Latin America, Logistics and the Impact of Digital Transformation
U.S. factory activity got a long-awaited movement into expansion territory in March, with Institute for Supply Management® (ISM®)’s Manufacturing PMI® above 50 percent for the first time since September 2022.
Up to US$6.6 billion in federal government subsidies support construction of a third fabrication plant in Phoenix for chipmaker Taiwan Semiconductor Manufacturing Corporation (TSMC), to further fortify regional strategic relationships and reduce North America’s reliance on global trade.
If manufacturing continues ramping up, moving those products to and from business partners in Latin America requires working with logistics enterprises that embrace the same level of speed, agility and transparency that American-based companies have grown accustomed.
Ready or Not Here We Come
Statistics suggest that the next two years will bring an unprecedented amount of foreign direct investment (FDI) into Latin America, especially Mexico. In turn, this will increase the need for more open lines of supply in the sale and purchase of goods to the U.S.
Álvaro Villar López, country manager of foreign trade and international logistics solutions provider Nowports, says that amid business climate repositioning, transit bottlenecks should get worse before they get better. “The region was definitely not ready, and that’s been made clear by the heavy congestion on various supply routes in and out of Latin America, especially in the Panama Canal,” he says.
If nearshoring demand continues to escalate, Laredo, Texas will be overwhelmed, López adds. Port Laredo is currently the largest inland international port in the U.S., handling enormous amounts of trade. “Unless the governments of Mexico and the U.S. focus on building new infrastructure and roadways, accommodating the supply chain pivot may take longer than necessary,” he says, though that should drive major development projects.
Hesitancy Costs
Logistics practices in Latin America today have already been surpassed by U.S. and Canadian enterprises. Many of the same technology-based conversations among suppliers, manufacturers, distributors and logistic professionals in Europe and North America are taking place in the emerging markets of Latin America — but the context involves rudimentary restraints.
Digital transformation in this region is a more complicated issue than many might expect, says López. “For a long time, the problem was a lack of access to high-speed internet,” he says, “but now, most of these countries don’t have the technologies available, allowing logistics companies to digitize their operations.”
Issues in the digital progression include the high cost of software platforms, López says, or communication challenges that inhibit understanding of language, local regulatory and tax systems, and local or regional business practices. “The cloud resources and infrastructure needed to support high-level data analysis may not be there, which is a major barrier,” López says, adding that the list of requirements goes on.
His sentiments on inaccessible technologies mirror those of others regarding digital transformation delays in Latin America. Business school Inesdi’s Think Digital Report 2023 survey included findings about the delay in digital transformation, with many respondents indicating their workers are not ready for it. “We can’t get very far if employees don’t have digital literacy or an interest in it,” López says, making the idea of industry-wide digital transformation a long road.
Logistics Risks, Emerging Markets
Price increases are another challenge for suppliers in reaching companies in Latin America.
“The wars in Eastern Europe and the Middle East, the drought affecting the Panama Canal, forced the rerouting of supply chains, increasing delays, costs, spoilage and more,” he says. There is a silver living, he notes: “These global disruptions have made overland shipping to and from Latin America more attractive, fueling nearshoring.”
Digital transformation, or lack of it, has visibly impacted cargo theft. López says the volume of cross-border shipments, in an environment that remains ill-prepared, presents logistical challenges. “When goods move through high crime areas that have insufficient security infrastructure, these are easy targets for cargo thieves, and they target shipments known to contain valuable goods,” he says.
Logistics companies know they need to increase digitization to stay ahead of criminals, but their level of sophistication often overrides security measures in place. López says the responsibility to correct the problem rests with Mexico and the U.S.
“We’ve created an ecosystem that needs better enforcement. Both countries are aware of the gaps to enforcing regulations and the thieves exploit the situation,” he says. Increasing cooperation of Mexico and U.S. law enforcement agencies is a first step, López says, and already a priority.
The Learning Curve
Bridging the differences between countries in how they do business takes extensive, ongoing communication and willingness to change.
For example, Latin America has made progress enabling remote work, making it easier to hire consultants or managers in various countries without opening on-site offices. López advises business representatives to seek counsel from strategic partners already doing business in those countries. “Chances are there’s someone you know with management and compliance experience in that country, a perfect resource to help you understand and manage regulations,” he says.
As an alternative, he suggests partnering with companies that already have on-site teams. “If you don’t have the funds to hire a lot of extra personnel, this can be a good option,” though he cautions to avoid uneven partnerships — giving away more than you’re getting back.
Long-Term Gain
This year marked a milestone for the U.S., engaging in more trade with Mexico than any other country.
Just a few years earlier, Latin America may have been perceived as an “alternative” supply chain resource. “Not anymore,” says Lopez. “Now, it’s a first choice.” With lower labor and product costs with no compromise on quality, Latin America is showing the ability to meet the needs of U.S. and Canadian enterprises.
(Image credit: Getty Images/DKosig)