February 1, 2007
strategic insight | Supply Chain South of the Border

Mexico redux?

Mexico redux?

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.

By John R. Johnson

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."

About the Author

John R. Johnson
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.

More articles by John R. Johnson

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