American manufacturers and retailers have long associated Mexico and countries within Central America as challenged by inadequate infrastructures that contribute to costly and limited truck, rail and water transportation services. But as supply chains increasingly look to near sourcing, stung by factors such as increased shipping charges and quality concerns surrounding imports from China, these markets are becoming increasingly important to U.S. companies.

And with this heightened attention, has come an impetus to improve freight forwarding capabilities in the region.

Take the case, for example, of FCI Automotive, the fourth largest manufacturer of automotive connectors in the world. FCI opened light manufacturing operations in San Pedro Sula, Honduras, in May 2007 to diminish costs and supply U.S. carmakers in Mexico and the United States.

“U.S. carmakers are in trouble and are looking at every way to cut costs,” comments Marcelo Rocha, FCI general manager in San Pedro Sula. “Facing tighter margins, suppliers like us are also trying to put in place more production sites in lower cost countries, such as Honduras.”

While Honduras might seem farther afield to the United States than Mexico, Rocha confirms that ships departing its major seaport, Puerto Cortes, on its Caribbean coast are within an easy two-day voyage to the ports of Houston, Miami and New Orleans.

In addition, Puerto Cortes operates as the largest and deepest port in Central America and is connected to San Pedro Sula via a modern, four-lane highway. Plus clearing U.S. Customs is expedited since Puerto Cortes is the only port in the Western Hemisphere-and one of only three in the world-that scans 100 percent of inbound and outbound containers. The port participates in the U.S. government’s Container Security Initiative (CSI), Megaports, and Secure Freight (SFI) Initiatives. Consequently, Honduran and U.S. Customs officials work side-by-side to completely scan each container for radiation.

The critical piece is the puzzle: transporting freight back and forth.

Multiple advantages

Given such resurgence of manufacturing facilities in Mexico and Latin America, freight forwarders are increasingly concentrating services there.

“This shorter time-to-market from factory overcomes many of the challenges manufacturers face with overseas production by reducing transit times from four to six weeks to three to five days,” remarks Lucas Kuehner, managing director, USA for Panalpina, a worldwide provider of logistics and forwarding services. “This minimizes plant downtime due to faster replenishment of low inventory in instances of lost or damaged freight-or even last minute product/part design changes to meet new specifications.”

Companies also do not need to keep large inventories of stock on hand in case problems arise in the manufacturing process. “This can also reduce warehousing costs,” he says.

Other advantages are a competent, plentiful and lower cost labor pool; shorter travel distances for technical consulting and quality control that leads to higher quality products despite lower labor costs; similar language and culture that makes it easier to communicate; time zone advantages; free trade agreements such as the North American Free Trade Agreement (NAFTA) and Central American Free Trade Agreement (CAFTA) that allow for large duty reductions or elimination; and U.S. side programs such as Customs-Trade Partnership Against Terrorism (C-TPAT), Free and Secure Trade (FAST), and Express Lane that expedite shipments.

“We work closely with customers to ensure they have vital knowledge about processes and procedures required to benefit from trade agreements,” Kuehner says.

Tony Wilmoth, spokesman for Norvanco International, Inc., a Sumner, WA-based end-to-end outsourced logistics provider, emphasizes that manufacturers and retailers sourcing from Mexico especially benefit from NAFTA.

“The tax advantage is certainly the reason to manufacture in Mexico, especially for commodities with high duty rates and/or quota restrictions,” he says. “For the rest of Central America, it comes down to sourcing cheaper labor and reducing costs.” 

Free trade zones (FTZs) throughout Latin America put in place to attract foreign manufacturers also offer advantages by eliminating barriers such as tariffs and quotas. While the principle FTZ in Honduras is located in Puerto Cortes and is operated by the government through the National Port Authority, privately owned FTZs are being developed in the country. FCI, for example, is located in Green Valley Industrial Park, a free zone in the northern part of Honduras.

While many suppliers are locating plants in Mexico’s interior, freight forwarders find that maquiladoras, or in-bond factories, continue to have a significant impact on diminishing barriers to foreign trade. That’s because maquiladoras import materials and equipment on a duty-free and tariff-free basis from the United States for assembly or manufacturing and then re-export the assembled product back to the United States.

“U.S. companies continue to realize the benefits of maquiladora production because of their ease of sourcing raw materials form U.S. suppliers, short shipping time, and low cost delivery,” Kuehner says. 

Mexico, in particular, offers more stable transportation costs due to the fact that fuel hikes did not play a factor in rising costs for full-truck-load (FTL)/less-than-truckload (LTL) trucking on the Mexican side. They are based on the average monthly charges published by Petróleos Mexicanos (PEMEX), Mexico’s state-owned petroleum company. “This stands in stark contrast to some of the recent volatility of fuel surcharges on airfreight from continents like Asia,” Kuehner states.

Forwarders step in

But despite the advantages, these markets present their own set of challenges that an experienced freight forwarder/customs broker can address. These include different Customs laws, practices and rules along the U.S.-Mexican border. In other words, what works in Laredo might not in El Paso and other border crossings, Kuehner warns. Additional issues include pilferage, violence and criminal activities caused by organizations related to the drug trade rampant in Mexico, especially along the Southern U.S. border. Then there are issues related to Transportation Security Administration (TSA) requirements.

“TSA is going to continue to present challenges in terms of meeting requirements and how they service customers coming out of Mexico,” says Detroit, MI-based Dale Page, senior director, automotive sector, for Pilot Air Freight. “This will dictate the service solutions that we can use for our customers.” In other words, if a customer is looking for timely service coming out of Mexico and are not a known shipper, forwarders have limited options for expediting that shipment.

Border control officials between the United States and Mexico can also be an issue. “There are a lot of issues regarding transportation and how it’s managed,” Page says. “The key to our service success is we have knowledgeable people at the border who work closely with both U.S. and Mexican Customs. This makes for a seamless transition. You can never forecast what truck will get the red light and what inspections need to be done. These can cause delays.”

But if the paperwork is right, and a knowledgeable freight forwarder is representing the shipper, even those challenges are doable.

While some service provided by freight forwarders has been impacted by wide spread consolidation in the industry, others like Panalpina have been able to adjust and meet is customers’ growing and changing needs.

“The trend at Juarez/El Paso market, for instance, shows that some of the larger ‘consolidated’ companies are not able to keep up with an ever-changing and complex customer demands,” Kuehner says. “While Panalpina remains a strong and solid player in the global market, we are able to offer flexible and prompt reaction time to our customers’ needs and expectations.”

What appears to be the stronger driving force is client corporate logistics departments becoming more involved in managing cross-border logistics. “Most large U.S. companies had left the management of cross-border logistics up to each maquila,” Kuehner reports. 

But now with C-TPAT and other compliance drivers, factories are now becoming managed by their corporate offices. “This is having an impact on standardizing operating procedures as well as driving down cost with economies of scale,” he adds. “We see a bright future for Panalpina with this market due to our involvement with key industry verticals like auto, hi-tech and medical. “

Panalpina, a worldwide provider of logistics and forwarding services, has well-established cross-border business units in San Diego, CA; Phoenix, AZ; and El Paso and Laredo, TX. Recently, the company opened an office in McAllen, Texas, and Panalpina El Paso moved into a state-of-the art, 116,000 square-foot warehouse/distribution center for direct distribution to big consumer markets in less than 24 hours (e.g. California, Texas, Tennessee, Georgia, etc).

“We have established trans-border standardized solutions that offer solid operations with cross-border expertise and U.S. brokerage teams, cross-dock service and cross-border trucking with pick and pack, and delivery schedules to ensure professional coverage of all customers’ needs are met at all times,” states Kuehner. “Furthermore, we are making on-going investments in leading edge IT tools and human capital to support U.S. Customs specifics such as NAFTA entries, Reconciliation and Duty Drawback.”

Pilot Air Freight is equally concentrating efforts in Central America and Mexico. Fifty percent of the business Pilot does in the automotive sector is coming out of Mexico, despite diminished sales in the industry..

“We are finding there continues to be a need, although volumes are low,” Page reports. “Nevertheless, there continues to be a demand for seamless transportation from the interior of Mexico, where the auto industry is concentrated, to the United States.”

Pilot offers door-to-door service with complete visibility and tracking from the minute a shipment is picked up in Mexico to when it is delivered to the end user in the United States-or vice versa.

“The challenge in the past has been the ability to find reliable Mexican carriers that could meet the schedule requirements of customers,” Page says. “Today we have a lot of confidence that the carriers we use can get the job done from the interior of Mexico.”

Again, the key is how freight forwarders manage shipments at the boarder. Here, Page again emphasizes how important it is to have knowledgeable people working on both sides of the border as well as good relations with both U.S. and Mexican Customs officials. wt



Karen Thuermer, a Washington D.C.-based reporter, specializes in transportation topics.

Sidebar: FedEx Freight, UPS Expand their Presence 'South of the Border'

Amongst logistics providers and freight forwarders, FedEx Freight and UPS rank in the vanguard when it comes to providing capability to facilitate U.S. supply chains expanding into Mexico. Previously regarded as problematic because of under-developed infrastructure and security issues, Mexico is experiencing a resurgence amongst companies looking to source closer to home. And, no small factor in that renewed confidence is the elevated presence of reliable U.S. transporters.

Carlos Fallos, FedEx Freight’s VP, General Manager, Mexico has been doing business in that country for three decades. Over that time he’s seen lots of progress. “Fifteen years ago, the Mexican market was concentrated locally. All of that has now changed, most companies realize they can no longer prosper by catering to the local market and they have adapted very quickly and can go on a global scale.”

Fallos points to both tangible and intangible change. “What is different today,” he observers, “is that the folks in charge of shipping in general have an education of high quality. They’re knowledgeable about logistics and have a high level of understanding about transportation.”

The FedEx organization had been in Mexico for about ten years before FedEx Freight opened a sales office in 2000 which has since expanded into both U.S-Mexico delivery as well as intra-country within Mexico.

There’s border-to-border,” explains Fallos, with off-on loading at Laredo or El Paso. “The Mexican government still has tight reigns on what comes into the country,” he notes. The LTL has to be delivered to Mexican forwarder-broker located on the U.S. side of the border who inspects the merchandize and papers, and assures that the government gets its duties.

A second category is direct service from a U.S. destination to a Mexican one, where FedEx Freight’s Mexican dedicated carrier partner, Autolineas America  (ALA, Mexico’s largest carrier measured by sales, with over 1500 tractors) takes over on the other side. “They created a separate LTL division exclusively for FedEx,” notes Fallos. “It is important to our customers that their cargo is being taken care of in a way that is consistent with FedEx standards.”

Shipments on ALA are managed on FedEx Freight’s IT platform and visible in the U.S. “We have the most robust technology platform for any LTL carrier,” says Fallos. “What we did in Mexico was an extension of that platform. The operating system is identical to that in U.S.”

Implementing a time-driven system posed challenges in a business environment where time commitments had traditionally been lax. “It’s not unlike how LTL was in the U.S. twenty years ago prior to de-regulation where transit times were lax and not consistent,” says Fallos. “We wanted to bring to Mexico market the same reliability and security processes as in the U.S. We are raising the bar in terms of LTL transportation in Mexico.”

UPS also has a long history in Mexico, starting out with small packages and, subsequently, express services. “We were in the game before NAFTA,” says George Post, Director of Marketing, Global Forwarding, UPS, “but NAFTA got us pretty serious.” The company’s Mexico business model entails UPS assets with significant airlift and ground capacity in the major industrial regions of the country, 54 operating centers for small package and supply chain solutions, 600 vehicles and 900 employees. In addition, there are brokerage operations at eight different border locations.

As with other brokers and transportation providers, UPS has seen a sizable up-tick in its business south of the border. “As Asia’s influence increased in the late 90s, we began to see a reciprocal decrease in business activity in the manufacturing sector on the south border of the U.S. Many companies began to re-think their manufacturing and supply chain strategies at that point. Some migrated from Mexico to chase lower labor costs in southern and northern China.”

Of late, however, things have changed. “The Chinese government enacted mandatory requirements for workers in areas such as retirement and health benefits, and established mandatory work hours.” The low-cost labor advantage was wearing thin. Then came the jump in the price of fuel, adding considerable added overhead to the Chinese connection. As a result, we’re seeing an up-tick in near-sourcing.

“You are not going to see the lights go out in China,” cautions Post, but there’s little doubt that Mexico is going to continue to grow in importance to U.S. supply chains (and as an internal market). “We have invested in our infrastructure over the past ten years as our customers and the economic conditions required. Our flexible network in Air Freight, Package, LTL and Ocean allows us to adapt quickly to these ever-changing conditions.”

UPS Trade Direct offers a solution that lets companies bypass distribution centers by shipping directly to retail stores or customers’ doors. Leveraging the breadth and reliability of the UPS global network, Trade Direct provides consolidation of international freight, air, ocean and ground transportation, customs clearance and direct delivery to multiple addresses within the destination country, all through a single source. There are multiple UPS Trade Direct solutions-the UPS Trade Direct Cross Border solution offers pickup and delivery across Mexico/U.S.

The UPS model makes use of its own fixed assets along with purchased transportation and alliances as circumstances require. In 2008, approximately 65 percent of the airfreight went by UPS assets and the rest via commercial airlines. As for small package, 90 percent moved on UPS assets.

- Neil Shister, Editorial Director