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The Logistics Challenges of Manufacturing in Mexico

A conversation with Matt Hamson, chief executive officer of Coronado Logistics Inc.

The Logistics Challenges of Manufacturing in Mexico

As manufacturers shift production from Asia to the western hemisphere, attention turns to Mexico as the ideal blend of low labor rates and proximity to U.S. consumer markets. Not so fast, though Ė there remain a number of issues to be addressed, before companies can set up successful operations south of the border. To be sure, the countryís maquiladora network of factories is already well-established, and can be expanded to accommodate the new surge of production. But companies are deeply concerned about the state of Mexicoís transportation infrastructure. Whatís more, the many reports of violence by drug gangs have them worried about the security of their people, as well as goods in transit. In this interview, conducted at SCOPE Spring 2014 in Chicago, Hamson talks about the realities of doing business in Mexico.

Q: What are some of the logistics challenges facing companies that are seeking to manufacture in Mexico?

A: Hamson: The biggest challenge is the gap between their expectations of how things work in the U.S. normally, and execution on the Mexico side.

Q: Many of those companies have already been manufacturing in Asia and other places overseas, so they must be used to an environment unlike that of the United States.

A: Hamson: Thatís true. Mexico is not a lot different from some of those countries. But insurance, security and transportation are a bit different than what you have in the United States.

In trucking in particular, the number one trend we see is lack of capacity. The movement of manufacturing from Asia to Mexico has outpaced equipment purchases by the trucking companies. At the same time, the majority of trucking in Mexico is dominated by smaller companies. Probably 75 percent of the equipment is owned by carriers that have 100 trucks or less. They struggle to expand rapidly.

I was recently talking to one of the large refrigerated carriers that operates in Mexico. They were turning down 30 loads per day Ė and they were just entering the peak season for their temperature-controlled cargo.

They donít have the equipment to service those accounts. Thatís true for both big and small companies.

Q: Are there also logistics issues involved in access for Mexican trucks entering the United States? This has been an issue ever since NAFTA [the North American Free Trade Agreement] was passed.

A: Hamson: Thatís part of the problem. We see it particularly in goods that pay extra due to transloading Ė shifting from one vehicle to another to continue the journey. But the bigger problem is that thereís just not enough equipment. The smaller carriers are usually family-owned. They operate within a region. Global players are used to working with large transportation companies that can handle all of their needs. Thatís hard to find in Mexico. Usually you end up with multiple smaller players.

Q: What about the quality of the trucking thatís available in Mexico?

A: Hamson: I would say the quality has increased a lot. On the systems side, trucking companies are using GPS tracking. They have up-to-date information, but communicating it isnít always timely. They usually cover those problems with people instead of with transportation-management systems. So you might find good equipment and a lot of people running it, but not necessarily the systems and the efficiency that youíre used to.

Q: What about equipment age? Here in the United States, a lot of owner-operators are being forced to buy new rigs because of environmental regulations.

A: Hamson: Itís not happening to that extent in Mexico, but as you mentioned, some of the laws allow Mexican truckers to cross into the United States, so they find themselves complying with those laws and upgrading their equipment. The average age of [power] equipment down there is about 10 years old. The trailers are a lot older.

Q: Let me ask you about intermodal. Some years back, stack trains became a big deal in Mexico, moving stuff to and from automotive plants. Then it petered out. To what extent is intermodal a viable option in Mexico today?

A: Hamson: Intermodalís a really interesting story in Mexico. There was a deregulation in the late nineties. That allowed foreign investment to come in. Kansas City Southern got a very nice concession from the government, and they have 14 years left on that. Also, UP has partnered with Ferromex. Between those two, they own 90 percent of the rail. So they have a real strong duopoly there.

Thereís pressure in the legislature in Mexico to reduce prices and break that apart, which has injected some uncertainty into the investment environment for rail, but neither of these companies is backing down. Currently, Ferromex has $500m in investment planned for 2014. Thatís 30 percent of their income Ė a huge capital expenditure.

In terms of growth, rail has a lot of potential. It was popular and kind of waned; now itís on the rise again. Just to compare Ė Canada has 60 percent of its cargo moving on rail, and the United States has about 42 percent. In Mexico, the highest number is 26 percent, and most people think that itís only 12 percent. So thereís a huge potential for growth shifting to rail. Not all of the tracks can handle double-stack trains, so you have these logistics hurdles, things that need to be upgraded. This is [the reason for] the huge spend theyíre making.

Q: These are the same issues that the United States and Canada faced decades ago?

A: Hamson: Right, they are playing catch-up. I would say in the next five to 10 years youíre going to see a huge amount of growth in rail and intermodal in Mexico. The Ferromex Pacific line runs up from Guadalajara to the Nogales-Mexicali-Tijuana area. Theyíre just months away from being able to handle stack trains there. Theyíre looking forward to the cost savings and to the additional security benefit.

Q: How would you compare the transportation insurance and liability environment in the United States versus that of Mexico?

A: Hamson: Thereís a major difference that sometimes surprises people. In the United States, when you get a transportation quote, it includes usually at least $100,000 of insurance on your cargo provided by the trucker or shipper. In Mexico, that is not the case. The trucking company does not provide insurance. Itís not required by law, and itís actually difficult to obtain. The owner of the goods has to obtain the insurance. Teaching that to some companies is difficult at times Ė they just assume itís included.

Itís important to understand what coverage you have. Getting all-risk insurance in Mexico is difficult. Just recently, a company was shipping food out of Mexico into the United States, and the product was damaged during inspection by the FDA. They opened the containers and spoiled the food inside. The shipper had insurance, but the Mexican policy explicitly excluded damage caused by health authorities. They did all the right things, and yet this exclusion is exactly where the damage occurred.

Q: What about the issue of safety and security?

A: Hamson: Thatís the number-one thing when people think about Mexico. I feel very comfortable there. Itís just like anywhere in the world Ė there are large cities, and those are dangerous. But the violence in Mexico is very targeted. If youíre not going out and partying until two in the morning, or going to strange parts of town, then youíre safe.

Q: How about safety for transportation? We hear lots of stories about drug gangs hijacking trucks.

A: Hamson: According to FreightWatch, which provides information on security worldwide, Mexico is the highest-risk country, along with two others Ė the United States and Russia. You can say itís relatively more unsafe in Mexico, but how much more? When you look at the raw numbers, the data says youíre 20 times more likely to have a vehicle theft or a robbery of cargo in Mexico than in the United States. Thatís kind of alarming. But what does that number mean? In material terms, itís one out of every 150,000 loads. In dollar terms, itís .12 percent of the cargo shipped. For companies that get hit, thatís damage to their business, but itís still a pretty low number.

One key difference is the level of violence. Eighty percent of cargo thefts in Mexico involve hijacking. In the United States, theyíre usually fraud and deception. When it happens in Mexico, thereís more violence involved. The trucker meets with the hijackers and is forcibly ejected from the vehicle. Thatís a lot scarier encounter than a fraud-type issue.

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