Mexico marine highway?
Water route could support more finished vehicle exports to United States.
Global manufacturers are stampeding into Mexico to take advantage of affordable, quality labor and proximity to the U.S. market and no one is investing more than the auto industry. Plants are springing up around the country, but questions about whether there is adequate rail capacity for finished vehicles are prompting interest in short-sea shipping services to U.S. ports.
“The crunch time is going to be 2015-2016. I don’t think [the railroads] can handle everything,” William Kerrigan, a Charleston, S.C.-based logistics consultant with years of experience in the auto industry, said in an interview. “I think manufacturers will have to use some kind of hybrid services: rail, short-sea and then rail to go inland.”
Mexico is the eighth largest vehicle producer in the world. There were nine auto manufacturers in Mexico producing 42 brands at 20 manufacturing plants as of 2012, according to the U.S. Commerce Department, and the numbers are rapidly growing. In 2012, according to the Mexican Association of Automotive Industry, 2.8 million cars rolled off assembly lines and 83 percent of them were exported. Almost two-thirds of those exports went to the United States. The value of Mexican vehicles sold in the United States topped $1.45 trillion in 2012, while Mexico only imported $3.3 billion worth of U.S. vehicles.
Auto production in Mexico is forecast to increase 35 percent to 4 million units between 2013 and 2018, according to Autocast.
Global economic forecasting and market data firm IHS predicts auto production through 2020 will rise 54 percent, or 1.6 million units, to 4.5 million vehicles, with a compound annual growth rate of 6.5 percent.
In November, Nissan Motors inaugurated its third plant in Mexico, this one in Aguascalientes, bringing its annual production capacity to 825,000 from 650,000 vehicles. It is supported by an adjacent supplier park.
Mazda Motor Corp. began the New Year by starting production of the Mazda3 at a new plant in Salamanca. It is exporting the car to the United States, as well as other countries in the Americas and Europe. Mazda also has agreed to build a car for Toyota there.
Honda is scheduled this spring to begin mass production of the Fit at a new $800 million plant in Celaya, near Guanajuato. The facility has an annual capacity of 200,000 units. The company also built a transmission plant next to the assembly plant.
Last summer, General Motors announced it will invest $691 million to increase capacity at its plants in Silao, San Luis Potosi and Toluca.
And Audi is scheduled to open a plant in San Jose Chiapa during 2016.
A key question is whether logistics capabilities allowing timely transport will keep up with the expansion in production capacity given existing constraints in the system. Mexican plants aren’t the only ones competing for rail equipment. Double and tri-level railcars are expensive and demand for them is also expected to grow in the United States to support strong domestic production and import volumes.
North American outbound flow is a metric used by the industry to understand capacity needs. It is defined as all the vehicles produced in the North American Free Trade Agreement zone for the NAFTA market or other countries, plus all the vehicles imported into the continent.
The flow of vehicles rapidly grew to 19.5 million vehicles last year from 13.4 million in 2009 and is forecast to reach 21.5 million units by 2017, according to IHS.
The challenge for the railroads is that the finished vehicle trade in Mexico is one way. Cars are transported north, but there is little, if any, southbound traffic. That means railroads have a lot of empty cars in the wrong places. They can make non-revenue bearing trips to reposition cars in Mexico, or they can recirculate them within their domestic network hauling to other destinations and move them south when they work their way closer to the border. Returning equipment can take longer when weather or other unforeseen events damage tracks or cause network delays.
Kansas City Southern, through an acquisition, has a 50-year concession to operate in Mexico. The other major railroad in Mexico is Ferromex, which is 49-percent owned by the Union Pacific. Both interchange with other Class I railroads in the United States.
Railroads claim they can handle the increase out of Mexico, but original equipment manufacturers are skeptical, and are considering alternatives, Kerrigan, who runs consulting firm KGI, said.
Spokespersons for several Class I railroads only provided generic information about their automotive franchises, without much detail regarding Mexico operations.
Another constraint is trucking capacity. Auto-hauling companies are having even more difficulty finding qualified drivers than truckload and less-than-truckload carriers because of the specialized training required. Drivers with multi-deck trailers have to be able to load and unload vehicles in all kinds of weather, in addition to safely driving an 80,000-pound rig, Kerrigan said in a presentation to an American Association of Port Authorities’ mini-conference in Tampa, Fla., earlier this year.
A potential relief valve, and protection against increases in rail prices, would be water-shuttle services between ports such as Veracruz and Altamira on Mexico’s Gulf Coast and U.S. Gulf and East coast ports, or between Mexico’s Pacific ports of Manzanillo and Lázaro Cárdenas and U.S. West Coast ports, but none exist.
After the tsunami in Japan three years ago and the flooding in Thailand in 2012 crippled the supply chains of companies like Toyota, Honda and Nissan, OEMs (original equipment manufacturers) “want options. They don’t want to be tied to one particular route or mode of transport,” Steven Rand, president and chief executive officer of Amports, said at the AAPA conference. He predicted 10 to 20 percent of the U.S.-bound vehicles from Mexico eventually will be shipped by water.
During the past couple years, vehicle manufacturers have induced pure car and truck carriers with trans-oceanic schedules to make extra stops in Mexico and deliver the cargo to East Coast ports, but the deep-sea services are sporadic and provide irregular capacity.
The carriers have been reluctant, so far, to develop a scheduled “marine highway” service because of the lack of backhaul cargo, logistics professionals say.
Roll-on/roll-off carriers need to be inventive, Kerrigan said, and explore the feasibility of a European short-sea model where barge and specialty watercraft companies share dedicated vessels to provide frequent service. One option might be to add a third leg to South America or Panama with U.S. exports and then deadhead back to Mexico to pick up another load.
And any short-sea service would probably need auto manufactures to collaborate on co-loading finished vehicles on vessels, he added.
Rand said auto makers could charter a vessel for a fortnightly service.
Per Folkesson, president of the Americas region for Höegh Autoliners, said for such a service to be viable it would need to be limited to one or two load and discharge ports.
Ports can play a strategic role and bring together all the potential actors—manufacturers, truck, rail, vessels, and stevedoring companies—in the supply chain to leverage their combined value instead of everyone continuing to directly deal with each other in separate silos, Kerrigan said. OEMs have done an excellent job over many years optimizing their inbound supply chains, but no one has fostered an intermodal approach toward getting finished vehicles to dealers. There is not a lot of communication between the various parties and a big problem for carriers is that manufacturers typically don’t share much forecasting information with them.
“Ports are kind of the fulcrum everybody has to come through. They need to be thinking of ways to increase throughput” without adding more land, including potentially building expensive multi-deck garages as is done at the Port of Rotterdam and some other European ports, Kerrigan said.
That’s what Port Tampa Bay is trying to do. In December, the port authority finalized an agreement with Amports, the largest auto processor in North America in terms of volume and processing acreage, to develop and operate a new terminal dedicated to handling imports and exports of automobiles and other rolling stock.
High U.S. demand for Mexican cars – one in 10 cars sold in America today is made in Mexico – and Florida’s large market – the state is soon expected to surpass New York as the third most populous state – make Tampa an ideal location from which to distribute imported cars throughout the Southeast, the partners say. Auto haulers could make dealer deliveries in Florida and the rest of the cars could be shipped inland by CSX Transportation, which has a track that runs through the port. They also envision the facility handling U.S. auto exports to Latin America and the Caribbean, as well as imports from Europe.
Amports is the exclusive auto processor at the port of Altamira and operates an in-land rail facility in Toluca, Mexico. Altamira and Veracruz, the largest ro/ro port in North America, are two-and-a-half days sailing distance from Tampa.
An impediment in Altamira is that the tunnel height on the Kansas City Southern de Mexico rail line from San Luis Potosi and Aguascalientes is restricted. Cars from the General Motors and Nissan plants are trucked in for export.
Mexico is expanding port capacity for finished vehicles.
Last year, Seattle-based marine terminal operator SSA Marine received a permit to operate in the public terminal at the Port of Lázaro Cárdenas and has been processing vehicles there since October. A year earlier it won the right to negotiate a concession to construct and operate the first specialized ro/ro terminal in Mexico, offering 600 meters of waterfront, two berths dedicated to ro/ro vessels, 42 hectares of storage area and capacity for handling up to 750,000 autos annually. The concession package is expected to be finalized in the second quarter, SSA spokeswoman Lauren Offenbecher said.
The current multi-use facility handles Korean imports for GM, as well as exports of Mexican-made cars to Latin America and Cadillac SUVs to China, as well as other brands.
SSA also provides stevedoring and terminal services for automobiles in Veracruz, Acapulco and Manzanillo.
Amports, the incumbent processor, continues to operate in Lázaro Cárdenas under a temporary permit, according to SSA. An Amports official declined to comment on the situation.
Amports and Port Tampa Bay are waiting to secure a customer before fully developing their 75-acre property into an auto terminal, but the berth, yard and buildings that previously served as a passenger car ferry terminal already exist, officials said. Amports has already begun to convert the warehouse space into an auto processing center, with more improvements to follow.
“We don’t expect it to happen overnight,” but a lot of OEM officials who attended the Short Sea Automotive Summit (co-hosted by the port, CSX, terminal operator Ports America and Amports) in late November were intrigued by the concept, Rand said.
“They liked the fact that there’s additional capacity. They liked the fact that someone like us is investing capital,” he said.
Rand predicted a contract wouldn’t be forthcoming until the new plants in Mexico come fully online, other auto makers become familiar with Tampa’s plan, and space begins to tighten in ports like Jacksonville, Fla., and Brunswick, Ga.
Auto yards at several U.S. ports are near capacity, with few opportunities for expansion, according to Rand and Kerrigan. Many auto manufacturers like to use ports to store inventory until it’s sold, which isn’t always good for throughput.
“In order to compete for larger bids you’ve got to have lots of land that is reasonably close the pier, got to have buildings so you can do accessorization work,” and in Brunswick available space for expansion is on the other side of a highway, Rand said.
Amports is the largest tenant in Jacksonville in terms of acreage.
Tampa’s location is ideal for serving the huge central Florida population without cannibalizing the volumes from Brunswick and Jacksonville, he said.
“I think the industry is getting to the point where we need this extra capacity,” Rand added.