Eduardo Solís
Executive President
AMIA
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Insight

Uncorking Logistical Bottlenecks

Mon, 09/01/2014 - 13:13

Few are better positioned to comment on the state of the automotive industry than Eduardo Solís, Executive President of AMIA. For Solís, continued exponential growth of the industry is inevitable, evidenced by the steady rise in manufacturing and export figures. However, Solís’ optimism is somewhat quelled due to potential logistical bottlenecks caused by booming automotive production. “There are no bottlenecks today, but I certainly see bottlenecks arising if the right actions are not taken over the next five years at Veracruz, Lazaro Cardenas, and Laredo. We must do our homework because the indicators show a growth of exports in the next five years of about 1 million vehicles. Mexico must have the right ports, railroads, and infrastructure in order to keep up with this growth,” says Solís.

Today, 19 major global car companies already have plants on the ground in Mexico, with many planning to expand operations or enter the market. Nissan has recently opened its second Mexican plant in Aguascalientes, at an investment of US$2 billion, Audi is approaching the same level of investment with a US$1.3 billion assembly plant in Puebla to start making the Q5 model there, and BMW recently announced a US$1 billion investment in San Luis Potosi. Projections have stating that production will grow to reach 3.7 million units by 2015 and 4 million in 2016. Investments by major OEMs have in turn attracted droves of international Tier 1 and 2 suppliers to Mexico, providing more suppliers to assist OEMs in the quest for the most optimized supply chain. In the last five years alone, Ford has gone from sourcing US$500,000 locally produced materials to US$14 billion. This allows the company to fuel operations worldwide with high-quality, low-cost materials sourced directly from Mexico. Today, Ford does not produce a single product that does not contain at least one Mexican component. This puts an operational link between Ford Mexico and each of the company’s 32 global plants, links that also exist within Mexico. Ford’s plant in Hermosillo produces cockpits while its sister plant in Cuautitlan produces individual components.

Access to optimal logistical solutions within Mexico is therefore essential in the race to reduce procurement and distribution lead times in an industry driven by cost. Indeed, according to Solís, logistical costs are one of the three most important areas that automotive makers analyze when considering where to build a plant, along with labor costs and government incentives. Therefore as plans for new production centers and increased production capacities abound, concerns have been growing about the ability of Mexico’s infrastructural development to sustain this growth. Mexico’s automotive industry investment is often concentrated in urban clusters, but these clusters do not always have easy access to the railroads. Industry analysts have also pointed to the fact that capital expenditure on new construction equipment has not increased adequately in line with industrial manufacturing growth in Mexico. Ford’s Purchasing Manager, Leo Torres, believes that logistics is the area in which Mexico can improve the most, after engineering. “In Germany, trains move inside the plants. Although Mexico has trains, they are not reliable and they are not on time. It is not just about putting the infrastructure in place; you have to build a culture of logistics. Mexico needs a national automotive development plan that engages the government, private, and education sectors,” says Torres. However, Mexico’s largest railroad operator, Ferromex, is hoping to provide light at the end of the tunnel in the country’s quest for a sophisticated logistical network. The company manages over 8,500km of track nationwide, and its specialized division Automotriz is attempting to address specific challenges faced within the automotive sector. While capital expenditure in Mexico on new equipment may have lagged in general, Ferromex itself budgeted US$450 million in this respect in 2013, with US$57 million of this going to the automotive division, according to Ferromex Automotriz’s Assistant Vice President, Alberto Sánchez Varela. “This investment is specifically targeted at the impact the automotive plants will have on our network. These funds will be allocated to cover that growth segment, aside the natural expansion our business is undergoing,” he explains. For Ferromex, the announcement of the creation of a new OEM plant in Mexico is rarely news since much of the firm’s collaboration with car makers begins ahead of time. As Sánchez Varela explains, developing relationships with new investors a couple of years early allows the company not just to be competitive, but also to anticipate how much time is needed to prepare for the extra volume of cargo and fit this seamlessly into its natural growth. Ferromex has sought to provide targeted logistical solutions for each major plant established in the country. The company analyzes each site, its transportation needs for inbound goods, and how best to answer those needs. An estimated volume for each vehicle line is also established to understand how best to deliver tailor-made logistic solutions for each OEM, each plant, and each type of vehicle.

Given the export-dominant nature of Mexican automotive production, the key for transport providers is how swiftly they can get the cars to the country’s key ports or across the border. Ferromex’s business model therefore looks at every means of export for vehicles, not only for cross-border trade but also the entire global network. It is here that intermodal transportation solutions are really helping to improve efficiency and competitiveness within the automotive supply chain. Ferromex controls a vital point for exporting vehicles in the port of Veracruz, enabling it to combine logistical services. However, media reports have stated that despite currently undergoing a decade long revamp, the port is not far off operating at full capacity, meaning that Ferromex will need to diversify its access to sea lanes. Furthermore, the port is also not the most optimal location to service the automotive industry’s booming cluster in Guanajuato. Closer hubs include the ports of Manzanillo and Lazaro Cardenas. Collaboration between the port and Kansas City Southern de Mexico (KCSM), Ferromex’s closest rival, has already seen the Lazaro Cardenas-Kansas City rail corridor being well utilized for around 15 years. KCSM has been reporting double-digit growth in car loads transported for the last few years. It enjoys the same alliances with US railroad companies such as Union Pacific. Ferromex recognizes the pressure to continuously diversify its logistical portfolio, and Sánchez Varela says the company is already talking to customers about their business needs for the Pacific and is actively considering how best to integrate that avenue into their logistics efforts. With so much investment and competition between major providers like Ferromex and KCSM, there is hope yet for Mexico’s logistical network.