June 4, 2024

By Alberto Coria & Daniel Karns

Supply chain leaders are weighing the implications of a power shift affecting America’s largest trading partner. Over the weekend Mexico held its biggest election in history, electing Claudia Sheinbaum its first female president and granting her Morena party an apparent super-majority in Congress that could bring about policy changes.

Markets reacted warily in the immediate aftermath, with one global analyst noting that her victory, “opened the possibility of changes in the Constitution, which alters, or better put, deteriorates the risk balance of Mexico, causing capital to leave the country.”

Mexico surpassed China as America’s biggest trading partner last year. In addition to the political transition, the new administration faces multiple supply chain-related challenges:

Security Risks and Cargo Theft

High levels of violent crime could jeopardize the country’s supply chain stability through relatively common occurrences such as cargo truck hijackings. In 2022, the Mexican federal government reported 7,644 violent cargo truck hijackings—a 3% increase compared to 2021, however; the Transported Asset Protection Association (TAPA Americas) reported that 76,599 cargo truck hijackings occurred during President AMLO’s administration, according to their investigation. A stark contrast to the numbers provided by the federal government.

Major companies including Ford, DJI, Danone, Wal-Mart, Pepsi, and Coca-Cola, have all suffered losses due to stolen truckloads of merchandise in Mexico. The new president, Claudia Sheinbaum, is largely expected to continue AMLO’s approach of “hugs not bullets” for combatting the cartel while simultaneously empowering the military.

Energy Sector and Pemex

Mexico’s national oil company, Pemex, operates under a $102 billion USD debt burden, with the federal government reported to be considering absorbing up to $40 billion USD to assist the company in its ability to service debts. In the past, this debt has regularly affected Mexico’s oil output due to Pemex having to submit late payments to suppliers and alleged corruption within the company.

With the chronic mismanagement of Pemex affecting Mexico’s oil industry, the country’s overall oil production is now less than half of what it was in 2004, despite massive budgetary allocations from the federal government throughout various administrations. Sheinbaum has pledged to remove corruption from Mexico’s energy sector to increase oil production. Sheinbaum is expected to continue AMLO’s policies of leaning strongly on Mexico’s oil production for national revenue and is likely to continue heavily funding Pemex. Under a Sheinbaum administration, customers should not expect any major swings in Mexico’s energy policies.

Mexican Peso and Near-shoring

Mexico’s currency has risen 19% over the past twenty-four months to around 16.7 per USD, now one of the best-performing emerging market currencies due to low volatility and high interest rates. The Mexican Peso is also one of the few major currencies that have gained against the USD this year. This is largely due to the increase of foreign investment in the country through near-shoring and high levels of trade with the U.S.

Sheinbaum is seen as pro-business and is unlikely to enact any policies to deter the ongoing trend of near-shoring given its substantial boost to the Mexican economy. “Turmoil in the U.S.-China relationship has provided Mexico with a historic window to present itself as an alternative to China,” according to a statement from the U.S. Chamber of Commerce.

While the Sheinbaum administration faces significant challenges in addressing security concerns, managing the energy sector, and maintaining currency stability, the near-shoring trend is expected to continue, presenting opportunities for U.S. companies to strengthen their supply chains in Mexico.

Potential Industries at Risk 

Interos monitors supply chain lifecycle risk for some of the world’s largest public and private organizations. Our customers have extensive connections to Mexico-based suppliers, including heightened concentration risk for some sectors, such as chemical manufacturing, due to sub-tier supplier relationships.

The data below illustrates key sectors whose supply chains could be impacted by future administrative or policy shifts under Mexico’s new government.

  • In Tier 1
    • Total: 2,880
    • Top Industries
      • Merchant Wholesalers, Durable Goods
      • Transportation Equipment Manufacturing
      • Chemical Manufacturing
    • In Tier 2
      • Total: 16,251
      • Top Industries
        • Merchant Wholesalers, Durable Goods
        • Merchant Wholesalers, Nondurable Goods
        • Machinery Manufacturing
        • Chemical Manufacturing
      • In Tier 3
        • Total: 26,468
        • Top Industries:
          • Merchant Wholesalers, Durable Goods
          • Merchant Wholesalers, Nondurable Goods
          • Fabricated Metal Product Manufacturing
          • Machinery Manufacturing
          • Plastics and Rubber Products Manufacturing
          • Chemical Manufacturing
          • Transportation Equipment Manufacturing

 

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