Nearshoring in the Americas

What do Xi Jinping, Vladimir Putin and ‘Amlo’ all have in common? Well, apart from their shared authoritarian streak, they are also all working to push manufacturing to Guatemala. Nearshoring’s first big push came from China, when Xi Jinping’s ‘Wolf Warrior’ diplomacy resulted in a trade war with the US. Those trade tensions have been exacerbated by China’s extreme ‘zero covid’ policy, which makes it practically impossible for western executives to conduct short business trips to the country. Just when multinational firms hoped the supply chain chaos would recede with the pandemic, Putin decided to invade Ukraine, pushing up energy – and therefore transport – prices. It is unfair to compare Mexico’s president, Andres Manuel López Obrador, to the other two quasi-dictators but his constant attacks on international investment in his country are pushing some firms to relocate.

It is too soon to talk about the end of globalisation but the convoluted supply chains that relied on cheap shipping, just-in-time inventories and far-flung factories has been proved fragile by recent global events. Of course, nearshoring is nothing new. Since the 1994 creation of the North American Free Trade Agreement (Nafta), multinational firms have built factories to serve the world’s biggest market – the US. In turn many of those factories turned to suppliers further south. Guatemala’s largest exports are already US focused. Its biggest export is its people, with millions of immigrant Guatemalan workers in the US sending remittances south. Its second-largest export industry is textiles, which sends apparel north. But until now, Guatemala has failed to fully capitalise on its location. It has always lacked the transport infrastructure, business parks and free trade zones to fully integrate with US supply chains.

Nearshoring

“The pandemic and geopolitics have created a big incentive for US brands to manufacture their goods closer to home”, says Diego Herrera, CEO of Pantaleon, a sugar producer and real estate developer that is one of Guatemala’s oldest and largest companies. “Guatemala is logistically very close to the US, which makes it less exposed to the high price of containers. Also, Guatemala isn’t at risk from being subject to sanctions. We have ports in both oceans and it is much easier to do business here than in Mexico because the security situation is much better. The rules of the game for businesses are more consistent here also. Much of the billions of dollars of international investments in Mexican energy projects following the reform will now have to be written down because a new government has changed the rules. In Guatemala we don’t have these problems because the executive branch is very keen on creating a good business environment.”

Guatemalan nearshoring isn’t just a nice-sounding business theory, says Karin de León, Co-Ordinator for Pronacom, Guatemala’s economic competitiveness agency – it is already happening. “We have already seen textile companies and light manufacturing plants come to Guatemala.” On big advantage is Guatemala’s location, says de León. “We are just two days’ sail to Miami, while access to the Pacific and Atlantic means we can serve both sides of the US.”

Surprisingly, being close to the US doesn’t just help for physical goods, it also helps service exports, says Guillermo Montano, a serial entrepreneur who founded and sold two successful BPO operations. “Our chief advantage is our proximity to the US. We are just two hours’ flight from Miami and three hours’ flight from Dallas, so we can have US experts coming to guide us every week. Our culture is very Americanised, which helps us understand our clients.”

Enhancing competitiveness

Of course, Guatemala’s location is nothing new. But now the country is making the improvements needed to take advantage of its privileged post code. “For many years free trade zones in Guatemala were stuck behind those in neighbouring countries”, says de León. That’s because many industries were prevented from using them. However, in 2020 a modification to the law allowed any sector to use free trade zones in Guatemala, which means they are now more attractive. The main benefit is the ten-year exemption on corporation tax.”

In theory, free trade zones are a good way to attract international companies but in reality, they are just a set of beneficial tax rules on a piece of paper. To really persuade companies to come to Guatemala you need to combine the tax advantages with physical business parks that offer a complete manufacturing and export ecosystem. Only now is Guatemala starting to build sophisticated, large industrial parks with Puerta del Istmo on the border with Mexico, Spectrum’s new park close to the border with El Salvador and Michatoya Pacifico on the Pacific Coast.

Another, less appreciated advantage, is that Guatemala benefits from an expanding local market. Strong domestic demand has built up a growing national manufacturing base that can supply new international operations. In addition to being the CEO of Fundesa, a non-profit economic think tank, Juan Carlos Paiz is the co-founder of Panifresh, a Guatemalan bread producer with factories across Central and North America. “I like to measure the economic market of a city by calculating how many consumers one of my trucks can reach in an eight-hour drive”, says Paiz. “That radius from the centre of Guatemala City gives you access to 27 million consumers. You have 17 million Guatemalans, 6 million El Salvadoreans and about half of Honduras’ 10 million population. If we improved our infrastructure, we could also incorporate the south of Mexico, places like Chiapas and Cancun, and that would increase the market to 40 million. The only cities in Latin America that have bigger domestic markets are Mexico and Sao Paolo.”

Montano, who is now the CEO of Mobiliare, a Latin America-focused real estate investment trust (REIT) agrees that the region’s strengths are often overlooked. “There are long-term economic trends working in Latin America’s favour. One is nearshoring, as international factories look to relocate in the Americas. And the other is demographics, with most countries in the region benefitting from a strong demographic boom.”

The latter point is confirmed by Dani León, CEO at ACTalentos, a Guatemalan human resources firm with offices across Central America. “Guatemala is in the middle of a demographic boom. A new government programme aims to ensure that by 2028 all public schools will have computers, the internet and teach English. We find that native Mayan speakers tend to learn English more quickly. I am very optimistic about the future of the Guatemalan work force.” Moreover, León notes that while Mexico recently outlawed outsourcing, which is a vital employment tool for international companies, Guatemala is improving its use of the mechanism. “Mi Primer Empleo (My First Job) is a scheme where we train high school leavers to be office-ready. Then we place them in outsourcing jobs for client companies. The Ministry of Employment pays 51% of the wage, while we pay the remaining 49% plus all of the social security benefits. It is a great programme because it changes the perception people have of outsourcing.”

Business environment

Clearly Guatemala is not a paradise and there are some challenges that should be highlighted. One is the transport infrastructure. At present its inadequate network of seaports, airports and roads all hinder Guatemala’s economic productivity. We explore the infrastructure challenge in-depth elsewhere in this report. The other weakness is the business environment. It scores poorly in the Transparency International corruption rankings and in the World Bank’s Doing Business report, before it was discontinued in 2021. But local investors feel those dangers are often overstated or misunderstood by international companies.

“Developing countries have all sorts of challenges, but that is why they are such an opportunity”, says Montano. “In these countries you can grow faster and get better returns precisely because they are developing. Investors need to separate political risk from business risk. None of these countries are expropriating private property or businesses. Of course, there is always some interaction between politics and business but that doesn’t happen in the type of businesses that we are investing in. Mining and energy, which are heavily-regulated industries that depend on government decisions, are more liable to political risk. But nobody is going to nationalise a call centre.”

“The other thing to understand is that the political risk goes in cycles”, continues Montano. “Lots of international observers get worried about the prospect of Gustavo Petro in Colombia or Nayib Bukele in El Salvador, but these populists are often good for business because they understand the importance of creating jobs. If you are investing in a business that will create employment or exports then you can expect government support.”

Luis Miguel Castillo, Chairman of the Board at CBC (Central American Bottling Corporation) runs businesses across Latin America but is most upbeat about Guatemala. “If you don’t need the public sector then it’s the best place to make business. We had a war and a bad reputation but I see now with the Guatemala Moving Forward project that we are doing with McKinsey that the public and private sector is working together. The best market in Central America to sell to, or produce in, is Guatemala. Mexico is a good reference point for us because they have been working on this – ie signing free trade agreements and investing in infrastructure – for a long time.”

Guatemala only needs to look around the region for inspiration on how to attract international businesses. Costa Rica’s excellent business parks and fiscal benefits have lured high-end electronics and medical device manufacturers. Meanwhile, Panama’s Canal and world-class seaports make it the transhipment hub of the Americas. But Guatemala shares the same privileged location – the Central American isthmus – while also carrying major advantages against those countries. Its young and expanding population give it a competitive and flexible workforce, while its energy infrastructure gives it cheap, renewable power. As increasing amounts of multinationals relocate from Asia to the Americas, many will come to Guatemala.