Global Logistics—August 2009

Brazils Broken Track Record Less Substance More Lines

Brazil is a little late coming to the railroad turntable, a reality that has stifled transportation infrastructure and economic development dating back to the beginning of the 20th century. As rural and expansive as the country is, a major rail renaissance has been barely chugging along.

For comparison’s sake, the United States (population 300 million), which is comparable in area to Brazil (population 200 million), has nearly eight times as much track. Germany (population 82 million), one-quarter Brazil’s land size, has 12,500 more miles of track.

Difficulties connecting interior manufacturing pockets with more developed coastal distribution hubs and markets have long been a barrier to development and are raising the alarm for both private and public sectors to take action. By some indications, the wheels are rolling.

America Latina Logistica (ALL), South America’s largest independent logistics supplier, recently secured a fresh credit line worth $1.1 billion from the Brazilian Development Bank to help fund rail capacity investment. ALL, which offers both rail and truck services, provides intermodal transport, port operation, and merchandise movement and storage throughout Brazil and Argentina.

ALL intends to use the loan to purchase 11,000 rail cars and more than 200 new or rebuilt locomotives, as well as to extend some trunk routes. The goal of these purchases is to increase cargo and container capacity for major agricultural and industrial export supply chains.

Still, even as available network capacity increases, Brazil’s railroad is largely undeveloped, suggesting past and current investments may only have a cosmetic impact improving rail/intermodal service for the long haul.

Currently, the country has 18,203 miles of track, a length similar to railroad figures from the early 20th century, according to one Latin American source.

While bringing new equipment on line is assuredly increasing frequency, improving service and safety, and reducing cost for the short term, there may be added impetus for Brazil’s railroads, government, and private sector to begin investing in and laying track to expand the country and the continent’s connectivity and economic growth.

Further incentive and aid may come from an unlikely source: China. The Chinese government is increasingly reliant on South America for raw material sourcing to support its own industrial boom. China and Venezuela recently formed a joint venture valued at $7.5 billion to build a new railroad connecting rural farm and oil regions in the latter.

Brazil also has a wealth of natural reserves such as iron ore that China is using to build its own railroads. Recently the Red Dragon surpassed the United States as Brazil’s top trading partner. Others may have their own incentive for investing in Brazil—which will likely create a much-needed stimulus for railroad development in the region.

Swiss Fixings

McDonald’s is making a run for the border—the Swiss border, that is. The Oak Brook, Ill.-headquartered fast food chain is moving its European operational base from London to Geneva, joining a swelling rank of U.S. companies that have relocated headquarters to Switzerland because of the country’s preferential intellectual property tax laws.

The Swiss tax regime, particularly for intellectual property, has become increasingly attractive for U.S. companies including Kraft, Procter & Gamble, Google, Electronic Arts, and Yahoo!—all of which have vacated the United Kingdom for less-regulated pastures.

The United Kingdom recently amended its tax rules on foreign profits from intellectual property rights, including patents and trademarks, which would have doubled duties assessed to companies such as McDonald’s.

Belying the reality, McDonald’s indicated its decision was a matter of strategic positioning rather than a reaction to changes in the UK taxation policies made by Alistair Darling, the country’s finance minister. The company reports the move "enables us to conduct the strategic management of key international intellectual property rights, including the licensing of those rights to our franchisees in Europe, from Switzerland."

The fast food chain’s European footprint is growing rapidly, and currently represents its largest region by sales, further justifying the continental move. But the seismic exodus of McDonald’s and others out of the United Kingdom has left the government struggling to make reparations when its own economy is struggling to draw foreign investment amid global economic turmoil.

The misguided mandate to impose a worldwide tax on passive income has forced the UK Finance Ministry into reactive mode, with plans now to table the proposed tax reforms, according to the Financial Times. But the damage may already be done.

In fact, the country is now beginning to lose some of its own domestic businesses, with Regus, a temporary office supplier, and pharmaceuticals company Shire, among others, relocating their tax bases to the Netherlands and Ireland, respectively.

Bringing Home the Bearings

As businesses grow more attuned to benchmarking total landed logistics costs and evaluating supply chain performance from source to shelf, there has been recurring chatter about the merits of nearshoring contract manufacturing. For some, lack of visibility and loss of control over process have made the decision inevitable and immutable.

Heckmondwike, UK-based 600 Group recently pulled back from outsourcing production to China because of poor quality levels and consequent warranty claims. The company, which manufactures and distributes machining tools and ball bearings, opted out of sourcing from China after new CEO David Norman came on board and reassessed and restructured product procurement.

"When I was appointed, it was clear that both the cost infrastructure of the Group and the machine tools supply chain needed urgent attention," says Norman. "Considerable action has subsequently been taken and continues to be required to effect transformational change within the Group’s operations, while concurrently taking additional defensive actions in light of depressed market conditions."

The Group’s prior strategy included outsourcing a large chunk of production and supply from China. But deteriorating quality levels and failed efforts to fix these issues, conflated by the costs of absorbing excessive claims, required a different course of action. In concert with the company’s decision to unplug China from its offshore supply network, it has moved to a simpler business model reinforced by manufacturing and supplying high-quality, customer-focused products.

This back-to-basics approach includes eliminating duplication and ensuring more consistency for customers. A single product management team now controls sourcing, working on behalf of the entire Group and its brands.

"Major restructuring and significant cost reductions have been necessary to ensure that 600 Group is in the right shape to weather the current market and has a strong platform from which to grow," adds Norman.

Under these circumstances, the Group’s supply chain has been re-engineered and new outsourcing arrangements put in place, resulting in a return to historic levels of product quality.