Latest / International Business with Fexingo: Global Trade, Cross-Border Deals, and Multinational Operations / The Hidden Cost of Nearshoring to Mexico
Transcript
- Lucas: If these conversations have moved your work forward in some small way, I want to say thanks for being part of this community. It’s listener support that keeps us independent and allows us to dig into the kind of detailed analysis you won’t find in a headline. If you’ve gotten value from the show, consider buying me a coffee at buy me a coffee dot com slash fexingo. Even a couple of dollars helps cover the research time and keeps the signal to noise ratio high. Luna: Exactly, and it really does make a difference in how deep we can go on these topics. Thanks for listening, let’s get into the meat of today’s discussion. Lucas: Let’s talk about nearshoring. Specifically, the narrative around Mexico. For the last three years, every CEO I’ve spoken to has treated Mexico not just as an option, but as the default solution for reshoring American manufacturing. The logic seemed bulletproof: lower wages than the United States, zero tariffs under the United states mexico canada Agreement, and a two-hour drive from most major US industrial hubs. But here is the thing that keeps me up at night. The data from July shows our trade balance in goods and services widened significantly to negative eighty-eight billion five hundred seventy-six million dollars. That is a massive jump from the previous quarter’s deficit. And while exports are ticking up, imports are climbing faster. So, where is all this nearshored capacity actually going? Luna: It feels like we’re seeing a lot of activity, but maybe not the productive output we expect. Are we looking at assembly lines or just storage? Lucas: That is the exact question. When I visited a manufacturing hub in Nuevo León earlier this year, I met with a mid-sized electronics component maker who had moved his final assembly from Shenzhen to Monterrey. On paper, the math worked. He saved fifteen percent on labor. But when you look at the operational reality, he was bleeding cash on logistics and compliance. The problem isn’t the cost of labor anymore. It’s the cost of getting the parts there and getting the finished goods out. Mexico’s infrastructure is still playing catch-up. Roads are congested, ports are backed up, and energy reliability is a genuine concern for heavy industry. Luna: So the wage arbitrage is gone, replaced by higher friction costs? That sounds like a margin killer for thin-industry margins. Lucas: It is. Let’s look at the currency context right now. As of September fourth, the trade-weighted US dollar index sits at one hundred eighteen point one. It’s been relatively flat, but the yen is weak at one hundred fifty-six per dollar and the yuan is stable around six point seven one. This means Asian competitors aren’t losing their price advantage overnight. A factory in Vietnam or Thailand might be cheaper to run than one in Mexico, even after accounting for shipping times. The nearshoring premium only works if you value speed over cost. But if your product isn’t perishable or time-sensitive, the math shifts back toward Asia. Luna: Right, so if I’m selling widgets that don’t expire in two weeks, why am I paying more for Mexican labor just to save a week of shipping? Lucas: Exactly. You shouldn’t. Unless you are dealing with something like automotive parts or medical devices where inventory carrying costs are huge. But here is the deeper issue. The skilled labor shortage in Mexico is real. We keep talking about low wages, but the average hourly wage for a skilled machinist in northern Mexico has risen by nearly twelve percent over the last eighteen months. Companies are bidding against each other for a limited pool of talent. Meanwhile, the regulatory environment is becoming more complex. Customs clearance times have increased due to stricter enforcement of the United states mexico canada Agreement rules of origin. You can’t just slap a label on a Chinese-made part and ship it across the border anymore. Luna: That sounds like a nightmare for compliance teams. How are companies actually handling the verification process? Lucas: They are hiring armies of lawyers and auditors. One executive I spoke with told me that his compliance department has grown by forty percent in size. They spend more time verifying the provenance of steel and aluminum than they do managing production schedules. It’s a classic case of policy intent creating unintended bureaucratic drag. The goal was to protect North American jobs, but the result is a heavier administrative burden that hurts smaller firms the most. Large multinationals can absorb the cost. Smaller manufacturers? They are getting squeezed out. Luna: So the big guys win because they can afford the red tape, but the mid-market gets stuck in the middle? Lucas: Precisely. And this brings us to the current account data. Our current account deficit is sitting at negative two hundred twenty-six billion eight hundred twenty-eight million dollars for the first quarter of 2026. That number is rising. It suggests that despite all the headlines about reshoring, we are still importing more than we are exporting. The capital flows are happening, but the trade balance isn’t fixing itself quickly. Investors are pouring money into Mexican real estate and factories, but that doesn’t translate immediately to reduced trade deficits. It takes years to build infrastructure, train workers, and stabilize supply chains. Luna: It’s like watching a movie where the plot moves fast but the characters are stuck in traffic. Great visual, but frustratingly accurate. Lucas: I think so. Let’s talk about a specific example. There’s a company called Grupo Industrial Saltillo, though I’ll focus on the broader trend rather than just one name. Many Tier-two suppliers are finding themselves stranded. They moved to Mexico to serve US auto makers, but they rely on components from Asia. If those Asian components don’t meet the sixty percent regional value content requirement, the whole vehicle loses its tariff-free status. So now, these Mexican suppliers are trying to source locally, but the local supplier base isn’t mature enough. They end up importing parts from China, paying duties, or redesigning products to use domestic materials that are more expensive and lower quality. It’s a Catch-22. Luna: So they’re trapped between a lack of local supply and the high cost of compliance. Does any sector actually benefit from this setup right now? Lucas: Electric vehicles and battery supply chains are the exception. Because the Inflation Reduction Act offers tax credits tied to North American sourcing, there is a massive incentive to build these facilities in Mexico. We are seeing billions in foreign direct investment flowing into battery gigafactories in states like Coahuila and Chihuahua. But even there, the challenges are mounting. Energy costs in Mexico are volatile. Solar and wind integration is uneven. And the water usage for battery production is raising environmental concerns that could lead to tighter regulations soon. So, yes, EV is hot, but it’s not a blanket solution for all manufacturing. Luna: Water usage? That’s a new variable I hadn’t considered. I assume drought conditions are playing a role there. Lucas: Absolutely. Northern Mexico is arid. Water rights are becoming a premium asset. Companies that ignore this are facing protests and shutdowns. It’s another layer of operational risk that investors often miss when they look at a spreadsheet of labor costs. They see low wages and ignore the resource constraints. Meanwhile, in the United States, we are seeing a counter-trend. Some companies are choosing to stay home because the total cost of ownership in Mexico is no longer lower. Automation is reducing the labor component of manufacturing costs anyway. If you automate a factory in Ohio, the labor savings from moving to Mexico disappear. You are left with higher logistics costs and regulatory headaches. Luna: So automation is essentially neutralizing the main argument for offshoring to Mexico. That’s a powerful shift in the dynamic. Lucas: It is. And we are seeing it in the stock market too. Look at the Russell 2000. It’s down two point one percent over the last five days. Small caps are struggling with financing costs and supply chain uncertainty. Companies that relied on the 'cheap Mexico' playbook are having to re-evaluate their strategies. They are realizing that resilience isn’t just about geography. It’s about flexibility. Can you switch suppliers quickly? Can you handle customs delays? Can you manage energy volatility? These are the new competitive advantages, not just proximity to the US border. Luna: Flexibility over proximity. That’s a subtle but critical distinction for CFOs to grasp right now. Lucas: Right. And let’s not forget the political risk. The relationship between Washington and Mexico City is always evolving. Recent statements from the administration have hinted at tougher enforcement on illegal immigration and drug trafficking, which often correlates with stricter border controls. If border crossings slow down, even by a few hours, the just-in-time model breaks. Inventory buffers need to expand, which ties up working capital. Remember, our imports of goods and services hit four trillion six hundred twenty-eight point one billion dollars in April. That’s a huge volume. Any bottleneck at the border ripples through the entire economy. Luna: Four point six trillion in imports. That’s a staggering amount of volume. Even a one percent delay is significant. Lucas: It is. And it’s not just trucks. Rail corridors are congested. Ports like Laredo and El Paso are operating at near-capacity. We are seeing long lines of trucks waiting for inspection. This isn’t a temporary glitch. It’s a structural bottleneck. Infrastructure spending bills promise solutions, but concrete doesn’t pour itself overnight. Until then, companies are paying a premium for speed. Some are using private warehousing in Texas to buffer against border delays. Others are dual-sourcing, keeping capacity in both Mexico and Asia. It’s a hedge against uncertainty. Luna: Dual-sourcing sounds expensive, but probably cheaper than a full stoppage. It’s insurance, essentially. Lucas: Exactly. It’s insurance. And given the current macro environment, with the ten-year Treasury yield hovering around five percent, borrowing money to build inventory buffers is costly. Margins are under pressure everywhere. Bank of America recently noted that investment banking fees are expected to fall more than ten percent in the third quarter. Deal flow is slowing. Companies are hesitant to make large capex commitments until they see clearer signals on trade policy and labor availability. So, the nearshoring boom might be cooling, or at least maturing into a more cautious, calculated approach. Luna: A cooling boom is better than a crash, but it means fewer easy wins for executives looking for quick fixes. Lucas: No quick fixes. Just hard work. I want to pause here for a moment to thank our listeners again. Your support is what makes this possible. If you enjoy the depth of these discussions, please consider supporting us at buy me a coffee dot com slash fexingo. It helps us keep the lights on and the research sharp. Now, back to the topic. What’s the takeaway for someone planning a move to Mexico in 2027? Luna: That’s the key question. Do you wait, or do you double down now before things get tighter? Lucas: I’d say double down, but differently. Don’t move everything. Move the high-value, time-sensitive items. Keep the commodity-heavy stuff in Asia unless you have a compelling reason otherwise. Invest heavily in compliance technology and local relationships. Build your own talent pipeline instead of relying on the open market. And prepare for energy and water risks. The era of naive nearshoring is over. We are entering the age of sophisticated, integrated North American supply chains. It’s harder, but it’s also more defensible. If you can navigate the complexity, you gain a real moat. If you just chase low wages, you’ll get burned. Luna: So the winners will be the ones who treat Mexico as a strategic partner, not just a cost center. Interesting perspective. Lucas: Yes. Strategic partner. That’s the phrase. Because at the end of the day, trade isn’t just about numbers on a spreadsheet. It’s about people, places, and politics. And in Mexico, those three things are changing fast. The question is, are you changing with them, or are you getting left behind by the old model? Luna: I suppose the best place to start is auditing your own supply chain for those hidden friction costs we talked about today. Lucas: Start there. Look at your compliance hours. Look at your logistics delays. Look at your energy bills. The answers might surprise you. And next time, we’ll dive deeper into how digital customs platforms are trying to solve some of these bottlenecks. Until then, keep your eyes on the data and your feet on the ground.