Spain’s faltering Mexican Reconquista

Mexico’s potential nearshoring boom could be jeopardised by its president’s attacks on Spanish companies, writes William Lee, Director at Secure Value...

Mexico looks likely to benefit from nearshoring as international firms attempt to reduce their exposure to China by shifting supply chains elsewhere. Mexico is an obvious nearshoring destination, given its geographical position on the doorstep of the US market and relatively cheap labour costs. Spanish companies are keen to get involved. After all, the two countries also share extensive historical, commercial and cultural ties and speak the same language. Yet recent developments have many Spanish firms, particularly in the energy sector, viewing Mexico with caution.

Relations started to sour in late 2022 when Mexican president Andrés López Manuel Obrador (known as Amlo) declared a pause was necessary in Spanish-Mexican commercial ties because Spain had, over many years, exploited his county. Energy companies have been a particular target as Amlo, a leftist populist, has moved to assert greater state control over Mexico’s energy sector. Spanish investors were especially rattled in April 2023 when the president announced the purchase of 13 electricity plants from Iberdrola, a large Spanish energy firm.

The purchase was labelled by the president a “new nationalisation” – a reference to the 1938 expropriation of the foreign-owned oil industry in Mexico – and was, at least partly, intended to ramp up political support among his support base on the left. Almo’s move is far less extreme than that of 1938, given that he is paying Iberdrola for the assets. Regardless, the incident underlined concerns among private operators over the government’s approach to the energy sector – something that was highlighted by Ibedrola’s willingness to sell.

A perception of hostility to foreign firms and policy uncertainty is certainly feeding into commercial decision makingWilliam Lee, Director, Secure Value

Amlo has frequently attacked Iberdrola, likening the attitude of one of Europe's leading energy firms to Spanish colonialists. He has also spent years embroiled in disputes with investors over energy, leading to a formal trade complaint by the U.S in 2002. Iberdrola have since stated that Mexico is no longer a core market for the company. Other large Spanish firms, such as Repsol, Santander and BBVA have also come in for criticism from the president. The two banks were excluded from bidding for Citigroup’s Mexican unit Banamex, which Citi is spinning off, as Amlo publicly stated he would like a Mexican bidder to acquire the bank.

The political climate in Mexico contrasts with recent comments by Antonio Basagoiti, president of the Spanish Chamber of Commerce in Mexico, who claims to have seen a marked increase in interest from Spanish firms in the Mexican market, largely driven by “nearshoring”. Mr Basagoiti claimed that in 2019, prior to the covid-19 pandemic, he would receive on average two requests per month on Mexico. This, he claims, has risen to 15 in the first half of 2023. While Mexican investment into the Spanish economy has spiked in recent years, as Mexican investors seek an alternative to traditional offshore locations such as Miami and Panama.  

A mixed picture

The data is mixed. In 2022, foreign direct investment (FDI) from Spain dropped by almost 64% year on year, to $1.5billion. However, more recent data for Q1 2023 shows a record quarter, with Spanish investment rising 148% year on year to $3.7billion.

Data for total inward FDI paints a similar picture. Total FDI to Mexico reached $18.6billion in the first quarter of 2023. Although this is lower than Q1 2022, if two major deals  (the merger of Mexico’s Televisa and US firm Univisión, and a restructuring of the US assets of Aeroméxico) worth a combined $6.8billion are stripped out of the data from that quarter, it represents a 48% increase. Much of this went to manufacturing and financial services. So Mexican FDI appears to be doing well, albeit not booming.

The data also masks an important underlying trend: the majority of FDI in the first quarter was made up of reinvested profits by companies already operating in Mexico, which accounted for around 90% of the total. Given the disruption of recent years, including the covid-19 pandemic and war in Ukraine, interpreting recent trends is challenging. However, what is clear, it that both in terms of Spanish and overall FDI, the anticipated nearshoring boom in Mexico has yet to take off. And if the bulk of recent investment was by companies that already operate in Mexico, the reduction of Iberdrola’s assets will only dent this further.

A perception of hostility to foreign firms and policy uncertainty is certainly feeding into commercial decision making. However, Mexican leaders have traditionally turned on the US when it suits their political needs – yet the deep commercial and geographic ties between the two countries have consistently helped them overcome bouts of political turbulence. Many Spanish firms will be willing to ignore the political noise and take a longer view of investing in Mexico.  Elections are due in 2024 and, although his Morena party is well-positioned to win again, Amlo is barred from running by a constitution that limits presidents to a single term.

It's worth noting that a realignment of US supply chains does not automatically shift them to Mexico. The US has seen a marked uptick in imports from Canada, Vietnam and Taiwan in recent years, suggesting a number of countries are benefitting. Although import growth from those countries is not significantly ahead of Mexico’s, it illustrates that the gains will be more evenly spread. Other issues such as concerns over security and corruption, and poor infrastructure in many parts of the country also continue to feed into a reluctance to invest in Mexico.  

The anticipated nearshoring boom is yet to take off. Mexico clearly can benefit longer term but to fully take advantage of this shift in trade would take greater engagement from the government, both in reducing policy uncertainty and bolstering domestic investment, in key areas, such as infrastructure. Although the president’s tendency to score easy points by raising historical grievances with partners such as Spain may help his short-term political needs, it’s not going to help Mexico profit from a once-in-a-generation shift in global supply chains.

This article is the second of a three-part series exploring Mexico’s nearshoring potential.