New Payment Dynamic Needed for Mexico’s Logistics Industry

The logistics ecosystem has historically been dominated by the big shippers, such as Unilever and P&G, that have established the rules of the game. These are rules that only the big logistics players, which account for merely 5 percent of the industry, have the capacity to play by. Complex payment schemes and prolonged pay dates are some of the standards in the business. These dynamics have made the field a slippery slope for microbusinesses (also known as “owner-operators”) with no real grounds for them to develop, compete and prosper.

This phenomenon was further accentuated during the pandemic, which increased the gap between them. Additionally, in recent years the transportation industry has been facing two major problems: on the one hand, the lack of skilled talent resulting in disruptions to the supply chain; and on the other, inflationary pressure on wage rates with serious consequences for the market. 

Focusing on Mexico, big carrier companies don't even represent 5 percent of the market share; nevertheless, in the 10 years between 2009 and 2019, they grew 96 percent, while small and medium businesses grew only 30 percent or less. If this were not enough, the biggest companies collectively grew their fleets by 100 percent, while owner-operator' companies grew in the range of 58 percent to 68 percent.

The gap is easy to see. A gap that has only widened the crisis in the road freight market. In fact, the lifespan of small carrier businesses is no more than eight years. Significantly less than the big guys in the industry, which have access to growth opportunities given their financial and management safety nets. 

Recently, the International Road Transport Union (IRU) confirmed that there is a deficit of 54,000 road operators in Mexico. This is a number that has never been seen before and it means that almost 10 percent of the country's total fleet — some 580,035 units — is at a standstill and some 216,000 loads are not being transported. These numbers are reflective of the complexity of the current scenario.

However, with technological tools emerging, we have a way to turn this around. The competitive advantage of logistics tycoons over owner-operators can be attributed mainly to cash flow access. The day-to-day operations imply cumbersome continual and unforeseen expenses, including sudden hikes in rates and sluggish investment returns. 

Furthermore, on average, shippers pay invoices for transportation services over long periods of time, which can last as long as 90 days, a totally unreasonable interval, considering that small companies have to cover their operational expenses up front since most of them have no access to credit. This leads to long-term debt and the risk of bankruptcy for the company, and only those who have the backup of solid economic assurances can prevail.

After the huge thrust of digitization in recent times, solutions that could improve these dynamics are becoming available, and it is important to learn about the true pain-points of small players that are, in fact, the true engine that moves our economy. 

Moreover, the time of long administrative processes could be gone. With technology that is starting to be available in the market, owner-operators could greatly simplify their administrative processes, providing greater control and certainty over their cash flows. Payment solutions make cash flow available to the players and therefore allow a more equitable landscape and a fair competitive environment for all. This is particularly convenient in the context of the operator crisis in Mexico. This new technology begins a process that could reverse the grim situation for the sector. 

In fact, it is estimated that in five years, the trucking industry will double its market value to over US$160 billion, growth that will only be possible with the technological support that makes operations more efficient and provides greater independence and safety to all carriers. These solutions will not only benefit small businesses themselves but also the more than 200,000 Mexican families who depend upon them. 

Technology is an ally that can allow SMEs to face difficult times without throwing away their dreams and investments. The time has come for greater balance in the market and with fair dynamics so all players can grow, compete and prosper.