Every day, about 10 Kansas City Southern trains crisscross the border at Laredo, Texas, hauling everything from cars to chemicals - up from about six trains just three years ago.

The fourth-largest U.S. publicly traded railroad is leading the charge to take advantage of the swelling freight traffic between the countries as manufacturing booms south of the border because of the rising costs of goods from China and other exporters.

Over the past five years, Kansas City Southern has spent about $300 million to lay roughly 90 miles of new track in Texas, buy and update terminals in Mexico and make other network upgrades. The railroad company now generates one-quarter of its revenue moving parts and finished goods across the border.

Union Pacific Corp (UNP.N), the No. 1 U.S. railroad company,

owns a 26 percent stake in Mexican railway company Ferromex.

Like rivals CSX Corp (CSX.N) and Norfolk Southern Corp (NSC.N), Union Pacific is partnering with Kansas City Southern to haul carloads in the United States to locations not served by the railroad.

As the U.S. economy creaks along, the growing business with Mexico is a cause for cheer: Both Kansas City Southern and Union Pacific are reporting much bigger increases in cross-border shipments than in overall volume.

Two areas that are "just exploding" are transporting automobiles into the United States and intermodal shipping - moving goods in containers that are shifted from truck to train or train to ship - said William Galligan, vice president of investor relations at Kansas City Southern.

The Kansas City, Missouri-based company, which took full ownership of a Mexican railroad now known as Kansas City Southern de Mexico in 2005, has built the first intermodal network between the countries.

Kansas City Southern, which started investing in the Mexican rail company a decade earlier, was betting the North American Free Trade Agreement would significantly alter shipping.

Total cross-border freight by train and truck has surged nearly 35 percent in the past five years, according to U.S. government data.

At $291 billion through September, the volume of goods crossing the border this year is set to top $352 billion in 2011 and $308 billion in 2010.

The Mexican automobile industry's double-digit production and export growth has boosted transportation needs. .

Kansas City Southern expects Mexico's vehicle output to leap 30 percent to 40 percent by 2015, citing Wallenius Wilhelmsen Logistics data.

The company, which already serves nine auto plants in Mexico, said Honda Motor Co Ltd (7267.T), Mazda Motor Corp (7261.T), Nissan Motor Co Ltd (7201.T) and Audi AG (NSUG.DE) will open plants there in the next two years. Five steel plants are also opening.

Galligan said Kansas City Southern was in talks with Asian and European manufacturers looking for space near the locations it serves in Mexico.

COPING WITH DRUG WAR

Along with the boom in business come dangers. Companies with operations in Mexico must deal with the ongoing drug war. Kansas City Southern posts guards on trains in high-risk areas and scans cargo as trains cross the border.

But most of the problems are on the roads. The Mexican Council on Northeast Foreign Trade, a private trade association, said 85 percent of illegal goods sent from Mexico to the United States were found in trucks.

A federal police officer who requested anonymity said it was a very big problem with life-and-death consequences. "Truckers in Tamaulipas state and Monterrey are often threatened with death if they don't transport what they're told to transport, drugs above all," the police official said.

Trains and trucks compete, but they have also partnered to keep up with demand.

"We don't have containers, we don't have intermodal customers. So we approached J.B. Hunt (JBHT.O), Schneider and Swift Transportation (SWFT.N), to name three big ones, and convinced them that this was a real huge opportunity," said Galligan.

Swift runs 700 trucks south of the U.S. border and plans to add up to 100 next year, Chief Operating Officer Richard Stocking said in mid-November.

"Mexico has increasingly been advantaged over Asia," said Foster Finley, co-head of the transportation practice at consultancy AlixPartners.

"China's real wage rates and cost of raw materials, overhead, the exchange rate, the freight costs - in ocean, inclusive of peak season surcharges and time on the water - have risen faster than the equivalent costs in Mexico," Finley said.

Kansas City Southern's cross-border volume jumped 21 percent in the first nine months of 2012, compared with a 6 percent rise in overall volume and generated about one-quarter of its $1.67 billion in revenue.

Union Pacific's cross-border carloads rose 6 percent in the first nine months, far outpacing its 1 percent overall volume rise, said Chief Financial Officer Rob Knight. Last year, Mexican volumes grew 9 percent, triple the total rise.

While railroad companies report results by business segment not region, Knight said its Mexican business netted about $1.5 billion of the $15.6 billion in revenue through September, on pace to top last year's $1.8 billion.

"Mexico represents roughly 10 percent of our total book and growing," up from 8.5 percent in 2007, Knight said.

DOUBLING UP

A number of ventures that broaden the footprint of U.S. transport in Mexico have surfaced recently.

Celadon Group Inc's (CGI.N) Trucking Services unit took over equipment and drivers from USA Dry Van, and FedEx Corp (FDX.N) added two service centers in Mexico.

U.S. Xpress Enterprises said it would buy 90 percent of Xpress Internacional and has formed a joint venture with Logisti-K in Mexico.

Logistics company Pacer International Inc (PACR.O) has a multiyear agreement to manage and provide transport for Union Pacific, as well as container and chassis management in Mexico.

Celadon is sticking with trucking, calling a revenue-sharing rail tie-up "not viable" because its trucks are more economical for moving freight near the border.

"If you're going to take things from Southern Mexico then it may make more sense," said Paul Will, Celadon's president and chief operating officer.

Whether companies go it alone or form partnerships, experts say Mexico is a top market for U.S. companies.

"Anybody with an opportunity to position themselves in this marketplace and chooses not to will probably regret it sometime in the next five to 10 years because cross-border market growth is going to outstrip probably any growth in any other (intermodal) transportation," said Dahlman Rose analyst Jason Seidl. (Reporting by Lynn Adler in New York and Liz Diaz in Mexico; Editing by Patricia Kranz, Edward Tobin, Andre Grenon and Jeffrey Benkoe)

• A Permanent Economic Emergency