Mexico has an image problem. And for years, its negatives—both real and perceived—led U.S. companies to shy away from the country. Its history of unpredictable regulatory changes, inconsistent customs policies, inefficient distribution, and rampant theft and drug smuggling left shippers, carriers, and third-party logistics companies (3PLs) feeling discouraged and frustrated.
In the end, cheap labor and the cost advantages of both the North American Free Trade Agreement and the maquiladora program often tipped the balance in Mexico's favor. Still, the country's drawbacks caused many to pull up stakes and move to China.
Now, some of that lost business is returning. A devalued Mexican peso coupled with Asia's rising labor costs and long transit times are making Mexico attractive again. Shippers also like the notable improvements in logistics services, technologies, and facilities. Furthermore, Mexico's government has made a public commitment to modernize infrastructure, improve security, and liberalize its customs regime.
Some of the old problems persist, but if you're making decisions about Mexico based on old assumptions, it's time to take a fresh look at this dynamic market. Here's an overview of some recent developments.
Transportation and infrastructure
Some of the biggest differences in freight transportation can be seen out on the roads, where well-maintained toll highways managed by private companies have cut transit times for over-the-road shipments. The trucks that travel Mexico's highways have changed, too. In years gone by, most trucks were old, worn-out, cab-overs—many of them taken out of service in the United States and resold in Mexico. Some of the mom-and-pops that shuttle trailers and containers across the border still operate aging equipment. But for truckload and less-than-truckload carriers, shiny new Class 8 tractors are now the norm. "The transportation equipment you see in Mexico today is pretty much state of the art," says Gene Sevilla-Sacasa, vice president and managing director of Ryder Latin America. "If you look at the average fleet today versus 10 years ago, it's much bigger and much younger."
Vehicle tracking systems are ubiquitous now. Indeed, they're a condition of doing business with large shippers, says Con-way Truckload's vice president of operations, Saul Gonzalez. All but two or three of Con-way's 80 Mexican partners use Qualcomm's satellite tracking system. The U.S. carrier's system interfaces with those of its partners, providing real-time notification of events and pinpointing the location of the 2,000-plus trailers it typically has in Mexico or along the border each day.
Trucking isn't the only mode that's modernizing. The government's policy of granting operating concessions to private operators, which typically pay most of the development costs, benefits rail, port, and intermodal services, says Carlos Bouffier, an independent consultant who works with the consulting firm TranSystems. The government often provides assistance to private infrastructure projects in order to create jobs and boost local economies, he says. Recently, for instance, national and local governments helped to build roadways, utilities, and industrial parks for vehicle-assembly plants and associated parts manufacturers, Bouffier notes.
There's more work to be done. Some intermodal yards, such as the one at Monterrey, are badly congested, and funding problems have delayed construction of container terminals at Punta Colonet, says Ben Fuqua, a vice president with TranSystems. There is some good news on the intermodal front, though. The Port of Lázaro Cárdenas on Mexico's West Coast boasts a new container terminal and expanded shipping services. The Kansas City Southern de Mexico's rail service from that port has opened up the market for importing raw materials and other products for final assembly inland, and provides rapid access for the finished goods to U.S. markets, Fuqua adds.
Facilities and technology
Not too long ago, you could safely assume that warehouses and distribution centers in Mexico would be inefficient, mistakeprone, manual operations. That's no longer the case for facilities that serve large Mexican and multinational companies.
"There's been tremendous improvement in warehousing," says Ryder's Sevilla-Sacasa. "If you go back 10 years, it was difficult to find a very good warehouse. Now, I would say we operate five million square feet of warehouse space in Mexico, and all of it is AAA, state-of-the-art facilities with very, very good security." It's still not easy to build those warehouses, though. According to the World Bank publication Doing Business in Mexico 2009, the biggest obstacle to building a warehouse is getting utility connections, such as water, telephone lines, sewers, and electricity.
Many operations rely on the same warehouse management systems and transportation management systems that are popular north of the border, and workers use similar types of equipment and software to store, pick, pack, and ship products. In fact, vendors of material handling and dock equipment say that Mexico is one of their fastest-growing markets.
Mexican companies are under the same cost and service pressures as their counterparts up north, and that's boosting investments in supply chain technology, says Francisco Giral, CEO of NetLogistik, a systems integrator that represents RedPrairie, Vocollect, and UPS Logistics Technologies in Mexico and Argentina. "We still have a five- to 10-year gap [in technology compared to the United States]," he says, "but that's diminishing."
In the past, companies typically relied on homegrown applications, but sales of best-of-breed solutions have climbed in the last five years. One reason is that most vendors now release their software in different international markets simultaneously, making new products available to Mexican buyers more quickly than before. Additionally, buyers can more easily share data and collaborate with suppliers and customers outside of Mexico if they use the same or compatible software.
Collaborating with trading partners via an Internet pOréal, especially in areas like transportation and supplier management, is catching on quickly. Giral says he also is seeing growing interest in service-oriented architecture (SOA) and supply chain performance measurement. Until a few years ago, the country lacked data centers that were capable of reliably hosting solutions. Now, there are several such centers in Mexico, most of them associated with big telecom companies.
Customs and security
Customs policies and cargo security, which are intimately connected, are high on the list of concerns for anyone doing business with Mexico. They're also priorities for President Felipe Calderón Hinojosa, who has ordered some changes in customs practices and reinstated a federal security program to reduce thefts from trucks traveling Mexico's highways.
The Mexican Customs Administration (popularly known as Aduana) is working hard to change its image. That campaign has succeeded, in Gonzalez's opinion. "They are very professional now and very easy to work with," he says. "I personally have not heard about any negative things with Mexican customs in years."
Two years ago, customs officials issued a five-year plan that called for redesigned and simplified procedures; greater use of automation, including an integrated IT system that encompasses all stakeholders; and better management of change and of human resources, among other measures. The agency is well on its way toward achieving those goals. Several years ago, it did away with the infamous "red light, green light" procedure for selecting shipments for inspection and has since implemented an electronic submission system for documents and payments.
Aduana is collaborating with international bankers JP Morgan on a pilot program that will give tax-friendly treatment to imports of raw materials for some manufacturers, reports Alvaro Quintana, formerly a high-level official in Mexican Customs and now head of logistics business for JP Morgan's global trade services group in Mexico. Under the pilot, three manufacturing companies and their customs brokers are clearing shipments through customs using a simplified document that contains minimal information. They do not need to classify the goods, and there are no physical inspections by either the customs authorities or the brokers. After they're cleared, the shipments go to special bonded warehouses called Recinto Fiscalizado Estratégicas (RFEs), where they can remain for up to two years tax- and duty-free.
The program is similar but more liberal than one that's already available to the auto industry. Quintana expects that if Aduana approves RFEs for wider use, the cost of importing into Mexico—estimated by the World Bank at $2,700 per container—will drop sharply, because it will speed customs clearance, eliminate two rounds of inspections, and reduce brokers' fees by hundreds of dollars per shipment.
Cargo security remains the biggest worry for shippers, carriers, and 3PLs, despite their best efforts. Truckers stick to major highways and travel in convoys; warehouses are installing high-tech surveillance and identity technology; and carriers in all modes are spending millions of dollars on guards and inspections.
But those measures have had limited success. A cargo security manager working on the border (who requested anonymity for safety reasons) reports that drug smugglers are targeting companies that participate in the Customs-Trade Partnership Against Terrorism (C-TPAT) because U.S. Customs is unlikely to open their trailers for inspection—and are threatening employees with death if they refuse to cooperate. In late January, the newspaper Reforma created a stir in Mexico when it reported that drug cartels control the major rail lines serving the United States. The newspaper said it had proof that railroad personnel at all levels and at nearly every station are colluding with the traffickers. The Mexican Railroad Association denied those charges, asserting that rail is the safest method of freight transportation in Mexico.
To combat cargo theft, many companies are turning to technology. Vehicle-tracking and container-monitoring systems are widespread, and some high-tech warehouses have sophisticated access controls, including fingerprint matching.
There are a number of cargo security and tracking systems on the market and in development. Aduana is planning to test one from Powers International, a company headed by Dr. Jim Giermanski, a professor of international business at Belmont Abbey College in North Carolina and an expert on trade with Mexico. Like other tracking systems, Powers' technology transmits alerts when a trailer or container door has been opened. It also "notices" if an intruder cuts a hole elsewhere in the equipment, and it can detect changes in light, temperature, and vibration.
Here's what makes this system interesting to Mexican Customs: It also tracks the chain of custody, controlling access and recording the container's contents at both origin and destination. At the point of origin, an authorized person enters data about the trailer's contents into a computer and uses an electronic "key" (similar to a swipe card) to arm and secure the lock. "The person who locks it has to be a vetted person who has a unique code number, so we know his identity," Giermanski explains. The system sends the handler's ID and detailed shipment data via satellite to a data center, which communicates the information to the shipper's logistics software and to customs authorities. En route, the container "reports" variations from its planned route and any other changes to a network of data centers. At the destination, an authorized person with a unique identifier opens the container with an electronic key and verifies that the contents match the original shipment.
Upbeat but realistic
The outlook for transportation, logistics, and trade in Mexico is positive and encouraging. Certainly problems persist, but Mexico will likely continue to make progress in its drive to reach logistics parity with the United States and Canada.
The growing cadre of Mexican logistics and supply chain professionals will see to that. The number of courses in the discipline at Mexican universities is growing, as is membership in professional organizations. The Council of Supply Chain Management Professionals, for example, now has two roundtables in Mexico, and APICS—The Association for Operations Management has nine chapters in the country. The rapid expansion of events like the annual Expologística trade show, which typically draws more than 300 exhibitors of material handling equipment and supply chain technology and services, testifies to the demand for logistics tools and information.
Like many people who do business in the country, Sevilla-Sacasa offers an upbeat view of Mexico's future that is at the same time, tempered with a dose of realism. "I think that Mexico has a lot of challenges, yet a lot of very positive things are happening," he says. "We all have to deal with difficult issues like drugs and crime— we can't be blind to them. But the fact of the matter is that goods continue to move and to reach the Mexican marketplace. Mexico is becoming a very competitive place ... and we are pretty confident the changes we are making will mean continuing improvement."