Learning logistics: integrating into Mexico's supply chain network.

The Mexican transportation sector has been a minefield for U.S. companies over the past 15 years or so. Lured by the potential of full participation in the carrier market, many companies have been burned.

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Even before Nafta took effect in January 1994, the Mexican government sought to entice U.S. companies willing to invest in infrastructure and technology and generate employment. The concept of "neutral investment" was established in law to woo investors.

This mechanism met with indignant opposition from local carriers and trade associations and the resulting litigation and political obstruction caused expensive legal headaches. Some carrier companies persevered, learned the ropes and eventually managed to resolve many sticking points that mucked up their business opportunities. Logistics operator Schneider National is a good example.

Schneider first came to Mexico in 1991 as a cargo carrier and was quickly enchanted by the government's siren song, which sought to pump in foreign investment. The result was a logistics industry odyssey that changed the nature of their core business, only to see them become one of the most successful supply chain management companies today.

Armando Beltran--a Mexico City native who earned an industrial engineering degree from Louisiana State University--joined Schneider in 1992 and has seen it all. He is now Schneider's director general for Mexico.

"I was part of the original team that was responsible for establishing the organization here," he said, admitting that business was scant and the company was literally feeling its way around the market at the time. "We basically started from scratch."

About the same time Beltran joined Schneider, the Mexican government baited the hook. The idea was to entice foreign investment into the country by offering them free rein if they brought in their own cash.

"President Carlos Salinas and Commerce Secretary Jaime Serra Puche were especially looking for investment in transportation," Beltran told BUSINESS MEXICO.

Salinas, Serra Puche and key local customers lobbied Schneider and other companies by unveiling a proposal that was called "neutral investment." The catch was that investors were required to pledge that they would invest in Mexico, specifically infrastructure and technology, with the idea of generating jobs.

President Salinas drew up an amendment to the hermetic Foreign Investment Law, creating a loophole that would permit direct investment. The administration twisted arms in Congress and won passage. Companies such as Schneider and M.S. Carriers were given the green light to acquire small Mexican freight companies.

Though the government and its new foreign investment collaborators believed they had hit a home run, they would soon find out the ball game had just begun.

Building A Network

Via "neutral investment," in 1993 Schneider acquired Transpo Virel, a small operator owning about 20 old rigs and with a limited scope in its business operations. A modern business strategy was implemented the following year with adaptations reflecting respect for the Mexican business culture.

"We were able to change a number of ways in which transport was provided," Beltran said. "We were among the first to install driver training programs; we were among the first to invest in satellite tracking."

"We grew the company significantly between 1995 and 1996 and started making noise in the market. Customers were falling all over themselves to hire us to provide services even though our prices were higher. Still our overall efficiency actually meant a lower cost and we were getting all sorts of business."

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Transpo Virel's success quickly caught the attention of Mexico's National Cargo Carriers Chamber (Canacar) and its then-president, Bernardo Lijstain.

Canacar had been opposed to the concept of neutral investment from the outset and had sought to block any form of U.S. investment in Mexico's transportation sector. Even after Nafta took effect, the implementation of transportation guidelines were effectively blocked (and still are today).

Lijstain exerted great pressure on then-President Ernesto Zedillo, essentially seeking to have all foreign carriers booted out of Mexico.

"They had every right to voice their opposition," Beltran says. "But none of us was doing anything illegal. Of course, the transition to the Zedillo government--changes at the Commerce Secretariat and the Transportation Secretariat--produced difficult negotiations with the government and with Canacar. Eventually, we promised not to expand our fleets and to limit our hiring of new drivers."

The growing legal fees forced Schneider to reconsider their approach to doing business in Mexico and rethink the trucking business. This eventually produced a solution to the political quagmire.

"We decided to work with third-party providers, contracting their trucks and drivers," Beltran explained. "We reached an agreement with Canacar and became members of the chamber by 2000."

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Cross-Border Market

The key was asking the elementary business question: Where should we go to make a profit?

Instead of banging heads with Canacar, the focus became the huge cross-border market. The advent of Nafta had prompted a surge in trade with the United States and to a lesser extent with Canada. Exports and imports skyrocketed and Schneider decided to end its fight to become a domestic Mexican company and rather become a player in this new market for which it was ideally suited.

U.S. carriers were introducing new concepts into the transportation industry such as "less-than-truckload," or LTL, and providing value-added services. This made life much easier for manufacturers eagerly seeking efficient ways to export and/or import.

These concepts and the strong values of the U.S. carrier sector initially exposed a chink in the armor of the Mexican transportation industry. Schneider--with roots both in the United States and in Mexico--then made a wise business decision. They focused energy on partnering with Mexican companies and placed greater emphasis on adapting their business strategies to the Mexican way of doing business.

Schneider soon earned the reputation of being a reliable partner that was eager to work with Mexican companies and was not angling to steal business or do cabotage operations.

"Our experience here taught us to respect the Mexican carrier community--there is much to learn from them and there are things they do extremely well," Beltran said. "U.S. carriers do certain things well also and we sought to coordinate our efforts, partnering with Mexican companies and working to build up the sector as a whole."

"Basically, we teamed up with the Mexican carrier community to provide customers with a quality service that is both valuable and sustainable."

Logistics Mexican-Style

The idea has been to implement ideas and concepts that could work in Mexico.

"As a result there has been a transfer of intellectual capital, of processes and technology, too," says Beltran. "But we have always been careful to adapt these ideas and concepts to Mexican culture. We recognize there are many differences as to how we operate in Mexico versus how we operate in the States."

One of these differences is found in the personnel, or "associates," as Schneider calls all its employees.

"We are very proud that we have Mexican leadership and Mexican management. We fully recognize that success is contingent on having Mexicans who understand the intricacies of doing business here with all the support from corporate."

This combination of Mexican savvy and U.S. technology has helped Schneider experience exponential growth. Beltran is deservedly proud of the company's achievements and its capacity to manage cross-border cargo by air, road and rail.

"Today, we are moving over 500 cross-border loads per day. This is compared to one cross-border load per month back in 1991," Beltran declares. "We've seen annual growth of about 20 percent each of the past four years."

Even though Schneider claims auto industry giants, top players in the consumer goods industry and retail sector titans among its client base, the company is not picky about its customers.

"We have experience with electronics and specialists in the glass industry and chemical companies ... I mean, we have our own HazMat tanks," Beltran says. "But we are prepared to service low-volume customers as well, even if it's just one load per month.

"Our goal is to provide superior service to every single one of our customers. Because in this business, you are only as good as your last load."

Ricardo Castillo Mireles is a freelance journalist based in Mexico City who focuses on the logistics industry.

RELATED ARTICLE: Inland Ports

As globalization widens its reach, Mexico's borders are moving inland.

Just in the past few months, two major inland ports with Free Trade Zone (FTZ) status are being designed. One FTZ site is located in the state of San Luis Potosi, the other in the state of Guanajuato.

The San Luis Potosi project is a private enterprise already in operation and is being managed by Monterrey-based company Logistik. The contract for the Guanajuato "port"--the Puerto Interior Guanajuato--will be awarded by the state government soon and the project is under development.

The common denominator of these two sites is that both are railroad infrastructure hubs and the respective independent Customs facilities are to be managed by the Finance Secretariat. Both sites will receive trains that pass uninterrupted across the U.S. border from either Nuevo Laredo or Ciudad Juarez, or load up goods from ships docking at Veracruz. The cargo will not be stopped for a Customs check until it reaches the FTZ, where all merchandise will be received at the local Customs house and logged as fresh entry. This is an entirely new concept for Mexican Customs.

The midland location of both new sites is considered privileged since they are within reasonable distance (400 to 700 kilometers) of major Pacific and Gulf of Mexico ports as well as having been traditional hubs for traffic heading to and from the U.S. border. Even so, each project is unique in its own right.

Logistik

Located on the outskirts of the city of San Luis Potosi on the road to Salinas, Logistik is a privately owned 530-hectare park with an oval in-bound and out-bound railroad spike. It also features an industrial park aimed at attracting and developing maquiladoras.

Logistik general manager Fernando Villarreal boasts that the project he is directing is totally private with 100-percent Mexican funding. The initial outlay was a US$40 million investment, while he projects that US$200 million will be needed to fully fund the FTZ site.

The land is divided into several parcels, with 40 hectares set aside for warehouses to store bulk grain products. The Logistik site will have a total installed capacity to manage up to 60,000 tons per month. The facility has a 3.5-kilometer in-bound and out-bound railroad spike.

The warehousing silos are already in operation and grain is arriving both from the U.S. border and from Veracruz, where there is a severe shortage of grain-storage facilities. Logistik sees grain storage as its primary opportunity for now.

A plot of 240 hectares is being prepared for an industrial park--presently under construction--which is slated to have full infrastructure facilities by the end of this year.

A container terminal project is nearly finished and it will have a flow-through capacity of 200,000 containers per year.

The Finance Secretariat expects Customs facilities to be up and running by July so that complete FTZ operations can be under way.

Outside amenities will include a commercial zone for retail and wholesale, where the products entering the FTZ may be "imported" for distribution. Villarreal says the types of customers he hopes to attract are "both national and international companies that want to benefit from the integrated logistics platform we offer." Operations will be on a 24-7-365 basis.

The entire operation will be overseen by Swiss company SGS de Mexico. They will supervise the flow of entry and exit of merchandise and will be responsible for reporting Customs information directly to the Finance Secretariat. SGS specializes in certifying and supervising FTZs.

Logistik has already signed up several customers who are conducting preliminary operations at the FTZ. Among these companies are Customs broker S.R. Forwarding, Wal-Mart, Sigma Foods, egg producer Bachoco, Qualtia Alimentos (Kir and Zwan cold cuts brands), as well as denim manufacturer Industrial de Parras.

Guanajuato Inland Port

Guanajuato Governor Juan Carlos Romero Hicks announced the integration of its state-operated FTZ will include a cargo airport (an extension of the existing Leon municipal airport), railroad and road infrastructure, all designed to facilitate intermodal traffic.

Spearheading the operation will be a state-of-the-art Customs facility with X-ray and Gamma-ray equipment to expedite the handling and processing of merchandise.

A principal feature of the project is the construction of a main railroad station linking the several different rail lines criss-crossing the state of Guanajuato. The "ferropuerto" will hook up with the lines coming from Manzanillo and Mexico City, as well as the Nafta railroad lines that now pass through nearby Celaya. Rail companies Ferromex and Ferrosur currently have operations in the state.

Unlike Logistik, the Guanajuato Inland Port will not have silos, but the project aims to take advantage of already existing industrial parks in Leon.

The main feature--the inland Customs facility--is already a reality, built on a 31-hectare location near Leon where the FTZ will be located.

--Ricardo Castillo Mireles

RELATED ARTICLE: Ports Face Opportunities, Challenges

In early May, officials from Kansas City, Missouri, and Lazaro Cardenas, Michoacan, signed a cooperative agreement to establish a new transpacific trade corridor aimed at "alleviating the delays and congestion at West Coast ports" and "promoting trade growth between the United States' midwest and Mexico," The CalTrade Report said.

The agreement reportedly calls for Kansas City and Lazaro Cardenas to jointly fund a "neutral marketing campaign" designed to "attract trans-Pacific traffic between the cities' ports, promote in-bond transfers between the cities' Foreign Trade Zones, and promote the development and deployment of security tracing and tracking systems along the U.S. midwest-to-Mexico corridor."

The continuing cargo bottleneck at the ports of Los Angeles and Long Beach have spurred action on other major projects aimed at keeping pace with the unprecedented flood of container cargo that is expected to move through the two ports over the next two decades.

The parent of Los Angeles-based Marine Terminals Corp. (MTC) has reportedly proposed the construction of a container port on the Baja California Peninsula, about 150 miles south of the California-Mexico border.

The Punta Colonet terminal complex would feature a network of terminals, warehouses, distribution centers, and berths capable of handling the newest generation of 8,000-plus TEU (20-foot equivalent) and larger capacity containerships connected to the California border by a dedicated rail line, the company said according to The CalTrade Report.

MTC has already begun lobbying the Mexican government for the goahead to proceed with the project, which will cost an estimated $1 billion and about five years to complete.

This news comes as Mexico's Transportation Secretariat recently admitted the cost for the use of port infrastructure in Altamira, Tamaulipas, is almost double the tariff charged in Manzanillo, Veracruz or Lazaro Cardenas.

Jorge Lecona, director of Hutchison in Mexico, criticized deficiencies in the Customs area of all the terminals.

"Much work has been done to promote the competitiveness of the ports, but the Customs area needs to work more on improvement. This is why the fiscal brokers will be a relief for the sector," he said, according to Reforma.

--Tom Buckley