Why you can’t afford to wait until mañana to think about Mexico.
By David Howland
If Mexico’s manufacturing industry commissioned an official logo, the pendulum might be a logical choice.
Nearly 20 years after the North American Free Trade Agreement put the country on many U.S. companies’ low-cost production maps — and 10 years after Asian powerhouses such as China, India and Vietnam stole much of that thunder away — Mexico has become a major manufacturing market to be reckoned with again. And this time, there’s every reason to believe its upswing will be sustained.
The question is will the country’s famously challenging logistics be any easier for U.S. companies to manage the second time around?
I’m happy to report the answer is a qualified yes, because over the past two decades many aspects of Mexico’s supply chain have undergone considerable change for the better.
However that doesn’t mean that U.S. companies can expect a cakewalk either, because in spite of all the progress that has been made, there is still far more than just an international border separating most companies from a seamless Mexico-to-U.S. supply chain.
In 2007, the Mexican government kicked off a promising National Infrastructure Program that paved the way for additions or upgrades to many of the country’s ports, airports, railways and roadways, including four new interstate corridors that would complement its NAFTA highway.
Unfortunately the plan was conceived before the economic downturn — and significantly affected by the subsequent global financial crisis. By last summer, when the program should have been entering its final year, scarcely more than half of the improvements had been made. Meanwhile, plans for the rest were in the process of either being scaled down or their deadlines were being extended.
What this means for U.S. nearshoring companies is clear: Although the fluidity and connectivity of Mexico’s land transportation network are much-improved, they are still anything but comparable to the levels routinely enjoyed by shippers operating exclusively within the United States.
A Bitter Pill
Over the past 10 years, much of the talk about U.S. cargo security has centered around the war on terror. In terms of Mexico, the discussion is just as likely to concern the war on drugs.
The country recently has been battling a significant drug-related crime wave — so much so that the U.S. State department issued a strong Mexico travel advisory last year.
And not surprisingly this has made U.S. truckers – who as a general rule already tended to be reticent about driving within Mexico — even less willing to consider transporting shipments south of the border.
As a result, U.S. nearshorers that are hoping to use drivers from their preferred U.S. carriers for transits within Mexico will need to alter that paradigm. Instead, they must expect to rely on Mexican trucking carriers (or U.S. carriers that have arrangements with the same) for almost all of their over-the-road, in-Mexico shipping. Or, like many North American shippers, they will need to increase their use of rail, which poses fewer security risks because of train shipments’ near-constant movement.
Shippers also need to consider Mexico’s security challenge when selecting the best cities for their distribution centers (because some regions of Mexico are more famously crime-ridden than others) and when comparing the merits of different DCs within those cities. Wherever possible, they should opt to locate in industrial parks that offer 24-hour controlled access. In addition, it’s especially important that their facilities of choice have substantial security devices installed.
Truck Driver Issues
Of course, crime isn’t the only factor that has impacted companies’ U.S.-Mexico carrier balance over these past few years.
For the better part of NAFTA’s history, the United States and Mexico have had difficulty arriving at a mutually agreeable cross-border trucking arrangement. In fact, the first such agreement — a pilot program that eventually involved 10 U.S. carriers and 29 Mexican carriers — was only implemented in 2007 before budget cuts led to it being discontinued in 2009.
Most of the delay in hammering out such an agreement has come from the United States, which has expressed reservations about how our country’s rigorous truck driver safety requirements can be applied to — and enforced with — Mexico’s truck drivers. And most of the financial penalties related to the delay have come from Mexico, which imposed billions of dollars in tariffs in protest for having to wait so long to have their carriers granted the possibility of operating on its free trading partner’s roadways.
The good news is there’s finally a new agreement in place. And if it stands it will eliminate those tariffs and provide companies doing business between the two countries to exercise any number of carrier alternatives for their over-the-road shipping.
The bad news is it is being challenged by several powerful organizations in the United States that are hoping to have it overturned in court. In addition, only a small number of carriers from either country have applied to be cross-border shippers.
As a result, most U.S. companies will continue to need to factor extra time into their border crossings to allow not only for clearing Customs but also to change between U.S. and Mexican drivers and — possibly — switch equipment.
When my company opened its first Mexico facility in 1992, ours was the first U.S. 3PL to establish warehousing operations there. Given some of the less-than-glowing advice our people on the ground shared about the experience, it’s surprising we weren’t the last.
Among their criticisms: Obtaining phone service could take one to two years (and a mountain of red tape). State-of-the-art warehousing facilities were non-existent. And finding employees with high levels of education was difficult.
Fast-forward to now. Although Mexico’s phone service is still not on par with that of the United States, the Central Intelligence Agency’s “The World Factbook” now describes it as adequate. The supply of newer warehousing facilities has improved dramatically, allowing some of the industry’s larger 3PLs to transfer operations to more modern, well-appointed facilities. In addition, Mexico’s compulsory level of education has risen from 9 years to 11 years, making it easier — although not 100 percent easy — to find more educated warehouse employees.
However, bear in mind that this situation could change as more organizations follow the trend of moving their manufacturing to Mexico and begin to buy or lease better facilities. Ultimately organizations that are late to the party may find themselves having to settle for best-available rather than best-of-class. So don’t wait until mañana to start mapping out your company’s Mexico warehousing network.
On The Right Track
Thankfully, not all of the Mexico logistics news is quite this mixed. The rail industry in particular has done an excellent job of reading the tea leaves and making a wide variety of infrastructure improvements and route upgrades that have vastly improved U.S.-to-Mexico shippers’ land transportation options.
For example, instead of having just one primary intermodal service lane between the United States and Mexico, shippers now have their choice of five major corridors that are accessible from 14 metropolitan areas. There are new intermodal facilities in Kansas City and Houston in the United States and Monterrey, San Luis Potosi and Toluca thanks to Kansas City Southern. And Norfolk Southern has invested nearly $300 million in improvements.
As a result, rail transits — which also offer cost, Customs clearance, carbon footprint and crime-deterring advantages — are a far more viable and reliable shipping prospect for U.S. nearshorers than they ever have been before (although this will create some challenges of its own due to the fact that more rail traffic will be moving North rather than South, leading to greater equipment imbalance issues.)
It’s also important to note that the sum of Mexico’s economic and supply chain parts (which, as the saying goes, is greater than the whole) has the potential to make any and all logistical headaches worth it in the end.
According to recent research conducted by global consultant AlixPartners, Mexico offered the lowest total landed manufacturing cost for U.S. manufacturers in 2011. That’s right: Mexico.
From more cost-effective labor to a far shorter transit time between production and delivery, there are many ways it is giving its competitors from across the globe a run for the U.S. offshoring money. And given some of the rising manufacturing costs present in those markets it could compare even more favorably in the years to come.
Will you be reading and hearing more about this once-again-hot manufacturing center over the next few years? There’s no question.
More important, will your company be ready to deploy a Mexico strategy as soon as it should be? If you haven’t already started thinking about it, the answer may be no.
David Howland is the vice president of APL Logistics’ Land Transport Services. To learn more, visit www.apllogistics.com.