Globalization has been driven in part by Western firms outsourcing manufacturing to Asia, but the long-term viability of shipping across the Pacific Ocean is under question given high logistics costs and rising wages in those markets.
That’s according to Texas A&M University’s Supply Chain Systems Laboratory, a research arm of the school’s industrial distribution program. The organization is putting together a consortium to study manufacturing trends and how to improve throughput in the Mexico-Central America-Texas region.
Dr. Barry Lawrence, director of the industrial distribution program at Texas A&M University, spoke with MDM recently about the critical factors affecting trade and growth in Mexico, why he thinks labor costs are losing out to logistics, why China and other low-cost countries across the ocean may not always be a viable No. 1 option for production, and business opportunities on the other side of the U.S. border for U.S. manufacturers and distributors.
Lawrence says that U.S. firms have an opportunity to create a symbiotic relationship with Mexican firms by selling products to help them in production or by taking the products into the U.S. for next-level manufacturing.
MDM: Why do you believe labor costs are losing out to logistics in the decision on where to move production?
Barry Lawrence: The labor rates will tend to equalize over time. Salaries will go up in China. In Shanghai, for example, you could train a worker, the worker could work for three years under a contract, and then after three years they go up to the highest bidder. Many companies didn’t anticipate this.
They also didn’t predict the cost of actual training. The expectation was that the training of Chinese workers would be similar to training a U.S. worker or a little higher. What they didn’t factor in was culture, a different belief system, and so on. Of course some did, but it was often underestimated.
The other problem is there’s no middle management. China has not had middle management because they haven’t had a capitalistic society. So you have to send an expat over there, which costs a lot of money, to train the middle management layer. And then those who are trained -again -might be taken away by other companies.
The Chinese government’s answer to this is that they have to move away from the big ports, and that’s why they’re trying to push production out into the countryside.
But as they do that they’re going to incur even higher logistics costs. And the training issue will grow even more extreme. Because of this, we believe that labor costs are gradually going to overwhelm the logistics equation.
MDM: How is this related to the shift to regional manufacturing in Mexico?
BL: Mexico and the U.S. both seem poised for a manufacturing boom on both sides of the border. A manufacturing boom in that area is more beneficial to the U.S. economy than to continue to ship jobs to China.
The real solid proof of this is that Chinese firms are now coming to Mexico to do production. That tells you that the Chinese have recognized that shipping across the Pacific Ocean doesn’t make sense. This is something the U.S. firms should take note of.
Mexico’s manufacturing sector has been growing rapidly. The automotive sector is one of the biggest growth areas, and electronics is huge. Aerospace is on the move now and even medical and other sectors are growing.
MDM: How do labor costs compare in Mexico?
BL: They are below the U.S. but not below China -that’s the tradeoff companies are examining when deciding whether to open in China or Mexico or the U.S. But I believe they have missed the point.
MDM: Is it just Mexico, or is there growth in Central America as well?
BL: Right nowof their own. Panama has already got a successful free trade zone for example.
MDM: What logistical challenges exist in Mexico?
BL: The issue here is the roads in Mexico. It takes a long time and is difficult to get a road built in Mexico. On the Texas side, the problem is congestion. There is a lot of traffic on the Texas highways.
There are also major shortages in truck drivers on both sides of the border. A concern the Mexicans have if Mexican drivers were allowed to drive into the U.S. is that American trucking companies would try to lure them away. Right now they are restricted from driving their trucks into the U.S.
MDM: What are the challenges with customs?
BL: Crossing the border can take anywhere from less than an half an hour at off-peak hours to as long as six hours. During that period the driver has to stay with the truck and is not even able to go to the restroom. If you can imagine 18-wheelers sitting on a bridge idling for six hours, you can imagine the amount of waste associated with that.
The problem is there’s not enough capacity for those peak hours. The customs process may have to be redesigned -or capacity has to be increased. Customs is open 12 hours in the U.S. -if you go to China, customs runs 24 hours.
No one would suggest customs should be scaled back or that we should expose our country to any dangers. But process improvements that still protect the integrity of the U.S. border and at the same time make customs a faster pass-through -those are being investigated and implemented on a regular basis.
MDM: How optimistic are you in the consortium’s ability to make changes in these areas?
BL: The problem is if you are going to be able to move toward making improvements, you have to have an independent party to say we discovered this, and it should happen this way. It arms the people who want to bring forward the infrastructure improvements.
We’re suggesting a study be done to create an optimal configuration for the region -we’re looking at what could be so that those that would like to make improvements can make decisions based on that.
As far as customs go -I can’t say for certain. The customs service and the U.S. government want to make improvements and have passed a number of measures to smooth the process. They like any organization should be looking at what the next thing is that they could do.
Our study will help them understand the issue from a business viewpoint -from their customers’viewpoint. An analysis that puts numbers to the page from an independent third party could be helpful to them in determining which processes they should improve.
MDM: This consortium falls under the goals of the Texas A&M Global Research Center in Monterrey, Mexico. Can you tell us a little about that project?
BL: The research center is there to help distributors and manufacturers improve throughput in this region. As part of this research center, we are implementing projects to help companies be more successful in manufacturing and logistics throughput between the two countries.
For more information on the Mexico-Texas Trade Corridor consortium, or how you can participate, click here to download the pamphlet or call (979) 845-1463. The consortium will bring together manufacturers, distributors, logistics providers and government entities to understand how to optimize opportunities in this area.
Dr. Barry Lawrence holds the prestigious Harvey Hubbell Professorship in Industrial Distribution at Texas A&M University. He manages the Supply Chain Systems Laboratory and Global Research Center in Monterrey, Mexico. As a faculty member and director of Texas A&M’s Industrial Distribution Program, he is involved in graduate, undergraduate, and professional continuing education teaching activities, funded research projects, journal publications, academic society meetings and publications, and industry presentations.
Mexico is the primary area. There are companies opening in Honduras, Panama and Costa Rica, especially. In northern Mexico I can ship by truck through Laredo, TX, into the U.S. But on the other hand I could be in Honduras and ship it by ship and in three days it’d be in Houston.
The Panama Canal is restricted so large container ships can’t go through it. But that will change in 2014. I believe at that time there will be an escalation of companies that will go to Central America.
MDM: What are the opportunities in Mexico for U.S. companies?
BL: For example, about 15 percent of what is exchanged in goods between U.S. and China is China buying from the U.S. With Mexico it’s about 35 percent. As income grows in Mexico, we can expect that number will continue to increase. Also there are chronic shortages of materials in Mexico that the U.S. could serve if we were to build this relationship in a positive fashion rather than the way we have to date.
A simple example is fabrication. There is a shortage of fabricators in Mexico. The result is that a lot of firms are having a difficult time getting supplies.
You could build additional fabricators in Mexico but meeting U.S. regulations on a lot of these materials is not something Mexicans particularly want to do. So it’s more likely the fabricators would be in the U.S. near the border and shipping into Mexico.
Another area is technology. The U.S. has leading-edge technology, for example in automation, which is likely to grow in Mexico. There are many products that Mexico does without simply because distributors are not calling on them.
MDM: Then do you think the market opportunities in Mexico are largely untapped by distributors?
BL: It’s a major opportunity for selling into Mexico. As the manufacturing boom goes forward, look for opportunities in Texas and California as new markets open up.
One of the companies already in the consortium has said they want to open up distribution facilities along the Mexican border to serve the maquilas. They currently serve the Texas region, but are being hit with requests from maquilas without even making an effort.
MDM: What’s the impact of North American Free Trade Agreement (NAFTA)?
BL: NAFTA did really trigger the manufacturing boom in Mexico and it’s one unlike any that Mexico has ever seen. Probably as much as 30 percent to 40 percent of manufacturing jobs can be traced to maquilas and if you add in companies not classified as maquilas, but do similar work, the number jumps even higher. It’s led to a lot of trade and logistics and supporting activities in the U.S. Southwest.
If NAFTA were to be scaled back, it would have a devastating impact on the Mexican economy and would undoubtedly affect the U.S. But it would also decrease the opportunities for the U.S. to attract manufacturing to the Southwest and bring manufacturing back from China.
MDM: How are ports driving manufacturing activity?
BL: The ports are a big driver of activity. Many of the maquilas moved to western Mexico to cities like Mexicali and Tijuana to take advantage of the Los Angeles port. But with L.A. under constraints and Panama Canal restricted on large shipments, that has driven activity to central Mexico.
Manufacturing has gone to central and northeast Mexico to be served by ports like Lázaro Cárdenas and Altamira.
There’s a new port planned for Baja California called Punta Colonet. It will be a major port of significant size -to draw down pressure on L.A. And the Panama Canal is due to be expanded by 2014, which at this point means we could see yet another shift. It could be when Central America becomes more important. Honduras, Costa Rica and Panama would run significant ports and manufacturing zones