Titled Will Latin America take advantage of supply chain shifts? the report explains that "[g]iven its proximity to the US market, localized supply chains would present a big opportunity for Latin America where, aside from Mexico, the region has not really been part of the boom in global supply chains in recent decades." Furthermore, "As the pandemic has exposed the fragilities of the global supply chain—and the enormous disruption that can take place when only a few links in the chain are broken—nearshoring some of this production to Latin America has become a more attractive prospect."
With an approximate population of 129 million, according to the Central Intelligence Agencies' World Factbook, The EIU asserts that "Mexico is the country in Latin America with the most success in regional supply chain integration, owing to the 1994 North American Free Trade Agreement (NAFTA) with the US and Canada. Currently, about 80% of Mexican exports are orientated to the US, of which the bulk are manufactured goods, including vehicles, electronics and machinery."
What is more, "the current moment should provide a golden opportunity for Mexico to increase its share of manufacturing in US-bound exports from East Asia. Instead though, so far at least, the pandemic has caused Mexico's share of US imports to slump badly to just 20% of Asian imports in May, although there were signs of recovery in June. The immediate question, then, relates to when Mexico can get back on track and be seen to manage coronavirus-related uncertainty."
In addition to the aforementioned finding about the Latin America region not being part of the boom in global supply chains in recent decades, the report's key findings include:
- The region faces considerable obstacles to supply chain integration, including poor infrastructure and logistics capabilities and legal and regulatory deficiencies. As such, although there is some opportunity for localization, the region as a whole is unlikely to take full advantage.
- Mexico seems best placed to increase its position in the US supply chain, but there are issues here too. In the very near term, the problem will center around the country's slow emergence from the health and economic effects of Covid-19. More fundamentally, Mexico will struggle without government policy to actively promote supply chain shifts, and without policy that attracts investment more broadly.
- Looking elsewhere in the region, a number of key metrics in The Economist Intelligence Unit's business environment rankings suggest that Mexico, Costa Rica, Chile and Colombia are, relatively speaking, better placed to compete with Asia in supply chains.
"Labor markets, economic policy and political effectiveness are crucial," the report notes. "Although weaknesses in logistics have been central to the failure of Latin America (with the exception of Mexico and Central America) to integrate into major global supply chains, there are clearly other challenges. One of these is the region's readiness to adopt new technologies and preparedness for industry 4.0 (the fourth industrial revolution) as firms in all sectors increasingly adopt, for example, artificial intelligence (AI) and robotics into supply chain processes."
The EIU assesses global technological readiness in its Business Environment Rankings, "looking at issues such as research and development (R&D) spending and infrastructure, the quality of e-commerce and e-government, patent applications, and technology usage. Taking all of these factors into account, and combining our assessment of technological readiness with an assessment of the infrastructure capacity of countries in the region, our rankings show that Chile, Mexico, Argentina and Colombia stand out ahead of the pack in Latin America."
Moreover, companies in the region making supply chain location decisions "will take into account factors such as policy towards private investment and foreign direct investment (FDI), the prevalence of free-trade agreements (FTAs) with other key players in the supply chain, and political and policy effectiveness and predictability."
Importantly, "An assessment of all of these factors, along with infrastructure, technological readiness and labor markets, taken from our Business Environment Rankings, suggests that, within Latin America, the economies most prepared for supply chain integration are Chile, Costa Rica, Mexico, Colombia and Brazil. This preparedness matters, given the stickiness of local investment. Moving manufacturing from one place to another is difficult and expensive. So, notwithstanding considerations that companies are giving to supply chain diversification and resilience, relocating requires the right conditions. There are sectoral implications here too: it is much easier to relocate a textile manufacturer than an autoparts or aerospace manufacturer, for example."
The EIU encouragingly maintains that "Latin America clearly has the opportunity to gain from nearshoring in the coming decade, given some comparative advantages, including its long list of FTAs, proximity to the US market and increasingly competitive wages. And some movement is likely, particularly to Mexico. To the extent that supply chain shifts happen, they would prove enormously beneficial, boosting local suppliers and helping the region's middle-income economies to move up the value chain."
Apart from those countries blessed with natural resources, the Latin American economy has experienced a variety of socioeconomic challenges in the past few decades often exasperated by corruption. However, with policy reform, support to expand infrastructure capacity, and private sector investment in technology R&D, I am expect to see a rise in regional supply chain integration. This will present opportunities for firms provided they effectively identify the country-level risks and prepare strategies to mitigate those risks.
Do you think Latin America can take advantage of shifts in the global supply chain?
Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.