It's still struggling to regain the manufacturing momentum it had in the early years of the North American Free Trade Agreement. But in the meantime, Mexico may have found an even better way to cash in on NAFTA.
John Johnson joined the DC Velocity team in March 2004. A veteran business journalist, John has over a dozen years of experience covering the supply chain field, including time as chief editor of Warehousing Management. In addition, he has covered the venture capital community and previously was a sports reporter covering professional and collegiate sports in the Boston area. John served as senior editor and chief editor of DC Velocity until April 2008.
Just five years ago, it appeared that Mexico's NAFTA-fueled bid to become a global manufacturing power had peaked. After a few years of steady manufacturing growth, Mexico's luck had turned. The U.S. economic recession that followed Sept. 11 had caused a spate of factory shutdowns along the U.S.-Mexican border. More ominously, Mexico had begun to hear the "giant sucking sound" Ross Perot had warned about. Only it wasn't the sound of Mexico suctioning up U.S. jobs. It was the sound of China (and other low-cost Asian nations) draining away both U.S. jobs that Mexico had counted on and jobs from Mexico itself.
Today, Mexico's fortunes may be looking up. It's seeing a resurgence in manufacturing activity—not just along the U.S.-Mexican border but also to the south in cities like Guadalajara, which has come to be known as the Mexican Silicon Valley. (In an interesting footnote to NAFTA, Ross Perot's own tech outsourcing company, Perot Systems, announced in November that it would open a service center in Guadalajara.) There are also plenty of signs that Mexico is recapturing some of the business it had lost to Asia.
In the meantime, Mexico has embarked on a bold new plan to cash in on NAFTA—one that centers not on manufacturing, but on logistics. At the heart of its plan is an aggressive West Coast port expansion project aimed at attracting more cargo business. Each year, millions of containers filled with low-cost Asian imports pour into North America—mostly through the California ports of Los Angeles and Long Beach. But those ports are hitting their capacity limits even as Asian imports continue to grow at double-digit rates, raising fears of worsening port congestion and shipping delays. That's led big U.S. importers like Wal-Mart and Costco to search for alternate gateways, creating a wide-open opportunity for the Mexican ports to California's immediate south.
"I don't know if Mexico will become the only gateway, but clearly today it is a gateway from Asia to the U.S.," says Armando Beltran, director general for Schneider National's Mexican operations, which introduced an intermodal service between Mexico and the United States in June. "I think that role will only increase over the next few years."
Back in the manufacturing game
Not so long ago, the suggestion that Mexico might yet see a turnaround in its manufacturing fortunes would likely have been dismissed as a pipedream. "Three or four years ago, there was a lot of consternation about manufacturing facilities leaving Mexico and moving to China," says Gene Sevilla, vice president and managing director of Ryder, Latin America. "Mexico is supposed to be the low-cost labor country next to the biggest market in the world, and yet it was not competitive relative to China."
But things are different today, says Sevilla. "Over the last six to nine months, we've been starting to see a lot of manufacturing come back to Mexico."
The trend is being driven largely by manufacturers of high-value electronic products that have short shelf lives due to the risk of obsolescence. Though initially drawn to Asia by low labor costs, some of these manufacturers began to reconsider after experiencing some of the problems associated with extended global supply chains—like higher transportation costs and the increased risk of disruptions and delays. As a result, many have moved back to Mexico, deciding it's best to be closer to the U.S. marketplace, which remains the world's largest consumer market. Some of those companies have adopted a hybrid outsourcing model, opting to keep commodity manufacturing in China while moving more sensitive manufacturing closer to the States.
Bumps in the road (and on the rails)
But a manufacturing boom would put severe strain on Mexico's creaky distribution and transportation infrastructure. Shortages of warehousing and distribution space have already been reported in the Guadalajara area as well as in Mexico City and Monterrey.
"At this point, the market for warehouse space is becoming very tight," says Sevilla. "There is a lot of demand for manufacturing and distribution space right now." That's true not just in the interior, he says, but also in the border cities of Ciudad Juarez (the sister city of El Paso, Texas) and Nuevo Laredo (located across the Rio Grande from Laredo, Texas).
Then there's the matter of Mexico's transportation network, which some fear will buckle under the added volume. To begin with, rail options in Mexico are already severely limited. Despite recent improvements, Mexico's rail system is still widely considered antiquated and inefficient, making rail service an impractical choice for freight with any kind of time restrictions.
"For high-value merchandise where speed is required, rail service is still not up to a minimum standard," Sevilla reports. "The rail companies are making investments to improve service and eventually should make those investments good for a lot of commodities that now move on trucks. There has been steady progress but … a lot of the commodities that move by train in the U.S. are still moved by truck in Mexico."
That means that for now, at least, the burden will be shouldered by Mexico's trucking industry, which is plagued by problems of its own. One of those is infrastructure. Although Mexico's highways have improved, allowing industry to push deeper into Mexico, the road system still needs work. Observers point out that these kinds of drawbacks, along with rising fuel costs and lingering concerns about burdensome regulatory requirements, could lead some companies to think twice before relocating operations there.
Berth of a nation
All these hurdles must be cleared before the country can fulfill its vision of becoming a North American logistics center. But Mexico is undaunted. It's pressing ahead with aggressive port construction and expansion plans in hopes of attracting more cargo business.
Contenders for that business include the bustling ports of Manzanillo and Lazaro Cardenas, which are located along Mexico's western coast. Manzanillo is Mexico's largest West Coast port right now. Lazaro Cardenas, 150 or so miles to the south, is currently undergoing an expansion intended to boost its capacity to some 2 million containers annually.
But the centerpiece of Mexico's plan is the proposed construction of a super-port at Punta Colonet, a remote windswept bay on Baja California about two hours south of the U.S. border. Late last fall, the Mexican government approved a plan to develop the area into a container port on the scale of those up the coast at Los Angeles and Long Beach.
If things work out according to plan, the port could take a lot of the pressure off LA and Long Beach. Analysts say Punta Colonet would initially be able to handle one million containers a year, with the number rising to five or six million after five years of operation. By comparison, Los Angeles and Long Beach together handle somewhere around 15.6 million TEUs (twenty-foot equivalent units) a year. Development plans for the complex, which Mexican officials hope will someday be known as the "Mexican Long Beach," include construction of a nearly 100-mile, two-way railroad to Mexicali, which lies along the Mexico-California border near Tijuana. That alone represents an ambitious undertaking—it would require laying track through deserts and through the mountains of Juarez. The rail line would link to California's sprawling Imperial Valley, from which products would be distributed throughout the United States.
Of course, all this is well in the future. Work has yet to begin on the port complex, never mind the intermodal connections. "It still needs to connect to the train, there are land concession issues, and major investment would be required for rail service to connect to the rails in the United States," warns Schneider's Beltran. Given the project's scope, he says, it's unlikely the port would be ready before 2015. But even with the delay, he says, the project still holds enormous promise. "[I]t makes all the sense in the world for this to be built."
Congestion on U.S. highways is costing the trucking industry big, according to research from the American Transportation Research Institute (ATRI), released today.
The group found that traffic congestion on U.S. highways added $108.8 billion in costs to the trucking industry in 2022, a record high. The information comes from ATRI’s Cost of Congestion study, which is part of the organization’s ongoing highway performance measurement research.
Total hours of congestion fell slightly compared to 2021 due to softening freight market conditions, but the cost of operating a truck increased at a much higher rate, according to the research. As a result, the overall cost of congestion increased by 15% year-over-year—a level equivalent to more than 430,000 commercial truck drivers sitting idle for one work year and an average cost of $7,588 for every registered combination truck.
The analysis also identified metropolitan delays and related impacts, showing that the top 10 most-congested states each experienced added costs of more than $8 billion. That list was led by Texas, at $9.17 billion in added costs; California, at $8.77 billion; and Florida, $8.44 billion. Rounding out the top 10 list were New York, Georgia, New Jersey, Illinois, Pennsylvania, Louisiana, and Tennessee. Combined, the top 10 states account for more than half of the trucking industry’s congestion costs nationwide—52%, according to the research.
The metro areas with the highest congestion costs include New York City, $6.68 billion; Miami, $3.2 billion; and Chicago, $3.14 billion.
ATRI’s analysis also found that the trucking industry wasted more than 6.4 billion gallons of diesel fuel in 2022 due to congestion, resulting in additional fuel costs of $32.1 billion.
ATRI used a combination of data sources, including its truck GPS database and Operational Costs study benchmarks, to calculate the impacts of trucking delays on major U.S. roadways.
There’s a photo from 1971 that John Kent, professor of supply chain management at the University of Arkansas, likes to show. It’s of a shaggy-haired 18-year-old named Glenn Cowan grinning at three-time world table tennis champion Zhuang Zedong, while holding a silk tapestry Zhuang had just given him. Cowan was a member of the U.S. table tennis team who participated in the 1971 World Table Tennis Championships in Nagoya, Japan. Story has it that one morning, he overslept and missed his bus to the tournament and had to hitch a ride with the Chinese national team and met and connected with Zhuang.
Cowan and Zhuang’s interaction led to an invitation for the U.S. team to visit China. At the time, the two countries were just beginning to emerge from a 20-year period of decidedly frosty relations, strict travel bans, and trade restrictions. The highly publicized trip signaled a willingness on both sides to renew relations and launched the term “pingpong diplomacy.”
Kent, who is a senior fellow at the George H. W. Bush Foundation for U.S.-China Relations, believes the photograph is a good reminder that some 50-odd years ago, the economies of the United States and China were not as tightly interwoven as they are today. At the time, the Nixon administration was looking to form closer political and economic ties between the two countries in hopes of reducing chances of future conflict (and to weaken alliances among Communist countries).
The signals coming out of Washington and Beijing are now, of course, much different than they were in the early 1970s. Instead of advocating for better relations, political rhetoric focuses on the need for the U.S. to “decouple” from China. Both Republicans and Democrats have warned that the U.S. economy is too dependent on goods manufactured in China. They see this dependency as a threat to economic strength, American jobs, supply chain resiliency, and national security.
Supply chain professionals, however, know that extricating ourselves from our reliance on Chinese manufacturing is easier said than done. Many pundits push for a “China + 1” strategy, where companies diversify their manufacturing and sourcing options beyond China. But in reality, that “plus one” is often a Chinese company operating in a different country or a non-Chinese manufacturer that is still heavily dependent on material or subcomponents made in China.
This is the problem when supply chain decisions are made on a global scale without input from supply chain professionals. In an article in the Arkansas Democrat-Gazette, Kent argues that, “The discussions on supply chains mainly take place between government officials who typically bring many other competing issues and agendas to the table. Corporate entities—the individuals and companies directly impacted by supply chains—tend to be under-represented in the conversation.”
Kent is a proponent of what he calls “supply chain diplomacy,” where experts from academia and industry from the U.S. and China work collaboratively to create better, more efficient global supply chains. Take, for example, the “Peace Beans” project that Kent is involved with. This project, jointly formed by Zhejiang University and the Bush China Foundation, proposes balancing supply chains by exporting soybeans from Arkansas to tofu producers in China’s Yunnan province, and, in return, importing coffee beans grown in Yunnan to coffee roasters in Arkansas. Kent believes the operation could even use the same transportation equipment.
The benefits of working collaboratively—instead of continuing to build friction in the supply chain through tariffs and adversarial relationships—are numerous, according to Kent and his colleagues. They believe it would be much better if the two major world economies worked together on issues like global inflation, climate change, and artificial intelligence.
And such relations could play a significant role in strengthening world peace, particularly in light of ongoing tensions over Taiwan. Because, as Kent writes, “The 19th-century idea that ‘When goods don’t cross borders, soldiers will’ is as true today as ever. Perhaps more so.”
Hyster-Yale Materials Handling today announced its plans to fulfill the domestic manufacturing requirements of the Build America, Buy America (BABA) Act for certain portions of its lineup of forklift trucks and container handling equipment.
That means the Greenville, North Carolina-based company now plans to expand its existing American manufacturing with a targeted set of high-capacity models, including electric options, that align with the needs of infrastructure projects subject to BABA requirements. The company’s plans include determining the optimal production location in the United States, strategically expanding sourcing agreements to meet local material requirements, and further developing electric power options for high-capacity equipment.
As a part of the 2021 Infrastructure Investment and Jobs Act, the BABA Act aims to increase the use of American-made materials in federally funded infrastructure projects across the U.S., Hyster-Yale says. It was enacted as part of a broader effort to boost domestic manufacturing and economic growth, and mandates that federal dollars allocated to infrastructure – such as roads, bridges, ports and public transit systems – must prioritize materials produced in the USA, including critical items like steel, iron and various construction materials.
Hyster-Yale’s footprint in the U.S. is spread across 10 locations, including three manufacturing facilities.
“Our leadership is fully invested in meeting the needs of businesses that require BABA-compliant material handling solutions,” Tony Salgado, Hyster-Yale’s chief operating officer, said in a release. “We are working to partner with our key domestic suppliers, as well as identifying how best to leverage our own American manufacturing footprint to deliver a competitive solution for our customers and stakeholders. But beyond mere compliance, and in line with the many areas of our business where we are evolving to better support our customers, our commitment remains steadfast. We are dedicated to delivering industry-leading standards in design, durability and performance — qualities that have become synonymous with our brands worldwide and that our customers have come to rely on and expect.”
In a separate move, the U.S. Environmental Protection Agency (EPA) also gave its approval for the state to advance its Heavy-Duty Omnibus Rule, which is crafted to significantly reduce smog-forming nitrogen oxide (NOx) emissions from new heavy-duty, diesel-powered trucks.
Both rules are intended to deliver health benefits to California citizens affected by vehicle pollution, according to the environmental group Earthjustice. If the state gets federal approval for the final steps to become law, the rules mean that cars on the road in California will largely be zero-emissions a generation from now in the 2050s, accounting for the average vehicle lifespan of vehicles with internal combustion engine (ICE) power sold before that 2035 date.
“This might read like checking a bureaucratic box, but EPA’s approval is a critical step forward in protecting our lungs from pollution and our wallets from the expenses of combustion fuels,” Paul Cort, director of Earthjustice’s Right To Zero campaign, said in a release. “The gradual shift in car sales to zero-emissions models will cut smog and household costs while growing California’s clean energy workforce. Cutting truck pollution will help clear our skies of smog. EPA should now approve the remaining authorization requests from California to allow the state to clean its air and protect its residents.”
However, the truck drivers' industry group Owner-Operator Independent Drivers Association (OOIDA) pushed back against the federal decision allowing the Omnibus Low-NOx rule to advance. "The Omnibus Low-NOx waiver for California calls into question the policymaking process under the Biden administration's EPA. Purposefully injecting uncertainty into a $588 billion American industry is bad for our economy and makes no meaningful progress towards purported environmental goals," (OOIDA) President Todd Spencer said in a release. "EPA's credibility outside of radical environmental circles would have been better served by working with regulated industries rather than ramming through last-minute special interest favors. We look forward to working with the Trump administration's EPA in good faith towards achievable environmental outcomes.”
Editor's note:This article was revised on December 18 to add reaction from OOIDA.
A Canadian startup that provides AI-powered logistics solutions has gained $5.5 million in seed funding to support its concept of creating a digital platform for global trade, according to Toronto-based Starboard.
The round was led by Eclipse, with participation from previous backers Garuda Ventures and Everywhere Ventures. The firm says it will use its new backing to expand its engineering team in Toronto and accelerate its AI-driven product development to simplify supply chain complexities.
According to Starboard, the logistics industry is under immense pressure to adapt to the growing complexity of global trade, which has hit recent hurdles such as the strike at U.S. east and gulf coast ports. That situation calls for innovative solutions to streamline operations and reduce costs for operators.
As a potential solution, Starboard offers its flagship product, which it defines as an AI-based transportation management system (TMS) and rate management system that helps mid-sized freight forwarders operate more efficiently and win more business. More broadly, Starboard says it is building the virtual infrastructure for global trade, allowing freight companies to leverage AI and machine learning to optimize operations such as processing shipments in real time, reconciling invoices, and following up on payments.
"This investment is a pivotal step in our mission to unlock the power of AI for our customers," said Sumeet Trehan, Co-Founder and CEO of Starboard. "Global trade has long been plagued by inefficiencies that drive up costs and reduce competitiveness. Our platform is designed to empower SMB freight forwarders—the backbone of more than $20 trillion in global trade and $1 trillion in logistics spend—with the tools they need to thrive in this complex ecosystem."