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back to index backLATINtalk November,  2005

NAFTA 10 Years Later: Mexican Supply Chains

HARD to believe, but it's been more than a decade since the North American Free Trade Agreement (NAFTA) went into effect. The expectation was that it would positively transform the socioeconomic fabric across all of North America. Manufacturing companies especially were encouraged to capitalize on the promise this opportunity brought. But has that happened — especially with the most southern part of the NAFTA region, Mexico? And to what extent has the logistics landscape in Mexico changed or evolved during this same time?

Room for Improvement

From a supply and distribution standpoint, things have improved in the past 10 years or so. But there is room for further improvement. The vast and complex flow of raw materials and finished goods between the United States and Mexico has increased, but the process is not yet seamless — at least in the way we look at it north of "the border."

Hundreds of U.S. companies continue to race into Mexico's potentially lucrative market. For those that have not yet begun operations, the transition may not be as easy as they think. Setting up an operation in Mexico still requires extra effort, even after the much heralded signing of NAFTA.

NAFTA paved the way for the launch of many new manufacturing plants in Mexico, but a greater amount of attention must be placed on creating a more reliable logistics system, one that is in concert with the nationís still-evolving infrastructure. This was a problem that existed prior to NAFTA and still needs work today.

There is also the competitive factor. In the past 10 years, China and other Far Eastern countries have become tremendous competitors for making and selling products that could originate in Mexico. This sense of competition is at the forefront of the minds of U.S. companies entering Mexico, as well as Mexican national companies and their government.

Companies that provide logistics services like warehousing and transportation are reporting continued and significant progress in their efforts to bring operations in Mexico up to the standards of what they offer north of the border. But these same companies also share daily and long-term challenges in vital areas including regulations that still differentiate Mexico from the United States, the quality of the carrier population, and the condition of the nationís road and rail systems.

Transportation and Warehousing

While the process of getting a Mexico logistics operation up and running is much the same as it is in the United States, there are some unique challenges.

Trucking is a good example. Prior to NAFTA, when the Mexican market was deregulated, there were fewer than 400 carriers in the country. Today, there are literally thousands. New carriers entered the market quickly in the 1990s, but finding a reliable one in the sea of new faces has become increasingly difficult. The financially stable ones are smaller in number, but they provide quality services and are looking for shippers to partner with, rather than just provide service to. By contrast, financially precarious carriers tend to take shortcuts, such as operating old or poorly maintained equipment. The proliferation of such carriers only serves to confuse the shipping public.

Finding a carrier is only half the Mexican transportation battle. Empty miles are always a problem, too, because there still is a large imbalance between northbound and southbound loads. This inequity will continue to exist as long as the United States dominates the balance of trade with Mexico. But the problem will ease as the number of U.S companies operating south of the border increases.

The warehousing situation in Mexico is equally as daunting. Most of the available warehouses in Mexico are old, too low, or too limited by U.S. standards. They often lack sufficient truck doors, docks, drainage, or security. Yet, the free-trade agreement created enough business to make inadequate warehouses seem attractive. Most companies are grateful for any space they can get because itís difficult to find.

Barriers and Trade-Offs

NAFTA has generated interest in U.S. logistics providers eager to spread southward, and to some extent, is helping ease the difficulty of doing business in Mexico. Recent government legislation has made it easier to obtain permits, licenses, and registrations. While the red tape might have shortened, economic and logistic barriers continue to exist at times.

When you compare the overall cost of doing business in Mexico, there are definite trade-offs. One trade-off is the high price of distribution equipment. A tractor in Mexico may cost a third more than the same tractor in the states. The same holds true for distribution real estate.

On the positive side, the labor supply is readily obtainable. Nearly two thirds of the country's 90 million people are below the age of 30 and many are looking for work. Well-trained, technically capable, local logistics professionals, however, are few and far between.

Case In Point

One example of how things have changed, but are still somehow the same, is the work that TNT Logistics North America does for some of the big automakers in Mexico. TNT is a third-party logistics provider for a number of original equipment manufacturing (OEM) plants in Mexico. TNT handles transportation, Customs clearance, warehousing, final customer deliveries, spare parts distribution, and logistics activities for these manufacturers.

TNT recently developed a state-of-the-art operation for wheel sub-assembly for one of these plants in Saltillo, Mexico. Using a multimillion-dollar piece of equipment, TNT workers mount tires on wheels, inflate and balance them, and then sequence them into the carmakers' assembly lines in another part of town.

TNT brings more than half of the parts going to the plants from within Mexico. This is one area that has changed in recent years. The portion of parts that are supplied domestically within Mexico has steadily been on the rise.

"The supply base in Mexico now is growing very quickly," said John Hollett, director of business development for TNT Logistics North America. "The Big Three car builders used to keep their historical supply and supplier base in the United States and trucked the parts to Mexico. When they moved operations to Mexico, they found out that the operating capabilities in Mexico far exceeded their expectations."

According to Hollett, the expansion of suppliers within Mexico wouldnít be so significant if they weren't providing high-quality manufacturing operations to their customers. "The initial perception was that the young manufacturing base in Mexico would come with a lower standard of quality than in the U.S.," says Hollett, who set up TNT's wheel plants in Saltillo. "But weíve found that the quality of suppliers in Mexico is equal to and sometimes better than U.S.-based suppliers. And this has fueled growth down there more than anything else."

This means that TNT and other logistics providers can develop scheduled delivery transportation programs in Mexico much like in the states. "We're developing a domestic pickup-and-sequencing mentality within Mexico," says Hollett. "This will equate to an improved delivery network and lower logistics cost over time."

In addition, TNT has found that the quality of its Mexican work force exceeded its expectations, too. "The first perception you have of going to Mexico is all those built-in cultural biases that have existed for years," he adds. "But we were pleased with the work ethic of the people and their desire to become more skilled. There is a desire to learn, and they have a true dedication to our customers and to the operation, even if it involves staying late to work through a backlog. And our turnover rate is steadily declining as well."

At the same time, however, TNT continues to work through issues that highlight the fact that logistics in Mexico, overall, still proves to be tougher than in the United States. One of the challenges involves rail service. Because railroad transportation is relatively inexpensive in Mexico, TNT is shifting more outbound shipments to the north from truck to intermodal or rail. But the movement of those parts now takes 11 days compared to the nine days that are needed for truck moves. However, the payback is a 40 percent savings on transportation costs using rail compared with trucks.

As mentioned earlier, warehousing costs can be far more expensive in Mexico than in the United States, and this is something that TNT has also experienced. Space is about five dollars a square foot per year in Mexico, and is dollar-dominated, compared with perhaps three dollars a square foot for comparable space in the states.

"This is because the infrastructure in the United States is already well-developed, while commercial real estate developers in Mexico have to put in infrastructure like pavement and, often, electricity," says Hollett. "Thatís one reason why warehousing is more expensive in Mexico, and why currency protection may be necessary."

Similarly, some domestic freight expenses in Mexico are higher than in the United States. Fuel prices, for example, are 10‚20 percent higher in Mexico, Hollett says. While Mexico is a big producer of crude oil, most of its refined product comes from the United States and Europe. And to finance truck purchases in Mexico, local carriers must pay interest rates of up to 30 percent, which is far higher than in the United States.

In Sum

Since NAFTA came along more than a decade ago, some things have changed in Mexico and some things are still on the "need improvement" list. Logistics is one of these things. Tremendous headway has been made, especially in the areas of working with suppliers in Mexico that are providing products and services to U.S. companies that are now manufacturing there. The bar has been raised and the expectation is that one day soon, the entire continent of North America will truly become that large, single commercial entity that NAFTA promised.

Source: Area Development - GAI

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