Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Mexico Is Becoming an Emerging Market Tech Hub
Transcript
- Lucas: So there's this narrative you hear a lot: that the China plus one strategy is mostly about Vietnam, India, maybe a bit of Thailand. But if you actually look at the dollar flows in the last eighteen months, Mexico has quietly become the single biggest beneficiary of corporate relocation out of China. Luna: That's a pretty big claim. I mean, Vietnam gets all the headlines with the semiconductor assembly. What's Mexico doing that's different? Lucas: It's the scale and the breadth. We're not just talking about low-cost assembly anymore. In 2025, Mexico attracted over thirty-six billion dollars in foreign direct investment, and the first half of 2026 is tracking even higher. That's more than Vietnam, Thailand, and Indonesia combined. Luna: Okay, that's a number I hadn't seen. What's driving it? Is it all Tesla and Foxconn, or is there a broader base? Lucas: Tesla's new gigafactory in Nuevo León is definitely a marquee project, but the base is much wider. You've got aerospace suppliers in Querétaro — Bombardier, Safran, GE Aerospace — all expanding. You've got medical device manufacturing in Tijuana. And increasingly, you've got software development hubs in Guadalajara and Mexico City. Luna: Right, the peso has been relatively stable too, which helps. Unlike some other EM currencies that got crushed by the strong dollar earlier this year. Lucas: Exactly. And that stability is partly because Mexico's central bank has been disciplined, but also because the nearshoring flows create a natural demand for pesos. When a company builds a factory in Monterrey, they need to pay local wages, buy local materials — that's real forex demand. Luna: But there's a flip side, right? Infrastructure. I've read reports about water shortages in northern Mexico, power grid constraints. Can the country scale fast enough? Lucas: That's the critical question. The government announced a forty-billion-dollar infrastructure plan last year, but implementation has been slow. The energy grid in Nuevo León is already under strain. And then there's the security situation — cartel violence in some states makes companies think twice about where to locate. Luna: So it's not all smooth sailing. But if you look at the EWW ETF, it's up modestly this week — about 0.2 percent in the last five days. The market seems to be pricing in a positive long-term view, even with the near-term risks. Lucas: Yeah, and compare that to the EEM, which is down over two percent in the same period. Mexico is outperforming the broader EM index right now. Investors are making a bet on proximity to the US market, on the USMCA trade agreement, on a workforce that's younger and more educated than a lot of people assume. Luna: I want to go back to the software piece for a second, because that's not something you usually associate with Mexico. What's happening in Guadalajara? Lucas: Guadalajara is being called the Silicon Valley of Mexico. Companies like Oracle, IBM, Intel, and Wizeline have major development centers there. The talent pool is strong — Mexico graduates about 130,000 engineers and tech professionals a year. And the time zone overlap with the US is basically perfect. For nearshore software development, it's a huge advantage over India. Luna: That makes a lot of sense. And it's not just cost savings — it's the ability to collaborate in real time. If you're a startup in Austin, you can have your developers in Guadalajara on the same working day. Lucas: Exactly. And that's a theme we see across the board. The companies that are moving to Mexico aren't just looking for cheap labor. They want speed, they want integration, they want supply chain resilience. The China plus one strategy is really about de-risking, not just cost-cutting. Luna: You know, it's interesting that we're talking about this kind of structural shift, and we can do it without any ads or sponsors. That's something we're really committed to on this show — keeping the conversation independent and focused on what matters. If walking through the economy with us has made something click for you, you can support that choice at buy me a coffee dot com slash fexingo. It's a small way to keep this ad-free. Lucas: Yeah, we hear from listeners that they appreciate not having to skip through sponsored segments. It lets us go deeper on the numbers. So if that's valuable to you, the link is there. And Luna, you mentioned the time zone advantage — that's a good segue into another angle. Luna: Sure, what's that? Lucas: The nearshoring wave is also reshaping Mexico's trade patterns. In 2025, Mexico surpassed China as the top trading partner of the United States for the first time in two decades. That's a huge milestone. Luna: I remember that data point. And it's not just about proximity — it's that USMCA rules require a certain percentage of content to be sourced from North America. That creates a virtuous cycle where suppliers move to Mexico to serve factories that are already there. Lucas: Right. The automotive sector is the best example. A car assembled in Mexico might have an engine from the US, wiring from Mexico, electronics from Canada. The cross-border supply chain is incredibly integrated. And as more EV production comes online — Tesla, but also Ford and GM expanding their Mexican plants — that integration deepens. Luna: What about the risk of the USMCA being renegotiated? With the current political climate, that's always a possibility. Lucas: It's a real risk. The agreement is scheduled for review in 2026, and any changes could disrupt the flow. But the structural advantages — labor costs, logistics, energy prices — those aren't going away. Even if tariffs adjust, Mexico still has a strong value proposition. Luna: Let's talk about the peso for a moment. It's been relatively strong, but with the trade-weighted dollar index easing to 120.9, is that a tailwind or a headwind for Mexico? Lucas: A slightly weaker dollar is generally good for EM assets, but a stronger peso can hurt Mexican exporters. If the peso appreciates too much, it erodes the cost advantage that brought companies there in the first place. So there's a sweet spot. Right now, the peso is trading around 18.5 to the dollar, which is still competitive. Luna: And the central bank has been pretty hawkish, keeping rates high to manage inflation. That attracts carry trade flows, which also supports the peso. Lucas: Exactly. So you've got this interesting dynamic: nearshoring creates real economic demand for pesos, and high interest rates create speculative demand. That's a double boost, but it also means the currency could overshoot. Luna: So for an investor looking at Mexico right now, what's the play? The EWW ETF, or individual stocks, or something else? Lucas: I think EWW is a good broad bet, but there are also sector-specific plays. The Mexican real estate investment trusts, or Fibras, are one way to play the industrial buildout. Companies like Prologis have big exposure to Mexican industrial parks. And then there are local consumer names that benefit from rising incomes. Luna: But you have to be selective. Not every company is going to ride the nearshoring wave equally. Lucas: Absolutely. The story is real, but the execution matters. And the risks I mentioned — infrastructure, security, policy — those aren't going away. But on a five-year horizon, Mexico is probably one of the most compelling EM stories out there. Luna: It's a good reminder that emerging markets aren't a monolith. While South Korea and Taiwan are struggling with the chip cycle, Mexico is benefiting from a completely different trend. Lucas: Right. And that's why we drill into the specifics. Because the headline EM index can be misleading. The real opportunity is in understanding the structural shifts beneath the surface. Luna: Well said. Thanks, Lucas. Lucas: Thanks, Luna. That's it for this episode.