Ask The (M)experts
For an update on customs, infrastructure, and manufacturing, IL went straight to the supply chain leaders and economic development experts who make Mexico their business.
More to the Story:
Q: U.S. and multinational companies have been looking to grow their interests in Mexico in terms of sourcing, manufacturing, and selling finished goods. U.S. transportation and logistics service providers have followed suit. What impact are these investments having on Mexico’s domestic market and as a supply chain conduit for products moving in and out of the United States?
John LaRue, executive director, Port Corpus Christi: As Mexico has become an alternative to expensive overseas outsourcing destinations, demand has increased for transportation, customs brokerage services, and regional warehousing companies. 3PLs have settled in inland ports such as Querétaro, San Luis Potosí, and Toluca, which are served by Kansas City Southern and/or Ferromex rail, and coupled with trucking companies including J.B. Hunt and Schneider.
Guillermo Chavez, business development manager, Meridian 100º: Investments near the border rely on U.S. interest in a competitive labor force and the fast time to market these locations provide. The challenge now is to foster development and investments in other regions within Mexico. The future rise of oil prices will prompt businesses to move manufacturing centers nearer to consumption centers. The Mexican government wants to turn the country into a major logistics hub, so the logistics infrastructure must be modernized to support connectivity, investments, and job creation throughout Mexico.
Mario Rodríguez de la Gala, senior director for transportation, Mexico, DHL Supply Chain: In the past 20 years, Mexico's growth and related infrastructure improvements have been significant. Before, adequate warehouses weren't available; if a company needed a facility, it had to invest its own resources to build one. Today, several national and international firms have invested in industrial parks, including build-to-suit and speculative space. The type and age of truck fleets has evolved, and road, airport, and rail infrastructure has improved.
Service providers have grown from local to state presences, and there are more international providers. Potential investors can be assured that feasible network alternatives for business in Mexico do exist.
Eugenio Sevilla-Sacasa , vice president and managing director, Ryder Mexico: Mexico has attracted large direct and indirect foreign investment, as evidenced by standard-of-living improvements for the average Mexican over the past several years, as well as new manufacturing plants and highway development.
Q: Well-publicized security and safety breaches, theft, and the recent overhaul of Mexican Customs raise red flags for businesses looking to invest in the country. How are the government and private sector addressing these issues?
De la Gala, DHL Supply Chain: Some private sector companies are dealing with security issues by not doing business across the border. This is a no-win situation for all involved. The companies that are doing business usually pay a price, either by taking more secure but longer routes or by adding security services to ensure products will reach their destination.
Although companies are on the right track, the Mexican government still needs to gain consistency in its results and, more importantly, the trust of investors.
LaRue, Port Corpus Christi: The government has imposed new rules that "rotate" Customs officials' posts periodically. In addition, most import/export documentation, as well as fee payments, are now performed electronically and supervised by the Finance Ministry. Work continues on the freeways' physical infrastructure, however, as many U.S. drivers are not eager to venture inland into Mexico because safe rest and refueling stops are limited.
Sevilla-Sacasa, Ryder Mexico: One way the government and private sector are addressing these issues is the Customs-Trade Partnership Against Terrorism (C-TPAT), a joint initiative to improve supply chain security. Companies that participate in the program benefit not only from expedited border crossings, but also from a closer working relationship with U.S. Customs and Border Protection.
Businesses looking to reap the benefits of production in Mexico must invest a portion of their savings in increased operations and supply chain security. Typical security investments include fortifying their operations with gates, walls, and fences; installing security systems; increasing security staffing and resources; vehicle tracking; private canine screening; and increased inspections and security procedure audits.
Pete Montaño, executive vice president, sales, Con-way Truckload: Due diligence in selecting the right carrier and understanding the nuances of the law, such as how cargo insurance works, will ensure successful operations in Mexico.
For example, with 2,200 trailers within Mexico daily, Con-way Truckload is selective about the carriers it works with, particularly as it relates to equipment control. We've developed relationships with 80 Mexican carriers—all of which are or will be C-TPAT-certified—and have a comprehensive system in place to track equipment. These arrangements translate into reduced risk of security breaches.
Chavez, Meridian 100º: From financial services to blue-chip companies, many of the world's most important businesses operate in Mexico. Throughout 2009, American automotive companies such as Ford, Chrysler, and GM invested in expanding their Mexico facilities, a sign of confidence in the country's business environment. Problem areas are being improved, particularly those related to cargo security on Mexico's highways and at the border.
This progress is partly due to groups such as the American Chamber of Mexico, a non-governmental organization (NGO) whose members account for half of Mexico's foreign direct investment. The group addresses the diverse issues that concern its membership and fosters continuous cooperation between U.S. and Mexican customs and trade offices.
NASCO, a tri-national NGO with public and private sector members, has served for nearly a decade as a high-level meeting point to analyze and discuss matters concerning transportation, security, and the environment. NASCO has become influential, and earned the respect of the three countries' governments for addressing topics such as cross-border truck transportation and security.
Advances in technology, particularly tracking and surveillance, are key to cargo security issues. Mexican government development policies, such as the recently created free trade zones, are also a sign that Mexican authorities aim to provide a secure, competitive, and world-class business climate.
Q: NAFTA is 15 years old, yet major trade integration issues between the United States, Mexico, and Canada still exist. What are these challenges, and how can Mexico and the United States collaborate to meet them?
LaRue, Port Corpus Christi: Though Mexico has substantially improved its regulatory transparency and implemented new commerce laws in recent years, the government has been slow in changing the regulatory structure for business. For example, it takes approximately 74 days to start a business in Mexico. It takes five documents and 17 days to export a standard shipment. On the U.S. side, NAFTA rules allowing Mexican truckers to enter and transit U.S. roads with their cargo need to be enforced.
Despite the complications, NAFTA has expanded the U.S. economy, and it has driven Mexico to openly commit to economic and political advances.
Edgar Guillaumin Ireta, assistant vice president, corporate affairs and right of way protection, Kansas City Southern de México: The main difficulty in improving Mexico's infrastructure is the financial planning and engineering required to attract investors to viable projects, and the U.S. Embassy can be very helpful in that regard. One improvement is creating a North American Infrastructure Bank to promote and guarantee funds to finance infrastructure projects in both countries, but specifically in Mexico. Another effort is channeling U.S. stimulus funding into important infrastructure projects, such as highways, bridges, and water and power generation facilities, along the U.S.-Mexico border. Before investing scarce public funds in new infrastructure projects, it is imperative to use existing border infrastructure to its fullest potential by making process reforms that streamline border crossing.
Other steps to encourage the continued support of U.S. agencies in developing needed infrastructure projects in Mexico: financial support for the U.S. Trade and Development Agency to conduct market research and prepare technical studies; increase the services offered by the Overseas Private Investment Corporation for infrastructure projects in Mexico; and additional funding for the North American Development Bank.
Chavez, Meridian 100º: Cooperation among NAFTA members must aim to foster competition as a trade bloc with other commercial blocs such as the European Union, the Middle East, and Asia. Advances in the three countries' infrastructure will create competitive conditions that will attract investment and create jobs in Mexico, Canada, and the United States.
Sevilla-Sacasa, Ryder Mexico: NAFTA has produced benefits for all participants, but trade partners will always deal with issues and challenges. They must maintain communication channels to collaborate on finding solutions that are fair to all parties.
Q: Mexico's ports have helped ease congestion at U.S. West Coast ports and present a back-door transport option into U.S. markets. With Panama Canal expansion imminent, and continued investment in rail/intermodal links with the United States, what are future expectations for Mexico's ports?
LaRue, Port Corpus Christi: Container trade into or through Mexican ports will continue to grow. Kansas City Rail invested more than $400 million in terminal facilities and upgraded tracks from the Port of Lázaro Cárdenas to Laredo to support this trade. A second container terminal will be constructed at the Port of Manzanillo, with an expected investment of $563 million. When construction is completed by 2014, the terminal will be able to handle up to two million containers.
Chavez, Meridian 100º: Despite 2009's global economic turmoil, which caused a drop in container trade to North America, forecasts by major port operators and maritime companies project a tremendous growth of goods heading to the North American trade bloc. West Coast ports will become more congested, and ports on Mexico's Pacific coast will continue to function as a bypass.
For both the United States and Mexico, the majority of consumption occurs in the East Coast states. Port developments in Canada, Mexico, and the United States—as well as the Panama Canal expansion—are necessary to handle the trade that will develop in the next decade.
Mexico will benefit from container trade increases if it can provide world-class port infrastructure and attract major global port operators while allowing a healthy competitive climate.
Mexico's most important challenge is to provide the right business environment to encourage ambitious logistics infrastructure development, continuity, and government support.
Ireta, KCSM: Most Pacific ports, in both the United States and Mexico, suffer operational crises and congestion due to lack of available space. This causes a decline in competitive markets because loading and unloading times do not meet industry demand.
These areas are located on the Lázaro Cárdenas route to the north border in Nuevo Laredo through the KCSM International Intermodal Corridor, which starts at Lázaro Cárdenas and crosses the country's north border.
The Port of Lázaro Cárdenas provides the greatest capacity in Mexico and is considered the most important gateway between the commerce of the Far East, Mexico, and the southeastern markets of the United States.
Q: Some insiders cite nepotism, corruption, and political mismanagement in Mexico's government as reasons for its economic struggles. Is this still a problem, and how are officials breaking down these ingrained barriers to change?
De la Gala, DHL Supply Chain: Local and state officials used to operate without transparency because they did not need to be invested in their communities when they could depend on federal government resources. With oil reserves dropping, however, individual and corporate taxation has increased, and officials know they must now compete among themselves for private sector money. They will be subject to more scrutiny.
LaRue, Port Corpus Christi: Reports indicate that more than 70 percent of businesses have been victims of fraud, and they report losses of hundreds of millions of dollars. The government has to amend the legal system and enforce it at all levels.
Ireta, KCSM: The authorities need to eliminate impunity because estimates indicate that 80 percent of cargo theft victims do not report the crimes. Between 2006 and 2008, approximately 99 percent of the criminals in cargo theft cases were not convicted, according to Mexico's National Commission of Human Rights.
The government can confront transportation vandalism and theft, but the police force needs to be purged of corruption if it is to participate in security efforts. Exchanging classified information among specialized security companies and the authorities will help enhance intelligence and generate the statistical data needed to develop crime prevention and cargo protection strategies for goods in transit.
An effective security model that reduces crime helps lower the transportation industry's insurance premiums and discourage black market activity.
Chavez, Meridian 100º: The Mexican government is allowing international organizations to criticize, evaluate, and rank its programs, initiatives, and secretaries to determine the issues that must be improved.
Q: With the growing promise of West Coast ports such as Manzanillo, how will further development in the country's interior, and a more balanced national transportation network, aid Mexico's trade competitiveness?
Montaño, Con-way Truckload: Mexico is taking the appropriate steps to position itself as a more attractive global trade partner by focusing on transportation infrastructure repair, improvement, and growth. This development is critical for U.S. businesses seeking to leverage Mexico's proximity to manufacture products and quickly serve the ever-changing demands of U.S. consumers.
The Port of Manzanillo—one of Mexico's busiest—reflects the country's commitment to strengthening and developing its transportation infrastructure. In fact, under Mexico's National Infrastructure Program, the country will focus on increasing infrastructure coverage, quality, and competitiveness by adding new ports, modernizing existing ports, and further developing its highway network. Additionally, by enabling its currency to flow freely with minimal restrictions, Mexico has made it easier for companies to do business.
LaRue, Port Corpus Christi: In addition to the Port of Manzanillo, the Port of Lázaro Cárdenas is helping Mexico manage its growing trade. Combined, the two ports handle more than 1.5 million containers per year.
In addition, Kansas City Southern and Ferromex have invested heavily in track and equipment infrastructure to expedite rail transit of containers to and from Manzanillo and Lázaro Cárdenas. The Mexican government has also invested in new freeways connecting these ports to Guadalajara and Mexico City.
Ireta, KCSM: The National Infrastructure Program is promoting Mexico's economic and social development. The country's political and economic context, however, creates obstacles to meeting these goals.
The private sector has invested millions of dollars in improving infrastructure for the freight industry since its privatization in 1997. We're moving more cargo, more safely than ever before in Mexico's history. Rail is good for the entire North American trading bloc, and its inherent environmental, security, and safety advantages are being realized after decades of neglect in Mexico.
For the rail industry to reach its full potential, however, public investment in urban infrastructure, such as overpasses, is needed.
Currently, it takes approximately 8.5 hours for a freight train to travel the 128 miles along the Lázaro Cárdenas intermodal corridor to Nuevo Laredo because about half the tracks are located in urban areas, where the top speed allowed is 12 miles per hour. In yards, the top speed allowed is 19 miles per hour.
By contrast, in the United States and Canada, the average speed allowed is 25 miles per hour and it only takes about five hours to travel 128 miles. With a better rail system, transit through Mexico could be as efficient as in the rest of North America.
Chavez, Meridian 100º: Despite China's rise in global consumption, the North American trade bloc will remain the biggest consumer market in the world. Proposed infrastructure developments for northeast Mexico will speed existing trade with the United States.
But rather than continue the dependence on bilateral trade with the United States, Mexico's National Infrastructure Program envisions establishing the country as a major global logistics hub for trade moving to North America from Southeast Asia, South America, and Europe.
Port developments are now being fostered on Mexico's west coast at the Port of Lázaro Cárdenas and the Port of Manzanillo, at the Port of Punta Colonet in Baja, Calif., and in the Gulf region. New logistics corridors are also being designed to link the east and west coasts, and to connect the more developed northern states with the south.
Q: In Mexico's maquiladora manufacturing facilities, goods spend as little time as possible in-country before being re-exported. Does this hurt sustainable economic development, which values quality as much as cost? Is Mexico embracing or distancing itself from maquiladoras?
LaRue, Port Corpus Christi: Until 1990, the maquiladora industry was booming in northern Mexico. Then, more than 60 percent of the maquila production left Mexico, drawn by cheaper labor costs in China. Now, because of transpacific ocean transportation's high costs and long transit times, U.S. and Mexican manufacturers are returning to Mexico's near-sourcing manufacturing arena.
De la Gala, DHL Supply Chain: Maquila activity will remain part of Mexico's reality. The country's leadership seeks to develop a stronger and more competitive industry that not only engages the national market but is also capable of competing in other markets. In both instances, quality is a non-negotiable element.
Chavez, Meridian 100º: As the world emerges from global economic turmoil, companies will continue relocating their manufacturing centers to be closer to their core markets. For Mexico, this represents an opportunity to evolve its maquiladora industry into specialized and value-added manufacturing, seizing the distinct competitive advantages of its geographical location and low labor costs.
Ireta, KCSM: Mexico depends on the foreign investment its maquiladora industry receives, 60 percent of which comes from the United States. Trade has quadrupled during the past 12 years, and if this growth continues, there won't be enough infrastructure to support it.
Mexico needs productive jobs that ensure the population's security, respect the environment, and provide accessible and high-quality services. The rail industry can contribute to this goal if it invests in infrastructure such as track, maintenance, and facilities; technology and communications; locomotives, cars, and equipment; and personnel, jobs, and training.
Sevilla-Sacasa, Ryder Mexico: The maquiladora program provides a combination of foreign capital and low labor costs in support of the export market. There is no conflict between low cost and high quality. Currently, many products manufactured in Mexico under the maquila program are both high-quality and cost-competitive on a global basis.
Q: What impact do U.S. and Mexico cross-border inland ports have on trade and logistics options for companies shipping in and through Mexico?
LaRue, Port Corpus Christi: Laredo will continue to be the most important entry and exit point for goods and services. Heavy investments in industrial parks, 3PLs, and bridges are in progress. Companies such as Meridian 100º and GENCO are working toward inland port infrastructure, with free trade zones on both sides of the border to expedite shipment flow.
In addition, Kansas City Southern is in the process of concluding studies and permits to construct a rail bridge south of Laredo, which will reduce transit times.
Ireta, KCSM: The inland ports face problems such as land-growth limitations, deficient rail infrastructure, outdated equipment, and cargo security. But these facilities are strategically located relative to the main ports and the busiest border-crossing point at Laredo. They're the first connection point with the country's main markets, such as Mexico City, and offer direct connection with the rails and main highways. The inland ports help fulfill shippers' intermodal and transload cargo transfer requirements.
Chavez, Meridian 100º: Even with world-class logistics infrastructure such as ports, highways, and rail systems, the Mexican logistics system will not be globally competitive without the development of inland ports. Each region has a different competitive advantage and logistical value, and their projected inland ports must envision the most effective infrastructure use, either by operating existing facilities or developing new ones.
Mexico's government recently added free trade zones to inland port development and created a competitive advantage for distribution and manufacturing centers, but the country still needs more warehousing space. North America's logistics warehousing infrastructure is at least 15 years behind Europe and Asia. Global 3PLs are homogenizing their worldwide warehousing spaces.
Mexico has the potential to develop modern inland ports with FTZ schemes and logistics space, but the country must benchmark with other developments around the world and encourage investment.
Sevilla-Sacasa, Ryder Mexico: Inland ports in the United States and Mexico provide shippers more options and lower costs. Long term, there is potential for increasing trade between Mexico and the United States.
Q: Why is it so important that the U.S. and Mexican governments continue working in concert to build stronger trade ties? What challenges do they still need to address?
Montaño, Con-way Truckload: Strengthening trade ties benefits the United States because of its proximity to Mexico and the ease of U.S./Mexico business afforded by NAFTA.
The biggest challenge to address involves customs and classifications. Though the United States and Canada classify products similarly, work still needs to be done to ensure secure, efficient cross-border shipping between the United States and Mexico.
Historically, moving freight across the Mexican border has been an inefficient process because of long lines at customs, limited crossing points, and inconsistent regulation enforcement. C-TPAT certification and equipment surveillance have helped ensure the flow of known, low-risk legitimate trade while minimizing contraband.
LaRue, Port Corpus Christi: Mexico is the United States' third-largest commerce partner, behind China and Canada. With a population of more than 100 million people, the country continues to be a strong potential market for American goods and services.
Foreign direct investment, particularly from the United States, should not only apply to the maquiladora industries along the border, but expand into the center and southern regions of the country. NAFTA's goal was not only to open up markets, but also to spur economic and political reforms.
De la Gala, DHL Supply Chain: Both countries benefit from trading with each other, but numerous challenges plague their partnership. Mexico has unions protecting their members' jobs, and state and federal governments defending particular sectors. There are also security and customs regulations issues.
Ireta, KCSM: Infrastructure investment is fundamental, particularly under current economic and financial circumstances. Mexico falls below the international average in infrastructure development. The country can strengthen its railway industry through public and private investments that provide public freight service to national and international industries.
To meet the competitiveness of global markets, Mexico needs highly efficient, rail-focused intermodal distribution networks. Rail shipping reduces transportation costs and can help realize energy savings when moving huge freight volumes over great distances.
Sevilla-Sacasa, Ryder Mexico: Mexican exporters should design supply chains that can guarantee their products' entry into other countries, and at greater speed than their global competitors. Not only do customs processes, tax procedures, and border crossings need to be simplified, the infrastructure that helps optimize logistics also needs to be improved. This would allow shippers to select more appropriate transport modes.