When Honda, Nissan and Mazda announced last year they would build large new automobile plants in central Mexico to supply cars for Central and South America, they were getting on an increasingly crowded road.
“The influx of Japanese Tier 1/2 auto suppliers has been astonishing, and Mexico is quickly ramping up to accommodate their arrival,” said Jordan Dewart, vice president for Mexico and Laredo, Texas, at Yusen Logistics (Americas). “On a recent trip to Mexico with our Japanese management team, we were surprised to see signs in Japanese, television channels broadcast in Japanese, even the clocks behind the front desk are now displaying the local time in Tokyo.”
Yusen Logistics and other global logistics providers are seeing a tectonic shift in global sourcing patterns as Chinese labor costs soar. That wage inflation is starting to ripple through the supply chains of manufacturers even as they pursue lower production costs and quicker turnaround times. And in a shift in the longstanding direction of factory work, some manufacturers with plants in China are looking for lower-cost locations in Asia where they can continue to source products for their fast-growing Asian markets.
Companies that manufacture for Western markets are moving to Mexico or taking a hard look at it, although many remain concerned about reports of drug violence. “We’ve seen a dramatic influx of rate requests and requests for proposals from companies that specifically say, “We’re doing this now in Thailand, or we’re doing this in China, and we want to take a look at the Mexico market,” Dewart said. “Their first question is: ‘Is the drug violence as bad as they say it is?’ We tell them there are 110 million people down there, and not every one of them is robbed at gunpoint every day.”
Mexico’s reputation for violence has curbed the amount of foreign direct investment, but “anyone who has been there for some time is so glad they have stuck it out because they are ahead of the curve,” Dewart said.
In the six weeks of 2012, the Mexican law firm that Yusen uses to help its customers incorporate in Mexico has received inquiries from more than 150 Japanese companies about how to set up business there to support the new Japanese automobile plants. Those inquiries are just a snippet that doesn’t begin to explain the extent of the demand in Mexico.
The shift in production is coming mainly from companies producing products in Asia for markets in North and South America. Component parts for assembly in Mexico are coming in from all over East and South Asia but mainly from Taiwan, Thailand, Japan, South Korea and Vietnam.
The companies shifting production to Mexico from China or considering doing so fall into four categories: automotive; apparel and general retail products; machinery and high-tech electronics; and consumer appliances. “Mexico was long considered a country that couldn’t handle something as complex as heavy machinery, but manufacturers are finding not only cheap labor, but also highly skilled labor,” Dewart said.
Many of UPS’s Asian customers likewise are looking to source in Mexico. “More and more of our Asian customers are exploring opportunities to move some production closer to the U.S.,” said Carla Huang, director of marketing for UPS’s high-tech and electronics segment. “It’s not just the labor costs, but it’s the total landed costs, when you take into account the labor along with transportation, and the ability to have the flexibility within their supply chain to respond to changes in demand.
“When they have a hot product with demand higher than expected, having production closer to the end-U.S. market allows them to meet customer demand rather than having to move those products from Asia,” she said.
The shift in production from Asia is having a big impact on cross-border cargo flows. Yusen uses more than 100 Mexican trucking companies to move its customers’ products to the U.S., and all of them are planning to increase capacity this year. “They are adding trucks, trailers and drivers,” Dewart said.
One Yusen customer is a high-end T-shirt manufacturer with a plant in Celaya, north of Mexico City, that produces large volumes for the U.S. “That goes to show that when you are in the fashion industry, you have to react quickly, and 30 days on the water is not going to cut it. You can go from Celaya to Chicago in three days, when it takes three-plus weeks from Shanghai,” Dewart said.
The quality of apparel production in Mexico has gotten so good that another Yusen customer is making high-end men’s suits there, using inlays from Pakistan, fabric from Italy, thread from Taiwan and buttons from China. “So we are seeing the sewing of men’s suits moving to the U.S. as garments on hangers that was almost exclusively done in Europe or Asia,” Dewart said.
Nine ocean carriers call at Mexico’s west coast port of Lazaro Cardenas, where APM Terminals is building a $900 million container terminal to compete for imports from Asia for the Mexican and U.S. markets. Kansas City Southern Railway, which operates a Mexican subsidiary, Kansas City Southern de Mexico, is improving its infrastructure to the port to meet that demand. The railway said the broader move toward near-sourcing manufacturing that had been going to China is one reason the carrier is betting big on cross-border trade between the U.S. and Mexico.
“The advantages of Mexico versus Asia are becoming more and more compelling,” said Pat Ottensmeyer, executive vice president of sales and marketing for KCS. “We believe it will ripple across the border and throughout the Gulf.”