Two years ago, it looked like Mexico’s dominance of low-cost manufacturing would be lost forever to China. But as transportation and production costs have risen, China has become less of a bargain for many firms—American and foreign—who are now taking a second look at the U.S.’ southern neighbor.

 Last month, South Korea’s second-largest electronics manufacturer, LG Electronics, announced plans to expand production at its Reynosa, Mexico maquiladora, creating 1,200 new jobs in the process. In addition, the company will invest $100 million over the next three years in Mexico to increase annual production to $4 billion by 2012.

LG currently operates three facilities in Mexico: a plant in Mexicali that manufactures LCD and plasma televisions, which will be consolidated with the Reynosa plant, and another in Monterrey for manufacturing refrigerators and microwave ovens.

Other companies with maquiladora operations in Reynosa have also announced expansion plans this year. German medical products company BSN Medical said in April that it was moving 163 jobs from a facility in Florida to Reynosa; jukebox manufacturer Rowe International Corp. announced a relocation of 100 positions from its Michigan facility to the city; while Corning Cable Systems has also shifted some production there.

At the same time, Sony is boosting its workforce in Tijuana by 1,500 positions, although the news was tempered somewhat by the company’s decision to close an LCD television manufacturing plant in Mexicali—one of five plants being shuttered worldwide. Nonethless, Mexican officials are encouraged by the move, which represents a $10 million investment for Tijuana and an expansion of the company’s workforce to 5,000 employees from 3,500 by year’s end.

Likewise, Mexican manufacturers are beginning to feel more hopeful about the economy as the steep declines in output have begun to level off.

“The most critical part of the slump has passed,” said the corporate treasurer for Mexico City-based Industrias CH SAB, the country’s largest steelmaker, last month. The company’s customers include Caterpillar, U.S. Steel Corp., and Honda Motor Company.

Rafael de la Fuente, an economist with BNP Paribas in New York, remarked that a recovery in U.S. manufacturing, which declined in June at its slowest pace since August, will dramatically help Mexican manufacturers of steel, petrochemicals, and other goods because the trade ties between Mexico and the U.S. are so deep: Last year, 80 percent of Mexico’s $291 billion in exports were destined for the U.S.

Ready for a recovery

The current economy notwithstanding, there has been a noticeable rise in activity along the southern border as companies prepare for a return of robust business, while transportation providers and governments are at work making sure the infrastructure is in place to handle the long-awaited uptick in trade.

Grayling Industries, an Alpharetta, Georgia-based manufacturer of asbestos abatement equipment, such as gloves and decontamination units, assembles the majority of its products in a 60,000 square foot, ISO-certified maquiladora in Juarez, Mexico. Most of the material used for its products comes from the U.S. and is shipped in full trailers and ocean containers, or by LTL, to its Juarez plant. Approximately 80 percent of the finished products are then sold to U.S. customers, representing about 600 full truckloads that cross over into El Paso, Texas each year.

According to Carlos Rubio, director of finance and operations for Grayling, the company turned to technology enhancements to optimize its supply chain and weather the recession.

“We started asking ourselves, ‘How can we use technology to increase cash flow, reduce costs, and create a win-win situation for ourselves and our suppliers?’”

Grayling began with its freight company, ProLogistics, which rented a warehouse in El Paso, Texas to better manage Grayling’s freight and inventory under one roof. The next step, says Rubio, was to find a Web-based system that could interact with Grayling’s ERP, “and I ended up finding SmartTurn.”

SmartTurn’s Web-based, on-demand inventory and warehouse management solution was a perfect fit for Grayling and the payoff was substantial, resulting in real-time visibility of what was in the El Paso warehouse at all times, and overall cost savings for Grayling of $83,000 a month due to improved operations along with a one-time savings of $300,000 to $400,000, estimates Rubio.

 In the meantime, key transportation arteries between the U.S. and Mexico are also getting upgrades. For starters, a new international bridge between Mission, Texas and Reynosa, Mexico is scheduled to open in October. The $168 million Anzalduas International Bridge will be one of the newest and largest southern border crossings, and equally important, will connect with I-69, which will eventually connect trade routes from Mexico and Latin America to the U.S. and Canada.

In order to strengthen its cross-border capabilities, C.H. Robinson, one of the largest non-asset-based 3PLs in the world, announced last month that it had acquired certain assets of International Trade & Commerce (ITC), a U.S. customs brokerage company specializing in warehousing and distribution, headquartered in Laredo, Texas. The acquisition adds to C.H. Robinson’s presence in Mexico, where the company maintains offices in Mexico City, Guadalajara, Monterrey, and Nuevo Laredo.

On the rail side, officials from Union Pacific Railroad and U.S. Customs and Border Protection (CBP) opened a new rail inspection building in Eagle Pass, Texas. The building will provide CBP officers with a one-stop location to process information and inspect incoming cross-border trains.

At the same time, Ports America officials are hoping a new Pacer International service will boost business at the Puerta México Intermodal Facility in Toluca, Mexico. In May, Pacer launched six-day a week direct rail service to and from the terminal to handle automotive, third-party domestic, and other trans-border traffic.

The non-stop, in-bond service parallels Pacer’s existing PacerMex ramp points throughout the U.S. and eastern Canada.

Operated by Ports America, the Toluca terminal is designed to handle 150,000 containers and 2 million tons of cargo annually. The facility has direct access to Kansas City Southern de México S.A. de C.V.’s “N” line.

The benefits of shipping by rail are not lost on Steve Hamilton, CEO of ChemLogix, who believes that intermodal inbond transportation is the best way to go when moving freight between the U.S. and Mexico, given the heightened safety concerns brought about recently by the illegal drug traders and cargo thieves, as well as customs delays and poor road conditions.

“Intermodal inbond transportation offers a safer, greener, and more cost-effective alternative to trucking,” says Hamilton. “It basically means putting goods in a container and shipping via rail from a U.S. point to a Mexican point (or vice versa) without stopping at the border.”

Transit time via rail between Chicago and Mexico City is about four to six days, says Hamilton, which ends up being about the same as trucking.

“For over a year, ChemLogix has successfully used this mode of trans-border transportation for bulk commodities in tank containers as well as traditional packaged freight in box containers. In addition to providing an easier option for transporting cross-border deliveries, intermodal inbond is much kinder to the environment,” he explains.

Raising concerns in Canada

By contrast, security issues like those expressed by Hamilton have not been a factor when it comes to trade between the U.S. and Canada, as experts emphasized in a recent report commissioned by the Brookings Institution that criticized the manner in which U.S. officials apply a “one size fits all” approach to border security.

“We need a constructive way to distinguish Canada and Mexico in terms of policy,” stressed Christopher Sands, a senior fellow at the Hudson Institute.

There’s “no denying that the border is less efficient than it was before,” agreed David Bradley, CEO of the Canadian Trucking Alliance. Worse yet, the inefficiencies are being masked by lower trade volumes brought about by the global recession, he said, and will resume full-force once trade volumes return to normal. “Creating a more secure, efficient, and flexible border will require the restoration of a risk assessment focus, real value-added benefits from participation in low-risk trade programs, appropriate levels of inspectors, and strategic investment in infrastructure—and not just bricks and mortar, but systems as well,” Bradley explained.

And if concerns over tighter border security aren’t enough, the ‘Buy American’ provision contained within the American Recovery and Reinvestment Act (ARRA) has rankled trade interests on both sides of the border. In June, Canada’s 13 consul generals met with American reporters to express their growing anxiety about the legislation, which has already canned a number of Canadian contracts, partly over confusion about what’s allowable and what’s not under the provision.

Specifically, while the provision states that stimulus money can only be spent on American-made iron, steel, and manufactured goods, there is an exception for countries (like Canada) that have an international trade deal with the U.S. However, the provision has caused some confusion for states and municipalities that, of course, aren’t covered by trade deals, and are therefore left wondering if they can buy only wholly U.S.-made products. News reports state that in various U.S. cities, mayors have canceled contracts or questioned bids. At a Marine camp in California, for instance, wastewater equipment made by IPEX, a Canadian firm, was ripped from the ground.

“The last thing I want to do is start a trade war, but I’m afraid it’s already begun,” said the mayor of Halton Hills, a western suburb of Toronto. In June, Mayor Rick Bonnette convinced the Federation of Canadian Municipalities to pass a resolution saying that, in 120 days, towns and cities could begin barring materials from any nation that refuses goods from Canada.

Indeed, worries about the growing protectionism in the U.S. are going to be high on the agenda when the “Three Amigos”—President Obama, Mexico’s Felipe Calderon, and Canadian PM Stephen Harper—hold their traditional trilateral summit, which is tentatively scheduled for the second week of August in Guadalajara.

Nonetheless, the undeniable strength of the U.S.-Canada trade relationship underlined by the massive exchange of goods and services between the two countries isn’t about to disappear anytime soon. As evidence, over the summer, Southwest Airlines took its first step into international cargo operations with Canada’s WestJet, with initial service starting with four cities: Calgary, Edmonton, Toronto, and Vancouver.

“While we eventually hope to be able to transport cargo throughout both airlines’ entire route network, this initial phase will only allow for the export of cargo from the U.S. to Canada,” stated Southwest. “WestJet makes for a natural first partner for our entrance into international cargo shipments given our positive working relationship and eventual plans to offer passenger code-share service with the Canadian airline,” the carrier added. wt

Sidebar: Mexico's Economic Outlook

Simply put, the current business environment in Mexico remains tough, according to Atradius, the global trade credit insurance firm. 

“Operating in an economy heavily dependent on trade with the U.S., businesses in Mexico have been hurt both by the devaluation of the Mexico peso against the U.S. dollar and shrinking exports to Mexico’s main commercial partner. Sectors that are particularly affected include automotive components and assembly operations, as well as consumer electronics and similar segments undermined by weakening U.S. consumer spending,” said the firm.

Nonetheless, the future looks a bit more promising. “Mexico’s financial position remains solid in the short-term as the government has run a prudent fiscal policy in recent years, reflective of the country’s investment grade ratings and reinforced by a newly granted $47 billion credit line by the IMF that was provided under very flexible terms.”

Furthermore, “The Mexican government has injected substantial stimulus into the domestic economy, equal to a projected 1.5 percent of GDP for 2009, in order to dampen the impact of the slowdown. However, the longer economic conditions, and oil prices, remain depressed the more difficult the situation will become for Mexico’s finances.”

For more information, visit Atradius at www.atradius.us.