U.S. Fleet Execs See Growing Potential in Mexico

This story appears in the June 1 print edition of Transport Topics.

Despite recession-related declines in trade with the United States, Mexico’s potential as an economic power has shippers and fleet executives taking advantage of the emerging market there.

Mexico, currently the United States’ third-largest trading partner, sends billions of dollars in freight across the border each day, much of it by truck.

Executives said that freight, once primarily disposable, cheaply made goods, now largely consists of high-value items such as televisions, electronic equipment and cell phones — the result of a concerted effort by the Mexican government to attract more sophisticated industries.

“We think Mexico has the potential to reach to the top five or 10 economies of the world by 2025,” Angel Mendez, senior vice president of global supply management for Cisco Systems Inc., told Transport Topics.

Craig Giffi, who heads the U.S. Consumer & Industrial Products Industry practice at Deloitte Consulting LLP, said that Mexican business officials are optimistic about the country’s ability to expand and compete in the North American market.

“The Mexican executives that we surveyed and interviewed for our North American competitiveness study were much more bullish about their capability three or four years out than were U.S. executives or Canadian executives,” he said. “There’s a real sense of focus and targeting . . . around what industries or what sectors they want to compete in and how they are going to go about that.”

A spokesman for the trade office of the Mexican Embassy in Washington, Francisco Sandoval, said the government has been implementing programs to bolster the industrial base in the information technology, auto parts and aerospace sectors.

Fleet executives stationed on both sides of the border have noticed the efforts of the Mexican government.

Armando Beltran, director of Schneider National’s Mexican operations, said he was seeing more growth in “electronics, cellular [phones], computers, LCD [screens], appliances and these types of durables.”

According to the U.S. Census Bureau’s Foreign Trade Division, the U.S. imported $12.9 billion in communications equipment from Mexico in 2008 — more than four times the amount it received from the country a decade earlier.

Mexican imports of electronics, appliances and audiovisual equipment all showed similar rates of growth.

Schneider’s projections, Beltran said, show growth continuing, because “companies are trying to put more business and open more plants in Mexico.”

Stephen Russell, chairman and chief executive officer of Celadon Group Inc., a longtime participant in the Mexican market, said that in “the last five or eight years [Mexican manufacturing] has shifted from making cheap toys and cheap hats . . . which moved to China . . . [to] more durable goods in nature: washing machines, dryers, bathtub fixtures and auto parts.”

“What we’ve seen over the past two or three years is a slow migration back here by some of those companies that have gone away from Mexico,” said Carlos Fallas, vice president and general manager of FedEx Freight Mexico. “They may not have come back completely back to Mexico, but they certainly decided it was important to them to have at least some portion of the manufacturing closest to the largest consumer market in the U.S.”

Mendez agreed, saying most shippers are “looking for the short supply chains.”

“We’re looking for the most efficient locations,” he said. “Mexico has some great competitive advantages to access the North American market.”

Troy Ryley, director of transportation and distribution for Transplace Mexico, said, “There’s seemed to be a boom over the last five years” in “mainly time-sensitive” products such as high-tech components.

To deal with that boom, Ryley said, the third-party logistics and technology provider has expanded its services and begun arranging for deliveries to and from the interior of Mexico, rather than simply setting up border crossings.

Ryley described the additional service as “more transparent” for customers, because “they are just dealing with one provider, instead of seven.”

Despite the improvements, Mexican exports have slowed along with global economic activity.

Herb Schmidt, president of Con-way Truckload, San Mateo, Calif., said that historically, “about a third of our business” involved the Mexican market, “but right now, it is running about 25% because the business in Mexico has contracted in the last six months.”

According to the U.S. Bureau of Transportation Statistics, trade in the first two months of 2009 between the United States and Mexico has been significantly off the pace for last year.

In January, surface trade between the two countries totaled $29 billion — a 31.1% decline year-over-year — and in February, the two countries shipped just $18.1 billion in goods across the border, a drop of 25.7% from the same month last year.

“I am very optimistic that eventually . . . maybe as soon as late this year . . . we will start to see some of this growth come back,” Beltran said.

To prepare for the economic rebound and anticipated future growth, Schneider is “growing our sales presence in the country,” Beltran said, noting that the company has “added resources in some markets like Monterrey and opened new offices in others, like Queretaro.”

He also said Schneider has expanded its service offerings and is developing better technology programs.

However, he said, Mexico needs “a number of structural reforms” such as changing its tax code and establishing a better energy policy, and needs “to further capitalize on our geographic position — proximity to the U.S. — by building the right infrastructure that allows for efficient supply chains, so Mexico can compete vis-à-vis with any other potential supplier.”

In an attempt to address these issues, Mexico President Felipe Calderon said during President Obama’s trip there in April that the country was proposing more than 200 border infrastructure projects to smooth the flow of commerce.

These ongoing problems have caused some companies to shy away from building in Mexico.

For example, Douglas Oberhelman, group president for Caterpillar Inc. overseeing human services,

sustainable development and re-manufacturing, said that the Peoria, Ill.-based equipment maker chose in December to establish a “very big assembly plant in Texas,” over bids from Mexico.

“Mexico was slightly more advantageous in a couple of ways, but we ruled it out because of political risk,” he said.

Schneider’s Beltran, based in Mexico, agreed that social issues, such as growing violence related to illicit drugs, and political issues, such as the limit of one six-year term for the country’s president — which he said hinders the government’s stability — do create risk for companies operating in Mexico.

Another challenge executives cited was the current status of cross-border trucking between the United States and Mexico.

“The border crossing is a mess, both ways — in and out,” Oberhelman said.

Freight crossing the border must be hauled by a drayage truck, slowing down shipments, executives said.

“It just delays shipments in and out and complicates the supply chain,” Oberhelman said.

Celadon’s Russell, a proponent of opening the border, said that the current system “adds complexity, it adds inefficiencies and it adds waste.”

Ed Alderman, managing director of international operations at Estes Express Lines, said the less-than-truckload carrier has not experienced significant problems at the border, but uncertainty about how long a shipment will take to cross forces it to build extra time into its delivery schedules.

“You can go across the border as fast as five hours, and most of that is waiting in line to get across the border,” he said. “Or sometimes it can take 10 or 12 hours, so we allow 24 hours for cross-border shipments.”

Earlier this year, the Obama administration ended the pilot program aimed at simplifying the process of cross-border trucking by allowing Mexican trucks to have access to U.S. highways beyond the narrow commercial zones near the border. The North American Free Trade Agreement requires the border to be open, but the United States has refused to comply, citing safety concerns.

Without the pilot program — which the Obama administration pledged to restart only after Mexico imposed billions of dollars in tariffs on U.S. imports — a U.S. truck can carry a load only as far as the border. There, the load must be transferred to a drayage truck for the actual crossing into Mexico, where a Mexican carrier will make the final delivery.

However, not all trucking executives favor a more open border.

“I don’t think it’d be good for our country or our industry,” said Con-way’s Schmidt.

That opposition, he said, is rooted in the belief that “it will displace U.S. driving jobs on the U.S. side of the border, no question about it.”

Schmidt added the current setup actually boosts business for companies on both sides of the border.

“The way it works right now, if we grow, the Mexican carriers grow, and if they grow the business in and out of Mexico, then we grow — it’s a win-win,” he said.