Top 6 differences in transportation costs between Mexico & U.S.A
Have you ever received a quote from a carrier to transport material from point A in the United States to Point B in Mexico and upon receiving the quote you realize that you are being quoted well over $3.00 USD per mile? Your initial thought is, this is absurd! How am I going to pay over $3.00 USD a mile to have this shipment delivered to the final destination in Mexico! I am being ripped off!! Well…think again.
There are many differences when calculating transportation costs in the U.S. versus costs in Mexico, yet many U.S. based brokers expect to see the same rates per mile they see in the U.S. for cross-border shipments. The reality is that the rate per mile is significantly higher and there are several factors that can help you make sense of the rate you are being quoted.
Logistics Performance Index (LPI)
World Bank has developed an index, named the Logistics Performance Index (LPI) that helps “grade” logistics performance of 160 countries from across the globe. The index grades these countries based on the following factors:
- Quality of the transportation related infrastructure (Ports, information technology, roads)
- Competence and quality of logistics services (transport operators and customs brokers)
- Ease of arranging competitively priced shipments
- Ability to effectively track and trace shipments
- Timeliness of shipments reaching destination within the established or expected delivery times.
- Efficiency of the clearance process (Ex. Speed, simplicity and predictability of formalities).
Having advanced infrastructure helps keep transportation costs down, allowing the carriers to pass a lower cost to shippers and brokers. The table and graph below shows an LPI chart comparing scores between the U.S. and Mexico. As you can observe, the U.S. has a better ranking than Mexico which translates to lower freight costs.
Mexico is currently undergoing major road improvements to facilitate the flow of goods traveling to and from the country through all major Entry Ports. Between 2013 and 2018 there will be a total of 45.22 billion pesos invested to enhance the Mexican transportation network which amounts to about 2.66 billion dollars. When you request a quote from a Mexico carrier, they factor in the time that is invested to travel those miles, whether a scouting service has to be used to evaluate the route prior to sending the shipment, if the route is safe to travel after dusk, the wear and tear their equipment will suffer, and whether the route allows them to travel via toll roads (they are known for being safer routes). A U.S. carrier rarely has to worry about the roads being in unsafe conditions and can plan its routing with confidence from behind a computer by calculating the number of miles and the driver’s hours of operation.
Logistics competence also plays a huge role in determining the cost of the freight. The trucking industry in Mexico does not have nearly as much regulation as the U.S. which complicates the process to select carriers. In order to comply with service requirements, a broker must do their due diligence in selecting a carrier that has the technology platform and business practices that allow them to serve customers with high standards. Contrary to the U.S., the prices offered by different carriers for the same route could vary greatly. Much is linked to the volume each carrier serves and the tools they have invested in to make them more efficient. You would think that better tools could improve their operating cost by making them more efficient, but they assume the client is ultimately benefiting from the tools (as much as they are) and pass the cost to the client. This causes a higher cost for the shipper or broker for tools that one would consider standard in the U.S. such as tracking, transportation management systems, GPS, etc. To make things more interesting, Mexico carriers are very inclined to provide a more competitive rate to a shipper or broker that they have a great relationship with. You can often see the same carrier quoting two very different rates to different companies for the same route. The difference? Company A has invested in the relationship by taking the time to schedule periodic office visits, personal and business conversations over lunch, on-site meetings at their locations, resource sharing in terms of know-how and training and of course a steady volume. Company B may be a first time client or someone whose only bargaining chip is to provide them with ongoing business.
When you think about “securing” your load in Mexico your thoughts are most likely focused on cargo insurance. Maybe you will think about the possibility of your load being stolen or the driver having an accident and you will request at least the same coverage you receive in the U.S. The reality is that cargo insurance is not required by law in Mexico and carriers will charge clients a premium for it, increasing your overall rate. The launch of government initiatives to secure the supply chain (such as C-TPAT or NEEC) place additional pressure on carriers to invest in infrastructure to protect their shipments. Investing in security guards for carrier’ yards, security cameras, tracking devices for tractors and trailers, K9 inspections, surveillance escorts, and background checks for drivers may not be at the top of your checklist when asking for a quote, but they are a necessary evil for many carriers and a portion of that investment will once again be included in your rate.
Supply and Demand
The supply and demand curve is more predictable in the U.S. versus Mexico. The use of load boards to secure round trips before accepting the first leg of the trip offers a tremendous advantage to U.S. carriers making them more efficient and reducing the number of empty miles that the client has to pay for. The use of technological platforms further allows them to ascertain what the market rate for a particular lane is reinforcing on-going rates. It is very common for a U.S. carrier to try to increase an established long term rate due to fluctuating “market conditions”. If they receive data informing them that a lane pays $3,000 USD consistently, they will take no less. In Mexico, technological platforms for carriers are close to inexistent. The lack of a market rate forces carriers to rely on what they hear other carriers are charging. On the other hand, they are more likely to keep a year round rate if they have a good relationship with their client, they get paid on time and are treated with respect. Seasonal peaks are another driver of price increases. Because growers are willing to pay top dollar to have their time sensitive produce moved right away, you have to consider produce and other seasonal products into your planning and be prepared to pay extra during certain months or risk having your shipment go to the bottom of the priorities pile.
If you have previous experience working with carriers you will notice that fuel in the U.S. fluctuates up or down, while fuel in Mexico only goes up. Even though the National Chamber of Cargo Auto Transportation previously tried to implement Fuel Surcharges (FSC) in Mexico (CPAC), Mexico carriers do not charge a FSC and are more likely to provide you with an “all in” long term rate. Until April of 2016, fuel prices in Mexico were regulated solely by Pemex, a state-owned government managed Petroleum Company with no competition. With the energy reform that went into effect in April, private international petroleum companies will be allowed into the Mexican market boosting competition and hopefully decreasing the cost of fuel in Mexico. Since the current price per gallon is on average 20% higher than in the U.S. market, it may take a while before the price of fuel is close to what you would expect from your U.S. carrier.
Like any other industry, in transportation, the cost of doing business is passed on to clients. In this instance low Mexican labor cost does not equal low Mexican transportation costs. Until such time as Mexico’s infrastructure has reached an LPI ranking closer to that of the U.S. you can expect your price per mile to be higher than what you see domestically. While it is tempting to try to negotiate your rates to something that would be considered an “acceptable” price per mile in the U.S. keep in mind your responsibility as a broker, freight forwarder or shipper to support the work of international carriers and recognize that their proposal may not be so absurd after all if you consider the costs involved.