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Nearshoring’s Impact on Logistics Services
Logistics players in Latin America could see additional revenues of $10 billion per year by 2025.
BY DIEGO RODRÍGUEZ
Multiple factors — like geopolitical challenges, supply chain de-risking, and environmental pressures — drive the growing significance of nearshoring in Latin America. Latin America is on the forefront of a vast opportunity to become a vital link in value chains connected to the US and Europe, leveraging its competitive advantages such as a skilled workforce, cost-effectiveness, and proximity to the US.
Americas Market Intelligence estimates that logistics players operating in Latin America could see additional revenues of $10 billion per year by 2025 due to nearshoring. This revenue stream would primarily be driven by a surplus of exports and imports of goods. This has quick-win potential in various sectors, including autos, textiles, pharmaceuticals, and foods.
Mexico is at the forefront of nearshoring, driven by its strategic location, the USMCA trade deal, and participation in initiatives like the Inflation Reduction Act, which supports electric vehicles and renewable supply chains. Companies are migrating to Mexico, as indicated in a study by AT Kearney which found that 96% of CEOs consider nearshoring as a strategic option, reflecting an 18% increase from 2022.
Several significant nearshoring investments in Mexico include Tesla, Ternium, Solarever Group, BMW, Nidec, Citic Dicastal, Man Wah, ZF Group, Cenntro Automotive, and Noah Itech. These investments span electromobility, metals, EV batteries, automobiles, and more.
For logistics players to capitalize on this trend, strategic investments are crucial. The strengthening of Latin American currencies against the US dollar and the need for modernizing public infrastructure are highlighted. During January and April, logistics providers interviewed by AMI expressed anecdotal evidence that their freight volumes have increased at double-digit rates in Mexico and Central America. At the same time, investments from global and local players are making a splash in the news, like DHL’s $500-million investment in its supply chain division in Latin America over the next five years.
The Impact of Nearshoring on Trucking Transportation in Latin America
Trucking transportation plays a pivotal role in connecting locations within countries and regions in Latin America, particularly where rail shipping is limited to bulky commodities and natural resources. The trucking industry, a vital component of the logistics and supply chain sector, has witnessed a transformative phase driven by factors such as the surge in e-commerce and nearshoring activities. This growth has spurred modernization efforts and revenue generation, influencing the entire transportation landscape. The sector’s rapid digitalization and professionalization have accelerated during the COVID-19 pandemic.
However, despite these advancements, high operational costs, influenced by double-digit inflation rates impacting vehicle prices, fuels, insurance, and maintenance services, have increased expenses for moving freight between ports, consumer hubs, distribution centers, and production facilities. This situation could lead to industry consolidation and potential bankruptcies, particularly as major players seek to establish more robust networks to serve exporters in markets like Mexico and Brazil.
In Mexico, the nearshoring trend is expected to drive a substantial increase in demand for trucking services, projected to grow up to 15% annually over the next decade. However, analysts caution that addressing road safety, enhancing truck production, and modernizing vehicles are essential challenges for Mexico to leverage the business opportunities presented by nearshoring fully.
Brazil heavily relies on road infrastructure for cargo transportation, accounting for approximately 61% of its total movement. This dependency was evident during a disruption caused by a truck driver strike in May 2023. Demands for freezing diesel prices and minimum freight rates led to severe economic disruptions, eventually resolved through government negotiations. Brazil is also facing external pressure to introduce environmentally friendly vehicles; however, limited government support for electric vehicles has resulted in a slow adoption rate of less than 1% for alternative propulsion trucks.
In Colombia, reliance on land transportation constitutes 90% of cargo movement, contributing substantially to the country’s GDP. However, this heavy reliance has led to increased logistics costs, surpassing production costs and impacting the economy. Challenges in road conditions, transportation efficiency, restrictions, and vehicular congestion have compounded these issues, with a backlog of road infrastructure projects adding to the complexity.
Freight crime has seen a dramatic rise in Chile, with post-pandemic restrictions contributing to a 27% increase in levels compared to pre-pandemic times. Cargo crime, particularly hijacking incidents involving electronics and foodstuffs, has led to significant insurance claims.
The Impact of Nearshoring on Warehousing and Fulfillment in Latin America
The rapid growth of e-commerce and nearshoring has accelerated the expansion of warehousing and fulfillment subsegments in the Latin American logistics industry. Warehousing involves strategically storing inventory near borders or consumption hubs, while fulfillment encompasses order processing and delivery. These segments offer significant potential as international manufacturing players seek additional production capacity to meet demand from various Latin American markets.
Leading companies like DHL, DSV, Mercado Libre, Frialsa, Solistica, Emergent Cold, Grupo Traxion, and Suppla operate in this sector. DHL Supply Chain recently announced a substantial investment plan of $551 million. This plan focuses on strengthening infrastructure and supporting automation and sustainability initiatives, emphasizing healthcare, automotive, technology, retail, and e-commerce sectors. Notably, Mexico and Brazil are set to receive the largest portion of this investment. The concept of “omni-sourcing,” aimed at de-risking supply chains through investments in multiple source points, forms the cornerstone of DHL’s strategy.
Prologis, a prominent real estate firm, has highlighted the impact of nearshoring on Mexico’s logistics real estate market with a significant surge in net absorption across Mexico’s six major markets, with occupied space surpassing vacant space. This trend has doubled from 2019 to 2022, leading to a remarkable drop in vacancy rates, which plummeted to just 1.1% in the first quarter of 2023, a sharp decline from the pre-pandemic average of 6%. Furthermore, the construction of logistics sites has seen a substantial shift, with 60% of ongoing projects already pre-leased, compared to a 36% pre-leasing rate observed in 2019. These developments have culminated in a noteworthy 16% increase in rental rates over the past year.
In Brazil, the logistics real estate landscape is centered around Sao Paulo, which accounts for over 60% of the country’s industrial and logistics real estate stock. Sao Paulo’s strategic location, efficient highways, and well-connected air transport network, including one of South America’s largest airports, have positioned it as a critical distribution and logistics hub. Additionally, the state of Minas Gerais has emerged as a promising location for large logistics centers due to its incentives for industrial and logistics companies. Key players in Brazil’s logistics real estate sector include Multilog, TECADI, Jadlog, and DHL, which expanded its fulfillment network in the country.
Meanwhile, Colombia’s logistics real estate market has experienced a slowdown in the construction of new warehouses, with 2022 seeing a 60% decrease in new spaces compared to the five-year average. This decline is attributed to rising construction costs, increased financing expenses, and political and economic uncertainties. As a result, the Built to Suit model has gained traction, driven by custom-made spaces developed based on pre-existing contracts. Major players in Colombia’s logistics real estate sector include Servientrega, Almaviva, Kuehne+Nagel, and DHL Supply Chain.
Chile’s metropolitan region, particularly Santiago, is a hotspot for logistics real estate development due to its strategic location and excellent connectivity. The demand for warehouse space remains high, with a zero-vacancy rate reported in the second half of 2022. Companies are actively signing contracts for under-construction projects, and new inventory is projected to increase rapidly in the coming years. Key players in Chile’s logistics real estate sector include FedEx, EIT, Maersk, and Starken.
In conclusion, the logistics markets in Mexico, Brazil, Colombia, and Chile are undergoing significant transformations driven by factors such as nearshoring, e-commerce growth, and regional economic dynamics. These trends are reshaping the landscape and presenting opportunities for both local and international players to establish a strong presence in the region.
This article was first published by Americas Market Intelligence. Republished with permission.
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