Mexico offers logistics alternative: becoming integral part of U.S. supply chain.

The logistics business in Mexico has been caught up in a whirlwind of change ever since the North American Free Trade Agreement (Nafta) went into effect.

A decade ago, the industry was known as transportation and distribution. As the joke goes, back then, the sector was dominated by individual family-owned trucks with names like "Mudanzas Martinez" painted on the side; now, the same trucks have banded together and repainted their vehicles with names like "Lopez Logistics." Continuing in this vein, participants in the industry today have taken to calling themselves supply chain management professionals.

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But it certainly isn't as simple as that. The industry is burgeoning and modernizing as imports and exports drive the Mexican economy. The ports modernization sponsored by President Ernesto Zedillo is paying dividends, as is his strategy to privatize the nation's railroads.

Two items are helping drive the growth and investment in the logistics industry--China and a backlog in U.S. Pacific Coast ports.

China's skyrocketing growth offers Mexico the opportunity to step in and offer its services as an integral part of the U.S. supply chain beyond the goods it already produces and exports to its northern neighbor, the world's No. 1 economy.

Secondly, traffic at the California ports of Long Beach and Los Angeles is so backed up that as many as 50 ships are kept waiting offshore as long as a week at a time. Environmental restrictions and other limitations prevent the ports from expanding and other U.S. ports are rapidly becoming backed up. Investors are eyeing Mexico as a solution wherein Pacific Coast ports would be linked to intermodal transport and shipped overland to the United States.

The good news is: Mexico appears capable of taking advantage of the opportunities these situations present. The bad news is: bickering among companies has slowed implementation of regulations and much-needed reform.

Transshipment Of Goods

Mexican rail already offers shippers an attractive alternative to heavily used U.S. Pacific Coast ports.

A new law went into effect on December 1, 2004 opening up the ports of Lazaro Cardenas (Michoacan) and Manzanillo (Colima) to container traffic. Effectively, this means Mexico now allows the free transit of containers from Pacific Rim nations to the United States. The catch is that transit is only permitted by railroad.

Mexican ports were previously closed to this type of cargo. For many shippers and carriers, Mexico was uninviting since the Finance Secretariat levied a US$90,000 refundable bond on each container. Now a green light has been given to railroad companies Transportacion Ferroviaria Mexicana (TFM)--a partner of Kansas City Southern--and Ferromex--a partner of Union Pacific--to haul containers to the U.S. border cities of Laredo and El Paso. The only money required of the two railroads is a US$55,000 warranty for the operations.

"This year an agreement was signed among several government agencies for the development of intermodal corridors," said Customs official Fanny Angelica Euran Graham.

"With this new accord, we have been working with the Secretariat of Communications and Transportation and the transport industry to facilitate the process. Some corridors have been established through new taxation rules managed by the Finance Secretariat."

"Basically," Euran Graham said, "this benefit is limited to merchandise transported by railroad under international traffic regulations from Lazaro Cardenas to Nuevo Laredo, from Manzanillo to Ciudad Juarez and from Manzanillo to Nuevo Laredo."

The response so far has been enthusiastic. Railroad operators and port officials are thrilled.

Carlos Porraga, the logistics manager for TFM, says this is an opportunity his company has long been lobbying for.

"It's a giant opportunity we have long sought and we have a lot of experience in internal intermodal operations," he said.

Although dealing with imported goods fresh off a boat and learning the way around the dockyards is all new, TFM is ready for the challenge.

"We are already working with large shipping companies like Maersk, CP Ships and APL," Porraga said. "Even so, we anticipate that this will be an international traffic business that will evolve and develop gradually."

Lazaro Cardenas port operator Juan Paratore says that, thus far, his port--which opened for business just over a year ago--is handling 8,000 TEUs daily. (TEUs are 20-foot equivalent units or 20-foot-long cargo containers.) Commercial operator Hutchinson Ports Mexico has already announced plans to construct a new state-of-the-art dock in the port as shipping lines that operate in the Pacific are signing up for service through Mexico.

Among shipping lines that are aggressively shifting operations to Lazaro Cardenas are NYK, Cosco Lines from China and Taiwan's Evergreen Lines. According to Paratore, in just a few years, the port will have a flowthrough of 200,000 containers a year.

"And we can consider building new docks as needed to handle even greater traffic loads since we have a 16-kilometer long ocean front," Paratore says.

Truckers Want In

Not everyone is happy about the new international traffic laws, however.

Oscar Moreno, the legal adviser for Mexico's National Cargo Carriers Chamber (Canacar), characterizes the new arrangement as "an unfair trade practice."

"What's genuinely intermodal about a corridor that only allows railroads to participate?" he asks.

After months of lobbying and public criticism from Canacar and other trucking associations, Customs officials announced it would examine the creation of intermodal trucking corridors.

A pilot program will be organized out of Ensenada, Baja California, which is the nearest Pacific Coast port to the U.S. border. An oversized cove is being dredged to facilitate access for large container ships and the containers would be hauled by road to Tijuana, Tecate and Mexicali.

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Customs official Euran Graham says truckers originally were left out of the intermodal picture because the government believed it would be impossible to control the movement of containers by truck. She said the primary fear was that haulers were more vulnerable to theft and criminal organizations.

"Our expectation is that allowing transport by truck would likely result in an increase in contraband, which would probably remain in the country to be sold on the black market," she said.

In contrast, Euran Graham insists officials have full control of the railroad operations

"The railroads have cooperated fully with us, including developing linked and integrated operations," she said. "They share information electronically, which allows us to closely monitor traffic and assures us trains will not deviate from specific itineraries, they won't make unauthorized stops and cargo won't be removed until it reaches its destination."

Euran Graham explained that the warranty for each operation is invested as a global bond fee ensuring that the carriers--the railroad companies--are responsible for fulfilling the letter of the law and guaranteeing that the merchandise would transit out of the country on time and untouched.

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Demanding Inclusion

Nonetheless, Canacar's Moreno insists the law exclusively benefits railroad companies "contrary to federal law governing competition." He asserts that the General Customs Administration Office should extend the terms of the transit permit to include road carriers.

"The Federal Competition Law is supposed to guarantee and foster free access to the market and the law should be enacted with regard to truckers and the intermodal transit agreement," Moreno said.

This is highly unlikely, at least in the foreseeable future.

"The trucking industry was excluded for very clear and specific reasons," says Euran Graham. "We have established that certain sensitive and restricted cargos must be transported by rail, for security reasons. We simply don't have the mechanisms in place to control and monitor truck traffic.

"We will continue to work with the trucking industry to define a set of prerequisites, controls and requirements that might enable us to open some traffic to them. But we have to get to the point where we trust individuals or companies to be responsible for the containers in transit."

Logistics Legislation

For over seven years, a road cargo bill has been gathering dust in the Chamber of Deputies.

Transportation Committee President Francisco Avila says a failure to compromise among the parties and competing interests has prevented the bill from being voted out of committee. Representative Avila says the situation has been effectively muddled by three competing transportation interests: Canacar; the National Association of Private Transport (ANTP); and the Mexican Association of Courier and Messenger Companies (Amepac)--and their lobbyists.

* Canacar represents public service federal transportation, that is primarily truck owners who carry cargo for third-party services.

* ANTP--a new organization--represents large companies who own their own fleets, as well as companies that do fleet leasing.

* Amepac represents courier service suppliers, including global giants like DHL, FedEx and UPS, as well as a myriad of national companies such as Multipak and Estafeta.

None of the organizations appears willing to compromise and Avila has little hope the bill will become law before the 59th Congress wraps up next year, unless the competing lobbying groups agree to work with each other.

Canacar's Moreno says private service fleet operators such as those represented by ANTP are breaching the law by providing third-party services. These companies were not issued federal licenses that allow them to haul goods for third parties.

ANTP spokesman Leonardo Gomez responds by saying his organization's members are indeed abiding by the letter of the law. He explains that the law states that private fleet operators can provide service to third parties if the merchandise is "linked or related to the operations of the fleet owner." For example, a baking company that owns its own fleet of trucks can haul refined sugar for a third party because sugar is a product used in the baking industry.

The law allows for broad interpretation and Gomez says the ultimate goal is to make trips cost efficient. Trucking companies would prefer to avoid having a truck return empty to its point of origin.

Stifling Fair Trade

Canacar claims this is an unfair trade practice. Private fleets are thus competing against "public" carriers, but Gomez insists it is a perfectly fair and legal interpretation of the word "linkage" in the law. Indeed, this interpretation has prompted a widespread rise in hauling contracts for private fleets who are represented by ANTP.

It is disputes such as this--and the heated confrontations that have resulted--that have prevented the three organizations from finding common ground to begin real negotiations over the new road cargo bill. The nasty stand-off has also sidelined discussion of related legislation.

For instance, Canacar and the government have long sought improvements to the national highway network. Last year, roads were badly battered by months of torrential rain and road conditions deteriorated. The ongoing quarrel means the pending approval of regulations establishing cargo weight and dimension limits--to prevent rapid deterioration of roads and highways--has been delayed.

Javier Altamirano, president of ANTP, argues that Canacar is trying to set the limits unreasonably low by overstating the damage larger, private fleet trucks cause.

"Their strategy is to force truckers to carry extremely light loads, forcing clients to pay for more trips, thus producing higher costs for businesses and consumers," he said.

This debate goes to the heart of discussion that is the focus of the logistics industry--cost efficiency along the supply chain. And if the lower weight and dimension measures are adopted, transportation costs will likely soar.

The most recent development is that the number of companies going back to operating their own fleets and not outsourcing to "public" carriers is increasing. ANTP members such as bottling company Femsa and baking company Bimbo now operate huge fleets of multiple-use transports to fulfill their own supply needs. But in doing so, they have hurt the bottom line of dozens of trucking companies, many of whom have been forced out of business.

As a result of the industry-wide bickering, Congress has been reluctant to act.

Moreno says Congress would prefer that the industry negotiate its differences on the basic issues and establish a more cooperative environment.

"The problem is most of the basic issues already are resolved," Moreno said. "The next step is for Congress to take on the question of weights and dimensions, leasing, linkages, parcel services and foreign investment. It's time for decisive action ... they've had plenty of time to study the particulars."

Even with all these issues to consider, Congress seems prepared to continue its "eternal siesta," as one carrier described the Transportation Committee's inaction.

This suggests industry leaders will continue to bicker over new laws and accuse each other of violating existing regulations that are not fully enforced.

But once these roadblocks get cleared away, Mexico is poised to become a prime-time player in the global logistics industry.

RELATED ARTICLE: DEMAND FOR PORTS

A construction boom is underway along the Pacific seaboard of North America as ports struggle to handle the growing traffic from China.

Some of these new ports are aiming to lure away some of the shipping that jammed up the ports of Los Angeles and Long Beach last year. Billions of dollars already have been committed to dredging and construction projects in Alaska, Canada and up and down the west coast. The Los Angeles Times in January reported that expansion programs are on the drawing boards on the Baja Peninsula and as far south as the Panama Canal.

Mexican officials announced negotiations were in progress to transform the relatively small port of Ensenada into a mjor deepwater facility. The state of Baja California hired Hong Kong-based Hutchinson Port Holdings to perform a feasability study, although expansion plans were still in the conceptual stage, the Times reported.

In April, the Times reported that a Los Angeles firm, fronting for Chinese and Korean concerns, is lobbying the Mexican government for permission to build a US$1 billion port in the agricultural area of Punta Colonet, also in Baja California just 150 miles south of Tijuana.

Roads, rail lines, port facilities and even a small city would be built to accommodate the project.

--Tom Buckley

RELATED ARTICLE: TOYOTA CONSIDERS MEXICO

Logistics officers with Japanese automaker Toyota are inspecting the ports of Manzanillo and Mazatlan as they study the possibility of shipping their cars bound for the U.S. market through Mexico.

Manzanillo Port Authority President Pedro Mota says Toyota is considering a long-term strategy that would include abandoning Long Beach as a port of entry to the United States because it is saturated and lacks expansion space.

If Toyota decides to shift its operations to Manzanillo, it would immediately become a primary Pacific Coast ports user since it exports around 1.2 million cars to the United States annually.

One condition Toyota officials insist upon is a specialized transit warehouse for automobiles, saying they do not consider the current multiple-use facilities adequate. Mota says Manzanillo could include a special 6,000 square meter facility to house 700 cars between the dock and the railroad spur as part of its expansion plans.

--Ricardo Castillo Mireles

Ricardo Castillo Mireles is a freelance journalist based in Mexico City.