Capitalizing on Nearshoring Trends
Maria Armental | Wall Street Journal
April 28, 2023
As more businesses look to diversify their supply chains and bring more of their production closer to the U.S., private-capital firms and the companies they own are increasingly looking to Mexico.
Known as reshoring or nearshoring, the shift to bring supply chains and manufacturing closer to the U.S. has grown as U.S.-China tensions and the pandemic-driven distribution crisis forced businesses to give priority to supply-chain resiliency over the cost-cutting that once sent that production to Asia, particularly China, consultants and deal makers say.
“The new variable that was introduced is risk,” said Rosemary Coates, executive director of the Reshoring Institute, a nonprofit organization that advocates the return of manufacturing to the U.S. “Companies were able to see that these long global supply chains involved a lot of points of failure and, potentially, introduced a lot of risk into their operations.”
The supply-chain rethink is generating investment opportunities in Mexico for private investment firms as well as growth opportunities for portfolio companies. Along the way, however, investors must navigate their share of hurdles, including a complex regulatory environment.
Private investment in Mexico, including venture capital and private equity, hit $3.4 billion in 2022, according to data from the Association for Private Capital Investment in Latin America, a trade group now part of the Global Private Capital Association. That was down from a record $5.6 billion in 2021, but more than double the $1.3 billion volume of 2019. The data doesn’t include expansion by U.S. companies opening factories in Mexico, for example, nor investment in private real estate.
Mexico benefits from proximity to the U.S. along with a strong manufacturing-based economy, skilled workers and free-trade pacts like the U.S.-Mexico-Canada Agreement, according to Jill Raker, a managing partner at longtime logistics investor Greenbriar Equity Group. The Greenwich, Conn.-based private-equity firm is exploring potential platform investments and add-ons to portfolio companies there, including companies that largely fulfill online U.S. orders from Mexico, Ms. Raker said.
“We have enough data points from the logistics companies we own and the logistics companies we’re talking to,” she said. “We feel good right now that the wind is behind the back [of] nearshoring and reshoring, and that’s unlikely to change.”
Manufacturing statistics would seem to support that sentiment. Since 2019—typically considered prepandemic—American imports of Mexican manufactured goods rose more than 25% to $402 billion, according to data from consulting firm A.T. Kearney Inc. Kearney, which has been tracking nearshoring for a decade, said that 2022 was the first year since 2019 that U.S. domestic manufacturing growth outpaced that of imports from China and other low-cost countries.
The nearshoring trend is driving growth at privately held companies looking to expand into Mexico, such as third-party logistics provider BlueGrace Logistics and contract electronics manufacturer MacroFab Inc.
Riverview, Fla.-based BlueGrace, which is backed by private-equity firm Warburg Pincus, is looking to open its first locations in Mexico this year to meet growing demand from customers, Chief Executive Bobby Harris said. The company is initially scouting for locations in the industrial and logistics hubs of Guadalajara and Monterrey, he said.
“That trend is not changing—it’s just getting stronger, so naturally, if we’re going to serve our clients, the best way that we can it’s we need to have a bigger presence there.”
“That trend is not changing—it’s just getting stronger,” Mr. Harris said of nearshoring to Mexico. “So naturally, if we’re going to serve our clients, the best way that we can it’s we need to have a bigger presence there.”
Meanwhile, Houston-based MacroFab, backed by growth equity firm Edison Partners, venture-capital firm Foundry Group and the venture arm of auto maker BMW AG, aims to nearly triple its presence in Mexico, said Chief Executive Misha Govshteyn.
The company owns a roughly 48,000-square-foot plant in Houston and is expanding to about 45,000 square feet a facility that combines offices and industrial space in Zapopan, near Guadalajara, in the Mexican state of Jalisco, according to Mr. Govshteyn. MacroFab also taps into unused capacity at a network of more than 100 partner factories in the U.S., Canada and Mexico.
“It’s the industrial space we need a whole lot more of,” he said, noting that the company focuses on industrial automation and what’s known as the Industrial Internet of Things, or IIoT. However, he added that by year-end, the company plans to expand into aerospace and defense, sectors that typically offer higher margins and that U.S. government officials seek to keep in North America, potentially driving investment to Mexico.
“I’m not sure if you’re going to be able to convince U.S. consumers to care about where their phone is built,” he said, but “for industrial products, and I think a lot of products that are, really, critical for maintaining critical supply chains in North America, the U.S. and Mexico are going to be way out in front.”
But Scott McDonough, a co-founder and managing director at Mexico City-based private-equity firm Alta Growth Capital, cautions that doing business in Mexico comes with its own set of regulatory and tax difficulties. Not all firms, particularly ones based outside the country, are well-equipped to negotiate them.
The Mexican government has taken a more active role in investment matters. President Andrés Manuel López Obrador, for example, initially threw into question Tesla Inc.’s plans to build a manufacturing plant in Monterrey over water-shortage concerns.
“Investors like certainty,” Mr. McDonough said, adding that more active government involvement can create unease that can “hinder investment to a certain degree.”
Undoing what was a yearslong chase for the lowest price—squeezing as much cost out of the global supply chain as possible—won’t happen overnight, said Michael Psaros, a founder and managing partner of manufacturing-focused and carve-out specialist KPS Capital Partners.
“The global supply chain remains very broken,” he said.