Mexico Back in the Supply Chain Spotlight

It seems like we’ve come full circle with Mexico. A lot of companies set up operations and sourced from Mexico back in the 90s, then the focus shifted to China and other Asian countries, and now Mexico is back in the spotlight. What is it about Mexico that makes it an attractive trading partner again?

I asked Troy Ryley, Managing Director of Transplace Mexico, that question in a recent episode of Talking Logistics, and here’s an excerpt of what he said:

Asia was the buzzword for many years, and it still is the buzzword in many respects. I think, because of the recession, Asia has become a little bit more unpredictable and costly for many reasons. We’ve seen, for example, instability in ocean freight, cost, and issues with [Los Angeles] ports in past years. Chinese labor, which everyone perceives as some of the cheapest in the world, isn’t as cheap, especially as you have to go further [inland], off the coastal regions, to find cheaper and cheaper labor…The U.S. economic recession made companies decrease inventories, which increased their need for speed to market and shorter cash-to-cash cycles. Unfortunately, China and most of Asia has a very long lead time, which makes forecasting even more difficult. In addition, China has a very old population, one of the fastest-aging populations in the world, and aging populations are more oriented toward services than consumption of goods.

Mexico, on the other hand, did a great job simplifying doing business, so it created a maquila program that’s been very successful that allows you to bring material [into the country] tax free, allows you to transform it, and then re-export it, only paying tax on the value added. There are roughly 4,000 maquilas operating in Mexico today…

Mexico has a very young population, they are high into consumption…[we’ve] seen a big increase in consumption of U.S. and foreign goods.

Energy is another important element. Most industrial countries convert either steel or plastic into products. You need energy in order to do this conversion. Luckily for Mexico, the U.S. has a surplus of natural gas; it’s a cheap energy source that helps Mexico continue to be competitive.

Economic stability [is another factor]. The peso hasn’t been devalued since the 90s. Mexico has built up substantial reserves. Currency is stable and inflation is under control.

But I think the most important factor is people want things quicker, faster, and more efficiently, and it’s hard to beat a country that’s 24 to 72 hours away from most points in the United States.

I also asked Troy about the logistics challenges shippers have — or should be aware of — with regards to cross-border trade with Mexico. Watch the short clip below where he discusses three key challenges: imbalance of freight during peak season; the visibility black hole at the border; and the need to build in flexibility.

Finally, I asked Troy about security, if it’s as bad as we read in the papers. Here’s part of what he said:

I think there’s a lot of misnomers. I think people see the news and assume certain things. I have some opinions…I think drug cartels sell drugs, and those are the ones you’ve seen in the news battling back and forth…Cargo thieves steal cargo. Very seldom are they the same elements. So, the publicity we have seen on TV is about drug wars, not cargo theft…Cargo theft is a fraction of a fraction of a percent [when you compare number of incidents to total trade volume], although it receives a lot of attention.

I think the real issue for Mexico is more [around] limited liability. In the Mexican equivalent of a bill of lading, a carrier is only legally liable for 15 times the Mexican minimum wage per ton or fraction of. So that causes a lot of heartache for companies in the U.S. that are used to going to their current U.S. carriers for $100K, $150K, $250K worth of cargo liability. [This] doesn’t exist in Mexico. The carrier is only responsible for carrying your freight, unless you contracted them for insurance. And my recommendation for most parties is if you need or want insurance, use your global policy and that will lower your risk and exposure in Mexico.

I encourage you to watch the rest of my conversation with Troy for additional insights on U.S.-Mexico cross-border trade trends, then post a comment and share your perspective on the topic!