This article was originally published in the third issue of FreightWaves’ Supply Chain Playbook.
Nearshoring is helping to attract more manufacturing to Mexico as shippers look for supply chains that are closer, less costly and more advantageous to doing business with the U.S.
Mexico has been the top U.S. trading partner since the beginning of 2023, reporting $397 billion in two-way trade from January through June, according to the U.S. Census Bureau. In comparison, Canada was No. 2 at $388 billion and China was third at $276 billion for the same period.
“We’ve already observed encouraging growth in Mexico’s nearshoring in recent years, particularly among companies that already possess manufacturing facilities within the country. Consequently, we’ve witnessed a surge in freight movement to and from the U.S.,” Ed Habe, vice president of Mexico sales for cross-border LTL carrier Averitt Express, told FreightWaves.
Nearshoring has the potential to boost the growth of Mexican manufacturing exports to the U.S. even further — from $455 billion today to an estimated $609 billion over the next several years, according to a recent report from Morgan Stanley, “Mexico Is Poised to Ride the Nearshoring Wave.”
Nearshoring is a business strategy in which a company shifts some or all of its supply chain operations to a location closer to its end market. The biggest single investment so far was automaker Tesla’s decision to open a $5 billion electric car factory in the northern Mexican city of Monterrey. The factory was announced in February and is scheduled to open in 2025.
“If U.S. manufacturing is to be less dependent on China, we think the path will be via Mexico,” Nikolaj Lippmann, Morgan Stanley Research equity analyst, said in the report. “Nearshoring is expected to be a long and sustained race that could help build new ecosystems in Mexico’s existing manufacturing hubs.”
To stay ahead of competition, Mexico must improve its commercial transportation infrastructure and highway security, recruit more truck drivers, and settle ongoing trade disputes with the U.S., Habe and other Mexico trade experts said.
The next phase of nearshoring will be the development of additional manufacturing plants in Mexico, which could constrain equipment capacity, Habe said.
“I believe we will continue to see continued investments that will grow the movement of freight between the U.S. and Mexico,” he said.
For shippers to capitalize on Mexico’s nearshoring growth, they need to be planning ahead for when capacity could become scarce in the next market cycle.
“Mexico still utilizes a trust- and relationship-based style of doing business; building those ties is critical to success versus rate shopping,” Jordan Dewart, president of 3PL Redwood Mexico, told FreightWaves.
Along with Habe and Dewart, FreightWaves spoke with Jorge Canavati, a principal at J. Canavati & Co., a San Antonio-based company that provides international logistics and trade consulting.
Capacity could tighten dramatically in 2024
Both Dewart and Habe said trucking and trailer capacity will grow tighter next year, and prioritizing new carrier relationships now will help spread out shipping options in the future.
One of the main causes of tighter capacity next year could be the multitude of factory expansions and new facilities opening across Mexico. After Tesla said its newest factory would be in Monterrey, a slew of automotive suppliers announced they would build production plants in the country to supply parts to the EV maker.
“Trailer capacity will continue to be an issue due to the imbalance of freight moving north versus south,” said Habe, whose Cookeville, Tennessee-based company is a freight transportation and supply chain service provider, specializing in LTL, truckload, dedicated, distribution and fulfillment services.
“The fact is that nearshoring in Mexico has been occurring since the 1960s,” Habe said. “Over the years, it has been hot and cold. Right now, it is hot. At the same time, this feels like it will be a long-term trend — if not permanent. This is prompting many companies to review their current cross-border strategies and to explore additional modes, including LTL pool distribution at the border, rail and even ocean.”
Dewart said shippers should stay as flexible as possible and bring multiple shipping options to the table.
“We like to say you want more than one bullet in your gun — from adding transloading options, taking advantage of carriers with B1 drivers, utilizing different border crossings,” Dewart said.
Redwood Mexico is part of Chicago-based 3PL Redwood Logistics. In April, Redwood Mexico moved into new offices in Monterrey and expanded its workforce with the aim of tapping into more companies and their nearshoring efforts in the country.
Dewart believes cross-border rates will spike after hitting a tipping point in 2024 and capacity demand will be massive.
“All of this massive investment in plant expansions and new plant construction will begin coming online next year, and we expect [U.S.] economic recovery in 2024, further fueling shipping levels,” Dewart said. “Mexican carriers are not aggressively expanding their fleets and have the same issues U.S. carriers have with driver shortages. Supply will not be there to meet capacity, so rates are sure to rise. It will be a carrier’s market worse than what we saw during COVID-19.”
Mexico needs to tighten security on its highways
Cargo theft continues to plague Mexico’s freight transportation industry. From January through June, cargo theft increased 21% compared to the same period in 2022, according to data released by the Mexican Association of Insurance Institutions.
“Drug- and cartel-related violence in specific areas along the U.S.-Mexico border, such as in the Mexican cities of Nuevo Laredo and Reynosa, can really hurt things,” Dewart said. “It feels like a fragile peace right now, and we’ve already seen that unrelated disputes like Title 42 can have an immediate negative impact.”
Title 42 was a health initiative that allowed U.S. officials to turn away migrants at the U.S.-Mexico border on the grounds of preventing the spread of COVID-19.
In recent months, masses of migrants arrived at border crossings near El Paso and Brownsville, Texas, temporarily shutting down ports of entry as authorities dealt with the situations.
In May, Mexican authorities reported a gunbattle between law enforcement officials and alleged cartel members in Reynosa, just across the border from Pharr, Texas. The shootout temporarily halted traffic along the Pharr-Reynosa International Bridge, a key border crossing.
“Cargo theft is a big problem. The violence is a big problem,” Canavati said. “The insurance rates for cargo are just going up and up and up.”
Mexico must prioritize infrastructure to spur trade growth
Mexico, along with some other Latin American countries, spends less than 1% of its gross domestic product on infrastructure, according to a report from the Mexico Institute at the Wilson Center in Washington.
In comparison, China spends the most of any country on infrastructure, between 4% and 5% of annual GDP. The U.S. spends between 0.5% and 1.5% of its GDP on infrastructure projects.
“There still needs to be more investment in natural gas distribution in Mexico, not focusing on these huge pharaonic investments that they’re doing, such as the Isthmus of Tehuantepec corridor,” Canavati said. “There has to be more of a focus on the real infrastructure that companies are investing in and are going to use.”
Mexico and other Latin American countries are facing deteriorating modes of transport, especially rail and road, the Mexico Institute said.
“Overall, statistics show that roads and ports in the region have improved marginally over the past decade, and railroads have not improved at all, placing it at the same level as sub-Saharan Africa,” according to the institute.
Habe said as more companies expand or open new factories in Mexico, the country needs to be able to accommodate increased traffic.
“The infrastructure in Mexico could pose challenges as highways and ports are used more than ever before,” he said.
Canavati said the government should focus on providing the water, natural gas, and better roads and bridges that will be needed by new or expanding factories in Mexico.
“Some people say Mexico is going to be the new China. Well, right now it’s far from it,” Canavati said. “China has an incredibly large manufacturing capacity, but we need to continue to support Mexico in this effort, with more infrastructure, because transportation needs to get better.”
Mexico’s stronger peso could affect freight rates
As more foreign direct investment arrives in Mexico, a strengthening peso and tightening trucking capacity could create challenges for cross-border trade with the U.S.
Matt Silver, vice president of cross-border solutions at Arrive Logistics, said the peso’s appreciation against the dollar could impact U.S. shippers and carriers running cross-border freight working with trucking companies in Mexico.
“The biggest impact that we’re seeing from the peso’s change is on purchasing transportation,” Silver recently told FreightWaves.
Around July 28, the peso’s worth reached its highest value against the dollar since late 2015 when it sat at 16.63 pesos per dollar. Since then, the peso’s value has fluctuated around 17 per dollar.
“The peso will impact things if it appreciates any further,” Dewart said.
Silver said if the peso continues to appreciate, it could cause friction between Mexican carriers and shippers.
“My advice is really about having an open conversation with carriers while paying attention to the market and understanding if things will normalize between the two currencies,” Silver said. “If we can get back to that 20 peso-to-dollar ratio, then you start to feel a little bit better about where things are. But if it stays where it is for a prolonged period of time, then you might have to revisit rates again.”