Sourcing Gets Caliente

In observing that Mexico is “sliding dangerously downward,” The Economist in July summed up the killings, lawlessness and fear that pervades the country amid the government’s war on drug gangs. Indeed, with 26,000 drug war victims over the past four years and the body count climbing daily, there seem to be few tangible signs Mexico is actually stabilizing. Increased security along the U.S. side of the U.S.-Mexico border shows the alarm in the United States over the situation south of the border.

But there is another story that is getting less publicity: U.S. trade with Mexico is growing, and at a faster pace than it is with other trading partners, including China. That suggests the possible impact of a trend toward near-sourcing, despite continuing irritants such as the U.S. refusal to honor its pledge under the North American Free Trade Agreement to allow Mexican trucks north of the border and Mexico’s retaliation this year with tariffs on $2 billion worth of U.S. exports.

Those appear to be just sidebars, however, to the bigger story that growth in the manufacturing sector remains relatively unscathed by Mexico’s drug wars. “There is some concern over the lawlessness down there, but that doesn’t seem to have penetrated the industrial side of the economy,” said John Larkin, managing director at investment firm Stifel Nicolaus & Co., who covers truckers and railroads, many of which handle large volumes of U.S.-Mexico trade.

Recent trade and transportation figures indicate a stronger rebound from the recession in Mexico’s exports to the U.S. compared with those of China. U.S. imports of goods from Mexico reached $90.4 billion in the January-May period, up 37 percent from the corresponding 2009 period. Imports from China totaled $128 billion in that January-May period, up 16 percent from 2009, according to U.S. Census figures. In May, imports from Mexico via truck were up 36 percent, and imports by rail were up 78 percent. Meantime, loaded container imports in May at the ports of Long Beach and Los Angeles, the largest source of which is China, were up a somewhat lower 26 and 12 percent, respectively.

Larkin’s optimism is derived in part from statements by truckers and railroads that, he said, are reporting strength in Mexico volumes that suggests true structural trends as opposed to a simple bounce back from the depths of the recession.

Steve Russell, chairman and CEO of truckload carrier Celadon, cited increased trade with Mexico due to growing competitiveness of its manufacturing industry as one reason behind the company’s increase in revenue and profit in its most recent fiscal year. Outgoing Kansas City Southern Railway Chairman and CEO Michael R. Haverty said “strong increases in our cross-border revenues” pushed significant increases in second quarter profit and revenue at the railroad.

Larkin attributes the strength in part to decisions by manufacturers to shift supply chains to more local sources in response to the cost and complexity of maintaining supply lines back to Asia. Recent labor shortages and unrest in China, as well as trans-Pacific container and vessel space shortages, come on top of systemic challenges that include security and product safety rules as well as a priority on environmental improvements.

“Long supply chains are increasingly going to become less attractive due to rising energy costs, increased global environmental and security regulations, inventories that you have to maintain, especially in a slow-steaming world,” Larkin said. “Maybe the better thing to do is access the low-cost labor in Mexico and take some of the risk out of running a supply chain that is three, four months long.”

Mexico sees an opening and isn’t shy about plugging its advantages. “Because of the geographic location of Mexico, it is regaining the trade that went to Asia and China, in particular,” said Gerardo Funes, vice president of communications and director at the U.S.-Mexico Chamber of Commerce’s national office in Washington, D.C. “Sometimes labor in China obviously is cheaper, but sometimes Mexico is as cheap and the quality is better, so I believe that what is going on right now is that the cost advantage that China had in the past is going away.”

China can hardly be written off as a source country; indeed, as a source of imports arriving in the U.S. via ocean container, it is far and away the largest origin country, with 48 percent in 2009 versus just 3 percent for the next largest suppliers, according to PIERS Global Intelligence Solutions, a sister company of The Journal of Commerce. And China’s share of containerized imports has been rising, growing from 43 percent in 2005.

China is laying the groundwork for a shift in manufacturing into interior regions, creating intermodal rail and inland waterway links to allow cargo to move quickly to ports in South China and Shanghai. Manufacturing also will remain in China because international companies want to serve the growing China domestic market.

But maybe when it comes to Mexico, there is more than what headlines suggest.

Peter Tirschwell is senior vice president for strategy at UBM Global Trade. Contact him at ptirschwell@joc.com.
 

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