Why Reshoring Beats Nearshoring for Supply Chain and Manufacturing Security

Key Takeaways:

• Nearshoring, moving manufacturing to Mexico, benefits from lower cost and geographic proximity to the US market
• However, three recent examples suggest that the risks for companies may not be worth taking
• Reshoring to US shores remains the safest strategy for stable supply chains

Case study 1 – Vulcan Materials gets their quarry and port expropriated

In March 2023, the executive board of US aggregates company, Vulcan Materials, woke up to bad news. One of its largest facilities located in Punta Venado, Mexico had just been illegally entered and seized by the Mexican army, a move sanctioned by the Mexican president. The Alabama based building materials company has since lost access to a prized asset, huge limestone reserves, as well as the only deep-water port in the region. These assets generate hundreds of millions of dollars in profits, supplying valuable crushed stone to vibrant reshoring cities north of the border, in Texas and Arizona. The company continues to mount a legal challenge, claiming a valuation for the land of $1.9bn dollars. Such expropriation is also a direct violation of the US-Mexico-Canada Agreement (USMCA).

Case study 2 – Donald Trump threatens tariffs on John Deere’s Mexican move

In September 2024, US farm equipment maker, John Deere, announced that it was continuing with cost reduction plans that involved shrinking production in Iowa and Illinois and moving it to Ramos, Mexico, laying off more than 800 workers in the process. While this type of news would normally have been greeted with applause by value-minded shareholders, they instead found Deere’s stock down 8% in response. It turns out, former President Trump had also heard the news and during a campaign stop in Pennsylvania, announced that if elected, he would levy a 200% tariff on anything Deere sold into the US manufactured in Mexico. As the US election nears, investors should be reminded that tariffs have been embraced by both Republicans and Democrats, which if put in place could catastrophically undermine nearshoring benefits.

Case study 3 – Air Liquide’s hydrogen plant gets expropriated

In April 2024, an order in the official government gazette decreed that the hydrogen plant at a Pemex¹ state oil refinery, that was sold to French firm Air Liquide by the previous administration, was now government property. This step tore up a 20 year contract and seized a privately owned asset at the second largest Pemex refinery in the country, for the goal of “energy sovereignty”. Lip service was paid to compensation, yet no detail of the amount was given.

Conclusion: Low cost does not mean low risk

While nearshoring may appear cheaper and competitive on the surface, we believe it fails to fully address supply chain risks. Geopolitical stability, rule of law in the context of private property and trade policy all weight heavily on the minds of executives tasked with managing these risks. There are also macroeconomic implications. If the Mexican government continues with such actions, it does not bode well for the review of the USMCA scheduled for 2026. When it comes to supply chain stability – low cost is often not low risk.