FEATURE OF THE WEEK: Mexico – A market opportunity worth pursuing?

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Prior to the signing of the North American Free Trade Agreement in 1994, some U.S. and Canadian truckers started doing business in Mexico to position themselves in a market that was rapidly starting to become part of the global economy. Companies such as CAT, CFI, Challenger, Celadon and Schneider were among the first to allow their equipment to enter Mexico. The large American railroads, Southern Pacific, Santa Fe and Union Pacific, (that were all independent at that time) maintained offices in Mexico and had agreements in place with the Mexican railroads.

Once NAFTA was signed, it began a stampede of carriers trying to do business with Mexico. Several companies opened offices in the country. Some invested in the country either by creating companies or establishing joint ventures with existing local carriers.

While so much attention is focused on China and India these days, Mexico seems to have become the forgotten trading partner of Canada and the United States. What is happening in Mexico and what is the current state of cross border transportation between Mexico and its neighbours?

Over the past few months I had the opportunity to work with a large Mexico-based food manufacturer that is in the process of expanding the sales of their products throughout North America. This afforded me the opportunity to meet with a broad range of transport companies that service this market and update my knowledge of this market.

Rail Service in Mexico

In 1997, the Mexican government privatized the rail industry. The government created three companies, TFM that operates the Laredo-Monterrey-Mexico City corridor, Ferromex, part owned by the Union Pacific railway that has authority of the northwest and Ferrosur that covers the south. By investing in assets and technology and by raising rates, this provided an impetus to ignite this industry. This gave shippers that were accustomed to shipping by truck a viable option. As a result, rail transportation became part of the supply chains of both consumer and industrial manufacturing consumers.

The Mexican government allowed foreign ownership of one third of Mexico’s national rail system. More recently the Kansas City Southern (KCS) System acquired the TFM Railroad.

According to Steve Ramescu, President of Axsun Logistics in Montreal, Quebec, “There is great benefit in having one management team, one information system and a more seamless movement of goods to and from Mexico. The Mexican government has allowed international containers to travel through Mexico in bond. This allows Mexico to become a ‘land bridge’ and eases the congestion at U.S. ports.” While approximately 12 to 14% of freight moves by rail in Mexico, this is projected to increase to 17 to 20% over the next few years.

Better rail service means that large retailers and consumer manufacturing companies are locating their DC’s in Mexico rather than in the United States, to service their Mexican consumers. As examples, Wal-Mart operates a DC in Mexico City and JC Penny has DC’s in Monterrey and Guadalajara.

Truck Transportation

Cross-border truck transportation (Mexico to USA and Canada) has made progress in some areas but it has remained static in others. While the free trade agreement called for open borders for truckers, this has not happened and is not likely to happen in the foreseeable future. However, this is in some ways more symbolic than it is truly detrimental to cross-border truck transportation.

According to Armando Beltran, director general, Schneider National Inc., Mexico, one of the big changes has been in trade flow patterns. “During the early years of NAFTA, there were naturally much more southbound flows than northbound flows. Finished goods and raw materials alike were being brought down to Mexico. Over time, production lines shifted from the U.S. to Mexico and Mexican companies started to develop local suppliers and an exporting business model. Then northbound finished goods and raw materials started being sourced from Mexico in North America. This has driven changes in capacity requirements and dynamic changes in pricing methodologies.”

Trailer interchange agreements allow carriers to move freight across the U.S. Mexico border, even if it has to be transferred from an American or Canadian carrier to a Mexican carrier. There is a broad array of companies that provide transportation service between the three countries. There are large carriers with thousands of tractors and trailers (in the United States and Canada that provide through service to and from Mexico) and there are small (i.e. ten truck) niche players that specialize in certain lanes (i.e. Tijuana to L.A.).

Initially Schneider National made the decision to invest in Mexico. Commented Beltrade, “Since 1997, we made the decision to work in Mexico in partnership with Mexican carriers. Schneider National brings its trailers/containers and the Mexican carriers contribute their trucks and drivers. We believe that Mexican carriers are better positioned with their cultural experience to deal with this uniqueness.”

Transit Times

According to Leon Jorge Medina of CAT Global Logistics in Montreal, “A typical over the road transit time from Mexico City to Laredo is only one day and from there to Calgary, Toronto and Montreal is about 4 days with a single driver and as low as 2 days with a driver team. Ramescu commented that “Intermodal service can take some 3 days on the Mexican side and about 10 days from the U.S. – Mexico border to these major Canadian cities.” While intermodal offers lower rates than truck, equipment availability may be a factor.

Future Challenges

There continue to be a number of challenges in shipping across the Mexico border. These include:

1. Increased security and regulatory requirements create border delays that are costly and inefficient.
2. There are significant more flows of northbound freight rather than southbound freight that create structural issues that are difficult to correct.
3. The three NAFTA countries have incompatible regulatory frameworks that manifest themselves in varying equipment weight and dimensions and different approaches to hours of service.
4. The multiple handoffs of the freight at the border (i.e. U.S. carrier to U.S. forwarder to transfer agent to Mexican carrier) create a higher risk of shortages and claims.
5. During a period of capacity shortages, some truckers may choose to not allow their trailers into Mexico in order to make their containers available for traffic moving within the United States and Canada.

Nevertheless, for many carriers, Mexico represents one of their most profitable lanes. All of the carriers with whom I spoke in preparing this article indicated that they are achieving significant growth on their Mexican business and expect this growth to continue in future years.

If you would like to share your experiences in shipping to and from Mexico or would like more information about how to service this important market, please contact me at dan@dantranscon.com.
Dan Goodwill is president of Dan Goodwill & Associates Inc. He has over 20 years of experience in the logistics and transportation industries in both Canada and the United States. Dan has held executive level positions in the industry including president of Yellow Transportation’s Canada division, president of Clarke Logistics (Canada’s largest Intermodal Marketing Company), general manager of the Railfast division of TNT and vice president, sales & marketing, TNT Overland Express. He can be reached at dan@dantranscon.com.

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