Issue #2: Nearshoring is Booming
With all this talk about crazy growth in Mexico, let's do a deep dive on what nearshoring means and why it's here to stay.
Level-Setting on Definitions
I post about nearshoring enough, I guess it made sense to spend some time on it in the second issue of the Silver Substack. Let’s start with some definitions:
Offshoring (pronounced: /ˈɒfˌʃɔː.rɪŋ/)
noun
The practice of relocating business operations, especially manufacturing processes, from one's home country to another country, primarily to reduce costs. This includes moving factories or production facilities to countries where labor, materials, and other operational expenses are cheaper.
Example: "Nike exemplifies offshoring by producing the majority of its products, intended for the U.S. market, in countries like Vietnam, China, and Indonesia. This strategy enables the company to benefit from lower labor costs in these regions. Additionally, sourcing raw materials locally shortens the initial stages of their supply chain, enhancing efficiency. This approach not only reduces production costs but also streamlines Nike's operations, contributing to its global success."
Nearshoring (pronounced: /ˈnɪərˌʃɔː.rɪŋ/)
noun
The practice of transferring a business operation to a nearby country, especially in preference to a more distant one. Nearshoring focuses on proximity to the original country, allowing for greater control, reduced travel times, and better cultural alignment compared to offshoring to faraway locations.
Example: "After producing the majority of their cars initially in the United States, Tesla has announced $15 billion worth of investment in Monterrey, Nuevo Leon to build their new Giga Factory and reduce costs for the cars they sell in the U.S.."
Why are “supply chain” and “nearshoring” such buzzy terms now?
There’s several reasons that have caused supply chain strategy to become a burning topic in the media and in board rooms across the world:
1. The Global COVID Pandemic
In early 2020, COVID-19 shut the world down and China took the worst of it. The delays were so pronounced, and the impact was felt for so long, from manufacturing to shipping, that it forced companies to rethink their supply chain footprints and bring their most critical manufacturing closer to home. For the United States, the logical move became Mexico.
Companies quickly pivoted in 2020 and 2021 to start sourcing materials and suppliers that were located in Mexico as they realized it would be easier to get to Mexico, easier to communicate with people where they had a higher likelihood of bilingual and bicultural talent, and similar timezones that further made life easier.
2. US-China Trade War
Trade tensions really started to balloon in 2018, where discussions for the USMCA were being formed, with rhetoric on social media and in the news media driving a deeper divide between the United States and China. There was very clear “America First” messaging around the USMCA, which was finalized on October 1, 2018, even if it ended up being beneficial to Mexico and Canada, it definitely wasn’t friendly to China.
The USMCA had a positive impact on North American trade, as car parts needing to be sourced within North America grew from 62.5% to 75% of the total makeup of a car. It also reduced tariffs on most industrial materials produced within the United States, Mexico, and Canada, and it strengthened intellectual property protections, which further encouraged companies to keep or move their manufacturing to North America.
3. Suez Canal Blockage
Who can forget Flexport’s Ryan Petersen jumping in to help fix the Suez Canal issue while we were all stuck at home staring at Twitter all day, back in March 2021? The images of Evergreen’s Ever Given stuck lasted a lot longer than the six days it was jamming up global supply chains.
This blockage caused container prices to skyrocket (and some forwarders’ revenues to skyrocket, temporarily), and further scared every transportation executive around the world. It’s estimated that these delays caused anywhere from $5-10 billion in lost trade per day.
4. Brexit
The United Kingdom’s decision to ditch the European Union in 2020 created some serious changes to how Europe operates. It caused companies to rethink how they bought materials from the UK and how they sold their goods to the UK. Countries around the world had to negotiate new deals with the UK.
Any time a change in trade terms happens, it opens up the opportunity to rethink supplier bases and you can bet companies reconsidered doing business with the UK given their new status.
5. Semiconductor Chip Shortage
Did anyone have any clue what a semiconductor chip was before we realized there was a massive shortage in 2020 and all of a sudden, car prices skyrocketed? You can’t make a single car without semiconductor chips. Smartphones, computers, TVs, gaming consoles, headphones, refrigerators, microwaves, and espresso machines (for all my carajillo lovers out there) all rely on semiconductor chips. Our whole world relies on them. Imagine a world without semiconductor chips? Definitely wouldn’t have OpenAI.
A Tesla Model S, for example, requires over 2,000 chips to operate. If you’re missing a single one, Tesla can’t continue the production line. The chip shortage caused OEMs to come grinding to a halt. When that happened, given how much of their production occurs in Mexico, it sent cross-border transportation into a tailspin as carriers relied on this volume heavily to feed their networks. While OEMs were paused, those carriers no longer had their headhaul freight to get their trucks moving.
Supply Chain Makes the World Go Round
When you think about it, every single thing that you use or touch every single day is only available to you because of supply chain operators and the technology that powers it. How things are made, shipped, and delivered gets more and more complex as the world evolves. There is so much technology that supports all the various aspects of a supply chain, from sourcing and managing suppliers and transportation to customs and trade compliance and all the other complexities that exist between.
Take U.S. Steel, for example, from when they start creating new steal out of recycled materials and natural resources to that steel becoming part of the airplane that I’m sitting in as I write this newsletter from my laptop that had been manufactured by Foxconn and Apple in China before being shipped by a UPS cargo plane to the United States and eventually ending up on a truck, and then a distribution center, and then a brown UPS truck and finally my doorstep.
As the world changes, supply chain footprints change
There are a TON of companies moving their manufacturing to Mexico. I recently sat on a panel with Jordan Dewart, President of Redwood Mexico, and Scott Shannon, VP of Cross-Border Solutions at CH Robinson, where we discussed a lot of these changes. One thing Jordan called out is that we’re just at the tip of the iceberg.
A lot of nearshoring news right now has focused on Monterrey, N.L., which is only about 155mi south of Laredo, TX, the highest volume border crossing city, handling about 32% of all US-Mexico trade. And a lot of the stories we’re hearing are about factories that are just now receiving investments, meaning they haven’t been built yet and we should expect to see a surge of volume in the coming years.
So many companies are investing just in the Monterrey area alone:
Tesla - $15B
Lingong Machinery Group (LGMG) - $5B
Trina Solar - $1B
Mattel - $1B
Unilever - $400M
Monterrey is a natural first option for manufacturing given its proximity to the border. Your cost for transportation is cheaper, it’s easier to get to Monterrey for business reasons, and there’s more bicultural talent in Monterrey than most other cities in Mexico, which makes it easier to do business there for Americans. I would expect to start seeing a lot more investment start to occur in the following markets:
Ramos Arizpe / Saltillo, Coah.
El Bajío (San Luis Potosi, Querétaro)
Mexico City area
Guadalajara
Juarez and Chihuahua
Tijuana and Mexicali
Reynosa and Matamoros
So where is the opportunity for investment?
I get a lot of calls on this topic and will address a few opportunities I see in the space:
1. Customs, Trade, and Security Compliance
Customs and trade compliance is different in every country. The way you import something into the United States is different than how you import something into Mexico. Shipping a load from Mexico to the U.S. has a different process than the opposite direction. Mexico is the U.S.’s number one trading partner but Mexico is also doing a LOT more business with China and most of Asia.
Companies in Mexico will continue to see new opportunites to grow and, with that growth, they’re going to be doing business with more trade partners. One wrong classification of a product can be costly, one bad actor in your supply chain can ruin your AEO/CTPAT status, incorrect incoterms can cause nightmares during a hot shipment. It’s not just about finding the right customs broker at that point, it’s about the technology infrastructure that all these customs brokerages and manufactuers rely on today.
I recently had the opportunity to invest in a startup called Zerio that is working to solve the AEO/CTPAT compliance challenges for manufacturers in Mexico. It’s the first time I’ve seen someone attempt to digitize this incredibly complicated process and I think Zerio has the opportunity to help digitize the cross-border supply chain.
2. e-Commerce Will Be Back
Yes, it’s been a bit slow for e-Commerce and 3PLs in that space. We know things are slow everywhere right now – it’s the calm before the storm. Freight markets are cyclical and we just need to power through the next 12-18 months, but I’ll leave it to Craig Fuller to handle the freight cycle predictions. More and more e-Commerce sellers are starting to turn to Mexico as a natural location to produce their products.
It’s complicated to bundle products and ship them cross-border and there’s certain providers who excel at that. While UPS and FedEx have long offered those bundled solutions, there’s new companies hitting the market who have raised serious capital to offer newer and more modern solutions. I see companies like XB Fulfillment as one of the fast risers in the space who are helping e-Commerce companies exporting from Mexico to the United States.
3. Physical Warehousing at the Border
When you manufacture products in Mexico, you ship it to the United States and eventually distribute it further into your network or to your customers. The more freight that flows from Mexico to the United States, all being produced at different speeds and sizes, the more we’re going to need to store some of that product at the border.
There’s a lot of work done when it lands somewhere like Laredo or El Paso. Often times, companies re-package, label, mix-and-match pallets, and re-distribute those goods to different parts of the United States and Canada. Some companies will produce a single product at a particular factory in Mexico, and let’s say they have three separate factories in Mexico producing three distinct products. They’ll send truckloads from each plant to Laredo and then split them out and re-combine into three combination truckloads that then distribute to various parts of the United States.
4. Better Technology for Industrial Manufacturing
Between the CHIPS Act that encourages manufacturing of semiconductor chips to move to the United States, which will result in their suppliers being in Mexico, and the rapid development of consumer technology devices, Mexico is going to need stronger high-tech support to be able to participate in this tailwind. There have been concerns about whether semiconductor chips can ever be produced in Mexico and it’ll take serious investment in both the technology and training.
There’s already several massive technology companies producing in Mexico today:
Flex is a massive electronics manufacturer based in Guadalajara
Lenovo makes laptops in Monterrey
Foxconn produces laptops for Dell and HP, televisions for Sony and Vizio, and semiconductor components that end up in a lot of Apple’s iPhone, iPads, and Macs
5. Better Logistics Infrastructure
The more production that happens in Mexico, the wider the delta becomes for that northbound-southbound imbalance. Northbound volume is increasing at a faster clip than southbound volume and, because of this imbalance, demand for northbound capacity will continue to increase. Carriers are going to get pickier about which freight they haul, freight brokerages who are investing in Mexico will need to use service and expertise as their differentiator as capacity becomes commoditized, and cross-border transportation will get even more stressful.
I remember a transportation executive at one of the largest beer distributors who produces product in Mexico telling me that Mexico has and will continue to be a black hole to most transportation people. Too much of their freight is still domestic U.S. for them to spend enough time to understand how cross-border freight works, and they’re likelier to hand that off to one of those logistics experts I mentioned. A lot of what happens today in cross-border logistics still happens via email, WhatsApp, and even LinkedIn, with a LOT of phone calls in between, and a good amount of finger pointing. While there are some standards, the space begs for better standardization.
Wrap it up Matt, you’ve been talking about nearshoring nonstop!
Let’s wrap this up with a few of my favorite recent blogs and podcasts:
One of my favorite venture capitalists, and one of the strongest supply chain investors, is Ty Findley at Ironspring Ventures. Back in August, he published the second edition of The Blueprint – Nearshoring: A Shift in LatAm Transport & Logistics. I highly recommend giving it a read if you’re interested in reading even more about nearshoring.
Since I talked a bit about Flexport in this post, and with global trade at the center of this discussion, while I may be a bit biased given he’s my brother, give Andrew Silver’s The Freight Pod episode a listen where he interviewed Bill Driegert, who originally taught me how to write macros in Excel back in 2008 while we were both at Coyote. (Apple Music | Spotify)
Our friends to the North get so upset when we don’t talk about Canada while talking about North American trade, so this one’s for you, Noah Sidenberg - congratulations on the work you’re doing to help expand Arrive Logistics into Canada! (FreightWaves article)
Reach out on LinkedIn or X/Twitter – let’s keep this dialogue going about cross-border freight and nearshoring! And if you’re as obsessed with cross-border freight as I am but haven’t joined the Cross-Border Connections 🇺🇸 ↔️ 🇲🇽 LinkedIn group yet, please do!