Mexico Paves The Road to Properity

Transportation infrastructure lies at the heart of Mexico’s ambitious plans for the future.

“Nowadays, competitiveness, economic growth, and countries’ opportunities for well-being depend largely on the solidity and modernity of their infrastructure,” said Mexico President Felipe Calderon on July 18, 2007, the day he announced a five-year, $37-billion public-private funding package to upgrade his country’s highways, railways, ports, and airports.

Calderon cited a study showing that every percentage point of Gross Domestic Product (GDP) invested in infrastructure generates additional economic growth of 0.3 percent.

But while Mexico’s transportation infrastructure has made great strides to date, obstacles still await. Logistics in Mexico currently costs up to 20 percent more than in the United States, according to consulting firm InfoAmericas.

A panoply of factors contribute to these high costs, including poor road conditions, inadequate rail infrastructure, a disconnect between transportation modes, and the resulting need to carry more safety stock.

Still, conditions have been good enough to attract many U.S. manufacturers and shippers who are tapping Mexico’s resources as a production center, market, and logistics conduit to the rest of North America. While Mexico’s transportation infrastructure considerably lags behind the United States’, in that gap lies opportunity.

Unlike the United States, which must overcome legacy infrastructure that was only partly designed to handle an influx of international goods or a high volume of north-south freight movement, Mexico has the opportunity to create a well-coordinated, multi-modal infrastructure to efficiently move shipments within its borders, and out for export.

Boom Times

Mexico and U.S. manufacturers doing business there have much good news to boast about. Mexico ranks as the world’s 12th-largest economy by GDP, on par with countries such as Canada and Spain. Per-capita income continues to rise, creating a growing middle class.

Approximately 90 percent of Mexico’s imports and exports are covered by trade agreements with more than 40 countries. The most significant agreement, NAFTA, helped triple intra-regional trade between the United States, Mexico, and Canada from 1994 to 2004.

Growing cross-border trade volume continues to drive many transportation improvements. The northern part of the country, for example, has seen a marked increase in the quality of its roads.

While NAFTA limits the ability of foreign companies to operate trucks in Mexico beyond a 25-mile zone on either side of the U.S.-Mexico border, U.S. third-party logistics providers (3PLs) freely operate logistics facilities and offer services there.

Partnership agreements among U.S. and Mexico carriers have spurred an ever-expanding array of consolidation and transfer facilities on both sides of the border, replete with 3PLs, brokers, forwarders, and drayage services managing Customs clearance and hand-off processes.

“Mexico’s steady march toward integration with the U.S. economy has been glued together by fairly sophisticated cross-border logistics, which manages to move goods at about four to five percent of the cost of goods sold,” according to InfoAmericas’ September 2007 Latin American Market Report.

“Large-scale manufacturers on the Mexico side of the U.S. border utilize state-of-the-art logistics processes and technology to connect their factories with global suppliers and U.S. customers,” the report notes.

Myriad government programs smooth border crossings. The well-established maquiladora factory system enables material and equipment to be imported to Mexico duty-and tariff-free for assembly or manufacturing, then re-exported back to the originating country.

Currently, the garment and electronics industries make heavy use of this system. Under NAFTA, some of these goods can now enter the Mexican market. Mexico’s government has also extended tax breaks to the maquiladoras to incent them to stay put.

Pre-submission of electronic manifests, and programs such as the Customs-Trade Partnership Against Terrorism (C-TPAT) and Free and Secure Trade (FAST), expedite Customs clearance and eliminate time-consuming cargo inspections at the border.

New initiatives include the Federal Motor Carriers Safety Association’s controversial pilot program, which allows up to 100 carriers from Mexico and the United States to receive cross-border privileges for one year.

The North American Facilitation of Transportation, Trade, Reduced Congestion, and Security (NAFTRACS) initiative is a three-phase pilot project introduced by NASCO to develop and deploy cargo tracking and management technologies for freight transported through the I-35/29/80/94 trade corridor.

Free-trade zones (Recinto Fiscalizado Estrategico) are also emerging with greater frequency, providing unique warehousing facilities where cargo enters and exits by going through Customs.

Merchandise leaves these facilities sealed in trailers that won’t be opened again until they reach their U.S. destination, bypassing inspection at the border.

“Mexico is using inland ports as experimental places to test these new Customs handling procedures,” says Frank Conde, director of special projects and communications at NASCO.

Mexico’s domestic infrastructure has received less attention than methods for bringing shipments over the border. The country’s infrastructure ranked below chief rival China and nearby Latin economies including El Salvador and Barbados in a recent World Economic Forum report.

A wide disparity exists among modes, however. Logistics managers in Mexico rate the quality of toll highways eight out of 10, and airports and seaports 7.9, compared with 6.2 for toll-free highways and 6.5 for rail, according to InfoAmericas.

In contrast to cross-border transport, “Mexico’s domestic logistics industry is less efficient and the full cost of transportation and logistics probably reaches closer to 15 to 18 percent of the purely domestic market GDP,” notes the InfoAmericas report.

“Currently, it’s hellish to get from point to point in the country,” acknowledges Conde. “Businesses can’t rely on consistent delivery times, so they build ridiculous redundancies into their inventory and transportation operations.”

Attaining Mexico’s ambitious improvement plans will require overcoming some significant obstacles.

While a national commitment to infrastructure improvement exists, some individual states show a lack of consistency. “They’re often not on the same page,” says Scott Satterlee, vice president of transportation for C.H. Robinson Worldwide, a 3PL based in Eden Prairie, Minn. “That’s one hurdle they’ll have to fight through.”

Mexico a la Mode

Highways. Eighty percent of Mexico’s domestic transport and 70 percent of international transport moves over the road. Toll-free highways are often of poor quality, and only 25 percent of Mexico’s roads are paved.

To upgrade, the Mexican government has been privatizing; since 1989 it has built more than 2,400 miles of four-lane highway through concessions to private sector contractors. Major toll roads stretch from Guadalajara to Zaplotanejo, Maravatio to Zapotlanejo, and Leon to Lagos de Moreno and Aguascalientes.

“State-of-the-art and world-class highways tend to be private, with high tolls,” says Gene Sevilla-Sacasa, vice president and managing director for Ryder Latin America.

Road congestion also can be an issue. Travel time from Mexico City to Loredo, for example, takes longer than a similar distance in the United States, according to Satterlee.

Paying the Tolls

Problems arise even on some toll roads, such as the Autopista del Sol, a 163-mile span connecting Cuernavaca with Acapulco. The road was allegedly constructed from poor-quality materials to minimize costs for the operators, who were awarded only a 10-year concession. The government has had to bail out several private operators, then re-privatize.

“Some issues have arisen in the last few years,” agrees Edward Habe, regional sales director for Averitt Express, a freight transportation and supply chain management services company operating in Mexico. “Even some toll roads aren’t being maintained, causing accidents and delays.”

Locals warn carriers to limit their speed on some stretches. Poor road quality also means carriers must replace trucks more frequently.

New toll road deals cover longer terms, which could encourage better quality. In August 2007, for example, ICA, Mexico’s largest construction company, won the right to run four existing toll roads in central Mexico with its $4.1-billion offer in a 30-year concession. Mexico plans to construct 10,900 miles of new roads, one-fourth of them in rural areas.

Of the country’s $37-billion infrastructure improvement package announced in July, $26 billion is allocated for roads, with half the additional funding coming from private sources. The government expects to complete 100 road projects, including major highways linking the Pacific and Gulf coasts, over the next six years.

Rail. Currently, rail carries 15 percent of both domestic and international freight traffic, but the potential exists for much more.

“Rail has been privatized, but still faces major investment issues,” explains Guillaume Corpart Muller, regional director, Mexico, Central America and the Caribbean, for InfoAmericas. “One, the legal infrastructure behind rail makes investors wary. And Mexico’s rail leadership has not demonstrated they can make the system work effectively and efficiently.”

In addition, different rail systems lack interconnects, forcing railcars to be unloaded, then reloaded. These delays mean it can take six to 10 days for a shipment to move from Asia to Mexico. “For plants operating on a just-in-time system, that’s not fast enough,” Corpart Muller says.

“In most cases, rail is effective when transit time and inventory carrying costs are less than the costs of carrying extra inventory at the plants,” says Joseph Gallick, senior vice president of sales for Penske Logistics, which serves as the lead logistics coordinator in Mexico for General Motors and other companies.

When rail systems are eventually interconnected, “companies will be able to reduce supply chain costs and cut inventory because the network will become more reliable and consistent,” adds Alejandro Marines, Director General-Mexico for Penske Logistics.

Mexico officials acknowledge that rail plays a key role in the success of the country’s seaports. Rail carriers such as FerroMex and Kansas City Southern de Mexico have upgraded services over the past few years, although they need additional revamping to handle increasing cargo volumes. President Calderón’s funding package allocates $4.6 billion to rail.

“The greatest potential for domestic transportation in the short term lies in improving rail,” Corpart Muller says.

Air. Shippers in Mexico consider air cargo cost-prohibitive, except for high-value goods such as electronics and pharmaceuticals. Even in those industries, many shipments fly by exception, in emergency situations only. Most airports have been privatized, and airport infrastructure investment plans addressed another important Mexican industry—leisure travel, although some of the 33 airports that received cash subsidies are located in industrial areas.

Seaports. Seaports play an essential role in Mexico’s international trade. Ports in Veracruz, Manzanillo, and Lazaro Cardenas lead the pack, having made significant investments in cargo handling and intermodal infrastructure. Lazaro Cardenas, for example, will soon be equipped to handle supersized Chinese containerships.

Mexico’s Pacific ports increasingly serve as an alternative to congested U.S. West Coast ports. Shippers report unloading times of as quick as eight hours, compared to the several days it can take in California. Mexico ports have considerably lower labor rates—25-percent less than those in the United States—and better labor stability.

“Some companies currently using the Port of Long Beach are now receiving shipments at Manzanillo or other Mexico ports, and trucking them to the eastern seaboard,” says Sevilla-Sacasa.

While Mexico’s Pacific ports garner most of the attention as an option for bypassing the congested U.S. West Coast, its Gulf ports are starting to attract some interest.

Averitt, for example, recently built a new facility in Panama City, Fla., to coordinate services with Linea Peninsular, which specializes in moving cargo between under-utilized Yucatan Peninsula ports and the United States. The agreement helps Averitt avoid busier U.S./Mexico crossings. Other 3PLs may soon follow suit, especially if infrastructure investment continues.

Market Know-How

Mexico’s rise continues to attract considerable interest from U.S. manufacturers.

“Large U.S. companies are heavily invested in Mexico,” says Sevilla-Sacasa. Smaller companies and market newcomers depend on 3PLs to manage freight and inventory in Mexico on their behalf, while larger companies outsource network planning and some product handling to drive down costs.

New entrants to Mexico manufacturing tend to source from other locations. “They may experiment with ocean and rail from the United States or Canada, so transportation can be costly at the outset,” explains Penske’s Gallick. While some companies begin building up local sources and driving down costs, others are content to outsource completely.

Consider Trumbull, Conn.-based Pilot Pens, which manufactures and markets quality writing instruments. In 2000, the company formed a subsidiary to buy, then resell, its pens in Mexico. Because it did not want to invest in infrastructure in the country, it turned to Ryder.

The 3PL transports goods from Pilot’s Florida manufacturing facilities to a Ryder-leased distribution center in Guadalajara, then out to its retail customers. Ryder also handles order processing, customer service, inventory storage and management, motor carrier selection and billing, and shipment tracking.

What’s the Difference?

U.S. shippers doing business in Mexico need to understand the similarities and differences between the two countries’ transportation operations.

Mexico Carriers: Due to truckload and less-than-truckload (LTL) ownership limitations, U.S. shippers and 3PLs face the challenge of finding Mexican carriers with business processes, technology, safety, equipment, and service quality equivalent to carriers in the United States.

Mexico’s upper echelon carriers are on par with the United States. But with the country’s highly fragmented carrier market, it could take five different carriers to cover one long route, and every handoff introduces the potential for security risks and transit time delays. In addition, Mexico’s informal, cash-only trucking industry retains a strong presence in the market.

“Service quality and price vary tremendously among Mexico’s carriers,” says Pete Montano, executive vice president of sales for LTL carrier CFI, which partners with 80 Mexican carriers. Carriers specialize in certain areas; smart shippers tap this expertise to ensure the best service in each region.

“Concerns over risk, theft, and product ownership are more complicated in Mexico than in the United States,” notes C.H. Robinson’s Satterlee.

Often it’s only after an incident that shippers learn some Mexico carriers don’t provide the same levels of insurance as in the United States due to high premiums. Shippers need to ensure their Mexico carriers provide the required coverage or consider purchasing third-party policies where applicable.

To help shippers further navigate Mexico trucking, most 3PLs offer the ability to thoroughly vet, then monitor, carrier performance. “We visit with our Mexican carriers every 30 days and create a report card,” says Montano. The carriers that do business with CFI must submit twice-daily updates, usually electronic, to the carrier’s tracking system.

Reputable brokers, forwarders, and drayage companies also play an essential role in ensuring safe, efficient freight management. Transportation services companies with bilingual personnel and an understanding of the culture are also critical to the successful movement of goods.

Asset Imbalances: The growing use of Mexican ports rather than U.S. facilities for goods inbound to Mexico’s domestic markets and plants, and the increasing quality of Mexico’s raw materials, has reduced the need for import from the United States into Mexico. That means imbalances can occur in the availability of trailer assets. “Typically, we don’t see imbalances until after the winter holidays,” says Averitt’s Habe, although an unusual blip caused an October 2007 imbalance. “Shippers and carriers have to stay on top of asset imbalances.”

Many Mexican carriers rely on their U.S. partners for trailer assets. But finding Mexico carriers with their own assets, and those willing to haul empty, can help avoid shortages.

Safety: Just as in some parts of the United States, cargo security is an issue on specific routes in Mexico. To keep their cargo as secure as possible, businesses are employing strategies including well-maintained fleets, security agents, truck seals, delivery protocols, convoys, and global positioning systems in areas where additional steps are warranted. Smart shippers use carriers that specialize in a region in order to capture inside knowledge about that area.

“CFI’s Mexican carrier partners must take responsibility for the trailer and the customer’s goods,” says Montano. “Every day, we verify that carriers are keeping track of all trucks and goods.”

President Calderon has also beefed up security at some transportation centers. “The military presence is greater than a few years ago,” notes Averitt’s Habe.

Yes, transportation infrastructure in Mexico leaves some room for improvement. But the current administration places a priority on investment in both infrastructure and commerce-friendly policies, which bodes well for the country’s future.

Tapon Corona Tips its Cap to Quality Infrastructure & Service

Tapon Corona makes high-quality bottle caps with a unique 27-ridge design that enables them to twist off easily, yet securely seal in their contents. But that’s only one reason the Mexico City-based company earned Anheuser-Busch’s certified supplier designation and tops favored-supplier lists at five of the company’s breweries.

The ability to consistently deliver those caps to breweries across the United States within tight 10-minute delivery time windows also contributes to Tapon Corona’s solid standing with the brewer, as well as bottling customers including the Mexican arms of Coca-Cola, PepsiCo, and Latin brands.

Tapon Corona relies on CFI (recently purchased by Con-way Freight) as a major carrier and logistics advisor, helping the company meet those challenging delivery constraints as well as maintain a rigorous just-in-time production schedule, says Enrique Fernandez, Tapon Corona’s chairman of the board. CFI’s flexibility has been key to making sure product arrives on time, he says.

Tapon Corona’s supply chain includes steel and aluminum sourced from a Japanese supplier that offers consistent high quality, delivered via ocean carrier to an inbound warehouse at Mexico’s Manzanillo port.

The raw material stays at the port until it’s needed during the six-day/24-hour production process. It’s transported over the road to Mexico City in one day, with Customs duties imposed only when material is drawn, a boon to cash flow. Other supplies are sourced largely within Mexico.

Outbound goods travel over the road, 80 percent of them to the United States. Tapon Corona’s PASC Mexican and C-TPAT U.S. certifications, combined with CFI’s, ensure fast border crossings for trailers, each of which contains 10 million pre-printed bottle caps. The manufacturer maintains two U.S. warehouses to accommodate spikes in customer orders.

While the current infrastructure works for Tapon Corona, there’s always room for improvement, and planned upgrades will open up new opportunities.

“The upgrades will help us export more product from Mexico,” Fernandez says. “We want to expand business with existing customers as well as microbreweries.”

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