Blurred borders

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Fleet Owner / November 5, 2015

As North America recoups once-lost manufacturing, prepared fleets stand to gain

Hardly an economist hasn’t mentioned it: After Americans watched manufacturing slip away for decades, particularly to cheaper laborers across the Pacific, there’s been a growing trend of it returning closer to home, if not all the way back to the United States.

“Nearshoring” was added to the English language in recent years to describe the phenomenon. It continues to gain steam as the evolving demands and conditions of the modern, interconnected market drive opportunity.

There were doubts this year that the world’s largest free-trade machine that is North America, still shaking off setbacks of the Great Recession, would be able to keep up with the growth and potential, especially in terms of cross-border transportation and trucking flows. But trucking hasn’t stumbled—and carriers are investing more resources in U.S. trade not only from, but also into, Mexico and Canada anticipating, as one trucking executive tells Fleet Owner, “a bright future” for North American cross-border freight.

Where were the doubts? In late 2014, the top commerce officials from the U.S., Canada and Mexico helped mark the 20th anniversary of the North American Free Trade Agreement (NAFTA) with a joint statement of optimism and progress. “Our combined trade relationship is more than $1.4 trillion, and our economic output accounts for more than one-quarter of the world’s [gross domestic product]. The North American economy can out-compete any region in the world,” it reads.

Then in January of this year, the Federal Motor Carrier Safety Administration (FMCSA) announced that Mexican motor carriers would soon be able to apply for authority to conduct long-haul, cross-border trucking services in the United States, “increasing economic and export opportunities between the two countries and marking a significant milestone” in promised NAFTA compliance.

The agency conducted a pilot program to test a border-crossing program for Mexican carriers but failed to garner enough participants to reach statistical significance, it said.

The Teamsters Union—later supported by the Owner-Operator Independent Drivers Assn.—sued to stop the program from moving forward, warning of safety risks. The suit is ongoing, but FMCSA notes that at the end of the pilot program, long-haul operating authority for the participating Mexican carriers expired, and carriers are now allowed to apply for standard/permanent operating authority. Nine were granted permanent authority and four were granted provisional authority; two of the former “voluntarily relinquished” that authority, the agency tells Fleet Owner, and decided to operate only in the commercial zone buffering the border on either side. Since then, only one additional carrier, which has three commercial vehicles transporting mainly textiles, was granted provisional operating authority in early September.

Complicating matters, the rising strength of the dollar brought with it concern over whether this year’s available capacity could handle peak U.S.-Mexico seasonal trade demand, which runs from April or May through July and is driven in large part by equipment needed for perishable goods.

“The [Mexican] peso has gone from 12.5 to 13 to over 17 to the [u.S.] dollar in a short period of time,” explains Troy Ryley, managing director of third-party logistics (3PL) and technology provider Transplace’s Mexico operation. “So whatever incentives you had to purchase or source out of Mexico, they just became between 25% and 30% more encouraging.”

While that makes buying and producing goods in Mexico very enticing, he notes, it also likely makes for a tougher sell—and therefore less movement—of goods in the other direction. Less freight destined for Mexico means less U.S. equipment making its way south to receive and transport Mexican product back up north, creating a potentially large trade imbalance.

Meanwhile, in the works since 2006, there’s been a slow transition to use the U.S. Customs and Border Protection’s Automated Commercial Environment (ACE) cross-border freight protocols. The system promises to streamline import and export reporting for clearing U.S. Customs, and while it may bring a learning curve, it’ll also mean more flexibility for cross-border freight’s port of entry and potentially faster rerouting in case of backups.

Hecho en Mexico

Despite those would-be barnacles on the ship, U.S.-Mexico trade is healthy, and Mexico is booming as a location for nearshoring manufacturing and the opportunities that come with it, according to trucking executives. In the post-recession years, several tell Fleet Owner their companies have seen—and expect to see again this year—growth near or into double digits in their Mexico-U.S. cross-border business.

Further, it’s not only in trucking but in other forms of transport. Intermodal freight is also growing, Ryley says, and Mexico has experienced an uptick in freight entry via ocean as an alternative entry point for goods made in Asia as U.S. West Coast ports have been prone to holdups due to labor strikes and include some of the most problematic highway corridors in the country for trucks to navigate.

But clearly, some of the most impactful growth is coming from manufacturing springing up in Mexico. There are a number of factors driving that, says Lance Dixon, senior vice president of Werner Enterprises’ Mexico and Canada divisions. There’s speed to market, or “how fast a product can be produced and put on a shelf,” he notes. It takes a matter of days to come into the United States from Mexico versus two weeks to a month or more via ocean from China, for example.

Time zone differences within North America also are much easier to work with, Dixon adds. In the case of a U.S.-based company “you’re basically working on the same business day” instead of being half a day or more behind Pacific Rim countries. It’s often easier for companies to shuttle executives to and from a manufacturing plant in Mexico than to China, Malaysia, Indonesia, or other places production drifted to over the last few decades.

There’s also less of a communication barrier, Dixon notes, since “almost everyone in Mexico’s business world speaks English as a second language.” Add to the mix that a big part of the advantage and appeal of businesses sending manufacturing overseas, particularly to China, was cheaper labor and that has been evaporating.

Perhaps a quarter of a century ago, “the labor cost in China was really just a fraction of the labor cost in Mexico,” notes Eugenio Sevilla-Sacasa, vice president of international supply chain solutions at Ryder, “so many industries that were labor-intensive decided to open up manufacturing facilities in China.” Over time and as China’s economy grew, the standard of living and wages increased for many Chinese. That’s seen more on China’s eastern coast, Transplace’s Ryley points out, and companies have sought cheaper labor further inland, which can add time and costs to market.

“If you look at your manufacturing costs and you’re in a very labor-intensive industry in China where the labor [costs] have skyrocketed, then your advantage to manufacture in China is no longer there when you compare it to Mexico because you also reduce the inventory that you require in the supply chain” due to the shorter transit times required, Sevilla-Sacasa says.

Regarding what type of manufacturing is coming to Mexico, Bernardo Rodarte, vice president and general manager for Schneider’s Mexico division, says his company has seen quite a variety. “A lot of people, when they hear about investments in Mexico, think about the automotive industry, which has been very active recently,” he tells Fleet Owner.

“Practically all of the major car manufacturers have opened up shop or are planning to in the next couple of years in Mexico, and that has driven a lot of volume” of freight, Rodarte says. That also includes a range of supporting parts suppliers and manufacturers.

However, he notes, “we’re seeing companies from very different types of sectors opening in Mexico, and that is in great part also fueling increased demand for transportation that we’re seeing across the border.”

For that reason, “Hecho en Mexico” (made in Mexico)stamps, stickers and tags are being seen more commonly on goods, “from toys to air conditioners to food,” Sevilla-Sacasa says. In addition, “there’s a lot of food that the U.S. exports into Mexico; there’s a lot of manufactured goods that are made in the U.S. or parts and raw materials to supply manufacturing that are being imported into Mexico,” he observes, “so there is growth in both directions.”

What about the threat of capacity shortages or any barriers to Mexican trucking companies getting authority to operate in the U.S.? “I don’t really see a lot of carriers lined up to do a full line haul with a Mexican truck going into the interior of the U.S., or vice versa,” Rodarte says. “I believe a lot of this has to do with gaining efficiency.

“In having a truck move from the interior of Mexico northbound direct all the way to final destinations in the U.S., there’s still a border in between. Oftentimes,that border could take hours or, in many cases, also days to clear,” he continues. “You don’t want a truck sitting at the border for two or three days. In order to avoid that, the best way of doing it is to relay [a trailer] between a U.S. carrier and a Mexican carrier, which really makes everybody’s lives a lot simpler.”

Trucking finds a way

Thus, what’s happening with much of the freight moving between Mexico and the United States is that trailers are being trucked across the border north or south a short distance—with the Laredo, TX-Nuevo Laredo, Mexico, corridor being one of the densest of various crossings—and transloaded at carriers’ facilities.

And the companies that are getting ahead are working closely with U.S. and Mexican customs and maintaining certification under programs such as the U.S. Dept. of Homeland Security’s Customs-Trade Partnership Against Terrorism to expedite border crossing.

“I strongly believe, and in fact we do this every day, if the shipper has all of his documentation in Mexico, and all the entry work is done on the U.S. side, you can get across the border in minutes,” Rodarte contends. “It tends to be a quick process.”

Carriers are showing their faith in that process with continued investment. Werner, for instance, is upgrading its facilities in Laredo and El Paso, TX, and has also “moved to larger offices in Mexico in two of the four cities we have offices in,” the company’s Dixon says. “All of this is in preparation for continued growth.”

Still, according to Sevilla-Sacasa, moving freight in Mexico is not without its pitfalls.

Two limiting factors today are infrastructure, which has seen improvements but is at its limits for handling truck traffic in some areas, and telecommunications, which “you’ll have to bring with you in some remote locations.” Small-time and cartel-related theft and other crime risks also remain concerns requiring carriers’ diligence, he says.

Canada doesn’t get all the fanfare Mexico has lately, but it is a critical part of the North America trade equation. Not surprisingly, America’s largest trading partner is still helping create new opportunities for freight and goods distribution. For one thing, Canada is also part of the raw materials and manufacturing supplies trade that’s fueling production in Mexico.

“There’s parts moving into Mexico from Canada and from the U.S. and then back out,” notes John Costanzo, president of Purolator International, which hauls truckloads in Canada and operates as a 3PL in the United States. “So I think Mexico is going to present a tremendous opportunity for everybody in the next several years.”

Freight crossing the border between the U.S. and Canada has been more of a constant, rather than the faster-paced growth seen with Mexico, Costanzo says. Mark Aurig, vice president and general manager for Schneider’s Canada division, agrees, noting that “trusted trader” programs and crossing the border in general similarly have long been very stable, and there are plenty of options for doing the latter.

“But what we’re seeing with the Canada-U.S. trade as it relates to over-the-road and intermodal [freight transport] is that it’s really driven a lot by exchange rates,” Aurig says. “There tends to be a 12- to 18-month lag in that.”

He notes that the U.S. and Canadian dollars were about even for about five or six years, up until September 2014 when the U.S. dollar pulled ahead, just as it did against other currencies. “Prior to that and in the earlier part of this year, we were seeing stronger northbound demand from the U.S. to Canada than southbound from Canada to the U.S. That had been a market dynamic that we’d gotten used to for some time,” Aurig adds.

With the U.S. dollar now at $1.30 Canadian, U.S. goods headed northward have tapered off a bit since they’re more expensive for Canadians to buy. Aurig says that currency gap is expected to widen slightly and remain at least for the near future, which could bring an increase in southbound goods and freight coming from Canada thanks to the stronger purchasing power of the U.S. dollar.

Costanzo says PuroPost, a service his company launched about two years ago, has thrived in this market dynamic. It’s a blend of Purolator and Canada Post delivery, he explains, and offers lower cost and “very consistent, reliable delivery time into Canada.”

“Our growth in that [lower cost service] has been phenomenal over the last two years,” he tells Fleet Owner, noting that Purolator surveyed Canadian and U.S. consumers and found that most want low-cost yet reasonably quick shipping for online purchases. “It’s contrary to what the hype is now,” Costanzo adds. “It sounds sexy to say, ‘I’m going to deliver your product in two hours,’ but how many of us really need that?”

Both he and Aurig point out, however, that there’s also a space for very fast, narrow-window freight movement between the U.S. and Canada, and the well-established border allows for that agility.

“We have [u.S.-Canada] automotive moves where parts are going into an assembly plant, and we have literally four or five hours of leeway before a plant shuts down,” Aurig says. “You can’t build those kinds of networks unless you have a border that runs a lot more efficiently in terms of the time to cross.”

And in terms of trucking and transportation business models, again, trade between Canada and the United States offers options. For example, Schneider uses some 400 Canadian nationals as the drivers doing its U.S.-Canada border crossing, and they relay loads to U.S. distribution centers. “It allows us a huge amount of density within Canada, much more so than you would normally get from 400 drivers,” Aurig contends.

He says he expects continued growth in U.S.-Canada cross-border trade and potentially some manufacturing returning to Canada. “We’re going to see more pressure on southbound freight as more manufacturing expands into Canada, taking advantage of the exchange rate benefits. I think you’re going to see more retailers in the U.S. starting to source more of their goods from Canadian vendors, which will also drive more of that southbound volume,” he tells Fleet Owner.

Cross-border truck volume should remain strong, Aurig says, but more freight volume could come via intermodal rail connections. “There are some new capabilities being brought to bear by the railroads that are going to make shorter-length-of-haul intermodal [transport] between eastern Canada and the eastern half of the U.S. more efficient and cost-effective, as well as just shorter transit times,” he notes. “So I think we’re going to see growth on more of these shorter-length-of-haul lanes between eastern Canada and the eastern part of the U.S. with intermodal.”

Others likewise anticipate growth for North America. “At Ryder, we continue to invest in both Canada and Mexico, and we continue to see a bright future for trade between the U.S., Mexico and Canada,” the company’s Sevilla-Sacasa says.