Faced with Challenges, We Must Remain Optimistic About Nearshoring
Published on Oct 2, 2023
By Jordan Dewart - President, Redwood Mexico
Many US companies are investing in nearshoring initiatives in Mexico, and Redwood Mexico is spearheading the execution of these activities. We handle more than 25,000 cross-border shipments per year, have established relationships with over 200 carriers, and operate six strategically located facilities on both sides of the border. Redwood has seen firsthand the benefits that nearshoring has delivered to our customers.
Today, however, nearshoring is characterized by some challenges. While the demand for affordable cross-border trucking capacity continues to climb, there’s a growing disparity between domestic and cross-border trucking rates.
According to data from the most recent edition of the US Department of Agriculture's Mexico Transport Cost Indicator Report, rates for shipments crossing the Texas-Mexico border average $3.08 per mile. Meanwhile, DAT.com’s trendline report from June shows a US domestic average of $2.09 per mile. This 68% disparity between domestic and cross-border shipping rates is creating concerns about future disruption as manufacturers move closer to their end markets.
Shippers Are Confronted with Obstacles in Four Areas
What’s behind the huge disparity in rates today? At Redwood Mexico, we’ve identified four distinct sources of disruption for cross-border shippers:
Rising interest rates are interfering with capacity expansion. Logistics service providers (LSPs) and shippers are complaining about high interest rates in the US — roughly 6% — but rates are double that in Mexico. As a result, Mexican carriers are not rushing to expand their fleets while they’re at capacity. This hasn’t created an unrecoverable issue yet. But, if proper investments are not made, we might see disruptions on the roads similar to what we experienced at the ports in 2020 through 2022.
Mexican driver shortages are putting the brakes on growth. Another obstacle to cross-border capacity growth? The Mexican driver shortage is approaching 60,000 available jobs. Security concerns are enormous today, with many drivers holding out until safer conditions prevail, exacerbating shortages. Cargo theft was up 11% for the first half of 2023, compared to the same period in 2022. This lack of safety is creating issues both on the rate and driver recruitment sides. Just how big is the problem? Jose Cardenas, VP of Transportes Innovativos, reports that 20-25% of his fleet is holding out due to security concerns.
Rising diesel fuel costs are driving up rates. Yet another issue is rising diesel costs. In Monterrey, diesel prices average 23.2 pesos/liter (roughly $5.15/gallon in USD). In Nuevo Laredo, diesel fuel costs 22 pesos/liter (roughly $4.89/gallon in USD). With the drive from Monterrey to Laredo, Texas, accounting for nearly 150 miles, at 6 miles per gallon carriers covering this lane are paying over $250 USD in round trip diesel costs alone. This inevitably is driving up per-mile fees and interest rates for cross-border shippers and LSPs.
Unfavorable conversion rates are taking a financial toll. Today there is an unfavorable conversion rate from the US dollar to the peso that’s unfairly inflating Mexican shipping rates. As cross-border commerce continues to grow, this disparity between the dollar and peso should lessen. Current shipping rates and interest rates for LSPs and shippers are exorbitant. But shippers who are asking for their rates to be lowered are being urged by Mexican carriers to increase rates — and lock them in for the next three years to avoid seeing market rates skyrocket.
Redwood Mexico Is Driving Solutions
How can cross-border shippers overcome these obstacles and remain optimistic about the proven benefits of nearshoring?
There is no question that cooperation from both federal governments is needed to improve highway safety and security. Cargo theft is only part of the problem. Unsafe highways lead to heavier traffic during daylight hours, fewer drivers willing to get behind the wheel, and rising insurance costs.
Government agencies also need to reduce waiting times by streamlining clearances, inspections and other customs processes at the border. I’ve personally spoken with customs and port officials on both sides of the border, and the willingness to cooperate is there. Both countries need to eliminate red tape and produce innovative solutions, such as expanding the FAST program to the Mexican side of the border and increasing joint inspections.
However, shippers cannot wait for this problem to fix itself or rely on outside relief. As we often tell our customers, “The status quo will not cut it” and everyone must be an active participant in the solution. Redwood has found that the best way to improve efficiency is to partner with our customers and all members of the supply chain to identify bottlenecks, optimize load routes, shorten loading and unloading times, and speed documentation creation, transfer and visibility.
As a leading cross-border solution provider, Redwood Mexico is uniquely positioned to help companies capitalize on the promise of nearshoring, despite the current obstacles facing cross-border shippers. We provide cross-border capacity solutions, warehousing and distribution, US customs clearance, Mexico customs clearance, industry-leading transportation management solutions, and physical Redwood assets that assist in moving freight as quickly, efficiently and cost-effectively as possible.
Even with the challenging road ahead of us, I urge global companies not to give up on nearshoring. Just make sure you have the right partner along for the journey.