Nearshoring in the Railway Sector: How Proximity Drives Efficiency

By @dM1nBlog
Whatever economic sector you’re in, you’ve probably heard the term nearshoring in recent years. This strategy allows companies to expand their operations and reduce costs by relocating part of their production to third parties, sometimes in other countries. This move can help businesses grow into attractive regions for the brand and make local companies more competitive in the global market. In Mexico, nearshoring is gaining traction, and the railway industry is no exception, as international trade is a key pillar for railways.

Nearshoring in Mexico

One of Mexico’s major economic strengths is its immediate connection with the United States, one of the most active commercial borders in the world. Companies like Union Pacific cross daily, alongside Mexican concessions GMXT and CPKC. Union Pacific has a long history of transporting cargo in both directions, benefiting from Mexico’s strategic location since the North American Free Trade Agreement (NAFTA) came into force in 1994. The company handles import and export through six intermodal terminals, including the crossings at Calexico, El Paso, Nogales, and Eagle Pass, while collaborating with CPKC in Laredo and Brownsville.

Union Pacific saw a 14% revenue increase in 2022, with profits nearing $24.875 billion. The company has leveraged nearshoring as part of its business strategy for several years. For example, it invested in an operations center in Eagle Pass, where both U.S. and Mexican customs authorities work together. This setup has optimized time, improved processes, and reduced costs.

Following this successful nearshoring model, Union Pacific launched a $600 million investment program for commercial facilities. The company now primarily moves containers filled with petroleum products, construction materials, grains, coal, beer, and more.

In another nearshoring move, CPKC created the “T-MEC Train,” a collaboration between Canadian Pacific and Kansas City Southern that operates in the United States, Mexico, and Canada. This eliminates the need for trucks and allows for 100% rail transport of goods.

In conclusion, nearshoring in the railway sector not only reduces time and costs but also benefits the environment. Rail transport emits far less pollution than trucks, and some companies are taking sustainability seriously by investing in electric railways. Union Pacific, for instance, has earmarked $1 billion for upgrading its locomotives.

Challenges of Nearshoring

Although Mexico is making the most of its geographical advantage to expand nearshoring, there are still improvements to be made, both to help companies grow and to provide security for their million-dollar investments. For example, offering legal certainty would encourage companies to invest more in equipment, platforms, and containers.

While SMEs will have more opportunities through relocation, they will need to develop solid strategies for moving goods and designing routes that benefit them without negatively impacting others.

One potential issue for nearshoring in Mexico is the political climate. Andrés Manuel López Obrador’s decision to move private railway activities to the Isthmus of Tehuantepec’s state-owned enterprise has raised concerns among investors. Months ago, the navy seized a stretch of railway in Veracruz for expropriation, a move that upset some business owners, who are now calling for the Expropriation Law to be fully respected.

The Future of Nearshoring

While significant progress has been made, there is still much to be done in Mexico to strengthen the economy through nearshoring. Industries like automotive, appliances, construction, and energy are already showing remarkable growth using railways. However, there’s still room to penetrate more markets.

Despite the growth in recent years and the many benefits of rail transport, much cargo is still moved by truck. Forward-thinking companies should switch to rail for faster delivery times and substantial savings.

As more companies build factories in Mexico, whether they are expanding existing operations or establishing a presence for the first time (such as Tesla’s new plant in Monterrey), this trend will create jobs, increase competition, and strengthen both foreign and domestic trade.

Nearshoring is yet another factor driving the resurgence of the railway in Mexico. The train has evolved into much more than just a mode of transport—it is now a key player in Mexico’s economic development and a valuable tool for streamlining supply chains for companies of all sizes.

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