U.S.—Mexico Trade: Two-Way Traffic

Rising wages in China, long transit times across the Pacific, and fluctuating gas prices are fueling a nearshoring trend among manufacturers serving the North American market, and Mexico is reaping the benefits. Companies are pouring billions of dollars into new production capacity—so much so that by 2019 the country could surpass China as the United States’ top trading partner, according to Mexico outsourcing solutions provider The Offshore Group.

South of the Border Business Boom
10 Years of Trade with Mexico

Mexico has transitioned from a simple assembler of products to “an exceedingly sophisticated manufacturer,” the Offshore Group states. The country’s government has aggressively sought free trade agreements with other nations to foster growth. Mexico now has such agreements with 44 countries, and some type of free trade policy affects 90 percent of its trade.

Sourcing product from Mexico can be especially advantageous for North American businesses. “Product originating in Mexico can reach North American customers in one week or less, versus 20 to 30 days from Asia,” says Troy Ryley, managing director for Transplace Mexico, a division of Frisco, Texas-based third-party logistics (3PL) provider Transplace. “This helps drive transport costs down, increases speed to market, and reduces inventory cost. It also simplifies forecasting.”

U.S.-Mexico cross-border trade is not without challenges, however. Factors such as divergent regulatory regimes, capacity shortages, customs complexities, infrastructure issues, and congestion complicate the logistics picture. The good news is, improved service offerings and creative transport solutions help streamline the border-crossing process and optimize capacity.

Avoiding Handoff Hassles

“The problem with U.S.-Mexico cross-border trade has always been the handoffs,” Ryley notes. “The traditional model involves partnerships between truckers and customs brokers in the United States and Mexico, all trying to work together without data correlation or visibility. A lot can go wrong, especially southbound. So when a problem occurs, finger-pointing results.”

The 3PL sector, in particular, is focusing on building more integrated cross-border solutions that handle not just transportation, but all the myriad requirements inherent in streamlined trade. For example:

• Transplace co-located its Mexico and U.S. customs brokerage groups in one area to improve integration. “Our systems and technology are linked, which allows visibility,” Ryley notes. “Better tracking and visibility can pull time and money out of the supply chain.”
• Exel/DHL Supply Chain recently opened a 250,000-square-foot distribution center in Laredo, Texas, to support the company’s Logistics Without Borders supply chain offering. This multi-client, multi-industry solution provides a portfolio of services to facilitate cross-border trade, including value-adds such as vendor-managed inventory.
• Ryder manages more than 150,000 border crossings annually for automotive and other types of customers. Its largest operation—between Laredo, Texas, and Nuevo Laredo, Mexico—provides transportation management, including a large dedicated trucking operation, milk runs, and consolidation in both the United States and Mexico; line hauls to the border; cross-border activities; and deconsolidation and delivery to manufacturing plants, distribution centers, retailers, and end consumers.

Disparate Rules

A second border-related issue affecting U.S.-Mexico supply chains is the disparity in the legal and regulatory regimes of the two countries. One example is cargo liability.

In handling border crossings, Mexican customs brokers are liable for comparing the physical freight to the documentation to make sure they match, and for deciding classification and duty rates for goods crossing the border. If any issues or discrepancies arise, the Mexican broker can face penalties or lose its license.

“Mexican brokers often stop the freight, unload the trailer, and inspect the goods,” Ryley says. “That takes time. Less-than-truckload (LTL) shipments from all over the United States get trapped by customs brokers on the border, waiting to be consolidated into truckload shipments.” This unloading and re-loading, with interim warehousing, make exporting to Mexico more complex.

Another regulatory impediment that adds cost to cross-border trade is truck weight limits. “Truck weight limits are not harmonized among the three NAFTA countries,” explains Sonney Jones, director of transportation at Dal-Tile, a Dallas-based subsidiary of Mohawk Industries that manufactures ceramic tile products in several countries. “Canada and Mexico allow 25 metric tons; the U.S. limit is approximately 20 metric tons. This impacts the cost of moving goods in Mexico and Canada, because loads have to comply with the U.S. limit to cross the border. It costs Dal-Tile an additional $1 million in transportation to send shipments the 145 miles between Monterrey and Laredo at the U.S. weight instead of the Mexican weight.”

If the three NAFTA countries all allowed 25-metric-ton capacity, freight could move seamlessly, and the cost and capacity benefits would be significant.

Changing U.S. truck weight limits is a daunting challenge, however. The trucking industry has lobbied Washington for heavier trucks for years, but the rail industry opposes the change, fearing freight diversion.

The Intermodal Option

The rail industry has the opportunity to move from a “defensive” position in terms of cargo weight to an “offensive” position, Jones believes. “The railroads could offer heavyweight intermodal service to harmonize weights on NAFTA traffic, and grow their business at the same time,” he says.

“U.S. intermodal yards could be treated as inland ports, and allow heavyweight movements within a restricted zone around the inland port,” Jones continues. “This would harmonize cargo weights within NAFTA, without opening up U.S. highways to heavier trucks. This approach not only reduces costs, but could generate additional revenue for the railroads. And it’s a way to address the capacity shortage that may occur as the economy recovers.”

Despite these issues, there is good news regarding cross-border logistics management. Intermodal transportation, for example, is improving rapidly and becoming a popular alternative to all-truck transportation.

“Shippers now have the option of more reliable, seamless intermodal service between the United States and Mexico,” says Val Noel, president of Pacer Cartage and executive vice president of intermodal operations at Pacer International, a 3PL based in Dublin, Ohio. “Intermodal offers a 15- to 20-percent cost advantage over truck.”

These improvements to intermodal service come as a result of equipment and connectivity enhancements. Connectivity at the border between the forwarding and receiving railroads has greatly improved, reducing or eliminating the delays that once characterized this handoff.

For example, Kansas City Southern offers its TransBorder service, an all-rail service between the United States and Canada and major Mexican markets through collaboration with Kansas City Southern de México. Shipments do not stop at the border for customs clearance. Instead, they travel in bond, clearing customs at interior Mexican origins and destinations. TransBorder offers a through-rate structure that provides shippers a single price and bill for ramp-to-ramp shipments to and from Mexico.

Other important developments that support improved intermodal service include:

• Automation and streamlined requirements create a more efficient and effective customs clearance process. Mexico has taken steps to improve customs clearance, in particular by expanding hours of operation. Traditionally, Mexico’s customs service only operated Monday through Friday, with no weekend service. Now they work to clear cargo on the weekend.
• Substantial funds have been invested in Mexico’s intermodal terminal infrastructure—as well as in containers and chassis, technology for terminal reporting, and track-and-trace systems.
• Visibility is improving. “We receive more reliable and consistent information from ramp operators,” reports Noel. “We are working with our trade partners to provide real-time updates from the road so we can get closer to providing real-time door-to-door visibility.”

Creating Demand

Cross-border intermodal business is likely to expand over the next few years. “More than 20 new manufacturing plants will open in Mexico over the next 18 to 24 months,” notes Michael Burns, chief commercial officer, executive vice president sales and marketing at Pacer International. “Those new plants will create additional demand for parts moving into Mexico and finished goods heading out.”

The continued growth in Mexico’s manufacturing industry could create insufficient transport capacity to serve cross-border trade, especially southbound. These balance issues may impact cost.

“Freight flow balance varies by industry,” Burns explains. “Automotive is becoming more balanced south to north. But in large household appliance manufacturing, approximately three shipments move outbound to the United States for every one inbound to Mexico.”

The key is having the equipment in the marketplace to satisfy demand. “The transit time southbound is often more important because it feeds manufacturing,” says Burns. “Traffic may move over the road southbound and intermodally northbound. That can cause capacity imbalances, or force us to reposition equipment, which increases cost.

“Our private boxcar can move seamlessly on steel wheels across the border,” he continues. “We don’t have to transfer it to a truck to move across the border. The steel wheel process takes border-crossing delays and congestion out of the equation.

“Intermodal can be a compelling tool for manufacturers if they understand that it provides cost-effective consistency,” adds Burns. “It may not be as quick as over-the-road transport, but if a company has a relatively steady manufacturing pace, intermodal can be planned into the mix and be a great complement.”

Opposites Attract

From the shipper perspective, two issues are always major concerns: transportation cost and capacity, current and future. Dal-Tile is no exception. Its production network includes three plants in Mexico, two of which serve the United States and Canadian markets.

Dal-Tile’s product is heavy. When shipped, it weighs out before it cubes out, which means that without some creative thinking, Dal-Tile is paying to ship a lot of empty cube.

“Improving weight or cubic capacity utilization is a challenge many shippers face,” says Jones.

About four years ago, Dal-Tile began moving freight destined to the southeastern United States from its Monterrey, Mexico, plant by ocean—through Brownsville, Texas, to Tampa, Fla.

“That strategy allowed us to implement heavyweight operations, and harmonize the weight from origin in Mexico through delivery in Florida,” Jones explains. “We gained 33 percent in weight capacity utilization over truck crossing in Laredo. We eliminated miles and generated significant logistics cost savings. South Florida is traditionally an expensive destination.”

That solution made Jones consider how to further optimize the rest of his northbound freight. Before joining Dal-Tile, he worked for Crowley Logistics throughout the Americas, and was experienced in finding the right weight and cube mix to fill a box. “At Dal-Tile, weight was the predominant component of capacity demand, so we weren’t cubing out our boxes,” Jones says. “I knew lightweight product existed, but didn’t know how to find it. We needed a partnership from which both parties would derive tangible benefits.”

Jones tried contacting other shippers directly, but didn’t make much headway. Then he contacted Transplace Mexico.

As a 3PL, Transplace had visibility to many types of freight moving out of Mexico. It could serve as a matchmaker, facilitating collaborative loading among shippers with opposite, but complementary, freight densities.

Out of this concept emerged a collaborative freight consolidation program facilitated by Transplace involving Dal-Tile; Convermex, a Mexican manufacturer of disposable plates and packaging; appliance maker Whirlpool; and ladder manufacturer Werner Co. The companies share truckload, intermodal, and boxcar capacity from Monterrey and El Paso to their various U.S. distribution centers, where the products are unloaded, and, if needed, shuttled to their final receiving DC.

The collaborative program took about 24 months to set up. “We had legal and customs issues to resolve,” Jones recalls. “And the partners had to fully understand the process and see that the collaborative approach had merit: I can move 80 percent of your load and 80 percent of my load at the same time. Through the collaborative effort, we are moving 1.6 loads on what was one load previously.”

The program is specific to the four parties’ products, and is based on combining opposites on the density spectrum. Some costs are associated with consolidating product and length of haul. Some freight has to be shuttled to the loading location and re-handled; and processed again at the destination.

“But if you can combine 1.6 loads into one load, the length of haul allows you to more than recover the consolidation and de-consolidation costs,” Jones notes.

Dal-Tile’s collaborations include co-loading its shipments in boxcars with Whirlpool refrigerators from Monterrey to Pennsylvania, a trip of about 2,000 miles; combining intermodal shipments with Werner Co. for the 2,200-mile journey from El Paso to Edison, N.J.; and consolidating truckloads with Convermex from Monterrey to San Antonio and Chicago.

Transplace handles administrative support for the collaboration, including transportation management, freight billing and payment among the partners and their carriers, and customs brokerage. With two companies on a shipment, the capacity owner pays the carrier. Then Transplace bills the other shipper, receives payment, and pays the capacity owner for its recovery of the freight charge.

Dal-Tile uses the Mohawk fleet to recover product from the partner delivery destinations. Whirlpool’s Carlisle, Pa., DC is 75 miles from Dal-Tile’s DC in Eldersburg, Md., so Mohawk shuttles the freight, then bills Dal-Tile internally for the service. The same system applies if Dal-Tile freight ends up at Werner’s DC in Edison, N.J., located 225 miles from the Dal-Tile DC.

“The Mohawk fleet delivers to New Jersey daily, and has trucks that return to the Baltimore area,” says Jones. “We can provide backhaul loads at a competitive rate, which adds to the solution’s value.”

The collaborative alliance has found that shipments moving more than 1,000 miles are acceptable from a cost-benefit perspective. “We’re seeing benefits in the 10- to 15-percent range on lengths of haul around 1,000 miles,” Jones reports. “On longer hauls, we can generate 20 to 30 percent in benefits.

“The solution is ‘greener’ at the same time,” he notes. “We reduced the demand for transportation resources by 60 percent on certain lanes.” The collaborative group estimates it cut diesel use by about 500,000 gallons last year.

Beyond these savings, collaborative consolidation carries implications for transportation capacity once the U.S. economy recovers. “Capacity is tight today, so where will additional capacity come from to support economic growth?” Jones asks. “We are trying to get ahead of that curve and use capacity more intelligently.”

Two Sides to Security

Drug-related violence and cartels capture a lot of media attention in Mexico. The violence, and the fear it engenders, costs the Mexican economy one to two percent in annual gross domestic product, according to economist estimates.

While shippers must take extra precautions to protect their freight as it transits the country, most do not view security as a factor that would preclude them from pursuing expansion in Mexico.

“Contrary to news reports about drug violence and cartels in Mexico, actual issues of significant cargo theft are limited,” says Ryley. “We have sophisticated systems for protecting high-value goods, such as hidden GPS units that enable us to find and recover the freight.”

Transplace’s single-party integrated service arrangements help reduce security risks. The fewer people and handoffs involved, and the more centralized the tracking, the better security will be.

Not all shippers agree with Ryley’s assessment of the security risk in Mexico. Bridgestone Americas Tire Operations offers a counterpoint to the groundswell of support for expanding production capacity in Mexico. Although the Nashville-based tire company has two production plants in Mexico, which supply North America demand, it opted to build new capacity in the United States—not in Mexico.

“Bridgestone has been affected by a number of hijackings in Mexico,” says Dan Vits, general manager of transportation, Bridgestone. “When product is stolen there, it’s usually not covered under the same degree of cargo liability as we have in the United States.”

Ten thousand hijackings occurred in Mexico in 2011, resulting in unsecured losses of $1.9 billion, according to logistics security services company Freightwatch International. Bridgestone had a small portion of that, but it’s still a big concern for the company.

“Tires are attractive to thieves,” Vits notes. “They can be rolled off a trailer and easily moved into the black market. And they are a good commodity to re-sell.”

To thwart truck hijackings, Bridgestone requires its Mexico carriers to follow set security protocols such as providing specific route plans and never deviating from them; avoiding areas targeted by cartels; never leaving a load unsecured anywhere; equipping drivers/trucks with electronic communication; and using escorts for loads traveling through especially dangerous routes.

Insurance and liability for freight in Mexico is another troubling issue for Bridgestone. “You have to pay Mexican carriers for additional insurance up front or be willing to risk total loss,” says Vits. “Insurance is much more expensive in Mexico, so we just accept the risk of loss as a cost of doing business there.”

In addition to cargo security concerns, Bridgestone chose to expand in the United States instead of Mexico because of its workforce needs. Although labor costs less in Mexico, overall productivity is higher in the United States. Also, the United States sees less workforce turnover. “We are constantly hiring and training workers in Mexico,” notes Vits.

Bridgestone also considers driver hours of service a challenge in delivering to U.S. markets from Mexico because of the length of haul. From Bridgestone’s Cuernavaca plant to a large manufacturer in Ohio, for instance, Vits must allow seven to 10 days’ lead time for over-the-road transport—which includes the hours-of-service break.

Because of this delay, and the cost advantage, Bridgestone is considering expanding intermodal from Mexico. “Cost is our main driver,” Vits says. “But intermodal also provides a border-crossing advantage, because there’s no Laredo stop and no interchange timing. Goods can move direct with pre-clearance and in bond to the United States. Finally, there is less risk of theft and hijacking in the rail networks. Once a shipment hits the rail, it’s almost impossible to steal.”

Entwined Opportunities

Mexico’s steady ascendance in trading partner ranking with the United States makes cross-border supply chain management an exciting and highly dynamic proposition. Growth brings change, as clearly evidenced by the emergence of integrated 3PL solutions, expanded and improved intermodal service offerings, and creative collaborations to optimize transport resources. From all indications, the economic engine of trade will drive further streamlining of cross-border logistics.

South of the Border Business Boom

The following companies recently announced sizable investments in Mexico operations.

(all values in $US millions)

Source: The Offshore Group

10 Years of Trade with Mexico

U.S. exports to Mexico increased by 105 percent over the past decade, while U.S. imports from Mexico rose 91 percent.

U.S. Trade in Goods with Mexico

NOTE: All figures are in millions of U.S. dollars. Details may not equal totals due to rounding. Source: U.S. Census Bureau