Bringing manufacturing back to the United States, colloquially known as nearshoring, is poised to significantly reshape trucking and rail networks across North America. The push for localized supply chains promises shorter delivery times and reduced geopolitical risks, but it also brings challenges in infrastructure and logistics. The companies solving these challenges are going to be critically important and could be an investment opportunity.
Nearshoring offers two big advantages and a few smaller challenges. First, it can help companies avoid tariffs and FX headaches. Second, it can shorten lead times and improve inventory management. Trump’s original push for tariffs and COVID-19’s supply chain shock have made a strong business case for bringing manufacturing back to the United States. The cost of manufacturing domestically is higher than manufacturing abroad. However, having confidence that your supply chain can deliver and not having to deal with political spats carries significant value. Unfortunately, the higher costs associated with manufacturing domestically generally need to be passed on to the consumer. Higher prices for some goods are tolerable, but if it’s broad-based then it can be inflationary. An additional challenge is that the United States currently faces some constraints on manufacturing. Labor is one – we addressed it last month here – and transportation is another. Put simply, we need our domestic logistics to level up to accommodate a push for more manufacturing at home.
North American Trade
Mexico has become America’s largest trade partner, recently overtaking China as the top exporter to the United States. It is well positioned geographically and broadly has lower wage costs and a greater supply of labor for factory-level jobs than the United States. US companies have invested significant capital in Mexico over the past several decades and many companies send parts back and forth from the US to Mexico for different parts of the manufacturing process.
Canada’s geographic proximity has also made them a critical trade partner for the U.S., but mainly in the realm of natural resources. Crude oil, liquefied natural gas, lumber, and other mined commodities consistently supply US markets.
North American trade has become increasingly interwoven and has accelerated as scrutiny on China has mounted. According to the Brookings Institution, the U.S. imported $472.5 billion of goods and services from Mexico while Canada imported $15.6 billion worth of goods. The United States also accounts for over 40% of Mexico’s imports. This partnership is bidirectional and has led to gains for both the United States and Mexico. Generally speaking, Mexican manufacturing shouldn’t be seen as a direct competitor to American manufacturing but rather as a complement. Mexican factories use parts imported from the U.S. and vice versa; corporations have allocated capital across both countries to drive manufacturing efficiencies and try to remain competitive with low-cost goods from China. While investing in Mexico means navigating complicated labor laws and exposure to cartel crime, the low-cost labor makes it a necessary input for effective North American manufacturing.
The degree to which companies can nearshore and access cheap labor in Mexico is important because it impacts the mix of goods that can be effectively manufactured outside of China. High-value goods like electronics and automotive components can be manufactured and sold domestically with cheaper labor in Mexico and capitally intensive factories in the United States combining to offer a competitive product. Potential shifts in US import policy, specifically with regards to tariffs on Mexico and Canada could jeopardize this balance. The ability to manufacture efficiently in the United States could actually take a hit if we make trade with Mexico and Canada more difficult.
Consequently, while we are broadly optimistic on North American manufacturing, we’d shy away from trying to pick winners or losers who might be impacted by tariffs or trade disputes. Instead, we would suggest focusing on investment opportunities in companies who facilitate trade and transport unfinished components and final goods to their points of sale. The economy is strong, and nearshoring has momentum, the space is probably worth a look.
Nothing Is More American Than Trucking
The value of U.S. freight by truck with Canada and Mexico has steadily increased since the mid-2000’s and amounts to over $70 billion as of December 2023, according to the Bureau of Transportation Statistics. With nearshoring comes shorter supply chains, and an increase in the need for valuable truck space, meaning trucking fleets need to navigate the shifting trade landscape to accommodate retailers’ just-in-time inventory approach. With trucking, the two general approaches to shipments are full truckload (FTL) and less-than-truckload (LTL) – the latter meaning a single truck carries shipments from multiple customers and the former meaning all goods in the container are destined for the same location for the same customer.
Generally, LTL shipments are more expensive on a per-unit basis but offer manufacturers greater flexibility in getting finished goods to retail customers or storage warehouses. Instead of committing and paying up for larger shipments that take up entire truckloads, companies can have goods shipped with smaller, more frequent LTL runs which allow for quick inventory adjustments. These quicker adjustments are helpful during labor strikes or supply chain disruptions. LTL shipments account for just about 10-15% of the industry’s volume today, but the rise in e-commerce and necessary shorter transit times presents a compelling investment opportunity for trucking firms down the road.
Companies like FedEx Corp. (FDX) and Old Dominion Freight Line Inc. (ODFL), who specialize in LTL shipping, dominate the market and offer solutions to small and medium-sized enterprises that don’t have the scale to fill up whole truck beds with raw materials or finished products. Conversely, the FTL industry is highly fragmented and relies heavily on brokerage firms to match shippers with small and mid-size carriers.
Trucking is also incredibly fragmented. According to RXO Inc (RXO), the top 15 FTL carriers combine for less than 10% of total market share. More than 95% of carriers operate 10 trucks or less! Although still critically important for the food, pharmaceutical, and consumer goods industries, it’s a heavily diluted market with minimal barriers to entry.
Innovating American Trucking
Artificial intelligence and technological innovation is coming for the trucking industry. Something as simple as improving routing could lead to significant cost savings. Technology enabling real-time tracking of vehicles, predictive maintenance, and dynamic route adjustments based on traffic or weather conditions could all lead to bottom line improvements. Better routes and more well-maintained trucks reduce fuel consumption, repairs, and idle/empty drive times. Firms with enough capital to own trucking fleets and invest in technology like XPO Logistics (XPO) can integrate trucking fleets with warehouse management systems to streamline order processing and reduce downtime.
Technology can also help tackle regulatory complexity. Importing goods from Mexican maquiladoras, factories that import materials and export the finished goods, requires expertise in customs and border clearance. Facilitating the clearance of goods through U.S. customs and navigating documentation, duties, and inspections means third-party logistics firms like C.H. Robinson (CHRW) with integrated customs brokerage services are crucial for nearshoring to succeed.
Finally, the United States is facing an acute shortage of truckers, especially those who are interested in long haul journeys. The adoption of automated driving for semi-trucks would be huge for the industry. Regional routes often involve repetitive patterns and well-defined paths, making them ideal candidates for early implementation of autonomous driving systems. These systems can handle highway driving and reduce driver fatigue, while allowing human operators to focus on more complex urban or last-mile navigation. Currently, according to the American Journal of Transportation, the U.S. has a shortage of more than 80,000 truck drivers, a deficit expected to by 2030. This is compounded by the composition of trucking labor force – the average age of truck drivers exceeds the median labor force age in the U.S.
Companies focusing on autonomous driving are therefore going to be crucial if nearshoring momentum is going to keep picking up. Companies like Aurora Innovation (AUR) have teamed up with technology giants like Nvidia (NVDA) to mass produce its integrated driverless systems. Furthermore, companies like Tesla have been working on Semitruck technologies for years.
Railroads Are Essential Too
There is no one-size-fits-all approach to tackling the logistics of nearshoring, and trucking is not the only solution. Intermodal transportation, the integration of tracking and rail, is set to grow substantially as trucking routes shrink and the just-in-time approach to inventory management continues to permeate American manufacturing. Intermodal transportation isn’t a novel idea, but the relationship between the two transportation methods will have to deepen to accommodate nearshoring and the current demographics of the trucking labor force. Intermodal transportation relies heavily on strategic partnerships between railroads and trucking companies to optimize the process of getting FTL shipments onto rail cars and shipped across North America. All of the big players in FTL trucking are attached to the hip with Class I railroads like BNSF Railway, Union Pacific (UP)and Norfolk Southern (NSC), so the ability to leverage scale and in-house logistics is of utmost importance.
Rail hasn’t seen the same levels of growth as trucking over the last 20 years but is still well-suited for transporting large volumes of goods over long distances, making it a cost-effective option for long transports. Although the actual volume of rail freight is less than that of trucking, rail networks are essential to shortening trucking routes and reducing congestion on highways. Investments in rail infrastructure, including expanded rail yards, upgraded tracks, and digitization of intermodal facilities are all going to be essential in the years to come. However, investing in infrastructure is expensive and scale brings advantages in safety standards and cost efficiency. We wouldn’t be surprised to see M&A activity in the space pick up as nearshoring continues.
Even if there’s no M&A, we still expect the space to have significant funding needs. Any build out of intermodal transportation networks is going to be capital intensive. Electrification, new tracks, and new freight cars all have significant up front costs with long pay back periods. Specialized lenders and private credit shops will have opportunities to engage in asset-backed lending with long pay back periods.
American Investors Will Make Nearshoring Possible
Nearshoring is poised to uplift the significance of both rail and trucking industries. As manufacturing moves closer to home, the demand for efficient, localized logistics will only grow, requiring substantial innovation and capital. The integration of rail and trucking through intermodal transportation will be critical to maintaining the speed and flexibility needed for just-in-time delivery systems. Meanwhile, the trucking sector will see increased demand for trucking and third-party logistics as businesses continue to seek more agile, responsive supply chains.
Technological advancements will also play a pivotal role in reducing operational costs for shippers. For investors, this evolving landscape presents opportunities in the picks and shovels needed for transporting goods from point A to point B. As nearshoring continues to gain momentum, the future of U.S. freight transportation will be defined by innovation, collaboration, and a renewed focus on North American trade, and is worth keeping a close eye on.