Will Monterrey Fall Victim to its Own Nearshoring Success?

The city of Monterrey –capital of the Mexican state of Nuevo Leon– has found itself under the national and international spotlights as it emerges as one of the main points of focus for foreign investors eyeing Mexico under a nearshoring model. The city offers several advantages which make it highly appealing for industry. Nevertheless, it also faces risks which could dampen its “regio momentum”.

Data from Mexico’s Economy Secretariat shows that Nuevo Leon captured 13% of the total volumes of foreign direct investment drawn by the whole country (US$18.6 billion) during the first quarter of 2023, being surpassed in its performance only by the capital, Mexico City. The manufacturing industry has been at the center of those FDI flows, and the state has been effective in attracting and increasing industrial investment.

In March of this year, it was announced that Tesla will build a gigafactory in the state, heralding what seems to be a new phase in Nuevo Leon’s industry.  TCS opened offices in Monterrey in May of this year, and governor Samuel García Sepúlveda assured that Indian tech giants Infosys and HCL Tech will soon announce new investments in the local tech ecosystem. Local authorities also expect electronic component company Vimercati to join in as well. 

Our next Gigafactory will be in Mexico, manufacturing our next-gen vehicle pic.twitter.com/bk0IKrGtaZ

— Tesla (@Tesla) March 2, 2023

The mix of manufacturing, automotive and IT companies in the state is expected to consolidate a local industrial ecosystem which joins two of Nuevo Leon’s strongest industry clusters: automotive and tech. 

Nevertheless, this regio momentum could be in jeopardy. Is Nuevo Leon a truly sustainable bet for new companies seeking to relocate their supply chain? Or could the state fall victim to its own success, unable to provide the basics for foreign companies to properly operate in its territory?

Nuevo Leon is privileged in its geographical position. It is close to the United States, sharing a border with Texas, one of the strongest economic performers in the US. It also possesses good infrastructure and a highly skilled workforce, this while belonging to a well-established industrial region, powered also by the state of Coahuila’s manufacturing zone.

All of these perks give Nuevo Leon an edge which in itself is expected to push the state into a new period of bonanza. And yet, companies could face challenges that tend to come with unrestrained growth.

The availability of natural resources –water, above all– is a factor that should be taken into consideration. Over the past couple years, Nuevo Leon has faced a severe water crisis which has resulted in high levels of hydric stress and periods of low water availability. In mid August, local authorities admitted that they failed in their attempts to solve the crisis. 

The availability of natural resources –water, above all– is a factor that should be taken into consideration [by investors interested in Monterrey]

There are also high levels of air pollution in the state, caused in great part by local industry and which deteriorate the health of inhabitants. A study by the Pan American Health Organization (PAHO) declared Monterrey to be one of the most contaminated cities in Latin America. Monterrey’s Citizen Observatory for Air Quality points to the increases in population, industrial activity, vehicles in circulation, use of fossil fuels and the presence of an oil refinery within the metropolis as factors that have turned Monterrey into one of Mexico’s most polluted cities.

There’s a political dimension to the risks too. A diverse array of forces have aligned themselves to foster foreign investment in the state. Nevertheless, federal politics almost left a mark on Nuevo Leon’s capability to draw FDI. 

Before Tesla confirmed it would set its gigafactory in Monterrey, federal authorities lobbied for the facility to be built in either the State of Mexico or Hidalgo, both of them closer to the capital and near enough to the Felipe Angeles International Airport, one of the current administration’s flagship infrastructure projects. 

There were also concerns over federal lobbying in favor of government-owned electricity company CFE, which has lately been scrutinized over its capability to provide enough power for the proper operation of the gigafactory.

Could [Nuevo Leon] fall victim to its own success, unable to provide the basics for foreign companies to properly operate in its territory?

Finally, there’s the issue of security. Nuevo Leon has consolidated its state police as a security force which can be trusted and which has been professionalized thanks to the joint efforts of public and private organizations. Nevertheless, the state is no stranger to high crime rates.

It must be noted also that the Mexican North is a region where crime is most dynamic in the country, thanks in great part to its closeness to the US border. This has led to violent events which, even though not directly aimed at the general public or private industry, could dampen investment if proper action is not taken to increase security.

These actions become even more relevant given the plans to turn the Colombia-Solidaridad border crossing into the main gateway for Nuevo Leon-made goods into the US market.

Correctly tackling these challenges could turn Nuevo Leon into a sustainable destination for nearshoring over the next couple years. If the focus remains on attracting foreign capital –and not on keeping it–, the state could turn into a victim of its own success, finding its promises surpassed by reality.