Armstrong & Associates report points to strong and emerging logistics market in Mexico

As Mexico continues to gain traction as a more than viable option for global manufacturers to set up shop and leverage favorable labor wages and shorter cross-border transit times, it is subsequently becoming an attractive market for United States and global transportation and logistics service providers.

That was a chief finding of a recent report from supply chain consultancy Armstrong & Associates, entitled “Mexico: Trucking, Railroads and Third-Party Logistics Market Report.”

The reasons for this vary, but Armstrong pointed out in the report that Mexico’s free market economy has a GDP in the $1 trillion range, coupled with a mixture of modern and dated industry and agriculture that is “increasingly dominated” by the private sector. And recent Mexican administrations, the report said, have expanded competition in seaports, railroads, telecommunications, electricity generation, natural gas distribution, and airports.

What’s more, it observed that since the North American Free Trade Act (NAFTA) took effect in 1994 Mexico’s share of U.S. imports has increased from 7 percent to 12 percent, while its share of Canadian imports has increased 100 percent to 5 percent. And estimates of Mexican exports to the U.S. range from 70-83 percent of the country’s total exports, with U.S. imports ranging from 50-62 percent.

When looking at the commodities transported between the U.S. and Mexico by all surface modes of transportation, the top five for 2011, the most recent year for which full year data is available, according to the United States Department of Transportation’s Bureau of Transportation Statistics were: electrical machinery-equipment and parts at $80.5 billion; computer-related machinery and parts at $67.6 billion; automobiles, trucks and parts at $61.2 billion, plastics at $15.9 billion; and measuring and test equipment at $13.4 billion.

Armstrong explained that while automotive is not at the top of that list automotive logistics in Mexico has made considerable strides since 1994, as there are currently 25 automotive assembly plants spread out from Mexico City north and more than 1,000 Mexico-based Tier 1 and Tier 2 suppliers. The firm added that more than 2 million automobiles and light trucks were to be exported from Mexico in 2012.

“There are two big pieces to Mexico-based logistics, automotive and consumer goods-and retail-related products,” said Dick Armstrong, chairman of Armstrong & Associates. “Along with that, the U.S. ships a lot of chicken and meat south, but that is overwhelmed by the amount of produce Mexico ships north.”

Looking at some of the transportation and logistics service providers with strong presences in Mexico, Armstrong cited DHL/Exel, Werner, and Ryder as being heavily involved in value-added warehousing, transportation management, and trucking.

Other active players include APL/Vascor, Kuehne + Nagel, and Menlo as 3PLs active in automotive, tires, and high-tech, and Kansas City Southern and Ferromex leading the charge on the rails, with intermodal and car hauling growing in importance with growing service lines, according to the report.

“The railroads have expanded the amount of business they have in Mexico,” said Armstrong. “Kansas City Southern has really benefitted and part of the benefit has been in intermodal operations, particularly as it applies to TOFC (trailer on flat car) intermodal traffic.”

And Mexican customs clearance procedures are much more efficient for TOFC-hauled freight, he said, with the most efficient carrier clearing freight through Laredo, Texas, the top northbound border-crossing port in less than two hours although freight still needs to get from the rail head to the final destination.

Moving cross-border freight between the U.S. and Mexico requires myriad steps, said Armstrong, with carriers having to clear customs on both sides of the border requiring two customs agents being involved, and pick up and delivery partners on each side of the border.

“You might think the service for a larger carrier with a Mexican subsidiary is best, but in general the companies that truck to the border have very good relationships with intra-Mexico carriers with whom they have had partnerships for a long time,” he said. “And they have very good visibility into each other’s operations and interline like crazy. For Mexican carriers, U.S. business is very important to them that these partnerships really work very well. This is the case with companies like Werner and Ryder.”

If the near shoring trend continues to make inroads in Mexico, Armstrong said shippers and carriers and 3PLs will expand on an as needed basis.

What is holding that up somewhat, though, is what he described as an equipment flow problem.

“When retail and consumer goods and food and beverage freight flows into Mexico City, the northbound freight typically comes out of Guadalajara and Monterey and other points in the Maquiladora area, which is 100 miles from the border,” he said. “This requires getting trailers out of the Mexico City area and back up to Monterey. That is a balance problem, which requires adding more trailers and trucks to solve that, coupled with continuing to improve the Mexican highway system.”

Mexican transportation infrastructure pales compared to the U.S. and Canada, said Armstrong, although the country has done a good job of building highways, some of which provide important connections.

And he noted that for the automotive sector there is a fair amount of traffic that flows through west coast ports in Mexico from China and Japan and then moves inland. And for retail and consumer goods freight and automotive parts he said there is a lot of movement from Europe.

“A very significant part of what DHL is doing is movements from Europe into Mexico, and APL is moving from Asia into ports in Mexico,” he said. “Cross-border traffic is first but there is still a lot of stuff moving into Mexico without moving through the U.S.

For 2011, Armstrong & Associates estimated total Mexican Logistics costs at $142.2 billion, with 3PL revenue at $11.5 billion. Armstrong said he views Mexico as one of the “bright spots” in transportation, with trade activity there expected to continue to increase.