Global Logistics—July 2012
Considering trade with Latin America? Here’s a look at five key countries in various stages of economic, political, and trade/supply chain growth.
Argentina. Until recently, Argentina has been relatively resilient to global economic woes, and the impact of slower growth in Brazil. Ernst & Young’s Rapid Growth Markets Forecast predicts 3.8 percent GDP growth in 2012.
Recent unexpected, government-imposed trade restrictions could, however, depress this modest growth. In October 2011, the Argentinian government introduced new restrictions on buying foreign currency—those buying currency now need prior approval from the tax agency. This move seems to be a response to a recent drop in international reserves, which have fallen by more than US $5 billion since early August 2011.
Additionally, the central government just enacted regulations to minimize imports. Importers are now required to fill out a mandatory Anticipated Sworn Declaration of Imports, which must be approved by the government. Foreign manufacturers wanting to bring their goods or services into the country must enter into partnerships with local manufacturers for production.
These new measures have created a tangle of red tape and brought denunciation from 14 member states of the World Trade Organization, including the United States and the European Union.
The import restrictions risk freezing Argentina out of international markets and making it more of an economic outlier than it already is, notes Marcela Cristini, senior economist at the Foundation for Latin American Economic Investigations.
Walter Molano, a Latin American specialist at BCP Securities, also criticized the crackdown on imports. "The Argentine economy is doing well," he says. "But they’re missing the big Latin America boom."
For Unilever, the new restrictions "hurt our ability to deliver good customer service and put products on the shelf," says Wendy Herrick, vice president of customer service and logistics for North America, Unilever. "We have to assess whether we should set up a third party to make products inside the country, or build a facility to produce certain items."
Brazil. Recent economic indicators leave little doubt that the Brazilian economy has slowed. With the health of the global economy also deteriorating in recent months, Ernst & Young lowered its forecast for GDP growth in the country to 3.1 percent in 2012 (previously 4.5 percent). Infrastructure bottlenecks are expected to contribute to this slowdown.
Trade with China, which has become Brazil’s largest individual trading partner, is credited with providing a major boost to the country’s economy. China’s share of Brazil’s total goods exports has risen from less than two percent in 2000 to more than 17 percent in 2011. It’s not surprising that commodities are driving this strength in bilateral flows.
Brazil is also a significant importer from China, bringing in a diverse range of basic consumer products that China can often make more competitively than many of Brazil’s own industries. But Brazil still runs a significant trade surplus with China— US $11.5 billion in 2011—representing almost 39 percent of the country’s annual total trade surplus of US $29.7 billion.
It is also worth emphasizing that Brazil’s trade with the rest of Latin America is now substantial, accounting for US $57 billion (more than 22 percent) of its exports.
In terms of cargo volumes, the country posted a record year for general cargo and container handling at its ports in 2011, reports Brazil’s Agencia Nacional de Transportes Aqaviarios. Container traffic rose nearly 34 percent.
From a supply chain perspective, finding experienced talent in Brazil remains a challenge. "The labor market is very hot and it’s tough to find and retain top talent—especially at higher managerial levels," Herrick reports.
Colombia. Colombia is the big turnaround story in Latin America. Over the past decade, the country has transformed itself from a crime-ridden, drug cartel-dominated nation to a progressive trade economy with robust growth.
The Colombian government’s ongoing economic reforms and deregulation, and attempts at reforming the legal system combined with its pro-business stance, are also reducing the economic risk associated with investing in Colombia.
Although 2012 growth is likely to slow to 3.8 percent due to the weaker global outlook, inflation will remain below four percent. The country is set to benefit from higher trade flows associated with U.S. Congress’ ratification of the long-delayed free-trade agreement. This will help to support GDP growth averaging four percent per year over the medium term.
"Much of Colombia’s economic and GDP growth can be attributed to an explosion in foreign direct investment due to the government focusing on creating a favorable trade climate," Ernst & Young says. Unlike its neighbors Venezuela and Bolivia, Colombia has differentiated itself from other nations in the region by looking favorably upon foreign investment.
Colombia still poses security risks. Organized crime groups, urban street gangs, and armed neo-paramilitary gangs continue to operate in the country. But, "these issues tend to affect the social climate to a greater extent than the investment and business climate," Ernst & Young observes.
In terms of physical infrastructure, Colombia still faces substantial problems, especially relating to roads, ports, and transportation. For example, it takes more than 10 hours to travel from Bogota to Medellin by road, a journey of only 152 miles. The country recognizes this problem, and has allocated $3 billion to improving roads and transport infrastructure.
Mexico. Mexico is the United States’ third-largest trade partner and second- largest export market for U.S. products. U.S.-Mexico bilateral trade increased from $88 billion in 1993 (the year before NAFTA), to $460 billion in 2011, an increase of 423 percent. In 2011, Mexico-U.S. bilateral trade increased by 17 percent from 2010 levels.
The country’s economy grew 4.6 percent in the first three months of 2012 over first-quarter 2011; higher than analysts and authorities expected. Mexico’s manufacturing sector posted 5.5-percent GDP growth in the first quarter of 2012 over the same period in 2011, greatly exceeding the expected four percent, according to the Mexican Statistics Agency, Instituto Nacional de Estadistica y Geografia. This growth reflects a reactivation of Mexican exports to the United States.
Mexico’s strong maquiladora base currently provides U.S. businesses an alternative to Asia-based manufacturing, and opportunities to sell into the U.S. supply chain. U.S. exporters, however, often under-appreciate Mexico’s size and diversity. It can be difficult to find a single distributor or agent to cover this vast market.
Violence and security issues are raising logistics costs as carriers and shippers must institute technology and procedures to counteract hijacking, diversion, theft, and other security risks.
U.S. exporters continue to be concerned about Mexican Customs procedures, including insufficient notification of procedural changes, inconsistent interpretation of regulatory requirements at different border posts, and uneven enforcement of Mexican standards and labeling rules.
In terms of transportation infrastructure, Mexico changed its port policy in the early 1990s to act as the landlord—keeping control of management and planning—while encouraging the private sector to partner in construction, equipment, operation, and maintenance. This has spurred a much-needed quadrupling of investment in Mexico’s ports.
Third-party logistics providers and transportation companies are broadening their cross-border services to support this surge in volume. UPS, for example, recently introduced CrossBorder Connect, a premium ground freight service between the United States and Mexico designed to address the heavyweight freight challenges that still exist in U.S.-Mexico trade.
Panama. On June 28, 2007, the United States and Panama signed the United States-Panama Trade Promotion Agreement (TPA). Although Panama and the U.S. Congress approved the legislation, and President Obama signed it in October 2011, no date has been set for putting the agreement into effect.
When enacted, the TPA will result in significant trade liberalization, including financial services. It includes important disciplines relating to customs administration and trade facilitation, technical barriers to trade, government procurement, investment, telecommunications, electronic commerce, intellectual property rights, and labor and environmental protection.
Panama’s growth rate is among the highest in the region, largely owing to strong fundamentals and prudent policies. Real GDP growth has averaged eight percent over the past five years.
The government’s economic strategy for 2009-2014 aims at positioning Panama as a world-class financial and logistics hub. Cumulative public investment in physical and social infrastructure during this administration is expected to reach 50 percent of 2010 GDP by 2014. Tax reforms enacted in 2009-2010 are designed to increase tax revenue by about 1.4 percent of GDP by 2013. The Panama Canal expansion will double existing transit capacity and increase transfers to the budget.
When West Coast congestion and transportation costs became increasingly prohibitive in 2006, grocery store chain H-E-B sought an alternative solution at the Port of Lázaro Cárdenas, Mexico, according to a recent San Antonio Express News article.
The company operates 336 stores in Texas and North Mexico, and five million square feet of distribution/warehouse space. Each store receives about 40 weekly deliveries, so finding economies of scale and squeezing out transportation costs has always been a critical success factor.
While the San Antonio-based company had relied on Long Beach and intermodal transport to Texas, the Mexico landbridge option—Lázaro Cárdenas to Laredo, Texas, via Kansas City Southern Mexico rail service, then truck to area distribution centers—provided a less expensive, more efficient transportation option that allowed H-E-B to stock shelves at low prices.
The experiment worked for several years. Asian goods arrived at a five-percent lower cost and two to three days faster than through Long Beach. As the popularity of Mexico’s back-door U.S. intermodal lane increased, however, so did ocean container rates. Inevitably, the cheaper option became less competitive.
Today, H-E-B is back using Long Beach for most of its Asian trade, while also pulling some volume through the Panama Canal to Laredo—a contingency for managing potential supply chain exceptions.
A recent review by the Canadian government has provided impetus for CN, and the rail industry at large, to re-engage customers and improve service from one end of the supply chain to the other. "The major cause of rail service problems is railway market power, which leads to an imbalance in the commercial relationships between the railways and other stakeholders," the Rail Freight Service Review reports.
The service review pressed CN to initiate supply chain collaboration and service-level agreements with a wide array of stakeholders and customers, both large and small, covering a significant proportion of the railroad’s revenue base in forest products, grain, metals, coal, and intermodal traffic.
Rail shipper representatives, however, have called upon the Canadian government to go even further and consider regulatory measures to facilitate service-level agreement negotiations and commercial dispute resolutions.
This current tension between Canadian railroad and shipper interests hearkens back to U.S. Senator Jay Rockefeller’s (D-W.Va.) introduction of the Surface Transportation Board Reauthorization Act of 2009. The legislation proposed making the Surface Transportation Board an independent authority sanctioned to mediate disputes between railroads and shippers, as well as monitor operational performance on the tracks.
CN President and CEO Claude Mongeau has publicly cautioned the government to "carefully weigh the future regulatory environment for Canada’s rail industry.
"Make no mistake. The intrusive, regulatory-based approach to service demanded by shippers would be unprecedented in a market-based economy," he adds. "Such an approach would send mixed signals to customers and suppliers around the world about the government’s approach to commercial markets for rail transportation in Canada."
Leading economists are raising their forecasts slightly for German economic growth in 2012, from 0.8 percent to 0.9 percent, despite the ongoing European debt crisis. And they expect Europe’s largest economy will return to more positive growth in 2013.
The news comes as Germany’s unemployment rate continues to drop—a consequence that observers have termed the second "German miracle" following the country’s post-World War II reconstruction effort. Labor market reforms over the past decade are now paying dividends as the country climbs its way out of Europe’s economic doldrums and sets an example for its underwhelming EU peers.
"The power of unions and craft guilds was curtailed, making it easier for unskilled youth to enter the job market and for employers to hire and fire at will," wrote Donald L. Luskin and Lorcan Roche Kelly in a February 2012 Wall Street Journal article. "Germany’s lavish unemployment benefits were sharply cut back. An unemployed person in social-democratic Germany today can draw benefits for only about half as long as his counterpart in capitalist America."
Low unemployment, which is expected to hit 6.2 percent by late 2013 from current seven-percent estimates, is making consumers more willing to spend money and helping to grow the country out of the current economic abyss.
This positive growth forecast is also having a direct impact on the transportation and logistics sector. Companies are expected to hire up to 50,000 workers in 2012, says German supply chain trade industry association BVL. Transportation is a key barometer of economic health, especially given Germany’s manufacturing pedigree.
"Germany’s top-notch infrastructure and its position at the center of Europe make it a key logistics destination," says David Chasdi, logistics expert at Germany Trade & Invest, a foreign trade and investment promotion agency. "Our ports, airports, highways, and railways are used to serve more than 500 million consumers across Europe, as well as markets in Asia."
As a consequence, foreign investors are steadily gravitating toward Germany. Penske Logistics recently opened a new office in Düsseldorf to deliver logistics services to companies in the automotive, healthcare, manufacturing, and chemical sectors; Amazon will open two new facilities in 2012; and Swiss logistics giant Kuehne + Nagel broke ground on a facility in Duisburg, the world’s largest inland port.
At least two million jobs could be created across the Middle East and North Africa if export barriers are lifted to help stimulate stagnant regional trade. Currently, most Arab countries trade far more with Europe, the United States, and Asian countries than they do with each other. Only 11 percent of Arab non-oil exports are within the region, one of the lowest rates of intra-regional trade in the world, according to a report by the International Trade Center (ITC), a joint agency of the World Trade Organization and the United Nations.
Taxes on goods exported within the region have dropped in recent years under free trade agreements. But bureaucracy as it pertains to technical regulations, product standards, and customs procedures has multiplied for Arab companies looking to export to neighboring countries. One common trade barrier is the "rules of origin" provision, which requires exporters to produce extra paperwork if their goods contain ingredients from a third-party country.
Calls to renew focus on regional trade come as the Eurozone debt crisis and signs of slowing growth in China threaten the Arab world’s leading trade partners. The ITC believes simplifying rules, and incentivizing more commercial activity between Arab countries, would have a positive effect throughout the region, boosting trade by 10 percent.
As U.S. companies locate more business in the Caribbean and Latin America, security is becoming a hot topic—especially as it relates to extending U.S. transportation security standards and policy to supply chain partners. A recent agreement between U.S. Customs and Border Protection (CBP) and the World Business Alliance for Secure Commerce Organization (World BASC) is one step toward addressing this concern.
Cartagena, Colombia-based World BASC is a non-profit global organization that establishes and administers supply chain security standards and procedures in cooperation with governments, companies, and authorities around the world.
More than 2,000 companies across the Caribbean and Latin America stated they would work with CBP to promote and enhance supply chain security in their regions under the Customs-Trade Partnership Against Terrorism (C-TPAT) initiative. The C-TPAT program has been partnering closely with World BASC for more than 10 years. This recent agreement formalizes that relationship and challenges both parties to continue to work together to promote safe and secure world commerce.
North Africa’s "Arab Spring" signaled major political reforms across the continent, an upheaval that observers expected might trigger an economic awakening in the oil-rich region. But that revolution is on hold as Mediterranean neighbors Greece and Spain confront spiraling debt problems that threaten to sink Europe into further economic crisis.
Africa’s 2012 economic growth forecast—pegged at almost five percent by the World Bank—is largely tied to the rich natural resources and oil reserves that BRIC countries have been increasingly exploiting. With foreign direct investment comes development, and inevitable improvements in transportation infrastructure and expertise to facilitate sourcing efforts. In fact, a recent McKinsey & Company research report posits that Africa’s middle class is growing, and comparable to India’s.
Still, major infrastructure gaps and social and political divisions—especially in the interior—must be plugged before Africa can truly compete on a continental and global scale.
"While keeping an eye on new economic storm clouds in Europe, Africa must keep its focus on reforms that encourage growth, and ease social tensions that set off the Arab revolutions and caused North Africa’s GDP growth to decline by 3.6 percentage points to near stagnation in 2011," according to African Development Bank’s recent economic outlook report.
Europe’s current crisis is doing little to support Africa’s progress, as demand for exports shrinks and investment dries up. This "shadow" is also complicating the recovery of North African countries such as Egypt, Tunisia, and Libya following their political uprisings.
"The shadow comes from a worsening debt crisis in Europe that is causing lower global growth. This would further weaken Africa’s export markets, depress commodity prices, and undermine Africa’s recovery," the report summarizes.
UPS went all in when it acquired TNT Express for $6.8 billion in March 2012—a play that unequivocally raises its stake in the European market. FedEx has since responded with three acquisitions of its own, the most recent of which expands its delivery profile in the burgeoning Brazilian market.
The Memphis-based expediter’s purchase of Rapidão Cometa Logística e Transportes—a leading transportation and logistics company in Brazil—will allow customers access to Latin America’s largest economy. FedEx will acquire 770 vehicles and trailers, about 9,000 workers, and 45 branches. The expediter expects to fully integrate Rapidão into its larger operation within two years.
The Rapidão move continues a trend that began in 2006 when FedEx went looking farther afield for complementary business pieces to expand its global presence. First it bought UK domestic express transportation company ANC Holdings, followed by Flying Cargo Hungary, China’s Tianjin Datian W. Group, and India-based Prakash Air Freight in 2007. After a dormant period during the U.S. recession, FedEx picked up its global M&A pace with AFL and Unifreight India, and Mexico’s Servicios Nacionales Mupa in 2011. It most recently acquired Opek in Poland and TATEX in France.
For a company that purposely contracted its branded name (Federal Express to FedEx) in 2000 so that it would translate easier phonetically in countries where it operates, its track record over the past six years has been consistent—suggesting that these most recent moves were a long time in planning and not just a reflexive response to UPS.
While the Opek ($70 million), TATEX ($188 million), and Rapidão (sale price not yet released) acquisitions are a drop in the bucket compared to UPS’ $6.8 billion TNT Express haul, a pattern has emerged in terms of where FedEx is investing capital and looking to capture market share—a yet-to-be-fulfilled Eastern European market; India; and the gateway to South America, which is poised to host the 2014 World Cup and 2016 Summer Olympics.
The United States and the European Union (EU) could become a beacon of global trade collaboration if they continue on a path toward a comprehensive trade pact, says Germany-based electronics and engineering juggernaut Siemens.
"Sending the wrong signals from the United States and Europe to emerging countries such as Brazil, which has always been somewhat shaky on global trade agreements, would be a devastating message," says Siemens CFO Joe Kaeser.
Officials from both countries recently released an interim report on the potential scope of a deal, including reducing tariffs and service and investment trade barriers. Such an agreement could also stem China’s role in influencing global trade rules, analysts add.
The United States and the EU already have the world’s largest bilateral economic relationship, and account for about one-third of total trade flow, according to the European Commission. And U.S. trade in goods with the EU totaled $636.9 billion in 2011, estimates the U.S. Census Bureau. While the transatlantic partners have worked for decades to establish closer ties, they have often been stymied by issues including agricultural policy, and establishing a common set of standards for products such as machinery and appliances.
Current election-year politics will likely stifle any significant momentum until 2013, but EU officials are hopeful that something could happen by 2014. The pact’s specific goals include eliminating all bilateral trade duties, providing more service transparency, establishing a forum for resolving health and sanitation issues, and improving businesses’ access to government purchases.