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Strained supply chains prompt industrial nearshoring trends

Jan. 24, 2023
Nearshoring efforts south of the border are impacting truck flows in U.S.-Mexico cross-border trades and ultimately putting more pressure on spot rates across border markets.

U.S.-China trade friction and ongoing supply chain constraints have encouraged more U.S. companies to consider relocating production capacity closer to home, where shorter supply chains can be more readily managed.

“Some companies, under the rubric of the United States-Mexico-Canada trade agreement (USMCA), have relocated production capacity to Mexico, where hard (rail and road accesses) and soft (trade and regulatory frameworks) have been long-established,” according to the Bureau of Transportation Statistics’ 2022 Transportation Statistics Annual Report.

That theme of shifting production capacity from China to closer North American markets was made clear during a recent Heavy Duty Aftermarket Week 2023 panel session in Grapevine, Texas. During an opening session, Rob Phillips, president and CEO of Phillips Industries, explained that 20 years ago, China was an ideal place to operate because costs were so competitive. Today, however, due to container costs that drive up the cost of freight, as well as tariffs between the U.S. and China, for Phillips, nearshoring manufacturing capacity to Mexico has made the most sense.

“If I look back in my 20-year career, the decision to move to Mexico was probably the best in my career,” Phillips explained during the HDAW panel session. “We’re very bullish on Mexico. I’m a huge fan of the workers’ level of experience from an engineering perspective. We don’t have labor issues; we have people that want to help.”

See also: Equipment supply chain poised to meet pent-up fleet demand in 2023

Phillips Industries, which manufactures electrical and air brake system components for the truck and trailer industry, continues to increase its footprint in Mexico to better serve the North American commercial vehicle market. The supplier recently expanded a 33,000-square-foot, 70-person plant to a facility that is now half a million square feet. The company is also building a telematics facility across the street from its Mexico plant.

Consequently, Phillips Industries shifted its manufacturing focus in China to serve markets solely in China and Southeast Asia when possible.

“We’ve done all we can to halt the production of goods coming to the U.S. [from China],” Phillips said during the HDAW panel session. “We still sell to Vietnam to avoid the tariffs coming from the China side, but the reality is when shipping, everything is about moving closer to improve quality levels and sight values.”

Jeff Porter, president and CEO of heavy truck component supplier Velvac, pointed out during HDAW that the company has tripled its footprint on both sides of the border over the last five years, allowing the supplier to be more cost competitive and more responsive to customers.  

“When you look at the key factors that influence where to put your production capacity, availability and cost of labor, or proximity to customers, proximity to supply base, all of those arrows kind of point to Mexico as being a really good choice,” Porter said.

Velvac’s primary manufacturing facilities have moved and been expanded five times, according to the company. Today, the company is headquartered in New Berlin, Wisconsin, a western suburb of Milwaukee, and its primary manufacturing facility is in Reynosa, Mexico, directly across the Mexico-U.S. border from McAllen, Texas. Velvac also has remote warehouse locations in California, Texas, and Ontario.

“One other observation I would make is the maturation of the supply base in Mexico,” Porter added. “Fifteen to 20 years ago, the main industries there were appliances and light automotive vehicles, and you really didn’t have much of a supply base for our mid-range items in this industry. But that’s there now to a much greater extent, and it’s allowing us to bring much of that back now.”

Nearshoring, reshoring, foreign direct investment trends

Just last summer, fellow Endeavor Business Media publication Industry Week reported some of the findings from global conglomerate ABB, which polled 1,610 executives in the U.S. and Europe about their capital spending plans in the wake of the COVID-19 pandemic’s arrival, the resulting supply chain chaos, and Russia’s invasion of Ukraine. Of the respondents, 37% said they plan to return production to U.S. shores, while a third said they would look to nearshore new operations.

There are also indications that U.S. companies are reshoring some production capacity and that foreign direct investments (FDI) are being made in new plant operations, according to the 2022 Transportation Statistics Report. For instance, largely encouraged by the U.S. CHIPS and Science Act, U.S. semiconductor manufacturers Intel, GlobalFoundries, and Micron have announced plans to reshore fabrication plants in the U.S.

See also: Trucking industry challenges with the semiconductor shortage

As for FDI in 2021, foreign companies invested more than $333 billion in acquiring, establishing, or expanding U.S. businesses, an increase from $141 billion in 2020, with $121 billion of the 2021 amount invested in manufacturing, according to the BTS report. The report also points out that FDI in a country at the nation’s borders can also induce a shift in supply chains.

“Mexico, for example, has received $11.5 billion from its top five FDI countries in the first quarter of 2022 alone,” according to the report. “FDI flows from the United States are far and above the investments made by the other four countries—exceeding their combined investments. An upward trend in U.S. FDI can be observed around the timeframe of the USMCA’s signing and implementation in 2020.”

This, according to BTS, will largely impact truck flows in U.S.-Mexican cross-border trades, given trucking’s predominance over other modes.

“When you look at the major truck-crossing zones, we’ve been seeing load post volumes increase about 25% a year for the last four years,” Dean Croke, principal analyst at DAT Freight & Analytics, told FleetOwner. “We were seeing more load post volumes coming in from Mexico—even before the pandemic.”

Croke added that DAT is seeing more load post volumes come out of freight markets like San Antonio, Texas, and Charleston, South Carolina. He added that a rapid increase in warehousing in San Antonio and the Dallas-Fort Worth area is related directly to Mexican imports.

“Nearshoring is a real thing, and we are seeing more of it in the spot market in particular,” Croke said. “There are pressures on spot rates across those border markets, so there’s a balancing act there for carriers.”

About the Author

Cristina Commendatore

Cristina Commendatore was previously the Editor-in-chief of FleetOwner magazine. She reported on the transportation industry since 2015, covering topics such as business operational challenges, driver and technician shortages, truck safety, and new vehicle technologies. She holds a master’s degree in journalism from Quinnipiac University in Hamden, Connecticut.

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