposures in terms of risks that we've recognized over the last couple of years.”
China’s control of raw material markets means some operations cannot be cheaply nearshored, Rubin said, arguing that the resilience of a business increasingly depends on how diverse their operations are.
“I would call it a diversification of manufacturing. That’s what we're seeing,” he said. “Most companies are saying, ‘I'm not closing down my operation. I'm just expanding manufacturing.’”
This story was originally featured on Fortune.com
More from Fortune:
People who skipped their COVID vaccine are at higher risk of traffic incidents
Elon Musk says getting booed by Dave Chapelle fans 'was a first for me in real life' suggesting he's aware of building backlash
Gen Z and young millennials have found a new way to afford luxury handbags and watches—living with mom and dad
Meghan Markle’s real sin that the British public can’t forgive–and Americans can’t understand
Dozens of changes are coming to America's retirement landscape.
As 2022 comes to a close, there have been subtle shifts in ranking the world's richest people. In December 2022, Tesla and Twitter CEO Elon Musk ceded his title as the richest person in the world to…
Putin has tried using energy as a weapon against the West this year, but he risks going too far.
Similarweb Senior Insights Manager and Travel Expert Jim Corridore joins Yahoo Finance Live to discuss the ongoing controversy surrounding Southwest Airlines and its number of cancellations over the holidays.
Judge Lewis Kaplan has replaced Judge Ronnie Abrams, who recused herself because of a potential conflict of interest.
(Bloomberg) — One of the biggest landowners in Texas oil country doubled returns to investors in 2022. It’s starting the new year by suing some of them as a dispute over the future direction of the company spills into a Delaware court.Most Read from BloombergSouth Korea Sends Drones to Kim Jong Un’s Airspace in Unprecedented MoveRussia Says Ukraine Must Surrender Even as Putin’s Army RetreatsChina Reopens Borders to World In Removing Last Covid Zero CurbsSouthwest Air Faces Gridlock With Over 8
Meta and Alphabet Lose The Advertising Throne It seems that the long-held duopoly ruling the $300 billion advertising market is coming to an end as tech giants are fighting for their piece of the pie. Meta Platform Inc (NASDAQ: META) and Alphabet Inc (NASDAQ: GOOG) are losing their dominance to Amazon.com Inc (NASDAQ: AMZN), Microsoft Corporation (NASDAQ: MSFT) and Apple Inc (NASDAQ: AAPL). Figures According to Insider Intelligence, this will be the first year since 2014 that these two corporati
Three-year revenue growth rates between 39% and 54% are projected, making these stocks prime multibagger candidates.
GasBuddy doesn't see a repeat of the record above $5 per gallon of gas paid during 2022's wild swings for the energy markets, but prices won't stay this low.
Photo Illustration by Thomas Levinson/The Daily Beast/GettyEarlier this year, as Elon Musk looked increasingly likely to lose his court battle and be forced into purchasing Twitter, Justine De Caires started to get nervous.Like others, De Caires, a Twitter software engineer of three and a half years, predicted a Musk takeover would come with mass layoffs. Unlike many, the 25-year-old had closely followed the legal battle between the billionaire and the social media company and read every page of
Wells Fargo just entered into a record settlement with the Consumer Financial Protection Bureau for past transgressions.
Argentina's booming shale production in Vaca Muerta, a formation that rivals the United States' Permian Basin, is at risk of running out of road as infrastructure to handle the oil and gas nears capacity, threatening to put the brakes on rapid growth. The government is now racing to build out infrastructure: a major new gas pipeline is set to come online mid next year and there are plans for new export terminals near Buenos Aires. The government is also working on a liquefied natural gas (LNG) law to send to Congress hoping to stimulate investment.
Industrial technology company Cognex is going through a rough patch, but its long-term prospects remain excellent.
Oil is a dominant source of energy worldwide and oil companies supply billions of barrels of petroleum products daily to power transportation and industry. Rising public concern about climate change and measures to reduce the use of carbon-based fuels have yet to fully impact the industry.
Most laid off workers in tech are finding jobs shortly after beginning their search, as employers continue to scoop up workers in a tight labor market.
Target is the latest big-box chain to join in on the post-Christmas sales period. Known as the 'The Target Clearance Run,' the sale takes place until the end of the year and includes discounts of up to 50% on categories such as sleepwear, children's and adult toys, and beauty and lifestyle products. Additional deals include buy-one-get-one-50%-off on board games, a $15 gift card for those who spend $50 on household cleaning products like tissues, paper towels, and cleaning products as well as $10 off for those who spend $50 on food and beverage same-day delivery.
The semiconductor manufacturer's business has been on a tear though its stock price remains depressed.
Fast food company Wendy's made a price low on the charts back in May and has rallied the past seven months. Prices are back to the $24-$25 area which represents resistance for the past two years. Can shares of WEN finally breakout on the upside or will prices retreat again? Let's check.
The U.S. oil benchmark ended near unchanged Tuesday as U.S. refineries temporarily closed last week by a brutal winter storm came back online. Oil was lifted earlier in the session on optimism about Chinese demand as the country said it would drop quarantine requirements for incoming travelers, and after a brutal U.S. winter storm forced the temporary closure of several Texas refineries. Also, Russia banned the sale of oil and oil products to countries that participate in a price cap on the country’s crude exports.
Bullish sentiment is building in oil markets as China eases Covid restrictions, Russia warns of production problems, and a storm devastates the U.S.
