In mid-July, a German business delegation led by the country's ambassador to Mexico, Wolfgang Dold, traveled to the northern Mexican state of Sonora. From the state's capital Hermosillo it's only a 4-hour drive to neighboring Arizona in the United States. Among the business people who took the trip were representatives of major  German companies, including Siemens Energy, industrial gas maker Linde, energy utility RWE, and Daimler Trucks, the truck unit of carmaker Merzedes-Benz

Edwin Schuh, director for Mexico and the Caribbean at the German state-funded Germany Trade & Invest (GTAI) agency was also among them. The reason for the visit was the so-called Sonora Plan, he told DW, which is an ambitious infrastructure project blueprint for sustainable energies in the Mexican state, sponsored by the central government and aiming to boost solar parks and lithium mining.

Sonora holds the country's largest lithium deposits, which were nationalized last year. "In the medium term, the government plans to manufacture batteries for electric cars in Sonora," said Schuh, which had raised the interest of German car companies.

The US automaker Ford already operates a huge plant in Hermosillo, and some German automotive suppliers are also present. In order to attract more foreign companies, an agency called Ventanilla de Nearshoring has been established.

When two people quarrel, a third rejoices

Nearshoring is the new buzzword in Mexico. Instead of shipping goods halfway around the world in containers, many companies today are trying to relocate production closer to their major markets.

The COVID-19 pandemic exposed vulnerabilities in supply chains. Additionally, the trade dispute between the US and China has intensified in recent years compounding rising labor costs in China.

Mexico benefits significantly from its proximity to the US due to these factors. The British magazine MoneyWeek recently spoke of "Mexico's Moment," headlining a respective cover story with: "Investors should join the fiesta in Mexico."

In the first quarter of 2023 alone, around $18.6 billion (€16.9 billion) of foreign direct investment flowed into Mexico - an increase of nearly 50% compared to the previous year. US newspaper The Washington Post recently reported that the US is importing fewer goods from China, making Mexico the most important US trading partner.

The nearshoring investment trend gathers steam

"Many [foreign] companies have set up production facilities in Mexico," said Schuh, especially in central Mexico and close to the border with the US, like in the state of Nuevo Leon.

Electric carmaker Tesla in March announced the construction of a new assembly plant there and investments worth about $5 billion over the coming years. US software company Microsoft is also investing hundreds of millions of dollars, planning to build a data center in central Mexico's Queretaro.

"However, many Chinese companies are also coming to produce in Mexico for the US market," said Schuh, citing electronics company Hisense as an example, alongside companies from Japan, South Korea, and Taiwan. Their aim was, he said, "to get closer to the US market" and "minimize the risk" if the conflict between China and Taiwan should escalate.

Companies are already struggling to find available industrial land with existing electricity and water connections. "In northern Mexico, industrial park areas are over 95%. This is why the government plans to build a new industrial park in Sonora," Schuh told DW.

Investing amid cartel wars 

Thanks to the North American Free Trade Agreement (NAFTA), and its follow-up agreement, the so-called USMCA, negotiated by former US President Donald Trump,  Mexico has become one of the world's most important locations for the automotive industry.

A significant portion of US car production has been outsourced to Mexico, and German car manufacturers like VW, Audi, BMW, and Daimler have also established important manufacturing sites there.

However, there are major challenges for investors in Mexico, said Schuh. "The security situation is a problem. There are states in the north, like Tamaulipas, that are close to becoming 'no-go areas' due to the cartel wars," said Schuh.

And indeed, a German automotive supplier is currently relocating its factory from Tamaulipas to the neighboring state of Nuevo Leon due to the security situation, noted Schuh. In Tijuana, for example, German company managers have decided to move to close by San Diego and commute across the US-Mexican border due to extortion or kidnapping attempts.

Finding appropriate staff is also a problem, the GTAI director said, which is why many German firms run their own training programs. "Employees are in short supply. Companies often poach employees from each other once they finish their training."

Moreover, the north of Mexico has been plagued by drought and subsequent water shortages that have even led to water rationing and restrictions for water-intensive industries. The new Tesla plant in Nuevo Leon, for example, was almost blocked by Mexican President Lopez Obrador due to such concerns.

And finally, the supply of electricity has become a cause for concern, especially for German investors, who have vowed to source their energy mainly from renewable sources under sustainability policies.

State-owned utility CFE, Mexico's main power supplier, still operates primarily gas- and coal-fired power plants, with the government of President Obrador making no attempt to change that in the near term. Authorities even create bureaucratic hurdles for companies to invest in their own renewable energy supply.

Despite the multiple problems facing investors in Mexico, they don't seem to deter many foreign companies from setting up shop in the country. During the visit of German executives in Sonora, they haven't played a role in the talks.

"The companies are investing despite the problems, because Mexico's advantages are simply much bigger."

This article was originally written in German.

Edited by: Uwe Hessler