Why a Former Freight Broker Is Making a Major Bet on Mexico

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1:32Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. So obviously, Tracy, something that we've grown more interested in lately, and it has very interesting sort of macro trade, maybe political implications. Is this sort of the booming numbers we see in U.S.-Mexico trade? Absolutely. So U.S.-Mexico trade has picked up, as you have pointed out. And I'm kind of curious about the reasons why. This is what most interests me at the moment, as well as like the physical process of moving goods from Mexico into the U.S. But there's this story, this idea here about friend shoring.

2:12So given the Trump trade war and its ongoing evolution under the Biden administration, tensions have been rising with China. There's this idea of companies maybe moving some of their production away from China into either Southeast Asia or maybe Mexico. So we've seen a bit of a pickup. I really want to know what is driving it. Is it actually that friend-shoring idea or is it maybe something else? I know Mexico, for instance, is a really big exporter of car parts. So how much of that is driving it? I've seen Brad Setzer discuss this a little bit on Twitter. So I am excited to get into Mexico-U.S.

2:50trade. Totally. And, you know, you mentioned, you know, sort of Trump kicked it off after he won the 2016 election by beginning the process of tariffs on China and rewriting NAFTA, which became the USMCA and really sort of encouraging a shift in supply chains to North America, to the Western Hemisphere. And then it probably really accelerated further with COVID and just the massive headaches that everyone had getting stuff out of China. And so, right, that's sort of when the idea of like friend shoring or near shoring like really picked up, like just sort of this supply chain resiliency idea. And then this raises all sorts of other interesting questions Because, of course, if you're a Chinese company, like you're a Chinese automaker, say, or a company that makes other high tech goods, and maybe you're worried about tariffs, we're like, well, can you set up in Mexico and get around that?

3:43So it is still coming in from Mexico, but the beneficial owner is somewhere in China. There are some really interesting questions that arise out of cross-border U.S.-Mexico trade. Yeah, it's funny you mention that. I was just reading an article in the FT that came out recently, and they were talking about the number of container ships going from China to Mexico has hit 881 ,000 in the first three quarters of 2023, which is up from like 689 ,000 in the same period from 2022. So a lot of growth just in the space of a year. And it does beg the question, again, of what exactly is coming through Mexico?

4:22How much of this is a genuine shift in U.S. trade away from China versus this sort of rerouting? Totally. So we see the numbers and we want to get a better understanding of what are the types of goods and so on. And I'm very excited to say we really do have the perfect guest. It's someone from the freight world who has been working with U.S.-Mexico trade for a long time. And now the co-founder of a new company that's sort of going to focus on freight that goes cross-border from Mexico to the U.S. Matt Silver, co-founder and CEO of Cargato. Matt, thank you so much for coming on OddLots. Absolutely.

4:56Thank you for having me. Excited to be here. All right. So really simple question to start. If there's some piece of machinery that you want to ship from, say, Texas to California, how much easier is that than shipping a piece of machinery from Mexico to California? Or maybe to flip it the other way around, for a given unit of good, what is the complexity of getting that good across the border rather than just shipping it domestically? So shipping something from Texas to California, if you're a logistics provider or a trucking company, your main responsibility is to make sure that you get the freight picked up at that location in Texas, that it's scheduled to delivery and that ultimately you go deliver the load on time and that you get what was considered the bill of lading signed by the receiver and it turns into a proof of delivery and you're good to go.

5:47When you're moving a shipment from Mexico to the United States, and let's say you're going from somewhere like Monterey to California, you would get that load picked up in Monterey by a Mexican trucking company that would bring the freight up to the border. It would clear Mexico customs, go through U.S. customs, dealing with a Mexico customs broker and a U.S. customs broker and a border crossing carrier. And then you're working with a U.S. trucking company that's going to bring that load from, say, Laredo, Texas to Los Angeles. And so for a cross-border shipment, there's somewhere between six and eight parties involved in a single shipment.

6:20Whereas the domestic shipment has, you know, the trucking company, the shipper and the receiver. As someone who has shipped a lot of stuff like home goods between the U.S. and other places, the customs process is always more complex and more time consuming than you think it will be. On which note, Matt, how long would it take for that entire like end to end process versus, is say a domestic shipment, which I guess just gets picked up. And then the uncertainty on the time is really just the driver going somewhere and how long that takes. How long does that sort of customs process usually take? Customs can take anywhere from one to three days.

6:58It could really go up to 10 days. It could get longer than that if it takes a long time to prepare the paperwork. So the way that I always compare it, if I'm explaining this to somebody that has a basic understanding of freight is that a domestic shipment is your responsibility as a broker for, you know, call it one to two days, maybe three days if it's a longer length of haul, but that load picks up and it delivers and that's it. For a cross-border shipment, it can be anywhere from seven to 20 days. So you've got your standard transit time that, you know, from Monterey is four to six hours, from central Mexico can be about a day, and then it can take anywhere from one to three days to cross the border.

7:37And then, you know, there might be a 24 hour wait time before the load actually gets dispatched for delivery and then your standard transit in the US. So that's where it ends up at that seven to 10, if not 20 days. Let's back up a little bit. I mentioned that you're the co-founder of a new company that's going to focus on US Mexico trade. You've been interested in Mexico for several years. Why don't you just sort of give us the quick background of how you became a Mexico trade person and why you want to continue making this bet. A Mexico trade person. You know, you can describe your proper title.

8:11I'm just going to call you a Mexico trade person. Mexico freight expert. Mexico freight expert. Maybe that's a little better. Mexico Matt. There was a joke. But all right. So I got involved in Mexico freight when I was at Coyote. I was at Coyote for about a decade. That's a freight brokerage. Yes, Coyote Logistics, the brokerage. And I started the Mexico business while I was there by sheer dumb luck. And I started building the network out and growing the Mexico business. And I spent about three, three and a half years doing that. And then I left Coyote in 2018, started my own company called Forager.

8:46We were a cross-border digital freight brokerage. So we'd built our own proprietary technology, similar to like an Uber freight or a convoy, but specifically focused on moving freight between the US and Mexico. We were acquired by Arrive Logistics at the end of January of 2022. And then I left at the end of September of 2023 after helping integrate Forger to Arrive and helping lead and grow the Mexico business. Ultimately left at the end of September and started working on Cargado shortly after that. So what was the inspiration behind creating a company that is dedicated to Mexico-U.S. freight?

9:20What's the opportunity that you see there? I think there is so much complexity involved in moving across border shipment. Like I just kind of outlined that I think there's a lot of need for technology. And with nearshoring becoming such a major trend, all these manufacturers are moving production to Mexico. That's leading to the suppliers that have to support those manufacturers, whether it's their physical suppliers that are building the goods that are going into the parts that go into the car or the packaging that goes into CPG products. Ultimately, it could be those types of suppliers or it could be logistics companies and trucking companies, but they're all rushing to support their customers in Mexico.

9:58And so as all these logistics providers and trucking companies get involved in Mexico, I believe that they're going to need tools to be able to do their jobs. And I think that there's a better way to help them do their jobs. And it's just a matter of starting with the roadmap that we've built out to build what we're building at Cargato. Talk to us about what you see on the ground. So I know a lot of the investment in Monterey, you know, we know there's a Tesla factory, say 2024 versus, I think you said you've gotten to Mexico stuff about a decade ago. Talk to us about like what you see happening on the ground in various parts of Northern Mexico and elsewhere in 2024 versus what it looked like in 2014.

10:37Let me start at a really high level. When I started building with Mexico at Coyote, we were communicating with drivers in Mexico via those NexTel phones. where it was like a walkie-talkie that you would click to communicate with them. And so now most of the drivers in Mexico, most of the trucking companies have smartphones. They have iPhones or Androids. They've got laptops. They've got iPads or tablets. And so technology has come a lot further along in the last decade. From a physically what's on the ground perspective, Monterey has expanded massively. I was down there a few weeks ago, and the amount of new facilities that are still getting built, everywhere you drive, you see brands that you recognize.

11:16I saw LG, I saw some of the different golf companies that produce golf balls and golf clubs and everything else that comes along with that. Manufacturing in Monterey, there's lots of CPG brands that are starting to build up plants in Monterey, appliances and electronics. And so you see all these different companies that are building in Monterey right now that the same thing's happening in Ramasurizpe, which is just south of Monterey and Saltillo. It's happening in the Bahio, which is in central Mexico. Querétaro, Aguascalientes, Guadalajara, Mexico City, Puebla. It's starting to spread all throughout Mexico as people realize it makes a lot more sense to manufacture there than it does overseas.

11:54What exactly is Mexico actually exporting to the U.S.? So I mentioned in the intro, famously, there's a lot of car components and vehicles involved here. And you were just discussing some of the car companies that have been moving some aspects of production down there. But what are the things that are actually coming across the border? And has there been any change there over the past couple of years or so? I think it's been a lot of the same stuff. So like a lot of the automotive companies, for example, have been in Mexico for decades, like General Motors and Ford and Chrysler and everybody else.

12:26Like Tesla is the newest entrant to come into Mexico and they've done it the loudest, but they've been there for a long time, most of the automotive suppliers. And so automotive has long been a big part of it. electronics, whether it's appliances or computers or TVs. I remember we used to ship video game consoles to Mexico for a large electronics manufacturer. Beer is a major product that comes out of Mexico, all sorts of food products. Obviously, tequila comes out of Mexico, out of Jalisco. You've got mezcal coming out of Oaxaca and some other parts of Mexico. There's a lot of components that go into anything electrical.

13:02And then you've got anything that you would find in an office, anything that you would find around your house that's got wiring in it, there's a really good chance that it came from Mexico. So most of the major appliance manufacturers have plants throughout Mexico, whether it's LG or Samsung or higher, which is GE, the majority of them are manufacturing in Mexico. So what is the main case? Why are they doing it? I mean, I guess obviously some of it must be the USMCA and Trump's, the tariffs on China, maybe some of it, the COVID supply chain frailties. But what is the pitch right now? A company is thinking about setting up to Mexico.

13:37How much is it about that? And how much is it about, say, improvements in Mexico's own infrastructure, such that a neighbor that's so close to the United States actually makes more sense as a manufacturing hub? I think it boils down to a few things. USMCA update from NAFTA is definitely one of them. And so you touched on that. That encouraged more automotive parts, for example, to be made in North America that go into a car that raised that percentage from 62.5 % to 75%. Pandemic was definitely another major piece. So I remember at Forger, we had a customer reach out, a company called Premium Guard that said, we just acquired this plant from federal mogul in Mexico because our manufacturing in China was slowing down.

14:18And so we needed to be able to continue to manufacture and sell filters in spite of the fact that China it was shut down. And so we bought a plant in Mexico. We need your help shipping their freight from Mexico, the United States. And so overnight, their volume just started shipping. And we saw that happen with a lot of other companies. And so the pandemic scared everybody is the second piece. And then the third piece is that the proximity makes a lot of sense. It's a three-hour flight from Chicago to Monterey to go meet with a customer, to go meet with the team, to meet with a potential vendor.

14:49It's, I think, what, 15 to 18 hours to fly to China from the US. So getting to Mexico is a lot easier. Time zones are a lot more similar. They're not exactly the same, but they're similar. And so it's easier from a communication perspective. There's also a lot more people that speak Spanish in the United States than Mandarin. And so you're much likelier to find more cultural alignment, easier to communicate with people in Mexico than people in Asia or overseas. And ultimately, that time that you can cut down on travel and everything else directly affects your ability to control quality and control cost and everything else.

15:25And so Mexico just made so much more sense. And then on top of it, if you're setting up manufacturing in Monterey right now, it's like shooting fish in a barrel to be able to go find a provider that can help you move your freight or help you manage your customs process because of the density that's already there, you're walking into a market that already exists. It's getting more expensive, but it's there already.

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17:06business starting price for LTE business internet 25 megabits per second unlimited data plan with select Verizon business smartphone plan savings terms apply Tracy have you been to Mexico I have not so I just this is going to be like the most I mean I have when I was like a kid and we lived in Dallas I think we went to one of the border towns but I barely remember it sorry I feel like I have to be very specific here yeah this is like going to be the most boring point but like to Matt's point about how it's just a three hour flight. Mexico is so close from like anywhere. And like you could just take a long weekend trip there.

17:40It's so easy. And every time I travel to Mexico, like on a vacation, I'm just like, it's like it's right here. And so that point about just a three hour flight from Mexico maybe seems obvious, but it also is like it is so easy. Wait, I'm glad you brought that up, actually, the idea of obvious. So I'm thinking how to frame this question. So I I realize there is already a degree of trade between the U.S. and Mexico, obviously, and there is the free trade agreement, of course. But why hasn't Mexico been a bigger market before? Like, let's say 20 years ago. Why didn't this happen earlier? What was the holdup?

18:17I think the technology advancement was a big piece. Again, there's been manufacturing down there for decades. Like General Motors has been down there, I think, for 50 years or something like that. But it was while Trump was in office and started the whole trade war thing with China and said, we're going to bring everything closer to home and branded the USMCA as America first. But in reality, quote unquote, America first was really about North America. And so that encouraged trade for all of North America. And I think that was the catalyst that caused all this growth to happen. And the pandemic kind of tipped it all over.

18:49But, you know, it's been growing steadily for 20 or 30 years now. What about infrastructure? You know, Joe brought that up. We've seen some concerns over things like congestion in the Suez Canal at various points in time. You've seen attacks on ships. You've seen drought in the Panama Canal. Has Mexico built out its infrastructure at all to make the exchange of goods easier? Or is it benefiting from, I guess, deteriorating infrastructure elsewhere in the world? both i think you know there's definitely those external factors that are providing benefits but you know there's been some investment in infrastructure in mexico and the highways are getting better the tollways that most trucks are going to use are getting better there's definitely still a need to better support it and better regulate it so for example in the united states you could go on a website and you could find a bunch of details about a trucking company in a matter of three minutes, if you just type in their MC number, their DOT number, you can't do that with a trucking company in Mexico.

19:52And there's no regulation over freight brokerages in Mexico. And so I think what I would ask of Mexico to do to make things better would be figuring out ways to help with security issues like theft in Mexico. The cartel issues in Mexico definitely continue to be an issue. And then the infrastructure side of it is really related to the actual information related to the companies that are involved in the transactions and being able to register them, being able to understand what they do, because otherwise it's just the Wild West. And that's how you end up with freight getting stolen. Joe, have you been on the Mexican trucking boards?

20:25I assume there are Mexican trucking boards. No, I haven't. But I find that to be a really interesting point that I never thought of, which is we talk about infrastructure as highways or toll roads or canals or whatever. But the idea of like, also, it's important that there be some sort of centralized place where you can just look up the reputation of a freight brokerage or a trucking company and how valuable it is for the government to be able to centralize that and just sort of smooth that is not something I had really thought about before, but it is infrastructure in the sense. Talk to us a little bit more, obviously, the security situation.

21:01So it seems like this is one area where under the AMLO years over the last five or six years, maybe no progress at all on security, whether we're talking about homicides or the strength of the cartels in certain parts of the country. Talk to us a little bit more about what you're seeing on the ground from that perspective and then how risk of freight theft, et cetera, goes into companies making investment decisions. So there are parts of Mexico that are totally fine when it comes to moving freight. Like, you know, knock on wood, I rarely hear about issues with product coming out of Monterey, like out of northern Mexico or central Mexico.

21:38It's usually product coming out of southern Mexico, like near Puebla. So Puebla, there's a big Volkswagen plant there, and it's about two hours south of Mexico City. And so it's relatively close to what I would consider to be a major market. But a lot of carriers are scared to go there because of theft. And there's a lot of cartel activity there. And then Veracruz, which is along the Gulf of Mexico. And so that southern part of Mexico is still very frightening for a lot of trucking companies, for a lot of shippers, for a lot of freight brokerages to get involved in moving freight there. And so that's where there's a lot of cartel activity.

22:12I've also seen shipments get stolen coming out of Jalisco and Aguas Calientes, which is in central Mexico. So it's not to say that it doesn't happen, but the concern is definitely in southern Mexico. And then from a perspective of what people think about when they start investing in Mexico, Another thing related to the regulation and infrastructure side is that in the United States, cargo insurance is something that is required of freight brokerages and trucking companies. And so anybody that's shipping goods in the United States, there's cargo insurance that insures those goods if there were a truckload that got into an accident and the goods were destroyed.

22:50Separately, there's insurance if a car was damaged or if anybody was hurt, but there's insurance for the freight. In Mexico, there's no requirement for freight to be insured. And so none of the freight providers insure it. None of the trucking companies insure it. And most of the beneficial cargo owners, like the manufacturers, some of them don't know that it's required. And if they do, they try to get it insured, but it becomes kind of a headache. And so that's another big area is the fact that insurance isn't required. And so when people think about where they're going to set up manufacturing, they think, is my freight potentially going to get stolen?

23:23And if so, am I going to have to replace it? Or do I have insurance that can cover that? Wait, this might be a good opportunity. And I realize we probably should have asked you about this earlier. But can you walk us in excruciating detail, like the process of how these goods get moved? And again, we touched on it earlier, but like who hires the trucking company here or like who hires the freight broker? And then like, is the trucking company, is the freight company actually U.S. incorporated or is it Mexican? Who are the drivers? How does that like immigration process work? Is it a Mexican driver going into the U.S.?

24:02Do they switch over at the border? Is it a U.S. driver? I honestly have no idea, but it seems like the process is important here. Yes. Let's start at the very beginning. I'm a transportation leader that works at a large manufacturer in the United States, like one of the big automotive companies. And I have my manufacturing plant set up in Mexico. I've got some of my suppliers set up in Mexico. I've got some of my factories in the United States or my assemblies in the United States. And I need to make sure that my stuff gets from Mexico to the United States on a regular basis. And so I'm probably going to run an RFP or a request for pricing on an annual basis.

24:42I'm going to reach out to all of my providers. I'm going to go to a group of freight brokerages that I work with, especially when it comes to Mexico, that I trust and know that can provide good quality cross-border service who have the scale that I need. And then I'm also going to rely on a lot of the trucking companies that I've had long relationships with that continue to provide dedicated direct service to me. And so I'm going to say, hey, let's say I've got 10 ,000 shipments a year that are coming out of Mexico to the United States, I need capacity for that. I've got out of those 10 ,000, 2 ,000 of them are going to come out of Monterey, going to my plants in the Southeast.

25:174 ,000 of them are going to come out of my Mexico City facility, going to my plants in the Southeast and in the Midwest. And then the rest of them are going to come out of my San Luis Potosi facility, going to Dallas and Atlanta and Chicago. So all of you trucking companies and your freight brokerages, I need you guys to provide pricing for me. And typically they're going to say, I need it to be door to door, which means that I need you to be able to handle the entire thing from the pickup in Mexico to the delivery in the United States. Separately, I'm going to hire my own customs broker because I already have a customs broker that clears the freight for me at the border.