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Investment Opportunities? Direct Flights Connect China’s Powerhouse with Mexico’s Rising Star

By:
Carolane De Palmas
Published: May 13, 2024, 07:26 GMT+00:00

A historic air route has taken flight! On Saturday, May 11th, 2024, China Southern Airlines launched the first-ever direct passenger flight between Shenzhen, a south China powerhouse, and Mexico City, the bustling capital of Mexico.

China industry, FX Empire

This record-breaking 16-hour nonstop journey marks the longest regular commercial flight to originate in China.

China Southern Airlines isn’t new to Mexico. In 2017, they became the first Chinese carrier to operate flights to Mexico with the Guangzhou-Vancouver-Mexico City route. However, this new direct connection could signify a potential shift in the global economic landscape.

China’s recent border reopening in January 2023 sparked a wave of optimism. Nonetheless, international air capacity from China still lags behind pre-pandemic levels on average, with passenger demand and market dynamics changing.

Interestingly, the share of international air capacity controlled by Chinese carriers is on the rise with a jump from 47% in January 2023 to 63% in January 2024, exceeding even pre-pandemic levels of 53% in January 2019. Moreover, the major Chinese airlines – China Southern, China Eastern, and Air China – have collectively increased their international market share from 60% to 64% since 2019, according to Official Airline Guide (OAG).

The launch of this direct flight between China and Mexico could be a game-changer for investors eyeing Mexico’s potential as a nearshoring powerhouse. Let’s delve deeper into why this connection is so significant, as Mexico is becoming a significant destination in China’s economic expansion plans.

Nearshoring Takes Flight: Direct Connection Might Speed Up China’s Mexico Expansion

The ongoing US-China trade war, initiated in 2018 with tariff hikes by the Trump administration, continues to disrupt supply chains, so companies are seeking alternatives to mitigate these disruptions. The Biden administration’s policies, like the Inflation Reduction Act with its focus on domestic manufacturing, incentivize companies to consider nearshoring in North America to reduce reliance on China.

And let’s not forget the COVID-19 pandemic, which exposed vulnerabilities in global supply chains, prompting manufacturers to prioritise shorter distances for faster delivery and reduced risk.

So nearshoring has become a major trend for American and Chinese businesses.

The recent launch of a direct flight between Shenzhen, a Chinese manufacturing powerhouse, and Mexico City further strengthens this trend, as this improved connectivity could significantly bolster collaboration between Chinese and Mexican businesses, potentially accelerating Mexico’s manufacturing capabilities and attracting even more investment.

Mexico’s attractiveness for nearshoring is further bolstered by its openness to foreign investment. Ranked as the world’s 11th-largest recipient of foreign direct investment (FDI), Mexico offers a welcoming environment for companies seeking to relocate with an observed surge of FDI inflows in 2022, a reported 11.9% increase to USD 35.3 billion, according to UNCTAD’s World Investment Report 2023.

China itself is jumping on the nearshoring bandwagon with several companies establishing manufacturing facilities there, as its foreign direct investment (FDI) in Mexico experienced a meteoric rise. From a mere US$38 million in 2011, Chinese FDI in Mexico surged to US$386 million by 2021. This tenfold increase makes China the fastest-growing source of foreign investment in Mexico.

Why Are Chinese Companies So Interested in Mexico?

While geographic proximity to the North American market is a major draw for Chinese companies considering nearshoring, Mexico offers a compelling package of benefits that extends beyond location.

Mexico acts as a strategic reprocessing centre for Chinese intermediate goods. This allows Chinese companies to take advantage of preferential trade agreements between Mexico and the US, like the USMCA, for final product export.

It’s especially true for Mexico’s robust automotive industry that thrives on this model, processing intermediate goods and re-exporting finished vehicles to the US with significant cost savings. The several trade agreements that include Mexico offer companies significant cost reductions through lower tariffs and streamlined customs processes.

Additionally, the country prioritises intellectual property rights, providing crucial legal protection for Chinese companies’ innovations. Mexico has also fostered thriving industrial clusters in key sectors like the automotive, aerospace, electronics, and medical device industries.

These clusters attract foreign companies by offering a readily available, specialised supply chain, access to a skilled labour pool experienced in these industries, and opportunities for collaboration with established industry players. Furthermore, the Mexican workforce has a growing familiarity with working alongside Chinese companies due to years of collaboration and partnerships.

The Mexican government has also made significant investments in its infrastructure and logistics capabilities, which can translate to a well-developed network of highways, ports, and airports that efficiently facilitate the movement of goods within Mexico and across its borders. This strong logistical foundation minimises delays and reduces transportation costs for companies operating in Mexico.​​

How Can Investors Benefit From It?

While geographical proximity might be the initial spark, Mexico offers a comprehensive package of benefits for Chinese companies looking to expand their operations. From its role as a reprocessing hub and gateway to North America, to its robust trade agreements, skilled workforce, and well-developed infrastructure, Mexico seems to present a compelling opportunity for Chinese manufacturers seeking to optimise their position in the global market.

The shifting geopolitical and economic landscape presents Mexico with a unique opportunity. As the US and China recalibrate their trade strategies, Mexico’s position as a nearshoring hub appears primed for significant growth.

However, this evolving landscape also carries inherent uncertainties. Mexico faces internal challenges that could impact its ability to fully capitalise on the nearshoring boom, such as a high level of corruption and crime rate, as well as economic and social structural problems for instance.

Additionally, the major presidential elections in both Mexico and the US in 2024 could introduce policy changes that could affect the nearshoring trend, so investors should closely monitor the political landscape in both countries.

This evolving landscape could trigger potential investment opportunities depending on how the new situation will translate into the Mexican economy, as well as the way it will impact the Mexican Peso (XMN), which has been strongly performing since April 2020.

After reaching a record high against the American Dollar (USD) in April 2020, the Mexican Peso strengthened until May 12th, 2024, with the USD/MXN falling by around 30% over that period of time. In 2022 and 2023 the USD/MXN lost around 5.85% and 12.80% respectively. In 2023, the Mexican currency recorded its best performance in almost 30 years.

Daily Chart of the USD/XMN – Source: ActivTrader Trading Platform

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About the Author

Carolane graduated with a Masters in Corporate Finance & Financial Markets and got the AMF Certification (Financial Markets Regulator in France). Afterward, she became an independent trader, investing mostly in European and American stocks/indices.

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