Barber's Mexico Business Report

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A new day dawns in Mexico as seen from the rooftop terrace of Dean Barber’s home in Querétaro.

Welcome to our inaugural edition of Barber’s Mexico Business Report

Before we begin with the news, I thought you might want to know more about me and how I got to where I am today living and working in Mexico.

My career background stretches over 45 years, about equally divided between business journalism (two daily newspapers) and economic development in multiple states in the U.S. I’ve always had a keen interest in business as it continually shapes our lives.

I moved to Queretaro, Mexico, in the central part of the country, in May 2023, and I haven’t looked back since. 

You may be wondering why. A combination of factors influenced my decision. I first became aware of Mexican culture while living in Texas, which you history buffs know was once a part of Mexico. 

(To characterize the Mexican-American War (1846-1848) as a naked land grab by the United States is supported by historical evidence and perspectives, including that of Ulysses S. Grant, who later described the conflict as "one of the most unjust ever waged by a stronger against a weaker nation.")

For 13 years, I lived in Dallas where in 2020, the Latino population in Dallas was about 42.3%. (I believe it is more than 50 percent today.)

The more I came in contact with the Mexican culture, the more enamored I became with it.

Mexican people value family and work. And I started dating a Mexican woman who quite frankly treated me like I was a prince, which was uncomfortable and perplexing to me at first. (I grew to like it.)

Together, my girlfriend and I traveled to Mexico, which I discovered to be very diverse in food, culture, and ecosystems (everything from desert to jungle).

Eventually, I decided to move to Queretaro, a city of 2 million people that has become a hub for aerospace, automotive, and data centers. I chose Queretaro not only because of the quality of life but because of the growing professional and middle class. 

The evidence: About a mile from my house there is a Costco, Home Depot, Office Depot, Walmart, and Sam’s Club. I can even get Buffalo Wild Wings and Krispy Kreme donuts if I’m in the mood.

And while Queretaro is more expensive than certain other Mexican cities, I soon discovered that my living expenses were about half of what they were in Dallas.

What’s more, since moving here, I have been invited to more social gatherings in one year than in my 13 years living in Dallas. I have made friends and acquaintances from all over the world.

So why am I starting Barber’s Mexico Business Report? As a site consultant and a business journalist, I believe that I can dive deeper into the dynamics of business and foreign direct investment in Mexico to equip you with the latest trends, analysis, opportunities, and risks the growing Mexican market has to offer, warts and all.

As Mexico continues its journey to becoming a preferred manufacturing hub, ensuring you stay informed is more crucial than ever. 

So I encourage you to read through my reports and use them to inform your business strategies should your company want an operational presence in Mexico.

My firm, Barber Business Advisors, can help regarding optimal real estate options and other consulting services.

But this newsletter is not a sales pitch. I intend to provide you with the unvarnished truth about the business landscape in Mexico, the good, the bad, and the ugly.

Best regards — Dean Barber

And now, let’s get to the news.

Mexico's Congress to Debate Controversial Judicial Reform Amid Strikes and Investor Worries

Mexico's Lower House of Congress is set to begin debating a contentious judicial reform on Tuesday, with a vote expected later in the week, according to ruling party leader Ricardo Monreal.

The overhaul, championed by outgoing President Andrés Manuel López Obrador and supported by incoming President Claudia Sheinbaum, has triggered a strike by judicial workers, strained U.S.-Mexico relations, and raised concerns among foreign investors.

The Mexican peso has been significantly affected, trading at around 19.80 to the US dollar on Monday afternoon.

Critics argue that these changes could compromise the integrity of Mexico's legal system and negatively impact its democracy.

Sheinbaum reassured investors in June, stating they have “nothing to worry about” in Mexico.

However, the judicial reform proposal and other constitutional bills supported by Sheinbaum and introduced by López Obrador in February have nonetheless raised investor concerns.

Morgan Stanley, a New York-based investment bank, downgraded its outlook on Mexican investments, issuing an "underweight" warning due to concerns over the government's proposed judicial reform.

The underweight rating effectively advises investors to sell Mexican stocks, according to Reuters.

In its August 21 report titled “Latin America Model Portfolio,” Morgan Stanley announced the downgrade in response to the judicial reform proposal recently sent to Congress.

The same day, judges in Mexico's federal judicial branch initiated an indefinite strike in response to the proposed reforms. This action reflects widespread dissatisfaction within the judiciary regarding the potential impact of these changes on legal proceedings and judicial integrity

Gabriela Siller, Director of Economic Analysis at Grupo Base, warns that the reforms could push the Mexican economy into a recession.

"These changes are likely to slow the arrival of new investments and could eventually halt the reinvestment of profits and hiring by companies already operating in Mexico," she posted on X.

The peso became the most depreciated currency, second only to the Colombian peso, following López Obrador’s announcement of a "pause" in relations with U.S. Ambassador Ken Salazar, who had criticized the reforms.

The proposed judicial reform, which includes the popular election of judges, has not only caused unease among investors but also led to heightened political tensions. U.S. Ambassador Salazar's concerns over the reforms have escalated diplomatic friction, further unsettling investors and contributing to the peso's decline.

The relationship between Mexico and the United States has become strained, with López Obrador halting ties with the U.S. Embassy over Salazar's comments. Although Salazar attempted to soften his stance and offered a dialogue with the Mexican government, both López Obrador and Sheinbaum rejected the offer, insisting that the matter should be decided solely by Mexicans.

The American Chamber of Commerce in Mexico and the Canadian Chamber of Commerce in Mexico have urged careful consideration of the reforms, emphasizing the need to evaluate, debate, and refine efforts to strengthen the rule of law.

Rating agencies have also expressed concerns that these judicial changes might hinder Mexico's attractiveness for business, particularly in sectors that rely on a stable legal framework.

The proposed constitutional reform would make significant changes to Mexico's judiciary by requiring over 7,000 judges and magistrates to be elected by popular vote. It also seeks to reduce the number of Supreme Court justices from 11 to 9 and shorten their terms from 15 to 12 years.

Additionally, a new supervisory body would be established to oversee judges. Proponents argue that these changes are essential to combat the country's high impunity rates for violent crimes.

Monreal announced that lawmakers will debate and vote on the reform on Tuesday and Wednesday before sending the legislation to the Senate. The ruling Morena party and its allies currently hold a two-thirds supermajority in the lower house and are just one seat short in the Senate.

Other proposals from López Obrador, such as dismantling autonomous government agencies and integrating the National Guard into the military, have also stirred concerns among investors.

On Sunday, university students and judicial workers gathered in front of the Senate headquarters to protest against the proposed judicial reforms. President López Obrador argues that these changes are necessary because the current judicial system "does not serve the people" and instead "caters to the interests of organized crime."

However, experts contend that much of the impunity in Mexico is due to the shortcomings of prosecutors, police, and state attorney general offices, which are often under-resourced and plagued by corruption—areas that the proposed judicial reform would not address.

Mexico Poised to Become World's Top EV Exporter to U.S.

Mexico's electric vehicle (EV) exports to the United States have experienced an extraordinary transformation over the past few years, positioning the country to potentially become the leading EV exporter to the U.S. in 2024.

This remarkable growth trajectory reflects not only the increasing global demand for electric vehicles but also Mexico’s strategic investments in its automotive sector.

In 2019, the value of EV exports from Mexico to the U.S. was a modest $21 million. However, this figure began to rise steadily, reaching $25 million in 2020, despite the disruptions caused by the COVID-19 pandemic.

The real turning point came in 2021 when exports skyrocketed to an astonishing $1.732 billion, marking a staggering increase of 6,828% in just one year.

This momentum continued into 2022, with the value of Mexico’s EV exports climbing to $2.346 billion, a year-over-year increase of 35%. By 2023, exports surged again to $3.811 billion, reflecting an impressive annual gain of 62%. Cumulatively, the increase in Mexico’s EV revenue between 2019 and 2023 amounts to a remarkable 18,047%.

Looking ahead, if the value of Mexico’s EV exports in the second half of 2024 matches that of the first half, revenue could reach $6.254 billion. This projection represents an almost unfathomable increase of nearly 30,000% compared to 2019.

Such growth not only underscores Mexico’s burgeoning role in the EV market but also highlights the country’s potential to surpass established automotive powerhouses.

In the first half of 2024 alone, Mexico shipped EVs worth $3.127 billion to the U.S., marking a phenomenal 172% increase in export revenue compared to $1.15 billion during the same period in 2023. This remarkable performance positioned Mexico as the second-largest EV exporter to the U.S., trailing only Germany.

In contrast, German EV exports to the U.S. saw a comparatively modest increase of 7.8%, reaching $3.213 billion—just $86 million more than Mexico’s revenue. South Korea, Japan, and Belgium followed as the next largest EV exporters to the U.S. during this period.

The overall U.S. market for imported EVs reached a total value of $11.95 billion in the first half of 2024, reflecting a 36.1% year-over-year increase. This growth in the EV sector is indicative of a broader shift toward electric mobility, driven by consumer demand and governmental policies aimed at reducing carbon emissions.

Several factors contribute to Mexico's rapid ascent in the EV export landscape. Major automakers, including Audi, BMW, and General Motors, have established production facilities in Mexico, taking advantage of the country’s skilled workforce and competitive manufacturing costs.

The United States-Mexico-Canada Agreement (USMCA), which replaced NAFTA in 2020, further enhances the attractiveness of Mexico as a manufacturing hub by providing favorable trade conditions for automakers. This agreement facilitates tariff-free access to the U.S. market, thereby incentivizing companies to invest in Mexican manufacturing.

Additionally, Mexico's strategic geographical location, with its proximity to the U.S. market, allows for efficient logistics and supply chain management. This logistical advantage enables automakers to respond quickly to market demands and shifts in consumer preferences, further solidifying Mexico's position in the global automotive industry.

If Mexico continues to maintain its impressive growth in EV exports throughout the second half of 2024, it could very well finish the year as the top external supplier of electric vehicles to the United States.

Chinese EV Makers Eye Mexican Market as Potential 'Backdoor' to U.S.

Blocked from the U.S. market by steep tariffs, Chinese electric vehicle (EV) manufacturers have turned their attention to Mexico as a promising alternative for selling their high-tech cars.

As Mexico emerges as a significant hub for Chinese EVs, concerns are growing among U.S. officials who fear that Mexico could be used as a "backdoor" for Chinese automakers to access the American market.

Last year, China became Mexico's leading automotive supplier, exporting $4.6 billion worth of vehicles to the country, according to the Mexican Ministry of Economy.

The affordability of Chinese EVs, such as BYD's Dolphin Mini, which sells for around 398,800 pesos (approximately $21,300)—just over half the price of the cheapest Tesla—has won over even skeptical Mexican consumers.

Some Chinese EV makers, including BYD, are now exploring potential factory sites in Mexico's Durango, Jalisco, and Nuevo Leon states. BYD claims that establishing a plant in Mexico could create around 10,000 jobs, providing a significant economic boost to the region.

However, U.S. officials are wary of this move. They suspect it could be part of a broader strategy by Chinese automakers to circumvent trade restrictions and gain entry into the U.S. market.

“Mexico is an attractive production platform, not only for Chinese companies, but for other companies as well, in part because of that free trade access that it has to the American market,” Scott Paul, president of the Alliance for American Manufacturing told CNBC. “And it can do something that in trade terms is called circumvention.”

Under the United States-Mexico-Canada Agreement (USMCA), if a foreign automaker can prove that its manufacturing materials are sourced locally in either Canada or Mexico, it can export vehicles to the U.S. virtually duty-free. This potential loophole has U.S. lawmakers and auto companies on edge.

Michael Dunne, CEO of Dunne Insights, warned, “If [Chinese EV makers] are able to set up in Mexico, they would definitely pose an imminent threat to American automakers, if for no other reason, because their costs would be lower.”

In response to these concerns, President Joe Biden announced a 100% tariff on Chinese EVs in May, aiming to protect the nascent U.S. EV industry. “We [the U.S.] are just starting to scale up our EV industry, so it’s what I call an ‘infant industry,’” Scott Paul noted. “And like any infant, it’s at a very delicate time in terms of development and has to be massively protected.”

The U.S. pressure places Mexico in a challenging position, balancing its critical relationship with America while managing its growing ties with Chinese investors.

NETA Auto to Launch NETA X SUV in Mexico

Chinese electric vehicle startup NETA Auto, part of Hozon New Energy Automobile Group, plans to launch its compact SUV, the NETA X, in Mexico in the fourth quarter of 2024.

Priced at approximately MX$336,500 (around US$17,115), the NETA X aims to compete with popular models like the Nissan Versa, offering advanced technology and a driving range of up to 501 kilometers.

This launch aligns with a significant 44.3% increase in electric and hybrid vehicle sales in Mexico in 2023. The rise of Chinese EVs in Mexico is part of a broader trend, as manufacturers seek new markets in response to slowing domestic sales in China.

Several other Chinese automakers are also eyeing opportunities in Mexico. BYD is exploring potential locations for a new plant, considering states like Jalisco and Nuevo León.

The estimated cost of the facility could be around $600 million, similar to its investment in Brazil, with an annual capacity of up to 150,000 vehicles focused on the Mexican market.

Geely, the parent company of Volvo and Polestar, is interested in establishing manufacturing in Mexico to serve both local and U.S. markets. GAC Motor, a state-owned automaker, is also planning to enter the Mexican market with its electric vehicle lineup, while SAIC Motor aims to capitalize on the growing demand for EVs in Mexico and potential exports to the U.S. through favorable trade agreements.

These developments highlight the increasing interest and investment from Chinese EV manufacturers in Mexico, driven by the country's favorable trade agreements, manufacturing capabilities, and growth potential in the electric vehicle sector.

In 2023, China became the leading car supplier to Mexico, exporting vehicles worth $4.6 billion, reflecting a staggering 443.9% increase in EV and plug-in hybrid imports compared to the previous year.

BYD Narrows Down Mexican Plant Locations

Chinese electric vehicle manufacturer BYD has shortlisted three Mexican states as potential locations for its new manufacturing plant and is currently assessing a range of incentives offered by these states.

According to Jorge Vallejo, BYD's Director General for Mexico, the proposals include various benefits such as fiscal incentives, land, management support, and preferential pricing.

Vallejo emphasized that the decision involves more than just selecting a site; it also requires evaluating logistical factors, infrastructure, and essential resources like water and gas. The company aims to finalize the location by the end of the year.

BYD plans to produce 150,000 units in the plant's initial phase, with a second phase adding another 150,000 units, ultimately ramping up to between 400,000 and 500,000 units annually. This facility will focus on serving the Mexican market, as the company has no immediate plans to enter the U.S. market.

The Mexican federal government, under pressure from the U.S., has refrained from offering incentives like low-cost public land or tax breaks to Chinese automakers. Vallejo did not disclose the names of the states under consideration, though previous statements from BYD executives suggest the plant will be centrally located.

Meanwhile, other automakers like Stellantis are also expanding EV production in Mexico, with the company beginning production at its plant in the State of Mexico.

Mexico's FDI Hits Record $31 Billion in H1 2024

Foreign direct investment (FDI) in Mexico reached a historic high of $31 billion in the first half of 2024, marking a 7% increase compared to the same period in 2023.

The majority of the FDI, approximately $30.3 billion, was attributed to reinvested earnings by companies already operating in Mexico. This figure represents a significant increase of nearly $7.7 billion compared to the first half of 2023.

Additionally, 97.4% of profits generated by foreign investments remained in Mexico, rather than being repatriated.

The United States maintained its position as Mexico's primary investment partner, contributing 44% ($13.7 billion) of the total FDI. Germany and Japan followed as the second and third largest investors, contributing $4.2 billion and $3.1 billion, respectively.

The manufacturing sector was a major contributor to FDI, accounting for 54% of the total investment in Mexico during this period. This sector encompasses a range of industries, including transportation, beverage and tobacco, chemicals, and technology.

Companies announced over $45 billion in planned investments during the first half of 2024. This figure includes notable investments from companies such as Volvo, which plans to establish a $700 million manufacturing facility for heavy-duty trucks in Monterrey, Mexico.

Foreign direct investment was primarily concentrated in Mexico City, which received about 46% of the total, followed by Nuevo Leon at 7%, Baja California at 6%, and the State of Mexico at 5%.

Foxconn Invests $241.2M to Expand AI Server Manufacturing in Chihuahua

Taiwanese electronics giant Foxconn has announced a $241.2 million investment to increase its capacity for manufacturing artificial intelligence (AI) servers at its Foxconn Industrial Internet (FII) plant in Ciudad Juárez, Chihuahua, Mexico.

The FII plant, established in 2005, is a subsidiary of Foxconn based in China and is already producing AI servers - specialized computing systems designed to handle the demands of AI workloads.

The investment aims to further expand production at the 63,000-square-meter facility.

Foxconn, the world's largest electronics manufacturer, has a significant presence in Mexico with other plants in Tijuana and a recently acquired 421,600-square-meter site in Jalisco for AI server production.

The company has formed a strategic partnership with the Chihuahua government to advance talent training, foster innovation, and promote sustainable energy development in the state.

Here’s a roundup of other recent industrial announcements

Volvo has selected Ciénega de Flores, Nuevo León, as the location for its new North American heavy truck manufacturing facility, marking a significant investment of about US$700 million.

This new plant, which will span around 160,000 square meters, is set to become Volvo’s largest factory globally.

The new facility will be dedicated to the production of conventional heavy-duty vehicles under the Volvo and Mack brands.

The plant will bolster Volvo’s supply capabilities for its North American operations, including the United States and Canada, as well as Mack Trucks in Mexico and Latin America.

Construction of the plant is expected to commence soon, with operations slated to begin in 2026. Once fully operational, the facility will create approximately 2,500 direct jobs, significantly contributing to the economic and labor development of Nuevo León.

German aircraft parts manufacturer Diehl Aviation has started construction on a new plant in Querétaro, Mexico, with a US$45 million investment.

The facility will initially cover 8,200 square meters, expandable by up to 6,000 square meters, and is expected to begin production in 2025, creating around 500 jobs.

The site will produce components like extra-wide trunks for the Airbus A220, enhancing Diehl's partnerships with major clients like Airbus, Boeing, and Embraer.

In Jalisco, Alsea has broken ground on a new US$33.3 million operations center in Tonalá.

This facility, slated to be the company's second-largest, will generate over 180 jobs and support over 300 stores across multiple cities, including Guadalajara and Culiacán.

Operations are set to commence in the third quarter of 2025.

Additionally, the Elite III Industrial Park is under construction in Tonalá, marking the ninth such development in the area within three years.

The project is part of a broader effort to transform the region into a logistics hub, attracting both national and foreign investment while generating jobs and boosting local economic growth.

Schunk Mexico has opened a new Technology Center in Querétaro with an investment of over US$6.1 million, creating 66 specialized jobs.

The center focuses on advanced gripping systems and fastening technology, incorporating AI to optimize production. Kristina Schunk, CEO, expressed pride in the facility, crediting the dedication of teams in Mexico and Germany.

Are you considering starting operations in Mexico? I can help make your move to Mexico a soft landing. Contact me, Dean Barber, for more information.