Nearshoring is about to face its biggest challenge thus far: Mexican droughts.
For months now, international markets have been betting on Mexico as a viable alternative to China in global supply chains. The idea is simple. Given heightened political tensions with the Chinese government, Western nations are seeking to relocate their markets to friendlier and geographically closer countries. Mexico is an ideal candidate given its close proximity to the US, broad manufacturing capabilities, and low labor costs. This, in turn, has resulted in increased interest in the country, beating China as the top exporter to the US.
However, over the last year, the country has suffered from a series of droughts that could threaten the historic investment promised by nearshoring. To better understand this, we looked at historic data from Mexico’s National Water Commission (CONAGUA), and tried to fully explain its impact in the nation’s manufacturing sector.
CONAGUA currently classifies droughts using a five point system going from D0 (general drought conditions but no drought) to D3 (extreme drought) and D4 (exceptional droughts that cause emergency conditions due to lack of water access). Now, it is worth noting that droughts do follow a cyclical nature, often rising during warmer and drier seasons. Yet, when looking at an overall comparison of the last twenty years, we do notice a striking recent increase. The number of municipalities suffering from D3 and D4 droughts per month has grown significantly reaching 526 D3 droughts and 279 D4 droughts in May of this year—a total of 805 municipalities suffering from severe droughts at a time, or 32.9% of all municipalities in the country. We hadn’t seen similar levels of D3 droughts since 2020 and, even then, the overall number of droughts quickly fell by end of year. Now, the situation is quite different. Since July of 2023, there hasn’t been a single month in Mexico without over 250 municipalities suffering from D3 droughts. When it comes to D4 droughts (the highest category available), the situation is even worse. For the first time in the last twenty years, Mexico has reached well over 150 municipalities suffering D4 droughts.
Total Severe Droughts in Mexico (Category D3 and D4)
(Data from CONAGUA)
The above is more worrisome when we include all droughts (D0 through D4) and consider the phenomenon from a geographic perspective. Once again, using data from CONAGUA, we looked at the overall distribution of droughts in Mexico by every municipality. Namely, we added the total number of droughts in every municipality over the last year. Since we had data on the magnitude of each drought (ie, if they were a category D0 or D5), we weighted each event by its severity, assigning higher weights toi D4 than D3 and so on. This gives us a more accurate idea of not just the number of droughts in a municipality, but also how much they’ve suffered from them over the last year, giving higher weights to municipalities with more extreme droughts.
We found that droughts have been experienced all throughout Mexico in the last year, with a strong presence in the Bajio region and the nation’s northwest (excluding the Baja California peninsula). Surprisingly, we found that just seven municipalities across Mexico had experienced no droughts over the last year.
Weighted Sum of Drought Events in Mexico by Municipality (Last Year)
(Data from CONAGUA)
It is worth noting, of course, that the bulk of drought phenomena in Mexico were either D0 or D1 droughts (the least severe kinds of droughts) with 30,000 incidences together. However, D3 and D4 droughts were also considerable, happening almost 11,000 times over the last year.
Number of Drought Events in Mexico by Intensity in the Last Year
(Data from CONAGUA)
Now, you might be wondering how droughts affect nearshoring. In other words, why does this matter to Mexico’s growing supply chains.
There is a simple reason behind this fact. While we might not think much of it, manufacturing is highly dependent on water. Be it to cool machines or dye fabrics, modern industry needs water to manufacture products and keep factories going. In fact, it is estimated that around 14% of all water in Mexico is allocated to industry—for comparison, only 10% is used for personal consumption, with the remainder going to agricultural activities. So, droughts could severely impact manufacturing by limiting access to a crucial resource and forcing factories to shut down several times in a year.
To understand the impact of droughts in Mexico’s growing manufacturing sector, we used data from the country’s National Institute for Statistics and Geography (INEGI) to locate every manufacturing company in the country as of 2024. We were then able to plot every manufacturing facility in the country and locate the municipality where they were located.
Location of all Manufacturing Businesses in Mexico
(Data from INEGI)
Since we already had municipality-level data on droughts for the past year, we were easily able to relate the number of manufacturing centers with the intensity of droughts experienced by each municipality. Namely, we overlapped the maps to better understand the impact of droughts on manufacturing centers.
Location of all Manufacturing Businesses in Mexico and Drought Intensity by Municipality (Over the Last Year)
As a first metric, we wanted to test if there was any correlation between the number of manufacturing industries in a municipality and the severity of droughts experienced. That is, if the presence of manufacturing industries correlated at all with the likelihood of suffering a drought (or if manufacturing companies had inadvertently chosen their locations in drought-prone regions). Yet, an initial regression analysis showed no clear correlation between the two variables.
Relationship of Drought Intensity and Number of Manufacturing Facilities in a Municipality
What we did find, however, was the number of manufacturing companies located in municipalities that had suffered some drought over the past year. We were even able to classify them by the intensity of droughts they had experienced. In all, we found that over 99% of all manufacturing facilities in Mexico were located in municipalities that had experienced some form of drought over the past year. This was to be expected given the broad geographical reach of droughts we mentioned before—moreover, the bulk of manufacturing companies are located in areas that experienced only minor droughts (D0 and D1).
However, we did find that a shocking 44.24% of all manufacturing companies in Mexico are located in municipalities that experienced at least one D3 drought in the last year, and 11.25% are located in municipalities that suffered a D4 drought. That means that, in the last year, close to half of all manufacturing facilities have likely shut down at least for one day due to the increased risk of droughts.
Share of Manufacturing Businesses Impacted by Droughts in Mexico Over the Last Year (by Category)
All the above suggests a large challenge to Mexico. If the country wants to maintain large investments and carry the advantages of nearshoring, it will have to invest in better water infrastructure that reduces the risk of severe droughts. Otherwise, the country might risk losing on the promised gains of nearshoring and even suffer significantly through its established manufacturing sector.