On the Move: Why Mexico Is The Hot Spot in Supply Logistics

On the Move: Why Mexico Is The Hot Spot in Supply Logistics

Movement_to_Mexico_blog.jpgIt wasn’t too long ago when the epicenter of growth and excitement in the automotive production and supply chain sphere was Asia. China, Korea, and other neighboring countries were at the forefront of innovation and expansion for OEMs and suppliers looking to stake their claim in the increasing global supply network. And while this conception of Asia as the next frontier in manufacturing and supply logistics still persists, industry insiders are quickly coming to realize Mexico is in fact the next hot spot in the automotive supply landscape.

If you’re still shaking your head at the prospect of Mexico as the place to be in the automotive manufacturing and demand world, consider these startling statistics. As of the end of 2015, Mexico was the world’s 8th largest automaker and the 4th largest exporter of parts and components for the global automotive industry. Light vehicle production hit 3.4 million units in 2015 and analysts predict that number will increase to roughly 5 million units by 2020. 

And that’s not taking into account the potential for substantial growth. Due to an influx of automakers and suppliers establishing production facilities and hubs within the country’s borders, parts and unit production is expected to increase by nearly 10 percent during the next five years, according to industry data and analysis firm PricewaterhouseCoopers.

These numbers beg the question: Why? What is it about Mexico that is making it such an attractive location for auto makers and supply logistics companies to establish themselves in an effort to remain competitive in today’s modern production and supply network? Well, let’s consider the following:

  • Infrastructure: Currently, Mexico maintains 117 deep sea/costal ports with the capacity to house and transport large containers. The ability to accommodate the scale of ships and containers necessary for large-scale production is a key driver for companies looking to leverage competitive advantages not only in North America and Canada, but also in emerging markets in South America and Mexico itself. Mexico also boasts thousands of miles of railways that could possible allow for more cost-effective, intermodal freight options into North America and other neighboring markets.
  • Free trade agreements: Mexico is a major player in 10 key free trade agreements allowing access to 45 countries across the world - a consumer base totaling more than 1.2 billion people. The ease of restrictions, tariffs, and taxes on global trade uniquely positions Mexico as a center of production and supply logistics as companies can freely move products, production, and labor without becoming bogged down in the complexities of country-by-country trade laws.
  • Government incentives: The Mexican government, in an effort to bolster the country’s status as a major center of operations for automakers and suppliers, offers incentives and tax breaks to OEMs and tiered-suppliers to establish productions and facilities within the country’s borders. As a result of these incentives, more and more auto companies are setting up shop in Mexico. Currently, the country hosts 15 assembly or manufacturing facilities with more to come from companies like Audi, Toyota, and others.

Now, all this is not to say Mexico is an emerging market for OEMs, suppliers, and distributors without its share of problems and complications. 

While we just discussed Mexico’s wealth of railways, a good percentage of this railway infrastructure will need significant updates to handle the rail traffic companies will require in order to make Mexico a value-added location - in addition, new rail lines will also need to be constructed to supplement existing tracks, and a better bridge between rail and truck shipping lines for more efficient intermodal freight strategies. Though the government recently pledged more than $4 billion dollars to help refurbish and construct new port and rail infrastructure, some industry analysts remain skeptical about whether this initial investment will be enough. Rail carriers such as Union Pacific are also taking steps to faciliate more efficent shipping by investing in border-area facilities and hubs. 

It’s also important to note Mexico’s struggles with border crossing protocol - both for personnel and products - and intra-border security issues, which if unchecked or unaddressed, could potentially result in complications in the flow of products or even facility shutdowns should the political or security climate of the country waiver or collapse. While the Mexican government is taking strides to ensure companies will have peace of mind when it comes to moving products across borders and overall security, the risk of bottlenecks and other disruptions is one companies must decide whether to undertake, and if the demand and supply benefits will outweigh the potential for losses. 

But what does this mean for the outlook of the global supply chain?

Does Mexico establishing itself as a leader in the automotive supply stream mean anything? The answers vary depending on the source, but some outcomes appear universal no matter who you talk to.

First, the centralizing of production and supply operations in Mexico means companies will have to localize and source materials on a more micro-level to reduce costs and remain competitive - this also means companies must offer more autonomy to local officers, partners, and vendors to maintain cost-effective and productive supply strategies.

Second, with more OEMs opening facilities in Mexico, the potential for increases in Just-In-Time sequencing and production is a very real possibility as companies must devise methods of operating lean and efficient demand and planning streams. Incorporating JIT strategies will also require companies to implement more integrated demand and planning solutions with sequencing, order-slotting, forecasting, and analysis capabilities for planners and mangers to visualize and execute actions in real-time.

All added up, it’s difficult to see how Mexico could not be considered as part of the next wave of global automotive production and supply. While it may seem like a seismic shift in the current manufacturing and demand paradigm, companies who are prepared for it will not doubt find the next few years an exciting and profitable experience.

flexis offers a variety of integrated demand and supply planning solutions necessary for facilitating the production and movement of parts from a holistic, global perspective. Sequencing, order-slotting, and forecasting capabilities offer companies the tools to remain competitive wherever the global supply chain takes them.

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