Re-Shoring Reassurance

If I see another article about near-shoring, which I expect will happen within the next few days, I may get sick. This is one of the most sensationalized stories of recent years and yet I’ve always been troubled by it, sensing the headline is bigger than the story.

I get more troubled when I hear from economists that they’ve yet to see the impact in Asia-North American trade data. I see so-called near-shoring as actually a number of trends — most still minor at this point and some important — conflated into a single headline that falsely suggests that something dramatic is going on now.

“There actually is not a lot of specific evidence of actual companies having relocated yet” to Mexico, Stifel Nicolaus analyst John Larkin observed in a conference call in May.

There is some production moving from Asia to Mexico, though in fairness, production of goods destined for the U.S. market is moving around quite a bit within Asia; there is some manufacturing returning to the U.S., though this tends to be highly automated and limited to only a few companies so far; and wrapped up in it are Mexico-U.S. cross-border transportation movements that in some cases (such as intermodal) are staggeringly high but don’t represent near-shoring so much as conversion from truck to rail.

I have heard no container line suggest that its trans-Pacific volumes are eroding because of production moving to Mexico. To the contrary, as JOC Economist Mario Moreno has observed, the big ocean container trends in the Asia-U.S. market are a gradual shifting of sourcing from China to other Asian markets such as Vietnam and Indonesia. China last year accounted for nearly 47 percent of all U.S. containerized imports, down from 48.7 percent in 2010, a gradual decline that has paralleled slight increases in market share by other Asian countries.

Part of what gets people focused on the near-shoring concept is transportation data, some of which is eye-catching indeed. Since the third quarter of 2011, Kansas City Southern’s cross-border intermodal volumes have seen year-over-year quarterly increases of anywhere from 59 to 106 percent. While near-shoring may be an element of this, improved security, lower costs, more reliable transit times, and more efficient border crossings are also elements — in other words, a factor of a conversion process from truck to rail that for several years has driven higher intermodal growth within the U.S. versus other modes.

And it’s not as if trucking is suffering. “We would note that the trucking operators with Mexico (subsidiaries) have noted continued strength in freight volume and rates in/out of Mexico, and some are adding capacity there as a result,” said David Tamberrino, a Stifel Nicolaus transportation analyst.

But at the same time, it would be unfair to say near-shoring won’t be coming in a bigger way down the road. Clearly, corporate executives are fixated on the concept: the most recent Alix Partners near-shoring survey found that 84 percent of those it surveyed said decisions to bring operations closer to the point of demand were a “pretty major business priority.” This is because of a need to shorten lead times and lower supply chain costs and risks. Some 40 percent of respondents said operations focused on serving the U.S. market would be relocated within two to three years.

Combine that sentiment with a new Mexico government changing the focus from fighting the drug war to the economy, and big things could indeed happen in coming years. “We see a very hungry Mexican government,” AlixPartners managing director Foster Finley said in a Stifel Nicolaus conference call. He called near-shoring to Mexico “the first of several innings of a long-term trend that we would expect to continue.”

Despite the Mexican government’s focus on the economy, security in Mexico remains a significant concern. “The overall topic of security has continued to impede the rate at which U.S. companies or companies bringing goods into the U.S. have relocated into Mexico,” Finley said.

The U.S. as a location for manufacturing is also gaining interest, because of its proximity to end-markets, stable politics (in comparison to other nations where regime change has either happened or is a possibility), rule of law and excellent transportation. Costs are high, thus a preference for automated operations. The surge in U.S. energy production and the possibility of the U.S. becoming energy-independent hold out the promise of lower energy costs, but that is still in the future.

And there is a difference between assembly and manufacturing. That is why it’s not surprising to hear skeptical comments. “All the best data we have shows that this alleged phenomenon (i.e., near-shoring) is completely imaginary,” said U.S. Business and Industry Council research fellow Alan Tonelson, as reported recently by my JOC colleague Mark Szakonyi.

Imaginary? I disagree, but very early stages and very gradual — yes. Gird yourself for many more headlines. 

Peter Tirschwell is executive vice president/chief content officer at JOC Group. Contact him at ptirschwell@joc.com and follow him at twitter.com/PeterTirschwell.

 

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