Mexico transitions to high-value manufacturing location

August 3rd, 2015

Mexico is no longer the low-wage sourcing location for low-value consumer products for the U.S. market that it was two decades ago when the North American Free Trade Agreement with the U.S. and Canada was implemented. True, average wages have risen higher in coastal China, where so much export production is based, than in Mexico. But with an increasingly skilled Mexican workforce and a rapidly growing middle class, many international companies are investing in facilities that manufacture higher-value products for the U.S. and Mexico’s domestic market, and still more are planning to invest in sourcing there.

The near-sourcing trend is fueled by the desire to reduce turnaround time from order to delivery, cut transportation costs, and, increasingly, to avoid any repetition of the West Coast port congestion and delays that plagued so many supply chains in late 2014 and early this year.

One U.S. importer, for example, responded to a survey about shippers’ supply chain plans in the wake of the West Coast longshore labor agreement in May by saying he wanted to shift as much production as possible away from China to Mexico.

“The whole near-shoring trend is based on ‘How do I make sure I don’t have my supply chain cut off because of lack of capacity or longshoremen’ and all of the issues you have when you’re bringing in product by boat from around the world,” said Troy Ryley, managing director of Frisco, Texas-based third-party logistics provider Transplace Mexico. “In Mexico, you’ve got multiple points to enter the U.S. via truck, and trucks are a lot more consistent on the highway than vessels on the open ocean. It’s a matter of days by truck, rather than weeks at sea.”

Over the past several years, there has been a continuous move of production to Mexico for the North American market. Some of that has come at the expense of Asia, but more often the investment in Mexican production may be in addition to Asia. “Investment going forward may be in Mexico, which doesn’t mean it’s being relocated from Asia,” said Foster Finley, a managing director of logistics consulting firm AlixPartners who specializes in supply chain performance. “Plants that in years gone by may have gone to Asia are going to Mexico now.”

In a survey last year of the near-sourcing plans of 143 senior manufacturing and distribution executives, AlixPartners found that 86 percent plan to increase their foreign manufacturing capacity closer to the U.S. in the next two or three years. The chief reasons behind these plans were the desire to cut the landed cost of imports, lower freight costs, improved speed to market and improved customer service.

The survey, conducted before the severe congestion that began to clog West Coast ports last fall, also found that 30 percent of those surveyed said near-sourcing of production would result in fewer supply chain disruptions.

“After NAFTA was implemented in 2004, many companies located in Mexico to take advantage of low wages and duty-free access to the U.S., but when China joined the WTO, they moved there to get even lower wages,” said Christopher Wilson, deputy director of the Mexico Institute at the Woodrow Wilson Center in Washington. “Over time, companies have become more sophisticated about the way they make site-selection decisions and are looking at a much wider range of factors. What that has done is push Mexico into its proper niche into areas where it has important competitive advantages vis-à-vis other countries.”

AlixPartners uses local wage costs as one of seven factors in measuring the competitiveness of global supply locations. The other six factors include availability of raw materials and cost, regulatory overhead, inbound transportation costs, inventory cost tied up in product flow, exchange rates, and tariffs or duties.

“Although Chinese wages are on average lower than Mexico’s, wages have risen rapidly up and down the coast of China that has historically been the factory of China, and they continue to go up,” Finley said. “China has made a concerted effort to tap into lower wages in inland China, but the problems are the lack of infrastructure to get product to and from the coast. The number of qualified workers also is still well behind the coast.”

The Mexican government is moving to enhance its competitive position by investing heavily in road, rail and aviation infrastructure improvements and by streamlining its customs procedures. As a result, it has become a major source for U.S. imports of bulky products such as automobiles, aerospace products and components and appliances that don’t fit easily into a container, but can be shipped by road or rail to the U.S.

Mexico is also the second-largest source of high-value, high-tech products such as cell phones, gaming consoles and computers, after China.

In the past, the Mexican government spurred the growth of these industries by providing incentives for them to group in clusters around cities that have an abundance of skilled engineers graduating from universities and the infrastructure to support shipments to and from the plants. It has since ended those incentives for all but the aerospace industry.

“Mexico has a very well-educated workforce that has the expertise to produce more technical products, like the aerospace industry,” said Derrick Johnson, vice president of segment marketing for UPS. “It is graduating 230,000 engineers every year.”

UPS is working with the Mexican government to identify the areas that have the infrastructure to support the transportation needs of industry clusters. “We look for good roads and rail infrastructure, but also the people with the skills to support these clusters,” Johnson said.

The aerospace industry is clustered around Chihuahua, which boasts plants by Hawker Beechcraft, Honeywell, Pratt & Whitney and Zodiac Aerospace. Bombardier, Eurocopter and Messier-Bugatti-Dowti have plants around Queretaro.

Although the government has scaled back on incentives to other industries, the incentives it provided in the 1980s and 1990s resulted in a cluster of more than 600 high-tech plants in the state of Jalisco around Guadalajara, which is known as Mexico’s Silicon Valley. Foxconn, Jabil Circuit and Flextronics assemble products there with components imported from Asia for the local and the U.S. market. Other plants are clustered around Chihuahua, Monterey and Mexico City.

“One of the big concerns for these highly technical products is intellectual property,” Johnson said. “Mexico’s IP protection is as strong as or stronger than other areas of the world, such as China.”

The automotive industry is far more spread out. Ford Motor Co. has plants in Chihuahua and Sonora in the north and Toluca in the south. Audi and Volkswagen have plants in Puebla near Mexico City. Honda has a number of plants. Chrysler, General Motors and Mercedes Benz have plants in Saltillo. BMW plans to build a plant in San Luis Potosi by 2019.

Approximately 1,100 top-tier parts makers also have opened production facilities in Mexico to supply these plants. Mexican automotive plants export about 80 percent of their production and account for 11 percent of all new car sales in the U.S.

Some cars are transported by rail to the U.S., and others by ocean. “Over the last two years, we’ve been seeing an increase in the traffic of car carriers transporting cars from Lazaro Cardenas through the canal to the U.S. East Coast,” Panama Canal Administrator Jorge Quijano said. “That may change if Mexico improves the roads and rail transport to Veracruz so cars can be shipped directly from there to the East Coast.” He said car carriers have told him they are building post-Panamax vessels that can carry 8,000 to 8,500 cars, compared with the current maximum capacity of 5,000 to 5,500 cars. “So for the next three years, we see strong performances for cars moving from Mexico through the canal to the U.S. East Coast.”

U.S. companies that source products in Mexico find it much easier to manage the engineering and quality control processes than in Asia because it is more cost efficient and easier to visit plants south of the border than across the Pacific. “The ability to supervise your engineering at a plant in Mexico is a lot less expensive than in Asia, and companies are starting to realize this,” said Phillip Poland, director of international trade compliance for DHL. “If I was making strategic decisions for a U.S. company, I would seriously consider building a plant in Mexico.”

Mexico has eased its customs procedures on imports of components for assembly in plants by moving all customs transactions onto a single electronic platform of window for export. “Mexico is ahead of the U.S. in that a single window increases compliance, decreasing the arbitrariness of customs from port to port,” Poland said. “It really streamlines and helps the movement of imports through customs.”

Mexico is working closely with the U.S. and Canada to harmonize their customs procedures under NAFTA. It signed on to the Wassenauer Agreement on export controls last year and is implementing an export control system, which together with its single platform on imports creates greater trade compliance.

Security is less of an issue in Mexico today than in the past, when theft of truckloads in transit was not uncommon. “That’s less frequent now, as the government has been cracking down on cartels to improve transportation safety,” Poland said.

The flow of trucks moving across the U.S. border promises to become easier as a result of changes in U.S. regulations introduced this year. For years, Mexican trucking companies with Mexican drivers could haul cargo only into a narrow commercial zone across the U.S. border, despite the provisions of the NAFTA treaty. In response, Mexico imposed retaliatory tariffs on U.S. imports estimated to cost $2 billion annually.

After a three-year pilot program, the U.S. Department of Transportation started allowing Mexican motor carriers to apply for authority this year 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 U.S. motor carriers.

“You’re starting to see Mexican equipment go farther and farther north,” Ryley said. “What’s defining how far north they go is not any restriction by the law, but is more how much deadheading time they can afford to take on or whether they have the complementary southbound loads that allows for a round trip.”

More U.S. companies opening high-tech factories in Mexico

December 5th, 2013

Faced with rising wages in China and high shipping costs, many businesses are finding manufacturing close to home more appealing. But despite its advantages, Mexico has problems.

By Shan Li

4:37 PM PST, November 29, 2013

Manufacturing in Mexico

Oceas Verona Orocio inspects the latest-model drone at the 3D Robotics manufacturing plant in Tijuana. The company’s drones were formerly made in China. (Don Bartletti, Los Angeles Times / November 30, 2013)

TIJUANA — In an industrial park five miles east of downtown Tijuana, Ariel Ceja toils in a white room bustling with assembly workers hunched over blue tables.

A master scheduler, Ceja is in charge of all steps of production at this factory nestled inside a cavernous warehouse. A cluster of anonymous buildings surround the facility. Nearby are pitted roads, and just a few minutes away by car is the Tijuana airport and a university.

San Diego-based 3D Robotics moved into this once-vacant spot in June, producing affordable drones and electronic parts destined for customers in the U.S. and around the world.

It is just one of many American companies streaming to Mexico to open high-tech factories in a reversal of the outsourcing trend in years past. Called nearshoring, businesses are moving production to Mexico, Canada and other nearby countries to take advantage of their proximity to the U.S.

“Recently I have been seeing more American companies bringing production here,” said Ceja, who started working for 3D Robotics a month ago. During the 1990s, “there were more Asian companies coming in, Japanese, Korean, but that has changed.”

It’s not just in Tijuana. Manufacturing plants are also opening in Mexican cities such as Guadalajara and Mexico City, bringing a wave of new jobs to a country recovering from the economic downturn and still fighting constant drug violence.

From 2009 to 2012, foreign investment in Mexico jumped more than 50% to $7.4 billion, and exports from foreign-owned factories also grew 50% to $196 billion, according to one industry group that tracks maquiladoras, or assembly plants in Mexico that are owned by foreign companies. After plunging during the economic recession, employment also has jumped 25% to more than 2 million. According to an economic study from South/East San Diego, themaquiladora industry is one of Tijuana’s biggest employers, behind businesses linked to its border crossing.

“Sometime in the last year, we reached a crossover point where it became cheaper to make a lot of goods in Mexico than in China,” said Hal Sirkin, a senior partner at Boston Consulting Group. “A lot of American companies are looking or moving.”

The global recession and its aftermath led companies to rethink their supply chain. Faced with rising wages in China and high oil prices, many are reconsidering the appeal of manufacturing close to home, especially small and medium-size businesses without the bargaining clout of Apple and Wal-Mart.

Those businesses are finding a skilled workforce for high-tech manufacturing in Mexico. The country has doubled the number of post-secondary public schools, many devoted to science and technology. Former President Felipe Calderon last year bragged that Mexico was graduating 130,000 technicians and engineers a year, more than Germany or Canada.

The educated labor pool has attracted the car industry. Mexico has gained at least 100,000 auto-related jobs since 2010, according to a Brookings Institution report. Nissan, Honda, General Motors and Ford have all announced plans to expand in coming years.

3D Robotics, which makes drones and parts priced up to $730 for civilians and tech enthusiasts, is among the start-ups drawn to Mexico’s low costs and proximity to the U.S. The company once manufactured its drones and kits in Southern California and China.

But Chief Executive Chris Anderson said making products overseas was a lengthy process that meant waiting for months for merchandise to come on ships. Chinese factories also required bulk orders that tied up a lot of the company’s capital and prevented engineers from innovating quickly, which is vital in a tech sector such as drones.

“We decided it didn’t make sense at our scale and pace of innovation to ramp up in China,” Anderson said.

Instead, the company looked south.

3D’s first Mexico factory in 2011 was in the three-bedroom Tijuana apartment of general manager Guillermo Romero, who spent the first months of the test run in Mexico soldering parts and assembling drones in his living room along with one employee.

“We started with some benches and soldering stations you can buy anywhere,” Romero said. “We were like, ‘Let’s see what happens.'”

Sales of drones assembled in Mexico quickly grew after Romero got the hang of putting them together, and 3D moved into its first manufacturing space last year.

The last of the manufacturing equipment was trucked to Tijuana this spring, when the company moved to its current 12,000-square-foot facility. American engineers in San Diego design drones that are crafted almost completely by about 60 assembly workers in Tijuana.

A walk through the cavernous warehouse that houses the factory shows 3D’s quick expansion. On the second floor, a newly completed call center opened about a month ago, bringing customer service in-house for the first time. Inside the assembly room, workers solder circuit boards, attach plastic arms and test the flying machines.

“Mexico is very flexible. You can start projects here and grow them,” Romero said. “It’s very good for start-ups.”

For California companies, Mexico can be an especially attractive bet, analysts say. The ability to order in small batches means that designs can be changed quickly and production can be revved up and slowed down in a matter of days instead of months.

That can be invaluable during the holidays, as San Bernardino-based Cannon Safe learned.

On Black Friday in 2008, the safe manufacturing company received a panicked call from a major retailer that had drastically slimmed down its inventory in response the financial crash, President Aaron Baker said. But shoppers were scooping up their safes, prompting the chain to issue thousands of rain checks that it had to quickly honor.

Cannon’s Mexico facility was able to increase production and deliver new merchandise within four days, compared with weeks or months if the safes had come from China, Baker said. “That was our ‘aha’ moment.”

Today, about 60% of the company’s safes are made in Mexico, nearly double the production levels five years ago. Meanwhile, its China production has dropped by half, Baker said.

Although wages are higher in Mexico than in China, the relative ease of doing business and proximity can bring costs on par or even lower. Companies find that they don’t lose valuable time waiting for shipments. Deliveries can also be routed to another port or simply brought by truck when problems crop up, such as the eight-day strike that paralyzed the ports of Los Angeles and Long Beach last winter.

Companies looking to bring production closer to home rank Mexico as their No. 1 choice, according to a survey from consulting firm AlixPartners.

The tipping point may have come last year when manufacturing costs in Mexico, when adjusted for productivity, dropped below those in China, according to a Boston Consulting Group report. Within two years, the average cost of production in Mexico will be 6% below China and as much as 30% lower than countries such as Japan and Germany.

“Companies are bringing back parts of manufacturing to Mexico. They are saying, ‘We want our manufacturing process close to our engineers, we want our inventory next to our customers so it’s easier to ship,'” said Joe Mazza, a partner at advisory and accounting firm McGladrey in Los Angeles. “There are also many companies in China that are not exiting China, but reducing their manufacturing and bringing some to Mexico.”

With all its advantages, Mexico still has its fair share of problems. Companies that don’t produce their own goods can have a hard time finding the right third-party manufacturer in a country that can’t compete yet with China’s dense supplier base and strong manufacturing infrastructure. Mexico also just passed fiscal reforms that include raising taxes on U.S.-owned companies and other businesses, increasing worries that foreign firms might leave the country.

Despite these challenges, more U.S. companies will consider locating factories in Mexico in the coming years, analysts said.

“This is the return of manufacturing in Mexico,” said Scott Stanley, senior vice president of NAPS, which aids companies setting up factories in Mexico. “Every month it seems like there are more and more companies moving. There is no sign of that trend slowing down.”

Copyright © 2013, Los Angeles Times

President’s proposed tax reform is huge threat to Maquiladoras and border economy

October 7th, 2013

Mexico’s President Enrique Pena Nieto recently presented to Congress the executive’s fiscal reform initiative which will be evaluated by the House of Representatives first and then by the Senate.

The highly controversial proposal, originally expected to structurally reform Mexico’s budget model, turned out to be a general tax increase on businesses, higher income earners and international firms manufacturing in Mexico, among other already “captive” tax payers.

The proposal does not include any provisions for the reduction or transparency of public spending, and does not properly provide for the incorporation of informal, unregistered businesses to the taxpaying base.

According to Alfredo Coutino, Moody’s Latin America Director: “The proposal is short of the expectations originally outlined by the President and it does not reach the objective of balancing the budget.

The proposal is based on hiking current taxes and creating new ones for the current tax payers; it does not propose to improve the efficiency of the tax authority by increasing the number of tax payers.”

The proposition is a political social initiative as it seeks to dedicate a large portion of the tax proceeds to support unemployment insurance and universal health coverage in Mexico. It also waives to impose IVA (value added tax, VAT, or sales tax) on food and medicines (The possibility of taxing food and medicines was highly unpopular and was strongly opposed by the left parties).

Selective social programs are certainly needed in Mexico, but not at the sole expense of businesses.

Although rather unlikely, some hope that the government controlled House of Representatives is able to produced a more balanced proposal that includes spending cuts, transparency and accountability by state and federal entities and the expansion of the tax payers base.

Mexico’s legislators were setting an example so far through the “Pact for Mexico”, blitzing through reforms in education, telecom and anti-trust among others. Although the heat of recent elections seems to have dented the process, Mexico’s legislators are not yet ready to “join the club” of their U.S. colleagues where Congress is practically paralyzed.

The resulting tax reform legislation in Mexico, if passed, is expected to be announced during this coming week of October 20.


Maquiladoras’ oldest cry in Mexico is the need for permanent and clear tax rules so that they can adequately make their typical 5-year financial and production plans. But the treasury department frequently changes the rules defying Mexico’s competitiveness to attract foreign investment. This time around, the resilience of maquiladoras may be pushed over the cliff.

In a nutshell, the new tax reform proposal includes the elimination of the preferential tax treatment that the maquiladoras currently have, taking them from a preferential corporate income tax rate of 17.5% to a rate of 30%.

In addition, the proposal will also impose a new 10% tax on corporate dividends and it will also expand the taxable income base by eliminating deductions and changing the “price-transfer” rules between parent company and maquiladora subsidiaries.

Also, the tax proposal practically eliminates the highly successful maquiladora regime that grants a tax free treatment on temporary importations of industrial inputs, by charging IVA in such imports. Although this IVA is subject to a drawback, it would take a huge amount of funds to finance its 6-month cycle from the time of payment until the eventual reimbursement.

Also, under the new rules, maquiladoras’ parent companies would be required to pay 16% IVA tax on the value of buy/sell transactions on the production supply chain or maquila to maquila transfers.

Unless they make profound changes to their global corporate structure, the IVA would directly impact the cost of doing business, because they would not be able to recover it. This would directly affect many Mexican businesses that are involved in the supply chain structure.

Carlos Angulo, PAN Congressman and member of the Maquiladora Committee and Secretary of the Constitutional Reform Committee of the lower house said: “We can summarize the effects of the proposed tax reform on the maquiladora industry in one word: Catastrophic.”

“For example, under the new rules, if implemented, the annual income tax bill of a typical 500-workers maquiladora operation would go from a current level of about $24 Million Pesos to over $230 Million”, explained Angulo, “..and the maquiladora industry as a whole would need to increase its working capital by US$17.5 Billion at an annual financial cost of about US$750 Million just to keep up with the IVA requirements on temporary imports.”

“Supply chain operations between maquiladoras, a current common practice, would be interrupted if faced with cascading IVA impositions. The tax reform proposal would be like a catastrophic knock-out blow to the maquiladora industry global competitiveness” said Angulo.

Luis Aguirre Lang, President of the Maquiladora National Council (INDEX) expressed his frustration as follows: “The tax reform has created panic among the international firms operating in Mexico. We could lose up to two million, three hundred thousand manufacturing jobs if this reform is approved as proposed.”


The tax reform includes a generalized consumption increase of the IVA rate within the border region from 11% to 16%.

Any housewife living in Ciudad Juarez knows what this means: More trips to El Paso to buy clothing, house items, school supplies, etc., anything that will be taxed in Mexico at 16%, she can get in El Paso at a sales tax rate of 8.25%, which with a little effort she can get refunded.

And the flow of visitors from El Paso to Juarez, which had recently started to pick-up as the security improved, will certainly suffer as restaurants, bars and other IVA taxed purchases will automatically increase their prices by 5% if the tax reform gets approved by Congress.

The reduction of consumer purchases in Juarez as a result of the IVA increase, will weigh in to increase the closing of commercial businesses, unemployment and violence.

The combination of reduced consumption and pulling the rug from under the maquiladoras will have a multiplying, significant negative effect on Mexican border cities’ economies and their quality of life.


Carlos Angulo summed it up as follows: “The tax reform proposal appears to be designed by a freshman student with a total ignorance of border commerce and international production sharing practices.”

It is expected that industry associations, state and city governments and everybody else with a stake in the maquiladora industry and the border economy will lobby heavily in the weeks to come to mitigate the negative effects of the tax reform on the 43 year-old successful maquiladora program.

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Juarez-El Paso NOW Staff report


Mexican Manufacturing Benefits U.S. Industry

July 26th, 2013


When NAFTA was first implemented in the early 1990s, the fear was that Mexican manufacturing would cost the U.S. jobs and wreak havoc upon U.S. industry. Mexico was viewed largely as an economic competitor that would pilfer U.S. employment opportunities, businesses, and bring about the demise of national economic prosperity. This set of assumptions was merely the result of a misconception of the nature of the U.S.-Mexico industrial alliance.

In reality, China has been a much more formidable concern in terms of low wages and competition for industry stateside. The past decade, however, has amply shown that the best way for U.S. industry to meet this challenge is partnership – not competition – with Mexico through production sharing, or vertical specialization, which occurs when two or more countries bilaterally produce a product. In other words, Mexican manufacturing firms rely upon materials produced by U.S. suppliers. The geographic proximity of Mexico and the U.S. has actually led to greater opportunities for U.S. suppliers vs. China. This is demonstrated by the fact that Mexican imports contain ten times more U.S. content than similar items manufactured by the Chinese. In fact, 40% of the United States’ imports from Mexico contain material inputs that originated in the United States.

Thus we see that “near-sourcing” manufacturing jobs to Mexico is, in a palpable way, beneficial to U.S. industry, fostering a partnership that keeps high paying jobs in the U.S. and sustains a demand for suppliers to feed the manufacturing done in Mexico that will then be exported, in most instances, back to the U.S.. This partnership results in products that, when sitting on shelves next to those produced in China and other developing countries such as India, Brazil, Indonesia, Vietnam and Malaysia, are price competitive.

With the aforementioned in mind, it is no surprise that one in twenty-four U.S. jobs is dependent on the Mexican maquiladora industry. Over 6 million U.S. jobs are dedicated to supplying manufacturing operations in Mexico, which means there is significant opportunity for U.S. suppliers to expand to meet the demand created by Mexican manufacturing activities.

Four segments in particular presently stand out as unique growth opportunities for U.S. industry:

In 2011, the Mexican automotive industry achieved a growth rate of thirteen percent. As a result, the demand for U.S. made parts and supplies is on the rise – these include items such as spare and replacement parts for gasoline and diesel engines, electrical parts, collision repair parts, gear boxes, drive axles, catalytic converters, and steering wheel assemblies, for example.

In 2010 alone, Mexico imported approximately $3.5 billion worth of products for the manufacturing of medical devices, $2 billion of which were from U.S. suppliers. Key opportunities for medical products suppliers include anesthesia equipment, defibrillators, electrocardiographs, electro surgery equipment, incubators, lasers for surgery, etc.

Total Mexican packaging production reached 9.1 million tons of containers and materials in 2010 for a value of $10.1 billion, of which $2.5 billion came from U.S. industry. There is significant growth potential for U.S. suppliers of metal, plastics, glass, wood, and cardboard packaging materials.

$1.4 billion was invested in plastics manufacturing in Mexico in 2011, revealing a steady rise in the demand for plastic materials and resins. Additionally, Mexico exports Ethylene and imports Polyethylene, which shows the opportunity for U.S. industry to supply polymerization technology.

Mexican manufacturing, although this may be counter intuitive to some, should be viewed as a partner to the U.S., rather than exclusively as a competitor.

K. Alan Russell
President and C.E.O.

The Tecma Group of Companies
2000 Wyoming Avenue
El Paso, Texas 79903
Phone: 915 . 534.4252
Fax: 915 . 534.0205

Our Mission: “To create an environment where our clients and employees never want to leave us.”

Four Reasons Mexico Is Becoming a Global Manufacturing Power

July 1st, 2013

Mexico is beginning to beat China as a manufacturing base for many companies despite its higher crime rate, according to a new report from Boston Consulting Group. Mexico’s gain is a plus for the U.S. because Mexican factories use four times as many American-made components as Chinese factories do, says the consulting firm. Here are Mexico’s four key advantages:

1. Manufacturing wages, adjusted for Mexico’s superior worker productivity, are likely to be 30 percent lower than in China by 2015. China’s wages have soared. They were about one-quarter as high as Mexico’s in 2000 but are catching up rapidly and will be slightly higher by 2015. And labor productivity remains higher in Mexico, even though the gap is narrowing. The crossover point was 2012, when unit labor costs in China (i.e., wages adjusted for productivity) grew to equal those in Mexico. By 2015, Mexico will be around 29 percent less expensive.

2. Mexico has more free-trade agreements than any other country. The North American Free Trade Agreement gives Mexican goods easy access to the world’s largest market, the U.S., as well as to Canada. But that’s not all. Mexico has free-trade agreements covering 44 countries. That’s more than the U.S. (20 partners) and China (18) combined.

3. Mexican manufacturing has a significant advantage in energy costs. Natural gas prices in Mexico are tied to those of the U.S., which are exceptionally low because of a glut of supply on the market. China pays from 50 percent to 170 percent more for industrial natural gas. Mexico also has an edge over China in electricity costs, although power isn’t as cheap in Mexico as in the U.S.

4. Industry clusters, especially in autos and appliances, are growing. Mexico has developed a national expertise in certain industries, which makes it more attractive for companies to locate or expand plants there. Because Mexico is a major auto manufacturer, 89 of the world’s top 100 auto parts makers have production in the country. The companies are concentrated in five Mexican states, reducing transportation costs. In appliances, more than 70 manufacturers are in the country, ranging from components makers to assemblers of both small and large appliances.

Mexico’s progress relative to China is major good news for the country because manufacturing accounts for 35 percent of Mexico’s gross domestic product (vs. 12 percent of U.S. GDP), Harold Sirkin, the report’s lead author, says in an interview. The U.S. benefits in two ways, he says. First, by selling more components to Mexican manufacturers. Second, by selling more consumer products, such as American-made beef, to Mexicans, who will have more money for imported products if their living standards rise.

How Mexico Is Becoming More Attractive To U.S. Manufacturers

March 29th, 2013
Mexico’s economy boomed when the country signed the North American Free Trade Agreement (NAFTA) nearly two decades ago. The manufacturing sector especially thrived as U.S. firms shifted their operations to Mexico to take advantage of the cheap labor costs. As a result, Mexico’s share of U.S. manufactured goods import rose from slightly about 4% in 1994 to about 13% in 2001, according to a report in the latest issue of IMF’s Finance & Development magazine.

Then the party almost came to a halt when communist China joined the World Trade Organization (WTO) in 2001. China’s entry into the WTO gave the country a strong edge over over Mexico since China could freely export its goods to the U.S. without any import restrictions. Hence China’s goods exports to the U.S. rose significantly while Mexico’s exports suffered.

From the report:

Between 2001 and 2005, Chinese manufacturing exports to the United States expanded at an average annual rate of 24%, while Mexico’s export growth decelerated sharply from about 20% a year to 3% on average each year over the same period. As a result, China’s share of U.S. manufacturing imports almost doubled by 2005, eroding the previous gains in market share by Mexico (see Chart 1).

In recent years, Mexico has been slowly regaining its lost manufacturing capacity as U.S. firms shift production to the country from China and other countries. This shift can be attributed to two reasons: labor cost and transportation cost.

(click to enlarge)

The above chart shows that wages in China are rising yearly and is getting closer to Mexican wages. Wages in the manufacturing sector in Mexico has remained fairly stable over the years while wages in China have been increasing. So China is becoming less competitive for U.S. firms.

Another factor that makes Mexico more attractive to U.S. companies is transportation costs. Since Mexico is much closer to the U.S. than China, and a stable rail and road network exists between the two countries, costs of shipping goods from Mexico to the U.S. is lower. Shorter distance also means that goods can reach U.S. destinations faster from Mexico than those transported by ships from China. Unless wage inflation in China stabilizes, manufacturing firms may continue to move out to other countries including Mexico, Vietnam, Philippines, etc. From an investment perspective, it is wise to keep an eye on the Mexican economy and equities.

(click to enlarge)

Source: The Comeback by Herman Kamil and Jeremy Zook, Finance & Development, march 2013, IMF

Mexico Replaces China as U.S. Supplier With No Wage Gains: Jobs

June 15th, 2012

Bloomberg-Businessweek Logo

By Nacha Cattan and Eric Martin on June 14, 2012

Julio Don Juan makes $400 a month at a noisy, cramped Mexico City call center. Without a raise in three years, he says he had to pull his 7-year-old son out of a special-needs school he can no longer afford.

In some places he might seek another job. Not in Mexico, where wages after inflation have risen at an annual pace of 0.4 percent since 2005 — worse than other nations in the region including Brazil, Colombia and Uruguay, according to the International Labour Organization. Close to a third of Mexicans toil in the informal economy without steady income. Julio Don Juan says many would envy him.

The cheap labor that is helping Mexico surpass China as a low-cost supplier of manufacturing goods to the U.S. — and lured companies including Nissan Motor Co. (7201) — has restrained progress for many of the country’s 112 million citizens. While Enrique Pena Nieto, the front-runner in polls to capture the July 1 presidential vote, has said wages are too low, whoever wins confronts the challenge of boosting workers’ incomes but not so much that assembly lines leave for other markets.

“The trick isn’t only to pay better salaries, it’s to make raises more sustainable,” said Sergio Luna, chief economist at Citigroup Inc.’s Banamex unit in Mexico City. “We have to be more productive, but it won’t be easy because it implies changing the status quo.”

Mexico’s low wages, cheap peso and surging auto shipments to the U.S. — which buys 80 percent of its exports — have increased manufacturing competitiveness during the past decade as labor costs in China and Japan have risen.

Sounder Footing

This has put Mexico’s economy on a sounder footing than Brazil’s to weather a prolonged global downturn. After trailing growth in Latin America’s biggest economy during the past decade — and watching as a commodities boom allowed Brazil to increase wages an annual average 3.4 percent above inflation from 2005 to 2011 — Mexico is poised to outperform Brazil for the second consecutive year.

President Felipe Calderon’s government forecasts gross domestic product will expand 3.5 percent this year and says exports will probably surpass a 2011 record of $350 billion. By contrast, Brazil will grow around 2.5 percent, according to a central bank survey of economists this month.

“A changing of the guard is slowly but surely taking place,” Nomura Holdings Inc. (8604) analysts wrote in a May report. “Ten years from now, we are confident that Mexico will likely be seen as having become the most dynamic economy in the region.”

Trade Agreements

Low wages aren’t Mexico’s only attraction: Inflation that reached 180 percent in 1988 has been kept under control by a central bank that since January 2010 has been under the stewardship of Agustin Carstens. The former deputy managing director of the International Monetary Fund has kept the benchmark rate at 4.5 percent since taking office, helping to fuel a rally in government bonds.

Investors also benefit from laws that limit the government deficit and trade accords with more than 30 nations, including the North American Free Trade Agreement with the U.S. and Canada. Mexico also offers savings for companies that want to be closer to American consumers, after a tripling of oil prices in the past decade raised transportation costs for Asian manufacturers.

Nissan, Japan’s second-largest automaker, shifted production of low-cost cars to Thailand and Mexico in recent years to counter losses as the yen appreciated, while Mexico’s peso slumped 18 percent in the past six years against the U.S. dollar. The company’s Mexican output hit a record 607,087 cars and light-duty trucks last year, rising 20 percent from 2010.

The latest company to expand operations is Plantronics Inc. (PLT) (PLT), which this month announced a $30 million investment after closing its plant in China as wages began rising there, said Cesar Lopez Ramos, the company’s Mexico legal representative.

Human Capital

Mexico has proven more attractive for the Santa Cruz, California-based headset maker because of its steady wages and “human capital that is more developed and capable of not only making products but innovating,” Lopez Ramos said in a telephone interview from Tijuana.

Some Mexicans criticize Calderon’s National Action Party, or PAN, for not spreading the benefits of economic stability more widely during 12 years of rule. In the absence of a stronger domestic market, jobs remain heavily dependent on U.S. consumers and foreign-operated assembly plants, known as maquiladoras. Unemployment, currently at 4.9 percent, has been more than double a 2000 low of 2.2 percent since 2009.

“We’re scraping by,” said Julio Don Juan, 37, the call- center worker. “Because costs keep rising, I’m actually getting a pay cut each year, rather than a raise.” He lives with his parents, who help him care for his son.

Low Inflation

Economy Minister Bruno Ferrari says that low inflation and expanded social programs have reduced poverty during the past dozen years and stemmed declines in purchasing power from previous decades, he told reporters May 8 in Mexico City. The share of Mexicans suffering from food poverty — lack of access to healthy, nutritious meals — fell to 19 percent in 2010 from 24 percent in 2000, according to government data.

A press official from the Mexican finance ministry didn’t respond to a request for comment.

Partly as a result of muted wage growth, Mexico’s per- capita GDP has risen 48 percent since 1999 on a purchasing- power-parity basis, the least among Latin America’s seven biggest economies, according to the IMF. By comparison, Venezuela climbed 51 percent, Brazil increased 73 percent and Peru more than doubled.

Time Lost

The lack of opportunities has spurred an exodus of 12 million Mexicans to the U.S. in the past four decades, more than half illegally, according to a study published in April by the Washington-based Pew Research Center. While net migration dropped to zero between 2005 and 2010, and some Mexican immigrants may be returning home because of the weak U.S. job market, departures northward could resume if the U.S. expansion picks up, Pew said.

“We need to make up for time lost over the past four or five years in the area of employment and salaries,” former President Vicente Fox, of Calderon’s PAN party, said in a May 2 interview in Mexico City. “The challenge for the next government is very big.”

Dissatisfaction with the economy is propelling Pena Nieto’s bid to return his Institutional Revolutionary Party, or PRI, to power for the first time since Fox ended its 71-year reign in 2000. The 45-year-old former governor of Mexico state had 37.2 percent support in a June 8-10 poll by Consulta Mitofsky, compared with 25.1 percent for Andres Manuel Lopez Obrador, who narrowly lost to Calderon in 2006, and 21 percent for Josefina Vazquez Mota of the PAN.

Raise Salaries

If elected, Pena Nieto says he’ll raise salaries gradually, by improving productivity. To do so, he promises to support legislation making it easier to hire and fire workers, luring more companies into the formal economy where they can take out loans more easily and make investments. He also favors ending state-run Petroleos Mexicanos’ monopoly; revenue for Latin America’s largest oil producer funds about a third of Mexico’s public budget.

“In no way are we willing to sustain Mexico’s competitiveness through low salaries, nor can we raise salaries artificially through populist measures,” Luis Videgaray, Pena Nieto’s campaign manager and his finance chief when the candidate was governor, said in a May 30 interview. “The only way to increase productivity is through reforms.”

Pena Nieto’s rivals say he isn’t capable of bringing about the change he promises and returning the PRI to power would reignite corruption that blossomed under its previous rule.

Poor Performance

Boosting Mexico’s productivity won’t be easy, given the poor performance of the country’s schools and the size of its underground economy, which the government says employs 29 percent of the workforce.

The nation’s education system ranks last out of 34 countries for enrolled high school-age students, behind regional rivals Chile, Argentina and Brazil, according to a 2011 study by the Paris-based Organization for Economic Cooperation and Development. The study included non-OECD members.

Improving education and generating better-paying jobs may also help the next government turn the tide in the battle against the nation’s drug cartels. A bloody turf war between rival gangs has claimed more than 47,000 lives since Calderon took office in 2006 and the government estimates that the drug war shaves 1.2 percentage points off economic output annually.

Skill Shortages

Delphi Automotive Plc (DLPH) (DLPH), the former parts unit of General Motors Co. (GM) (GM), has been addressing the skilled-labor shortage by training engineering students at its factories in the border city of Ciudad Juarez. About half of the Troy, Michigan-based company’s global workforce of 101,000 is employed in its 46 Mexico plants, compared with less than 30 percent in China.

While wages for some engineering jobs are rising, Delphi isn’t concerned that salaries will spike anytime soon, said Enrique Calvillo, the company’s human-resources manager in Mexico.

“We are always monitoring this, and we don’t see the possibility of an extreme boom in the next two or three years,” he said in a telephone interview from Ciudad Juarez.

That’s bad news for Antonio Chavero, who makes less than $1,000 a month as an engineering supervisor with three decades of experience in the car industry and who works at a parts plant in the central state of Queretaro. While he does metalwork in his basement to supplement his income and support his daughter, who is a teenage mother, his family still doesn’t earn enough to eat meat more than once a week, he said.

“I supervise 15 workers,” Chavero said. “I should be making more money.”

Nearshoring Fuels Mexican Manufacturing Growth

April 9th, 2012

Security concerns don’t yet appear to be putting a major dent in Mexico’s appeal to manufacturers. Here’s why.

Wednesday, March 14, 2012
By  Closer, cheaper, friendlier. That might have been the formula underlying moving to or opening manufacturing operations in Mexico. The United States’ southern neighbor offers transportation distances a fraction of those from Asia, a labor force a good deal cheaper than domestic workers, and a country causing fewer headaches about intellectual property and other trade concerns. But in recent years, drug-related violence along the border has caused some manufacturers to be more cautious about making the move to Mexico.

Even with those concerns, Mexico continues to benefit from U.S. companies and other foreign investors who see it as an attractive manufacturing destination. In fact, 63% of those surveyed by AlixPartners, a business advisory firm, named Mexico the most attractive country for siting manufacturing operations closer to the United States. Only 19% of the companies reported supply-chain disruptions in Mexico as a result of security issues. And 50% reported they expect things to improve over the next five years.

Mexico’s proximity to the United States solves the most pressing issue facing manufacturers, which is speed to market, according to Rich Bergmann, global lead for manufacturing for Accenture. “The stability of the time schedule of supply has become paramount in manufacturing. Whether we like it or not, a 12-month forecast, steady-state demand is no longer a reality. Everyone is running lean supply chains and inventories. Being close to customers is key to reducing lead time. Add to that the overall total landed cost and that explains why reshoring is occurring in Mexico,” he says.

In fact, Mexico helps multinational firms cope with a variety of factors stemming from intense global competition, says Arnold Matlz, an associate professor at the W.P. Carey School of Business, Arizona State University. They include the pressure to reduce and control operating costs, the need for operational flexibility, the need for different service outcomes for different customers, and shorter product/service development cycles.


Precision manufacturing is critical to aerospace-industry needs.
Photo Courtesy of The Offshore Group

To date, manufacturers operating in Mexico have been largely shielded from the drug-related violence. “As reports have indicated, Mexico’s violence is characteristically cartel versus cartel. It is something that has not had a very large amount of leakage into civil society, nor has it affected, in a noticeable way, the companies that are already doing business there. As a matter of fact, in spite of what is in the news, Mexico’s manufacturing economy is humming along,” says Steve Colantuoni, director of corporate marketing for the Offshore Group. “Companies that are already in Mexico are increasing their numbers and their production.”

Foreign direct investment in Mexico rose 9.7% in 2011 compared to 2010 to reach $19.44 billion, indicating that violence is not chasing away dollars. This faith in Mexico is helping to fuel strong economic growth there. After a 5.5% growth rate in 2011, the Mexican economy is expected to grow 4.5% in 2012. Manufacturing has been a significant driver of the economy, growing 8% over the past year and creating 1.8 million jobs.

A High-Flying Aerospace Cluster

One industry flocking to Mexico for its lower cost structure and ample workforce is aerospace manufacturing. Between 2010 and 2011, total sales in Mexico’s aerospace cluster increased by 25% to $4.5 billion, according to the Aerospace Industries Association, far outstripping the industry’s overall annual growth rate of 15%, according to data from the World Bank.

More than 250 aerospace companies and suppliers, including Aernnova, Bombardier, Cessna, Eurocopter, Hawker Beechcraft and Messier Dowty, now operate in Mexico and employ 29,000 people. As large OEMs set up shop, suppliers follow. Québec-based Heroux-Devtek, a manufacturer of aerospace and industrial products, made the move after prompting from some of its biggest clients. “Customers such as Boeing were saying, ‘If you want to be a key supplier, then you should consider Mexico’,” says Michael Deshaies, general manager of the firm’s Querétaro operations. Querétaro is one of the top states in Mexico for the industry along with Chihuahua and Sonora.

In fact, in Sonora alone, located in Northeast Mexico, manufacturing has been growing at 25% a year for the past five years. The number of companies serving the aerospace supply chain has grown from 21 in 2007 to 45 in 2011; and employment in the sector has more than doubled at the same time, from 2,520 to 7,000. The city expects employment will exceed 10,000 jobs by the end of 2013.

One employer contributing to the growing industry is INCERTEC, a specialty plating, metal finishing and engineering-solutions company based in Fridley, Minn. The company will be investing $1.2 million to move some processes to Mexico from Minnesota, where both capacity and labor constraints make it difficult to fulfill demand.

“In the industries we serve, precision is critical,” says Tim Meador, INCERTEC’s chief executive officer. “By adding this location, we can provide manufacturers doing business in Mexico the same consistency, quality and delivery provided by our U.S. location.”

Another consideration for Meador was the available labor source in Mexico. The average age in Mexico is 29, which means it is one of the youngest nations on the planet. Every year, 90,000 engineers graduate from Mexican universities — three times the number who graduate from U.S. schools. This contrasts to the company’s Minnesota location, where there is a shortage of skilled labor.


Mexican manufacturing provides advantages for high-volume manufacturers.
Photo Courtesy of The Offshore Group

It is not only the skilled labor but also the low cost of investing that attracted Scott Livingston, CEO of Horst Engineering, to the region. “New England is a good area for knowledge, but it is a high-cost environment,” says Livingston. East Hartford, Conn.-based Horst, a contract manufacturer of precision components and assemblies, has been in Sonora since 2006.

“We looked at environments all over the world and came back to the aerospace-manufacturing-in-Mexico option,” Livingston explains. “We felt that for a high-mix, low-volume product in a high-precision environment with a significant North American customer base, that it would give us significant opportunity — opportunity to transfer some product that we may not have been as competitive on in the U.S. that we were doing for existing customers; and it would give us access to a new labor pool that was manufacturing-oriented. We’ve seen considerable shrinkage of the manufacturing labor force in Connecticut, and we’re training people from scratch here anyway. So we figured we could do that in Mexico.”

Training is one of the many incentives offered to companies. “Government incentives, including training and infrastructure improvements, are key reasons that the aerospace cluster is growing. The government is also increasing resources to build up interior areas as opposed to the border towns,” explains Jay Jessup, president, Mexico Services Group.

Becoming a Manufacturing Export Powerhouse

Aerospace isn’t the only industry finding a manufacturing-friendly environment in Mexico. Automotive manufacturing in Mexico was on the rise in 2011, observes George Magliano, senior principal economist at IHS Global.

“It was a year of record production in terms of total vehicle consumption and export in the light- and passenger-vehicle market segments,” he notes. “Mexico is becoming a magnet for supplier investment. This is due to announcements of sizable investment in the country in new production platforms over the last year by large automotive-industry OEMs such as Nissan, Mazda, BMW, Volkswagen and General Motors.”

In 2008 Mexico became the largest supplier of auto parts to the United States. In 2010 Mexico ranked as the sixth largest automotive exporter in the world. The country exports 80% of its vehicles to the United States, and 11 of every 100 autos sold in the United States are made in Mexico. Predictions are that by 2014 automotive production will reach 2.4 million units. Eight of the 10 leading automotive OEMs have assembly plants in Mexico, and more than 300 Tier 1 suppliers have plants in Mexico.


The skill sets of Mexican aerospace-industry workers continue to advance.
Photo Courtesy of The Offshore Group

Heavy-truck manufacturers include Dina, Navistar, Kenworth, Daimler, Volvo, Isuzu and Scania.

On the supplier side, over 1,100 companies manufacture auto parts in Mexico, including: Robert Bosch, Denso, Delphi, Magna, Visteon, Eaton, Valeo, Bridgestone/Firestone, Johnson Controls, Michelin, Goodyear, Lear, ThyssenKrupp, Faurecia and Siemens.

In terms of exports of high-tech manufacturing, Mexico is the second largest supplier of electronic products to the United States. Exports of consumer electronics and devices reached $71.4 billion in 2010, an increase of 20% over the previous year. In fact, Mexico is the third largest global exporter of cell phones.

While Mexico is still heavily dependent on the United States for its exports, the country is starting to diversify its export markets.

“Mexico’s exporting structure has been based on the U.S. market where 90% of the products land. But during the recent economic downturn, in the past three years, they have reduced this number to less than 80%. Their export markets are more diverse, with Latin America growing. In fact, trade with Brazil alone has increased fivefold,” explains David Rutchik, a partner with Pace Harmon, an outsourcing advisory services firm.

Fueled by a young, increasingly educated population, low labor rates and aggressive promotion by Mexican government officials, Mexico appears well-situated for years of sustained growth. “We are predicting that by 2050 Mexico will be the eighth largest economy in the world,” says Paul Cronin, a U.S.-based executive vice president with the international commercial banking firm HSBC.”

In Mexico, Rail is On a Roll

February 10th, 2012

Latest News — By on February 8, 2012 9:32 pm

InBound Logistics

January 2012

By Merrill Douglas

Rail is hot in Mexico—and getting hotter every year. The country’s largest railroad, Ferrocarril Mexicano (Ferromex), saw its carload volume increase by 6.6 percent in 2011 compared with 2010, and revenues increase by 13.9 percent, according to the company’s chief executive officer, Rogelio Vélez.

Mexico’s second-largest rail carrier, Kansas City Southern de México (KCSM), reports that it moved 15.9 percent more carloads in the first three quarters of 2011 than in the same period in 2010.

These figures represent the growing demand for rail transportation both domestically and between Mexico and the United States.

The “nearshoring” trend is one driver of this growth. Thanks to high oil prices and rising wages, Asia is no longer the obvious low-cost location for companies that manufacture goods for the U.S. market. The increase in corporations building factories in Mexico has boosted the flow of materials headed south from the United States to Mexico, and finished products headed north.

Mexico’s central location is a second factor in the county’s rail renaissance. “It’s in the middle of two hot markets: North America and South America,” says Jim Commiskey, vice president, automotive and Mexico at Dublin, Ohio-based Pacer International, a logistics services provider whose portfolio includes a variety of intermodal freight services. “Mexico provides access to raw goods from the United States, and to countries such as Brazil that produce steel and other manufacturing necessities.”

A third cause is the fact that the rail industry in Mexico has been playing catch-up since the nation privatized its railroads in the 1990s.

“Rail in Mexico was underdeveloped because the state-owned railroad company, Nacionales de México, stopped investing in it in the years just before privatization,” says Vélez. When the private sector took over, the new rail carriers started improving the network and heavily marketing their services. Plenty of opportunity remains to be tapped.

As Mexican railways invest in upgrades that make their services more reliable, shippers are more apt to consider rail—especially intermodal—as a less expensive alternative to long-haul truck, says Paul Hirsch, vice president of Mexico operations at Hub Group, a provider of intermodal, highway, and logistics services based in Downer’s Grove, Ill.

“Many large corporations tried intermodal in the past, when the infrastructure and service providers were inadequate, and found that it didn’t work,” he notes. “Now they are trying it again.”


Mexico’s current rail system started to take shape in 1995, when the Mexican government announced its privatization plans. U.S. railroad Kansas City Southern (KCS) and Mexican company Transportación Marítima Mexicana (TMM) formed a joint venture to buy the Northeast Railroad concession. KCS bought out TMM’s share in 2005 and changed the railroad’s name from Transportación Ferrovaria Mexicana to Kansas City Southern de México (KCSM).

In 1998, mining corporation Grupo Mexico and U.S. railroad Union Pacific (UP) joined forces to buy the Northwest Concession, creating Ferromex.

In 2005, Grupo Mexico bought a third Mexican railroad, Ferrosur, which operated in southeastern Mexico. Having spent several years overcoming legal challenges, Grupo Mexico is currently merging Ferrosur with Ferromex.

Ferromex and KCSM offer cross-border service in partnership with KCS, UP, and BNSF Railway. The U.S. and Mexican railroads pass freight from one jurisdiction to the other at six major border crossings. The U.S. sides of these crossings are in San Ysidro and Calexico, Calif.; Nogales, Ariz.; and El Paso, Eagle Pass, and Laredo, Texas.

Often, the handoff of freight between a Mexican and U.S. railroad involves nothing more than a change of crew because customs import and export paperwork is pre-filed with U.S. and Mexican customs authorities before freight is loaded.

In the case of a UP train crossing onto the KCSM network at Laredo, for example, “the operators get out of the train at the border and hand over the controls to their KCSM counterparts,” Commiskey says. “Northbound KCSM trains are handed over to Union Pacific in the same manner for movement into the United States. Employees operating the trains are required to have personal customs documents and paperwork available for entry into the United States and Mexico.”

Much of the freight that passes through the international gateways serves the needs of the automotive industry. Pacer, for example, launched its “Mexico Direct” service 20 years ago to serve auto manufacturers with factories in Mexico.

Every major automaker in North America, including GM, Ford, Chrysler, Toyota, and Honda, uses Pacer’s services to and from Mexico, says Commiskey. Tier I suppliers that serve those manufacturers make up another significant customer group.

“We also serve a variety of electronics manufacturers, particularly in Tijuana and Juarez, and appliance makers in the greater Monterrey and San Luis Potosi areas,” he notes.


Manufacturers in Mexico ship finished product north to U.S. markets, while raw materials move south on rail to supply production lines in Mexico.

“One appliance maker, for example, ships rolled steel and blanks south to be stamped into washing machines and refrigerators,” Commiskey says.

“More industry is coming to Mexico,” says Bernardo Ayala, vice president, marketing and sales for Mexico at UP. “That is increasing demand for raw materials, as well as the need for transportation services to move those products within Mexico to the ports, or to the United States.”

Automakers also comprise the top customer segment for Hub Group’s services to and from Mexico. After that, Hub’s intermodal volume to and from Mexico consists of what’s known as FAK—freight all kinds. “Appliances, food products, beverages, and industrial products make up 60 to 70 percent of our total freight,” Hirsch says.

Some manufacturers in Mexico have chosen that country as a more economical alternative to China. The nearshoring trend drives an increasing volume of freight along the corridor that connects Mexico’s industrial centers with U.S. intermodal terminals such as the one that Kansas City Southern operates in at the CenterPoint Intermodal Center in Kansas City, says Chris Gutierrez, president of economic development group Kansas City SmartPort.

“Transportation costs from Mexico into the United States are 75 to 80 percent lower than from Asia, so we’re seeing a lot more manufacturing distribution coming into that corridor,” Gutierrez says.

Besides touting the advantages of the KCSM intermodal corridor to companies that manufacture in Mexico today, KCS and Kansas City SmartPort are also marketing to companies that currently import from Asia, but are good nearshoring candidates.

Agriculture has also helped swell cross-border traffic. “Bartlett Grain and other agricultural commodity traders have consolidation points in Kansas City and move their freight to Mexico,” says Gutierrez.

Along with those major customer segments, some less-obvious industries are boosting volumes on Mexican rail lines. “The growth driver for Ferromex in 2011 has been new railroad cars that are built in Mexico,” says Vélez.

Volume in that category surged 88 percent in 2011. Loads of glass bottles increased by 86 percent.

Ferromex parent Grupo Mexico, which operates a large copper mine in Sonora, Mexico, was responsible for another volume jump. In 2010, the mine reopened after a three-year strike.

“Sulfuric acid shipments resumed in 2011, driving Ferromex’s 58-percent surge on that commodity,” Vélez says. The railroad transports the sulfuric acid, a by-product of copper extraction, for export to the United States and Chile.

Another important factor in the growth of Mexican rail is the emergence of the Port of Lázaro Cárdenas, on the Pacific Coast, as an alternative to container ports on the U.S. West Coast. “Lázaro Cárdenas is largely a bulk port, but in the past four or five years it has expanded its container activity,” says Gutierrez.


Hutchison Port Holdings opened the first container operations at Lázaro Cárdenas in 2007. “Since then, Lázaro Cárdenas has been the fastest-growing port in North America,” says Patrick Ottensmeyer, executive vice president, sales and marketing at KCS, whose sister railroad KCSM provides the only rail service at the port.

Lázaro Cárdenas can currently handle approximately one million 20-foot equivalents (TEUs), and that figure is expected to grow in the long run to 2.2 million to 2.5 million TEUs.

Mexico has announced plans to name a second container concession at Lázaro Cárdenas, which ultimately would offer similar capacity to the Hutchison facility.

Kansas City SmartPort has worked with KCS since the late 1990s to market the Lázaro Cárdenas-to-Kansas City rail corridor. “We pushed both the U.S. importers and Asian exporters to consider the corridor not only for their freight moving into Mexico, but freight coming into the United States,” Gutierrez says.

That strategy seems to be paying off. “As of December 2011, our container traffic through Lázaro Cárdenas was up 31 percent through September,” says Ottensmeyer. “With continued expansion of container operations at Lázaro, KCS should post solid double-digit volume growth for an extended period.”

Along with improving its capacity to move containers, Lázaro Cárdenas will open a new bulk handling facility in 2012. “This facility will increase the volume of heavy, bulk commodities, such as coal and iron ore, that could move through the port,” Ottensmeyer says.

Whether containers are moving to and from the ports, or within Mexico, intermodal transportation still offers railroads and intermodal service providers a great deal of opportunity.

“The United States is a mature intermodal market,” Hirsch says. “Shippers understand the pros and cons, the rate structure, and the seasonal peaks.”

Not so in Mexico, where most freight still moves by truck. “Carriers and service providers still have plenty of market share left to capture by selling the economies of intermodal transportation,” he notes.

The improvements Mexican railroads have made to their infrastructure constitute a big selling point. Shipping by rail in Mexico used to be an adventure. “A shipment could take 10 days or 30 days to get to its destination,” says Hirsch. “The carrier wouldn’t be able to tell you when it would arrive.”

Commiskey cites the upgrades KCSM has made to its terminal in Monterrey as another significant improvement.

“In 2007, the ramp in Monterrey was inadequate for the market,” he says. Both the road leading into the facility and the ramp itself needed to be upgraded, and the facility needed to be modernized.

All that has changed. “The ramp is completely paved,” Commiskey says. “KCSM added a line of track, so there is plenty of room to park equipment, and new lifts speed unloading. The whole terminal is surrounded by chain-link fence and barbed wire, so it is very secure.”

The railroads have been making similar upgrades throughout Mexico, and those investments have produced significant benefits for shippers.

Ferromex spent $330 million on new equipment and infrastructure enhancements in 2011, including $72 million to improve the rail line and $35 million to update railyards and support track.

“We’ve invested $2.1 billion in infrastructure upgrades in the 13 years we’ve been operating,” Vélez notes.


Along with upgrading rail infrastructure, Mexican railroads and their U.S. partners have been improving security, helping to ensure that freight moving within Mexico or across the border arrives undamaged and free of contraband.

“Both KCSM and Ferromex work hard to ensure that safety procedures in Mexico are equal to the ones in the United States,” says Ayala at UP. Those safety measures include using x-ray machines to examine railcar contents, dogs that search trains for hazardous items, and high-speed cameras that monitor passing cars for open doors or broken seals.

If contraband is detected on a train, customs officials can isolate individual intermodal containers for inspection.

KCSM boasts a strong security record. “In 2010, the customer claims rate for theft, vandalism, or accidents for all shipments moving on KCS in Mexico was 0.02 percent,” Ottensmeyer says. “That means 99.8 percent of all loads we transported were moved without a customer claim.”

The multiple layers of safety and security provisions at KCSM include a focus on maintaining train velocity, which reduces the chance of incidents.

“The trains are really moving now,” says Hirsch. “They don’t stop, so no one can break into a train at rest.”

Whether in motion or stopped, double-stacked intermodal containers loaded into gondola cars present a formidable obstacle to criminals. One container rides low in the car’s well, making it impossible to open the door more than three feet, and the second car rides on top. “Most thieves will target trucks, rather than climb to the top of 20-foot-tall trains with a blowtorch to try to break in,” Commiskey says.

Criminal activity in Mexico has made rail carriers’ security challenges tougher in recent years. At Ferromex, recent initiatives to boost security include replacing private security guards—who are not allowed to carry guns—with armed Federal Police officers. Those officers protect the trains both in-transit and in the yards.

“We pay for the security that they provide us,” Vélez says. But Ferromex has not been able to boost the number of armed officers as quickly as company officials would like.

While the safety of shippers’ freight is of paramount importance, Ferromex also looks to the police to safeguard its own operations. Particularly challenging to the railroad were thieves in the state of Zacatecas who were stealing diesel from engines.

Not only did Ferromex lose money on the fuel, but the thefts interrupted operations. “Fifteen or 20 locomotives were stranded there because we had to refuel them,” Vélez says. Since federal officers started protecting the equipment in Zacatecas in September 2011, those losses have stopped.

Rail transportation in Mexico still enjoys a great deal of growth potential. Rail carries about 42 percent of freight in the United States and 60 percent in Canada, but only 26 percent in Mexico. “If we concentrate on boosting that share to 35 or 40 percent,” says Vélez, “our industry will gain real volume growth opportunities.”

Booming Mexico-U.S. trade buoys Kansas City Southern

January 8th, 2012

7:36 PM, Jan. 7, 2012  |
A train crosses the international rail bridge from Laredo, Texas, into Nuevo Laredo, Mexico. Kansas City Southern is benefiting from rising demand for the use of railway cars to ship products between the U.S. and Mexico.

 A train crosses the international rail bridge from Laredo, Texas, into Nuevo Laredo, Mexico. Kansas City Southern is benefiting from rising demand for the use of railway cars to ship products between the U.S. and Mexico. / Eddie Rios/Bloomberg News
Written by
Bloomberg News

Kansas City Southern railcars are rumbling over the Rio Grande as record trade between Mexico and the U.S. buffers the railroad from a slowing global economy.

Escalating shipping and labor costs in world manufacturing centers such as Asia have encouraged companies including Nissan Motor Co. and DuPont Co. to shift capital spending to Mexico. Many of the goods produced by their investments will head to the U.S., the destination for about 80 percent of Mexico’s exports.

Cross-border merchandise trade totaled $341 billion by the end of September, about 18 percent higher than it was at the same point in 2010, according to the most recent data from the Bureau of Transportation Statistics in Washington. The increase will help Kansas City Southern, the only U.S. railroad with a wholly owned Mexican subsidiary, weather the effects of a possible European recession as the 125-year-old company seeks to take business away from trucks traversing the border.

“This is the best organic growth story in the U.S. rail network,” said Matt Troy, an analyst at Susquehanna Financial Group in New York. He estimates Kansas City Southern revenue will rise two to three times faster than similar regional railroads for “several years.” “The combination of bringing manufacturing capacity back from Asia and the potential for highway share conversion creates a very strong one-two punch.”

Gunfighter generation

Traffic at the company founded in 1887, the same year American gunfighter Doc Holliday died, increased 9.2 percent in 2011 through mid-December, Troy said, citing data from the Association of American Railroads. That’s about two to three times the growth at other North American railroads, he said, adding that car loadings at Kansas City Southern have exceeded their pre-recession peak in 2006, unlike the rest of the industry.

Risks for Kansas City Southern include a possible recession in the U.S. or new federal regulations. A reduction in volume on its rails due to any prolonged weakness in the economy would leave the company vulnerable because a unionized workforce makes cost-cutting difficult, Troy said.

Also, “there’s increasing sensitivity toward pricing power,” Troy said. “The risk would be if Washington were to take a more proactive role in examining how rails price their business.” Drug-related violence in Mexico hasn’t affected Kansas City Southern’s operations, Chief Financial Officer Michael Upchurch said at a Sept. 13 conference in Chicago.

The company’s shares have gained 18 percent since June 30, while the Standard & Poor’s Railroads Index has fallen 1.6 percent in the same period. Troy, who has a “positive” rating on Kansas City Southern, said “you can check the box for every type of investor.”

As its plans in Mexico progress, the carrier has more room to grow, can increase profitability and will probably soon offer a dividend, he said.

Mexico accounted for about 45 percent of Kansas City Southern’s $1.57 billion in revenue in the first nine months of 2011, according to company filings. The company’s Mexican carloads increased 15 percent to mid-December from the beginning of 2011, Troy’s data show.

The fifth-largest U.S. railroad by revenue can cross the border without having to hook up to a new engine, as is the case with trucks, because of its counterpart, Kansas City Southern de Mexico.

It also owns the rail bridge at Laredo, Texas, where the largest share of goods flow across the border between the two countries. The railroad provides the only service at the Port of Lazaro Cardenas on the west coast of Mexico, which is scheduled to be expanded to compete with California.

Union Pacific

Union Pacific Corp., the largest U.S. railroad by revenue, also carries goods to and from Mexico, using Ferrocarril Mexicano SA de CV, of which it owns a portion. It relies on Kansas City Southern, which moves almost half of Union Pacific’s Mexican shipments, according to company reports.

Traffic should continue to pick up as America’s southern neighbor boosts factory output, according to Neal Deaton, an analyst at BB&T Capital Markets in Charlotte, North Carolina, who has a “buy” rating on Kansas City Southern. Almost 80 percent of shipments cross the border by land, the transportation bureau’s data show.

“There’s been a strong manufacturing renaissance in Mexico over the last four to five years, and it’s only getting stronger,” Deaton said in a phone interview.

Producers are seeking to move supply chains closer to end markets as transportation costs rise and because they’ve seen how much disasters like Japan’s tsunami can set back business, he said. Cheap manufacturing and a growing number of engineers also support the renewed pickup, according to Mexican Economy Minister Bruno Ferrari in an Aug. 19 interview.

Wage differences

While China’s wages are still below those of some other developing nations, they’ve been increasing at a faster rate. Chinese manufacturing labor compensation rose 106 percent from 2004 to 2008 on a U.S. dollar basis, data from the U.S. Labor Department show.

Mexican factory wages rose 23 percent in the five years through 2008, and were lower than that year-end peak in 2010. The Labor Department says the figures for China “are not directly comparable with estimates for other countries” because the country’s published statistics on wages often don’t follow international standards.

“Mexico is eclipsing China as a very attractive source of imports into the U.S. and what we’re seeing is that labor costs between Mexico and China are converging,” Kansas City Southern treasurer Michael Cline said at a Dec. 2 finance conference in Orlando, Florida.

Mexico attracted more than $400 million in investment each from automakers Yokohama-based Nissan, Germany’s Volkswagen AG, Japan’s Mazda Motor Corp. and Detroit-based General Motors Co. in 2011. Honda Motor Co. in August announced plans to build an $800 million factory in the central Mexican city of Celaya.

DuPont, the world’s biggest maker of titanium-dioxide pigment, said last year that it will spend $500 million to boost production of the ingredient used in paints. The Wilmington, Delaware-based company said some of the increase will come from an expansion in Altamira, Mexico, around 2014.

As more goods originate in Mexico, Kansas City Southern is trying to poach a bigger share of the $260 billion worth of goods that crossed the border by truck in 2010. Auto parts are second only to grain as the biggest commodity it moves across the border, and Kansas City Southern expects to get business through greater shipments of vehicles and shipping containers, Patrick Ottensmeyer, executive vice president of sales and marketing, said in a phone interview.

Between 2.5 million and 3 million trucks cross the border into markets that Kansas City Southern could serve in the eastern half of the U.S., Ottensmeyer said. The company currently handles about 1 to 2 percent of that market, he said.

The railroad is rehabilitating the Victoria-Rosenberg line, a 90-mile stretch of track in Texas that offers a more direct route from across the border. And it has invested in the Meridian Speedway, which connects the eponymous town in Mississippi with Dallas, along with a logistics center near Houston.

“We have invested to build a franchise,” Ottensmeyer said. “We’re having very good conversations with almost every railroad, and they all want to participate in the growth that’s happening in Mexico. They really have to use us to do that.”