Diego Rodríguez Paez
Director of Logistics and Industry Practice
AMI
While Mexico has been the focus of a lot of the buzz surrounding nearshoring, Central America also offers substantial potential, such as:
- A competitive cost per unit for manufacturing clothing compared to China
- Lower transportation costs from Honduras or El Salvador than in Asian markets
- The potential for creating clusters to handle the entire supply chain for the textile industry
However, outdated logistics infrastructure, climate issues, and bureaucratic challenges may blunt this potential.
To help companies quickly understand the key obstacles, we break them down below.
Required Road Revamps
Better roads would be a strong starting point for Central American countries, crucial for improving transportation speed and efficiency. Here’s a look at the most strategic steps to take.
Pay it forward. Increasing investments in road infrastructure is crucial for reducing land transportation costs in Central America. The region faces significant disparities in road quality and investment levels, with Guatemala and Honduras lagging behind Costa Rica and El Salvador. The road infrastructure in these two countries is probably a decade behind, necessitating substantial public investment to catch up.
Freshen the fleet. On average, the truck fleet in Central America is 18 years old and poorly maintained. This outdated fleet results in frequent breakdowns and inefficiencies, leading to cost overruns and delays in land transportation.
Make tracks. Only 256 km (159 miles) of railway lines operate in the region, further stressing the importance of road infrastructure. Improving and expanding the existing rail network could alleviate some pressure on road transport.
Get some privacy. Private financing for port and road infrastructure in Central America will likely remain limited until stable legal frameworks are established. Successful examples of privatization, such as Puerto Moin and Puerto Cortez, demonstrate that significant improvements are possible when governments step aside, offering a promising outlook for future investments.
Speed it up. Central America’s average highway speed for trucking transportation is less than 50 km/h (31 mph). According to multiple freight forwarders consulted in the region, trucks traveling from Guatemala to Costa Rica have an average speed of 18 to 20 km/h (11 to 12 mph). Increasing highway speeds is essential to improving efficiency and reducing transit times.
Clear customs. Modernizing customs infrastructure at borders is a critical step in enhancing trade facilitation. This includes adopting electronic systems and advanced cargo information, expanding exclusive lanes for trusted carriers, and addressing the need for physical transportation documents during red-light reviews. Additionally, improving cybersecurity and developing legal frameworks to regulate electronic fraud are necessary to streamline customs processes.
Weathering the Storms
Central America also faces challenges due to environmental problems and ongoing structural issues.
Wreaking havoc on roads. Intra-Central American trade heavily relies on land transport, but road maintenance needs to be funded. Climate change, hurricanes, tropical storms, and the rainy season all frequently lead to landslides, sinkholes, and bridge closures on major roads to ports, further complicating logistics. For example, the highway from Guatemala to Puerto Quetzal is the busiest in Central America, yet it suffers from a significant sinkhole in the Villa Nueva stretch. Similarly, the highway from Palin to Escuintla has collapsed, forcing trucks to use the NR14 route, which is prone to landslides. Recent hurricanes have also impacted the highway from Guatemala City to the Ciudad Pedro de Alvarado border in El Salvador, with the main bridge in El Colorado closed. These road closures severely impact truck carriers’ vehicle rotation, increasing costs and delays.
Courting complications. Project execution on key roads remains challenged by bureaucracy and legal battles. For example, the reconstruction concession on the highway from Escuintla to Puerto Quetzal has faced numerous legal appeals, which has halted progress and prevented much-needed improvements.
Driving away. The migration of truckers to the US has produced a shortage of drivers in the region. Trucking companies also face bureaucratic limitations in serving other markets, further exacerbating the driver shortage and impacting logistics operations.
Making Ports a Priority
Focusing resources on port improvements is another crucial step for Central American countries to make—existing conditions are problematic. For example, severe congestion in Guatemalan ports during peak season highlights the need for investment and modernization. Santo Tomás de Castilla, a public port, has outdated cranes and limited capacity, with no gantry cranes and inadequate container yard facilities. Puerto Barrios faces delays in moving general cargo and lacks modern systems infrastructure.
In addition, the facilities in Puerto Quetzal require modernization to expand and improve operations. The roads to ports in Guatemala are in poor shape, and a 300 km (186 miles) trip from production centers to ports takes 8 to 9 hours.
Of course, the port problems extend beyond Guatemala. In El Salvador, the Port of Acajutla has slow unloading processes and lacks adequate cranes, while Puerto de la Unión remains slightly used due to constant dredging requirements and a lack of private investment interest.
Despite these daunting conditions, Central America has several solid options for streamlining operations at its ports.
Move more. Improving terminal productivity and resolving gateway delays are critical priorities for port infrastructure. The current movement rate is below the global average of 24 movements per hour. Implementing operational technology systems and berthing window systems can significantly enhance efficiency.
Give facilities a facelift. Building unique operational piers for containerized and break-bulk cargo and relocating administrative buildings outside port areas are essential to improve Central American ports. In addition, expanding reefer plugs to handle increasing refrigerated cargo exports and maximizing port drafts to accommodate larger vessels will support growth plans.
Make bidding better. The private sector is wary of long and bureaucratic bidding processes, limiting progress on infrastructure projects. Streamlining these processes and ensuring transparency can foster private investment and drive improvements.
Go faster with feeders. Feeder ships can facilitate port operations and speed up trade on short routes, though they may impact ocean freight costs. These ships can help relieve land transportation volumes and improve logistics efficiency.
Jump-Starting These Changes
As we have seen in this piece, solving these logistics challenges in Central America requires a significant commitment from governments across the region—mainly financial commitment—and a plan that addresses the problems across various fronts.
Global multinationals interested in Central America may be the key to driving the logistics and infrastructure revamps that the region needs. Their potential investment in nearshoring could incentivize the region’s governments to address these concerns quickly…and pave the way for a more integrated and prosperous region.
Next Steps
But before multinationals can spur these changes, they need to understand the logistics lay of the land in their markets of interest. Market intelligence is crucial to obtaining this understanding.
Contact us to find out more about how our team can benchmark opportunities in different Central American companies, map out obstacles (and possible solutions), identify political or economic risks, find out how to streamline logistics operations at a granular level in each of the region’s markets and use this market intelligence to craft a successful strategy.
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