July 31, 2015 Nearshoring in Mexico 7/31/2015 According to the latest US/NAFTA freight numbers released by the US Bureau of Transportation, US trade with Mexico has continued to grow over the past ten years with US/Mexico freight Value increasing 100.5% from 2004 to 2014. A breakdown of the 2014 modal shares for this freight are: Truck: 67.5% Rail: 13.8% Vessel: 12.2% Air: 2.9% Pipeline: 0.9% Nearshoring in Mexico: Why? There are a number of factors that experts point to when explaining the positive year-over-year trends in US/Mexico air, rail and truck freight value totals: 1. The arrival of new fracking technologies and discoveries of shale gas deposits. North America has become a low cost energy center. The U.S. Chamber of Commerce Foundation stated that “Through the 1990s and early 2000s, energy-intensive manufacturing businesses were closing facilities in the United States because of higher natural gas prices.” These businesses were outsourcing manufacturing overseas to places such as Asia. However, with North America’s new found energy abundance more manufacturing will be near-shored to places such as Mexico. 2. Mexico’s manufacturing output has increased steadily over the last decade. The increase of skilled workers and improved technology has encouraged a nearshoring in mexico trend for many US manufacturing and distribution companies. Mexico has become a major source for US imports of products such as automobiles and parts, electrical machinery equipment and parts, as well as minerals, fuel, and oils. 3. The Mexican government is investing heavily to improve transportation infrastructure. Recent infrastructure investments include about 70 billion pesos ($4.6 billion) for port infrastructure through 2018, including building four new terminals in Veracruz to handle the anticipated increase in volume. 4. Mexico continues to streamline its cross border customs and safety procedures. Mexico will soon permit armed U.S. Customs and Border Protection agents to work within its borders as part of a trade agreement aimed at getting cargo from Mexico into the US faster. The US Department of Transportation has also recently started allowing Mexican motor carriers to apply for authority to conduct long-haul, cross-border trucking services. Under this program, Mexican trucks must be inspected and meet the same safety regulations as those for US motor carriers. Implications for Shippers With its strategic location, Mexico has become an up and coming location for many top international manufactures and distributers. More and more companies are looking to Mexico for reduced production costs and increased supply chain efficiencies. Dr. Edgar Blanco, research director in the Center for Transportation & Logistics at the Massachusetts Institute of Technology (MIT), recently stated, “Companies need greater supply chain visibility, and flexible distribution networks to accommodate their needs. Supply chain operations in Mexico have a great potential to become a premier solution for various industries and businesses.” If Mexico can continue to work on security and infrastructure concerns it could become a major player in the world market. Odyssey will continue to monitor this trend and update you as needed.