Trade logistics: thriving in Latin America despite obstacles and slower economic growth.
AS TRADE GOES, SO GOES LOGISTICS
And despite World Bank predictions of slower overall economic growth and trade activity this year in Latin America and the Caribbean, major players in trade logistics such as DHL, FedEx and UPS continue to invest in key markets in the region and expect significant growth in 2012.
A multibillion-dollar industry in the region involving thousands of service providers, trade logistics refers to all the steps involved in moving products from manufacturers to consumers as quickly and cheaply as possible. Enterprises working in the supply chain range from a tiny package delivery company in Sao Paulo to firms specializing in moving parts to auto manufacturers in Mexico to the huge, U.S.--and European-based courier and freight companies with fleets of cargo jets, armies of workers, enormous warehouses and offices worldwide.
Global companies such as DHL, FedEx and LIPS started out as messenger or courier services but moved into freight and trade logistics as they identified new growth opportunities in international commerce.
Logistics companies manage supply chains, offering services that include handling imports and exports; arranging air, sea and land transportation; managing customs and regulatory documentation; warehousing, inventory control, order fulfillment; moving delicate and dangerous cargo; and trade financing. Poor infrastructure, a lack of automation at air and sea ports, complicated internal regulations in different countries, a lack of transparency, and corruption have plagued the sector for years, slowing the movement of goods and increasing costs throughout the region.
Logistics companies, however, try to find ways around these obstacles for their customers and provide the best options for moving goods to market.
And despite an expected slowdown in regional GDP growth and international trade, business in several markets will expand or remain strong this year, according to executives at U.S.-based logistics companies. These markets include Brazil, Mexico, Peru, Chile, Panama, the Dominican Republic and perhaps Argentina.
In fact, logistics providers see new and attractive opportunities in Latin America as labor costs rise in China, and some manufacturers evaluate the option of moving operations to the Western Hemisphere.
"If you look at world markets, China and Asia have gotten a lot of publicity, but wages are increasing in China," said Jose Acosta, vice president of public affairs and operations for Latin America at LIPS, which has more than 8,000 employees in the region. "Companies seeking cheaper labor in Asia find that it's no longer so attractive. There will be more sourcing here in our region because the U.S. is the largest market in the world," and the transportation costs for moving products from Latin America are much less. "In addition, the region is drawing more direct foreign investment, and that pushes trade," Acosta said.
An expert in Latin American trade struck the same chord. "Labor costs are growing faster in China than in Latin America," said John Price, managing director of Americas Market Intelligence and a long-time consultant on competitive intelligence and business strategy in the region.
"Mexico is winning the race with China for outsourcing heavy, bulkier goods because they don't have to be shipped that far to the U.S. market."
Also FedEx sees a strong growth potential in Latin America for 2012. "In fact, to accomodate this growth, FedEx LAC has expanded internacional freight services in the region," says Salil Chari, Managing Director, Marketing for FedEx Latin America and the Caribbean. The company now serves 22 countries and 130 destinations in all.
The regional logistics market is highly fragmented. DHL, FedEx and UPS are the largest players, but they don't dominate the market because there are thousands of local and regional companies working different parts of the supply chain.
Logistics executives said they had no clear idea of the exact size of the total logistics market in Latin America and the Caribbean, but they believe it is a multibillion-dollar annual business.
"There is little information on the total market," says Jose Nava, president of DHL Supply Chain Latin America. "There are a lot of local companies, and some are very good operators. But some are small carriers that call themselves logistics companies. The big players make up less than 25 percent of the market, which offers us a real opportunity to grow."
DHL Supply Chain, one of two DHL divisions that handle most of the company's logistics business, has nearly 15,000 employees in its four principal Latin American markets--Mexico, Brazil, Argentina and Chile--and 70 warehouses with more than 13 million square feet of storage space combined. The company works with about 200 carrier companies throughout the region to provide customers with end-to-end service.
In addition to DHL, FedEx and UPS, large European companies such as Hellmann Worldwide Logistics and Panalpina Group operate in Latin America. There are also large local and regional companies--some with international ties, such as the Bomi Group, Seglo Logistics, TMM International and Zimag Logistics. As the gateway to Latin America, Miami is home to many of small to mid-sized firms that help move cargo to and from the region through the Port of Miami and Miami International Airport. WTDC, a Miami-based supply chain management company founded 36 years ago, is seeing a big increase in business this year in both large and small countries in Latin America, says Ralph Gazitua, the company's president and CEO. Among its diverse services, WTDC manages inventory for international furniture companies at a "dry port" (similar to a free trade zone) in Brazil.
WTDC "works mostly with mid-sized and some large companies," Gazitua said, "while the big logistics companies are fighting with each other over the top 100 companies in Latin America."
MORE TRADE MEANS MORE LOGISTICS
Latin America's exports were expected to grow last year by 26 percent, reaching about $1.1 trillion, according to an estimate released in December by the Inter-American Development Bank.
Intra-regional exports (those within the Americas) grew by 24 percent, and extraregional flows increased by 26 percent, the report said. The IADB, like the World Bank, also anticipated a decline in Latin America's GDP growth this year due to uncertainty the global markets and the potential reduction in demand for basic products."
Yet for company executives and trade experts, this year's outlook for trade--and logistics--is generally quite positive.
"FedEx still believes that Mexico and Brazil are the biggest players in the region," says Chari. And he estimates 2012 will be "another year of strong growth for Brazilian freight transport."
Price believes the highest growth this year will occur in Colombia and Peru, which are receiving strong flows of foreign investment. "Peru has received tremendous direct foreign investment in the mining sector, and the middle class has changed there dramatically in the last several years,"he said.
Although executives at DHL, FedEx and UPS won't talk about specific investment figures, they continue to see growth opportunities in the region for logistics and are expanding their operations.
"Latin America is taking a larger role in the global economy," said Samuel Israel, CEO Latin America for DHL Global Forwarding, a unit that shares most of DHI2s logistics business with the Supply Chain division. "It used to be very much an import region, but it has balanced its trade with perishables and commodities," he said. "There is a lot of potential for outsourcing (in the region) since many companies are still insourcing."
DHL Global Forwarding saw its ocean freight tonnage grow by 9 percent last year, and its air freight increased 13 percent in the region, Israel said. Both figures were above market rates. Israel's company, which has offices in the major cities where DHL operates, expanded its footprint in several countries by opening freight offices in secondary and smaller cities where it identified demand for its services.
The DHL unit has 120 offices in warehouses in Latin America and employs about 3,300 people. Working in concert with other DHL divisions, it moves freight by air, sea and land.
DHL Supply Chain has seen 10 percent to 12 percent annual growth in recent years from new and existing customers, Nava said. Like its competition, DHL wants to maintain and improve its portfolio of multinational clients, multi-Latin customers and other large regional companies while increasing its share of small and mid-size enterprises.
"I'm very proud to tell you that when I started with DHL, we had mostly multinational customers," Israel said. "Now we have a very balanced portfofio of about 53 percent small and medium enterprises."
The remainder is made up of large multinationals and other large Latin companies, some of which have expanded beyond their borders.
UPS has a "very positive" outlook for Latin America this year, Acosta said. "Brazil and Mexico are the biggest markets, but Colombia and Panama and Pere are expected to show profitable growth, and we will continue the trend that we've seen for the last few years."
UPS has made significant investments in Latin America and continues to do so, Acosta said. "What is critical for us is that we don't add capacity unless the demand is there."
UPS Capital is opening financial service offices (to assist customers' production, expansion, etc.) in Bogota, Lima and Sao Paulo, and last year UPS established a partnership with Deprisa, Avianca's delivery
UPS also expanded its capacity in 2011, bring in Boeing 767 cargo planes to replace 757s, adding 19 weekly flights in Central America and South America and opening new UPS offices throughout Brazil.
FedEx announced in January its FedEx Express unit was adding 12 markets in Latin America and the Caribbean to its coverage of priority freight and economy freight services.
FedEx has more than 8,000 employees in the region.
"We foresee that the market for transport of perishables (flowers, fruits, vegetables) will continue to grow in Latin America," says Chaff, who added the company offers 24-hour connections between the US, Canada, Mexico and the Caribbean and 48-hour connections to Europe.
The problems facing logistics companies all over the region are well-known: infrastructure (airports, sea ports, highways, railroads), poor performance of customs and border agencies, lack of computerized systems for processing paperwork, inability to track shipments, low quality of some local logistics providers and lack of reliability in shipping times.
In its most recent (2010) report on logistics performance in Latin America, the World Bank found that the region's overall performance lagged behind East Asia, the Pacific, Europe and Central Asia.
Brazil, ranked No. 41, was the best performer in the region, followed by Argentina (No. 48) among the 155 countries in the study. The World Bank said Brazil, Argentina, Chile, Mexico, Panama and Costa Rica were the "consistent performers" in the region, followed by 14 "partial performers" led by the Dominican Republic. Out of those 155 countries, Guyana ranked No. 140, and Cuba was No. 150. Germany was No. 1, and Somalia ranked last.
"Infrastructure is crucial, especially in places like Brazil that are growing very fast," said DHL's Nava. "Space is getting hard to find and more expensive," he added. "Some countries and areas are growing much faster than they ever planned."
For FedEx' Chaff "there are a number of risks on Brazil's booming shipping and freight transport sector, including the infrastructure deficit and signs of overheating in the economy." Also, a cumulative lack of transport infrastructure investment, he says.
Another challenge in the region is a lack of people who are familiar with logistics. DHL holds classes to train people in the region, but local companies also must step up, he noted.
Nava said he also would like to see change in tax and revenue rules in the region. For example, moving merchandise from state to state is complicated and requires more people and paperwork.
UPS's Acosta summed up the problem: "As a market, we see Latin America as very dynamic but in a nascent state," he said. "We still have a lot of growth to go, but we need cooperation from local governments.
"We can provide all these great services, but if it takes four, five or six days for merchandise to clear customs, your customer is not happy. Customers also have to ask for changes--it can't just be UPS and the other big companies."
Thousands of companies work in the trade logistics sector throughout Latin America and the Caribbean, including domestic and international. transportation companies, customs brokers, freight forwarders, consolidators, warehouses, inventory management, and trade finance firms. Some specialize in providing only one service (such as overland freight transportation within a country), but the big players--such as DHL, FedEx and UPS--offer end-to-end supply chain management. This list includes the largest international logistics operators, plus a sampling of important regional, enterprises.
- Asimex S.A.
- Bomi Group
- Herrmann Worldwide Logistics
- Panalpina Group
- Seglo Logistics
- Schenker Logistics
- TMM International
- Zimag Logistics