Waking up from Mexico’s Nearshoring Logistics Nightmare

Waking up from Mexico’s Nearshoring Logistics Nightmare   

By Víctor Herrera, Partner & General Director, Miranda Ratings Advisory 

September, 2023 


We are flush with research, interviews and articles on the prospects and benefits of the recent nearshoring trends in the world and how they are impacting Mexico. Many observers highlight the country’s capabilities and challenges. A recent Morgan Stanley research piece quantifies the potential at US$ 155 billion (10% of GDP) over the next five years. That represents an increase in exports of almost 35% (a 6.2% CAGR).  The estimate may be on the conservative side, as Mexico’s exports have been growing at a double-digit pace annually for the past few years. Even if these estimates are accurate, millions of Mexicans will prosper. 

 Challenges listed so far range from a shortage of industrial parks to a need to invest in clean energy and water supply.  But little has been said on how difficult is to move goods from one point to the other in Mexico today, much less visualizing how the country would move an additional 35% of exported goods, mostly to the US border. 

 85% of all goods are transported by truck in Mexico these days. That talks about the successful development of a highway network that allows merchandise to move within the country and to the northern border.  But it also underscores the lack of development of ports and railroads that allow goods to move effectively within the country and abroad. 

 Border bridges are saturated and long queues of trucks wait hours to cross to the US. But the wait is not only at the border. Sections of the “NAFTA” toll road (highway 57) that goes from Mexico City to Querétaro, San Luis Potosí, Monterrey, and ends at Laredo on the Texas border, often are plagued with traffic jams of trucks transporting goods to and from the US.  Mostly a two-lane each way road, its common to see up to 10-mile columns of standstill trucks in some key sections such as the Querétaro bypass road to San Luis Potosí. And crime doesn’t help. Taking advantage of gridlocks and weak police surveillance, hijacks are common.  According to a Dallas Morning News article, there are 48 violent cargo truck hijackings per day and a loss of over US$4.3 billion dollars in stolen goods.  Fuel, delays, and lack of security help make transport of goods by truck substantially more expensive than other options such as railways and shipping using modern ports. 

 We compared Mexico’s ground transportation infrastructure to the US against Canada’s.  Both countries export just under US$500 billion dollars per year and in both cases their main market is the United States.  So, all things being equal, infrastructure capacity should be similar. But it’s not. Mexico shows an overreliance in truck transportation which for long hauls, the cost of transporting a container can be ten times or higher than by rail.  Moreover, as we can see in Figure 1, rail capacity in Mexico is less than a third of that in Canada and has grown very little in the past 10 years. 

Meanwhile, container truck traffic crossing the border (Figure 2) has remained relatively stable for Canada, but has 86 crossing points, while Mexico’s traffic has increased by over 40% in the past decade but using only 28 crossing points. The limited number of points of entry explains the long traffic lines that we frequently see on the Mexican border. 

Maritime port trade for both countries is until recently very similar as seen in Figure 3. Mexico has shown progress in increasing container handling capacity in the last few years, but as more imports come from Asia, the main Pacific ports, especially Manzanillo, Mexico’s largest with approximately 3.4 million containers per year, has become saturated.  Goods must wait for days to be moved by rail or truck from the port, and on-site storage is limited. Even as Mexico has practically doubled its total container volume at its ports to almost 8 million containers per year, the volume handled is less than Laem Chabang (Thailand), Hamburg or Long Beach by themselves, which each approach a capacity of 10 million containers per year.  


Preparing for a Nearshoring event 

If Mexico is to be successful in increasing 35% total exports in the next 10 years, we should be ready for a substantial investment of infrastructure to allow that to happen. Since 85% of all goods are transported by truck, it only makes sense to invest heavily in expanding the points of border crossings to the US beyond the present 28 used junctions. The Anzalduas International Bridge cost about US$29 million when it was finished in 2009. Adding inflation to date, a new bridge can cost about US$45 million. Ten new bridges could cost US$450 million in total. But the access roads to these ports of entry must be expanded beyond the existing network.  A quick fix may be to expand some key roads, such as highway 57, the NAFTA corridor, to a three or four lane highway in each direction just as it was expanded close to Mexico City. Toll booths must also be modernized to keep the traffic flowing. Assuming an average cost of US$3 million dollars per kilometer with varying types of topography, that road, plus some branches to additional border crossings could cost less than US$6 billion. In all, the NAFTA corridor could be substantially upgraded with an investment of less than US$7 billion. That number represents less than half of what has been invested in the Dos Bocas refinery and is also less than half of what has been channeled to the Maya train. The payback of such a public investment would be substantially faster than the other projects. Additionally, more fluid traffic and better police surveillance can reduce hijackings from present levels. 

A more challenging task is to expand the railway footprint and traffic. Admittedly, the existing tracks have been upgraded to allow for longer and heavier convoys (up to 120 cars in length), but the container traffic and price competitiveness is substantially lower than that of the Canadian railroad connectivity with the US.  The main Mexican railroad 50-year concession is halfway through, and such concession does not allow for additional competition in the route to Laredo. Kansas City Southern Mexico represented about half of Kansas City Southern (¨KCS¨) consolidated revenues but carried a much higher margin. Now that Canadian Pacific has acquired KCS to create CPKC, the Mexican concession represents about 15% of total revenues of the new entity. CPKC has all the incentives to continue investing in the Mexican railroad concession and could negotiate an expansion of such agreement beyond the remaining 23 years. An extension of the concession could incentivize CPKC to increase transported volume to approach the Canadian-US traffic and enjoy higher volume at higher margins. If no extension is negotiated within the next ten years, their Mexican investment will erode, as the Mexican government will probably look for an alternative that can satisfy the transportation requirements of increased trade. 

 The same can apply to Ferromex, a 75% investment by Grupo Mexico and a 25% investment of Union Pacific. Ferromex covers all the traffic other than the Laredo crossing, representing 45% of total loaded container volume versus CPCK’s 55% share. 

 We should note that each company invests over US$250 million each year in the concessions, and that an investment that targets doubling the container crossing capacity would entail massive investments within the next ten years. At US$2 million dollars per mile of a high speed, single track new railroad, a 1,200 km new line running from Mexico City to Laredo can cost US$2.4 billion dollars. 

 Finally, Mexico should expand its port facilities. Present capacity is approximately 7.8 million containers per year, of which Manzanillo share is 3.3 million, Lazaro Cárdenas’ share is 1.1 million, Veracruz 1 million, Altamira’s 700 thousand and Ensenada and others the rest. Building new ports is an expensive endeavor. A new 500 thousand container capacity port can cost just under US$2 billion, such as Sorong in Indonesia or Map Ta Phut’s expansion in Thailand. The alternative is to expand the capacity of existing ones, but Veracruz in the Gulf of Mexico is surrounded by the city and Lazaro Cárdenas in the Pacific must increase its connectivity through additional roads and railways. While there is a possibility to expand smaller existing ports in the Pacific, albeit at a high cost, the only sizeable corridor to Europe is Veracruz. It may be required to build a new port with enough room for future expansion in the Gulf. Still, container capacity can by increased by 15% with a US$ 4 billion investment. Such expansions are required to import components from Asia and export goods to Europe and the Pacific Basin countries. 

It adds up, but it’s feasible 

 As we see from the needs and costs involved, a US$11 billion to US$15 billion investment in infrastructure in roads, rail, and ports, can set up Mexico to successfully take advantage of a Nearshoring wave that can increase exports by 35%. 

 As sizeable as that number is, it represents less than the investment that the government has made in the Dos Bocas refinery.  But the government does not have to incur the investment by itself. Mexico has a long history of successful investments through concessions when carefully planned and negotiated well.  Mexico’s potential to maintain its place as a competitive manufacturing center in an increasingly complex world can be achieved with the correct investments in the supply chain. The opportunity is here, Mexico deserves to leverage from it.