We're already seeing an uptick in manufacturing activity in Mexico, as companies react to rising factory wages in China and the complications of sustaining lengthy supply chains. In fact, Mexico threatens to rob U.S. manufacturing of some of its luster, and undercut the surge in American jobs that was supposed to result from the reshoring trend.
At the same time, Mexico is busy bulking up its port infrastructure, with the government sinking $5bn into expanding facilities on both the Pacific and Gulf Coasts. With congestion always a concern at U.S. ports, especially on the West Coast, Mexican ports could provide a tempting alternative for shippers in the U.S. interior.
Mexico’s ports are growing fast. According to recent research by Cushman & Wakefield, they led the North American container trade in 2014 with year-over-year growth of 3.5 percent. That compares with 2.6 percent for ports in the U.S., and 1.6 percent in Canada. (Keep in mind that U.S. port growth figures are generally from a larger base than those of Mexican ports. But the latter are nevertheless showing impressive results.)
Driving the trend is a big increase in import volumes supporting production in the burgeoning automotive and aerospace sectors, according to Gonzalo Gutiérrez, executive director for Monterrey and the northeast region within the Industrial Brokerage Services arm of Cushman & Wakefield. Mexico ranked seventh in light vehicle production in 2014, turning out a record high of 3 million vehicles.
There are roughly 80 formal ports throughout Mexico, but most of the action of late has been concentrated at four facilities: Manzanillo and Lázaro Cárdenas on the West Coast, and Altamira and Veracruz on the Gulf. Development plans include a tripling of capacity at Veracruz over the next 25 years and a new deepwater container terminal at Lázaro Cárdenas.
In all, Mexican President Enrique Peña Nieto is pushing 25 projects that will dramatically expand the country’s port capacity. Gutiérrez says the work promises to increase capacity of the national port system from its current level of 290m tons to 500m tons by 2019.
Of course, no port operation today can survive without good road and intermodal connections to the interior. Lázaro Cárdenas, which is currently handling around 1m twenty-foot equivalent units (TEUs) a year, already has an on-dock rail facility operated by the Mexican arm of the Kansas City Southern Railway Co. Not only does it provide the shortest route to Mexico City, it offers a direct intermodal link to the southern region of the U.S. Gutiérrez says KSC offers “the fastest seamless rail line to Houston and Dallas.” Development at Lázaro Cárdenas should serve to generate increased merchandise volumes along that route.
Manzanillo, Mexico’s largest port, handled around 2.4m TEUs last year, an increase of 55.8 percent over five years earlier. As the country’s only port that can accommodate double-stack railcars, it provides for efficient intermodal movements as far as the Texas border, 1,000 miles distant.
“With nearly 90 percent of Mexico’s trade being with the United States, Manzanillo’s access to the western coast, as well as Houston via rail and other eastern seaboard destinations via the Panama Canal, is seen as key to attracting investment,” Cushman & Wakefield says in its research note.
One reason that automotive companies are concentrating production in Mexico’s center states is the ability to move raw materials by rail along the Nafta Super Highway, all the way to Chicago. At least some of the major ports in Mexico feature foreign trade zones that allow shippers to defer or reduce import duties, Gutiérrez notes.
In evaluating the competition, Mexico must also look southward. The long-awaited addition of a third set of locks at the Panama Canal is already expected to have a major impact on container activity at U.S. West Coast ports. With an expanded canal able to handle vessels of up to 13,000 TEUs, the all-water option from Asia to the U.S. East Coast will become more economically viable for shippers.
Without question, an expanded canal will force Mexican ports to up their game. “They need to become more modern in terms of administration,” says Gutiérrez. Currently the largest ships calling Mexico are around 8,000 TEUs; new development will push that limitation to 10,000 TEUs, he says.
Gutiérrez sees few obstacles to the growth of Mexico’s ports, even taking into account the ups and downs of economic cycles. Despite the dominance of the ports of Los Angeles and Long Beach to the north, and the competitive threat of the Panama Canal to the south, Mexico still offers “a geographic benefit for companies in Europe and Asia.”
Lower labor costs, at least compared with the U.S., are also an attraction for shippers and carriers. Despite the fact that Mexico’s dockworkers are unionized, the country has gone at least 85 years without a port strike, Gutiérrez says. That fact alone could prove to be a draw for American importers and exporters, who have grown weary of the work stoppages and slowdowns that periodically plague U.S. West Coast ports.
That said, Mexican ports have one key disadvantage compared with their U.S. counterparts. Sailing times from Shanghai to Lázaro Cárdenas are four to five days longer than to Los Angeles and Long Beach. Still, there should be plenty of cargo to go around in years to come, and Mexican ports are determined to grab their share. The degree to which their business will come from the U.S. versus Mexico’s domestic markets remains an open question.