Union Pacific Is Seen Gaining Steam On Volume with Mexico Manufacturing

July 17, 2014

We are pleased to announce that our current foothold in Mexico is gaining traction as more companies choose to manufacture their products in Mexico. Mexican manufacturing is especially prevalent in cities like Mexicali, Tijuana, Juarez and Guanajuato. Union Pacific is now enjoying consistent demand for services out of these cities, and we anticipate that demand will increase as more companies discover the benefits of Mexico manufacturing.

Many companies have only recently focused their attention to Mexico manufacturing. Not very long ago, China was the standard choice for manufacturing abroad. This shift has occurred because of economic changes in the Chinese economy—changes that have had a negative impact on the cost of manufacturing within China’s borders. Multinationals that were at one time working exclusively in China have found the appreciation of the yuen, coupled with an increase of wage inflation, to be problematic.

According to Harold L. Sirkin, a senior partner with Boston Consulting Group, “Mexico is in a strong position to be a significant winner from shifts in the global economy.”

This recent success has boosted the target price for Union Pacific stock (UNP) from 97 to 115. We anticipate it will continue to rise. In a recent article that appeared on Investor.co, RBC analyst Walter Spraklin noted, “We continue to favor the rail sector, as we consider market fundamentals to be supportive of sustainable increases in both freight rates and volume levels for the next three to five years.”

A recent study conducted by Boston Consulting Group reveals that Mexican manufacturing shows promise in a variety of industries, and since 2012, average production costs in Mexico have been less than production costs in China. Some reasons that Mexico is now a better location for manufacturing involves the country’s low wage volatility and relatively lower energy costs.

One of the greatest money and time savers that Mexican manufacturing offers is a shorter supply chain and inexpensive transportation to and from the country. This stands in stark contrast with long-time competitor China, where transportation costs are more expensive, as well as more time consuming. Whereas Chinese exports are reliant on the costly and slow ocean freight shipping services available out of the country, Union Pacific leads the charge for shipping quickly and inexpensively across the U.S. border. This allows manufacturers see the benefit of a quick turn around time, as well as lowered shipping costs.

With 44 free-trade agreements (more than any other country), Mexico is well-positioned to export goods on a global scale. Given these changes, we anticipate that Union Pacific will continue to be successful in the years to come. Investors who wish to know more about Mexico manufacturing, supply chain and exporting to the U.S. are encouraged to North American Production Sharing, Inc., the leading outsourced administration and compliance management firm in Mexico.