It is hard to believe that the North American Free Trade Agreement (NAFTA) came into effect on January 1, 1994, almost twenty years ago. Like so many of us in the industry at the time, my colleagues and I rushed down to Laredo/Nuevo Laredo and other key Mexican points to learn the intricacies of the Mexican market and border clearance processes. But a “calamitous” peso crash, the rise of Asia and its huge, cheap labour force, the prevalence of ocean shipping, low energy costs and a host of other events conspired to delay the anticipated growth in the Mexican freight market.
Ten years ago, wages in Mexico were six times higher than those paid in China. A gallon of gasoline in America was $1.11 in 1994. By March 2003, it hit a record $1.79 a gallon.
Flash forward to 2013 and the picture is very different. The wage gap between Mexico and China had shrunk to 40 percent by 2011, according to the International Monetary Fund. Gasoline prices are averaging $3.63 a gallon for regular fuel, double the figure in 2003 and almost four times the cost in 1994.
Of course, geography is a key factor. Mexico not only sits across the U.S. border but it is a gateway to the Latin American markets that are buying Mexico’s autos, appliances and advanced electronics. The shorter transit times on shipping between Mexico and the United States and Canada are a big advantage over ocean shipping from Asia.
Manufacturing activity in Mexico is booming. While much of the world experienced slow growth or recession in 2012, Mexico had 6% GDP growth. Manufacturers in Mexico have well established supply chains that ship finished product north to U.S. markets, while raw materials move south to service their production lines.
The country produced 2.8 million cars last year. Japanese auto makers, Audi, Honda, Mazda and Nissan, are all set to open new plants in Mexico in 2014. Mexico’s expertise in manufacturing plasma TVs and plastic toys is driving manufacturing from China to Mexico.
Intermodal Transportation may be the Big Winner
The transportation industry is taking notice of the economic developments in Mexico. Rail in Mexico was underdeveloped because the state-owned railroad company stopped investing in it in the years just before privatization. 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. Rail costs are typically 20% less than truck on cross-border movements.
Goods cross the border via rail without delay and without non-value-added warehousing and transloading that has been common practice for decades. The customs process for a train hauling 250 containers takes roughly 30 minutes compared with a minimum two-hour wait for a single-load carrying truck. Plus, for nearly all cross-border trucking moves, it costs $150 to $200 to shuttle the load across because few U.S. trucking operators operate south of the border. These cost and service advantages may encourage shippers that have been wary of the Mexican market.
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 the rails concentrate on boosting that share to 35 or 40 percent, the industry could see significant growth opportunities.
Improved security is another part of Mexico’s growth story. Mexico’s drug wars and its cartels have made front page news around the world. But that has not limited the enthusiasm for doing business in Mexico. For example, 99.8 percent of all loads transported by the Kansas City Southern Railway, a major cross-border (e.g. USA – Mexico) provider, were moved without a customer claim. 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 would prefer to target trucks, rather than climb to the top of 20-foot-tall trains with a blowtorch to try to break in.
The long expected Mexico freight boom may finally be here. In next week’s blog, I will look at some of the leading transportation players that are investing in the Mexican freight market. Stay tuned.
Registration is now open for the 2013 Surface Transportation Summit in Toronto. For a peak at the agenda and the preliminary list of speakers, please click on www.surfacetransportationsummit.com.
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