As a manufacturer based in Mexico, you were excited to hear about the benefits of nearshoring. The idea of relocating your operations closer to home and taking advantage of lower costs and quicker delivery times was too good to pass up. However, as the year 2025 approaches, you find yourself facing unexpected challenges that are stalling your nearshoring initiative.

 With the strained relationship between the US and China post-COVID, many manufacturers are focusing on nearshoring, often moving operations to Mexico. However, across various manufacturing processes—plastics molding, extrusions, castings (aluminum and iron), forgings, rubber, and chemicals—Mexico’s capacity falls short of North American market demands.

Over two-thirds of executives interviewed by McKinsey and other consulting groups have listed nearshoring as a top initiative. Investments in greenfield manufacturing setups and supplier development in Mexico are increasing. Despite these efforts, there are significant challenges facing Mexican manufacturing and its supply base.

1.) USD to Pesos Exchange Rate: Most surveyed suppliers conduct over 90% of their business in USD. For the past decade, this has helped Mexican businesses combat inflation as the peso weakened. Recently, the peso has strengthened, likely due to the significant investments being made in Mexico. This shift has pressured prices and sales contracted between 2015 and 2023. For instance, a contract negotiated at an exchange rate of 20 with an annual value of $1 million now brings in only $700,000 due to the exchange rate change to 17 in 2023. This situation is beyond the suppliers’ control.

2.) High Borrowing Costs: Mexico’s borrowing interest rate is at a generational high. The costs of borrowing have increased significantly, and stricter underwriting has tightened credit lines. Many real estate and other loans are tied to USD, adding pressure on suppliers. If debt was written in USD instead of pesos, suppliers are paying 15% more for debt service due to exchange rate changes, in addition to a 5% interest rate increase. Suppliers with even minimal debt are struggling with payables, labor, and energy costs.

3.) Inflation in Mexico: The Big Mac Index, a proxy for inflation, indicates a significant rise in costs within Mexico. The majority party has implemented generous labor policies to improve living standards, and their recent election victory suggests these inflationary policies will continue, along with increased labor subsidies.

4.) Rising Labor Costs: From 2008 to 2021, inflation in Mexico was modest, and labor costs remained manageable, ranging from $6 to $8.50 per hour. The Labor Index rose from 58.09 to just over 100 in 2020 and has doubled in the past three years, putting additional pressure on manufacturers. Growth in delivery and e-commerce jobs offers similar incomes, making many young people reluctant to take manufacturing jobs.

Conclusion

Mexican manufacturers are becoming hesitant to provide long-term pricing, which is essential for Fortune 500 companies’ planning. They are also passing on labor and energy costs. If your Mexican supplier is unwilling to negotiate, giving capacity to other customers, or unable to meet delivery requirements, financial and labor issues are likely at the core.

North American customers should be empathetic towards these manufacturers. Sourcing and supply chain companies like MES have developed creative ways of working with suppliers that larger companies may not match. Contact us at sales@mesinc.net to discuss how we can help you navigate Mexico sourcing and supply chain challenges, leveraging a range of supplier engagement methods for resilient nearshoring solutions.