Mexico’s ports - the key to the country’s automotive supply chain

The port sector in North America generally has seen a lot of investment activity in the last few years but Mexico in particular needs more cash injecting to match its growing importance as a automaking country, as Simon Duval Smith reports

The variegated nature of port locations versus the car making centres in Mexico have created some particular headaches for OEMs and their logistics partners in the region. A quick look at a list of ports in Mexico and their OEM customers gives one an idea of the disparate nature of their locations.

Mexican Ports: Table in alphabetical order
Altamira - Gulf of Mexico Services - Landing, in-transit repair management, inspections, value added services, vehicle accessorisation.

Guadalajara - Jalisco (inland port)
Services: in-transit repair management, inspections, value added services, vehicle accessorisation.
Port of Lázaro Cárdenas - Pacific Ocean

Lázaro Cárdenas is located in Michoacán, and has more than 35 years of activity. It initiated its operations as an industrial port, however, over the years, its activities have focused on commercial cargos, including finished vehicles.

Services: Landing, inspections, in-transit repair management, value added services.
Monterrey - Nuevo Leon (inland port) Services at Monterrey include: in-transit repair management, inspections, value added services, vehicle accessorisation.
Saltillo - Cohahuila (inland port)
Services: Plant releasing, rail loading
Toluca (inland port)
Services: Driveaway delivery (to dealers), plant releasing
Toluca Auto Terminal - Mexico City (inland port)
Services: in-transit repair management, inspections, value added services, vehicle accessorisation.
Tuxpan - Gulf of Mexico Services: Landing, inspections, value added services, in-transit repair management.
Port of Veracruz - Gulf of Mexico
The Port of Veracruz is historically the most ancient and significant port of the country. In addition, as the first port given with the equipment for transporting automobiles, it has become one of the most important ports for the Mexican automotive industry. It is located at the east coast as well, with direct access to the Gulf of Mexico,

Services: Landing, in-transit repair management, inspections, value added services.
Veracruz - leading the way

The port of Veracruz is a very good barometer of the state of port activities and facilities in Mexico; while it saw decreased finished vehicle and incoming parts flow in 2018, it continues to be the leading port in the country. The movements in the port fell 6.6% in the first quarter of 2019 but it still remains at the peak of the country’s automotive industry. The automotive port movement increased 3.2% nationwide, seeing the movement of a total of 487,817 units.  

Almost half, 235,180 vehicles, passed through the port of Veracruz to be exported according to data from Secretaria de Comunicación y Transportes (SCT). 

In second place was the port of Lázaro Cárdenas (LC), which moved 117,530 units, a growth of 1.6% on 2017 figures. In 2018, port operator SSA Mexico invested $51 million in Lazaro Cardenas to install a roll-on, roll-off terminal aimed to increase vehicle handling capacity for the growing automotive industry in the country. The facility has the capacity to handle 450,000 vehicles a year and available space to expand to 760,000 vehicles, in an area of 43 hectares, which includes a 530-meter dock, some more of which has been taken up in 2019..

SSA Mexico also operates a terminal at the Port of Veracruz, with capacity to handle 550,000 vehicles.

Other ports are catching up with Veracruz’s success though; the highest growth has been seen at Tuxpan, which is also the most modern port in the region. Tuxpan showed an 84.4% growth in the first quarter of 2019, with 31,579 shipped and landed units. Altamira, on the country’s Gulf coast, showed strong growth in 2017 and 2018 but has slowed as new manufacturing plants have come on stream and steadied their output.

The US market - growing demand and tariffs

In 2018, the US imported more than 8 million vehicles and exported around 2 million, a sizeable chunk of these imports were from Mexico - some 2.5 million, an increase of nearly 75% over the last five years. As European, Japanese and Korean transplants continue to spring up, so their supplier partners locate nearby, all parties still attracted by the favourable labour rates and the quality of the workforce.

Bill Kerrigan

Bill Kerrigan

What could put the brakes on this dramatic rise in volumes? The Trump administration's revised trade deal with Mexico and Canada is expected to raise OEMs' costs, but industry experts still expect Mexican production to reach 5 million vehicles by 2020 as exports grow, especially to new territories that have favourable trade agreements with Mexico.

Most of the 3.9 million vehicles built annually in Mexico are exported to the US and Canada. 

Vehicle exports from Mexico to the US have increased by some 75% over the last five years, and I ask Bill Kerrigan, vice president of logistics for SSA Marine's auto division how he thinks the supply chain has responded. He says that the last year has proved how nimble the supply chain, and particularly logistics providers, are: "Every time President Trump has spoken about tariffs, and there has been a lot of money spent due to the tariffs in the past year, people started rushing to ship parts by the end of a particular month because they are afraid that the administration is going to introduce a new tariff."

Growing SUV sales and the strain on railcar supply

With the massive growth in US sales of SUVs and pickups, there is a shortage of bi-level rail cars with sufficient height clearance; and a challenge is getting tri-level equipment adapted quickly enough and/or building new bi-level railcars and certifying them fast enough to keep up with demand. This situation is pushing OMEs to use more short sea shipping, as Kerrigan tells me. "There is no question that this is happening. One has to remember that a lot of that SUV and truck product was not built in Mexico five years ago. GM and Chrysler have shifted production of a lot of trucks and SUVs to Mexico and this has brought two major challenges - we do not have enough bi-level railcars in the right place at the right time and the round trip for that bi-level wagon is longer because it has to go all the way to Mexico and back and it will be going empty one way in most cases. This gives one less 'turns'." 

Short sea takes over from rail

The rail system in Mexico has been hampered by the legacy of few lines and lack of investment - re-routing or adding to rail lines is tremendously costly and the volatility of the automotive industry has discouraged investment. Road performance has waned as the industry struggles to manage a rail car fleet stretched over much longer supply chains. The key for efficiency is turning assets quickly once a delivery is made. But little southbound demand for finished vehicles leaves railroads attempting to recirculate empty rail cars at the lowest possible cost because there is no revenue generated by those moves. At the same time, many rail cars are tied up hauling products in and out of US ports but things are changing as Kerrigan says: “There has been an increase in short sea exports but that has been more due to cost issues than anything else. The rates for short sea shipping are still very cheap. Of course, they are not really short sea in European terms - not 20-50 miles but generally less than 1000 miles.”

Picture courtesy of Kelisi

Indeed, global seaborne vehicle shipment rates have declined in the last few years as new vessels have been launched, increasing supply and pressuring car carriers to cut freight rates. Kerrigan says that the issue is not that there are so many more ships available but that a lot of the vessels are already plying some of the routes. "A lot of these ships are coming into Veracruz already to pick or drop off cargo and vehicles and they all have capacity because by the time they get to Veracruz from say, Asia, they have space on board as they have already unloaded a lot of cars."

This is in line with many analysts's forecasts; global seaborne vehicle shipment rates declined in the last couple of years as new vessel orders entered the fleet, increasing supply and pressuring car carriers to cut freight rates.

Port changes

Mexico's ports were originally designed with general cargo in mind and the adaptation of them for finished vehicles has been ongoing for many years, as Kerrigan says, "If you look at Lazaro Cardenas, where we are, that was the first and only dedicated auto facility ever built in Mexico. So, we are doing well for facilities on the west coast. On the east coast, the addition of new ‘garaging’ - vehicle storage - and the movement of some of the container facilities to the new container facility will open up some space by this time next year (fall of 2020) in Veracruz, which will help alleviate some of the congestion. This congestion is two-fold, not just the number of vehicles but also the number of berths available."

Of course, regular shuttle services with smaller roll-on/roll-off vessels going back and forth between Mexican and US ports are a possible solution but the lack of two-way volume makes such a scenario impractical in most cases, meaning empty vessels or the high cost of building or adapting ships capable of quickly turning round from general cargo to roll-on/roll-off for finished vehicles.

Domestic sales and different supply chains

In the home market in Mexico, imports are a much smaller share of port traffic than exports, though the disparity should be closing with the much-vaunted rising economic prosperity in the country. Passenger vehicles built domestically tend not to be sold to consumers and most Mexicans buy more entry-level cars, which creates good two-way business for car carriers bringing imports from Asia. Domestic sales of Mexican-built cars seem to be fairly steady or declining a little occasionally, due to finance difficulties and general low availability of cash in Mexico, as Kerrigan says: "Mexico's domestic sales are not that big - in the region of 1.3 million vehicles per year and they have been pretty steady over the years. The OEMs are using the plants in Mexico to build vehicle for export to the US and Europe, building higher-value vehicles. They are importing vehicles for the Mexico market from China, Thailand and India so what we have are two totally different supply chains and that has been a problem for the railroads to accommodate and that is why you are seeing much more trucking of finished vehicles in Mexico than in the past. And there are a lot of one-way hauls of imports from Asia and some imports from Europe and the exports back to Europe."

Inland ports and processing centres

There has been a lot of discussion about more 'inland ports' being built to relieve some of the congestion at Mexico ports. This is a particularly suitable policy as most of the vehicle making plants in the country are some distance from the ports. As in many countries, the cities and their infrastructure have grown along the coastline and so space is at a premium close to the ports, even given the size of the country and the vast areas of undeveloped land.Kerrigan says the auto industry and ports should consider building some inland facilities, as has been done in South Carolina and Georgia for containerised trade to release space for vehicles and ease congestion at the docks, where space is at a premium.

Such facilities are essentially marine terminals located 100 miles or more from the coast and serviced by regular shuttle trains that quickly move product to and from a seaport, the goal being to increase efficiency by storing and processing shipments away from the crowded seaport. Even though such a setup adds another step to the shipping process, he says the economics of storing and prepping cars closer to population centres makes more sense than doing that work at the port.

Kerrigan says that there are some 'off-dock' facilities being created and used but these initiatives are in their infancy. "There are a couple of off-dock facilities at Veracruz and it will be interesting to see what develops in the next two to three years. I think there is a possibility that we will see more of these facilities being created but they will be more geared to bringing the vehicles closer to the market than being close to the ports, and the market is mainly Mexico City and to the north."

Interestingly, this is somewhat at odds with many other regions around the world, where processing often takes place at or near the port, before truck transport collects the finished vehicles. Kerrigan believes the only model for these inland processing centres is for them to be shared amongst OEMs, "They have to be used by multiple OEMs, it can't just be one carmaker using one processing centre." Kerrigan believes that the will to share facilities is growing, certainly among his customers. "We see a lot more sharing of facilities now than in the past; once one OEM finds a solution, everyone will jump on board."

IT in Mexico - tech in its infancy?

Traditionally, Mexican ports and other logistics facilities have lagged behind the rest of North America, and indeed the world, in efficiency in IT and 'digital supply chain' terms, as Kerrigan says. "There is no question that IT and digital technology is lagging behind in Mexico because traditionally it was mainly a region supplying good but inexpensive labour. At Vascor we are investing a lot of money in technology because it is going to be needed.” I ask Kerrigan what would he had unlimited funds to spend on improving the business in Mexico? “I would spend a lot on IT and technology as right now the west coast terminals like Veracruz are quite modern and are developing well and tech would provide greater speed of process and also give better security for the finished vehicles,” he says, adding: “I would also spend money on creating some better by-passes on the rail network; the government and the railroads are looking at these now, they need to be completed sooner rather than later." 

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Automotive Purchasing and Supply Chain Magazine - Issue 32