TRENDS IN 3PLTrucking / CUSTOMER in Mexico: RELATIONSHIPSNavigating the Opportunity NovemberJune 2017 2016 Phone: +1-800-525-3915 Website: www.3plogistics.com Email: [email protected] ABOUT ARMSTRONG & ASSOCIATES, INC. Armstrong & Associates, Inc. (A&A) was established in 1980 to meet the needs of a newly deregulated domestic transportation market. Since then, through its leading Third-Party Logistics (3PL) market research and history of helping companies outsource logistics functions, A&A has become an internationally recognized key resource for 3PL market information and consulting. A&A’s mission is to have leading proprietary supply chain knowledge and market research not available anywhere else. As proof of our continued work in supporting our mission, A&A’s 3PL market research is frequently cited in media articles, publications, and securities filings by publicly traded 3PLs. In addition, A&A’s email newsletter currently has over 42,000 subscribers globally. A&A’s market research complements its consulting activities by providing continually updated data for analysis. Based upon its unsurpassed knowledge of the 3PL market and the operations of leading 3PLs, A&A has provided strategic planning consulting services to over 30 3PLs, supported 17 closed investment transactions, and provided advice to numerous companies looking to benchmark existing 3PL operations or outsource logistics functions. All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form by any means, electronic, mechanical, photocopied, recorded or otherwise, without the prior permission of the publisher, Armstrong & Associates, Inc. The facts of this report are believed to be correct at the time of publication but cannot be guaranteed. Please note that the findings, conclusions and recommendations that Armstrong & Associates delivers will be based on information gathered in good faith from both primary and secondary sources, whose accuracy we are not always in a position to guarantee. As such, Armstrong & Associates can accept no liability whatsoever for actions taken based on any information that may subsequently prove to be incorrect. ©2017 Armstrong & Associates TRUCKING IN MEXICO Trucking in Mexico totaled $60.0 billion in 2016. Proximity to the United States, low wages, increases in manufacturing competencies, and retail investments throughout Mexico are keeping trucking in Mexico afloat. While trucking in Mexico is bobbing relative to the United States due to currency fluctuations, the complexities of intra-Mexico and cross-border trucking with the United States requires expertise. Retail companies such as Walmex (Wal-Mart de Mexico SAB) are expanding throughout Mexico. Walmex is investing $863.0 million in opening and remodeling stores and bolstering logistics and online commerce. A total of $112.19 million is earmarked specifically for logistics. In addition to the amount Walmex plans to spend on store expansions, it is investing $1.3 billion in logistics over the next three years.1 Companies, such as Wal-Mart, are expanding into Mexico for shorter leadtimes. Ocean transit cannot react as quickly to consumer demands as truckload transit. The expansion of retail companies throughout Mexico bodes well for third-party logistics (3PL) providers. According to the Armstrong and Associates report “Trends in 3PL/Customer Relationships – 2017”, 90% of Domestic Fortune 500 companies rely on 3PL providers for outsourced logistics and supply chain services. Mexico-based 3PLs have a high proportion of customers in Retailing and Healthcare. These industry verticals tend to use fewer 3PL services per relationship but they are often more strategic. Major customers include Johnson & Johnson, FEMSA, Nestle, Proctor & Gamble, Stanley Black & Decker, PepsiCo, Bio-Rad Laboratories, and Kraft Heinz. Figure 1. Mexico: 3PL Distribution of Customer Relationships by Industry Vertical The Mexican trucking market is divided into intra-Mexico and cross-border import/export trucking with the United States. Domestic trucking’s core is the Mexico City area, connecting to major cities like Monterrey and Guadalajara. Cross-border traffic is dominated by export/import activity involving the United States. Eighty-one percent of the Mexican exports are to the United States. Mexico is the second- largest market for U.S. exports and tied with Canada for second-largest for imports into the United States. Mexico accounts for 13.2% of total U.S. imports, and more than 4 million containers and trailers cross the border each year.2 The average truckload freight value is about $52,000. 1 Harrup, A. (2017, March 15). Wal-Mart de Mexico to Invest 17 Billion Pesos in 2017. Retrieved March 28, 2017, from http://www.morning- star.com/news/dow-jones/retail/TDJNDN_2017031411317/walmart-de-mexico-to-invest-17-billion-pesos-in-2017.html 2 https://www.cia.gov ©2017 Armstrong & Associates 3 TRUCKING IN MEXICO The busiest cross-border port is Laredo, Texas which averages 12,200 trailers and containers a day. The other primary ports are Otay Mesa, California; El Paso, Texas; Hidalgo, Texas; and Nogales, Arizona.3 Table 1. Top 10 U.S./Mexico Border Crossings Ranked by Loaded Truck Containers – 2016 Source: U.S. Department of Transportation, Bureau of Transportation Statistics According to the U.S. Department of Transportation Bureau of Transportation Statistics, the primary commodities shipped to and from Mexico are “Electrical Machinery; Equipment and Parts,” “Vehicles Other than Railway” and “Computer-Related Machinery and Parts”. For vehicles, the parts move south and finished vehicles move north. There are about 30 automotive assembly plants operating in Mexico. In general, cross-border traffic flows are about sixty percent northbound and forty percent southbound. Trailer capacity for northbound movements can be very tight during the summer produce season. Most cross-border movements involve a U.S. carrier and a Mexican carrier. Each works with a customs broker on its side of the border. There are two governmental agencies involved in any cross-border shipment. U.S. Customs and Border Protection (CBP) is part of the U.S. Department of Homeland Security. The corresponding Mexican agency is the Ministry of Commerce and Industrial Development which is in the Department of Customs. All shipments are handled by the Mexican authorities through the use of pedimentos which are import/ export forms. Importing and exporting are covered by each country’s individual laws and NAFTA (North American Free Trade Agreement). Mexico maintains a national registry of importers and exporters. About 18,000 companies with U.S. investment are involved in Mexico. Shipments into Mexico are subject to value-added taxes. Not surprisingly, there is a host of customs brokers waiting to help. There are 225 brokers in Laredo alone. The shipper needs one broker of record for CBP and one for Mexican customs. Mexican carrier tractors, without U.S. Federal Motor Carrier Safety Administration (FMCSA) authority, are restricted to operating within 25 miles (40 km) of the border. In effect, this reduces most operations to shuttling. To keep shipments to a “single line” move, some U.S. carriers have acquired Mexican subsidiaries. For examples, Celadon Group has Servicio de Transportacion Jaguar, 3 U.S. Department of Transportation, Bureau of Transportation Statistics ©2017 Armstrong & Associates 4 TRUCKING IN MEXICO and Swift Transportation acquired Trans-Mex. Currently, a U.S. company cannot purchase and own a Mexican carrier. Other trucking companies set up control relationships with dedicated Mexican trucking companies and profit handsomely from it. For example, Ryder Supply Chain Solutions has two dedicated companies, Servicio de Transporte Internacional (STIL) to handle intra-Mexico movements and Akna Transportes (Akna) for cross-border shuttling. Ryder normally completes cross-border (yard to yard) movements of trailers in less than two hours in Laredo. A key to Ryder’s success is the use of C-TPAT (Customs-Trade Partnership Against Terrorism) and FAST (Free and Secure Trade). C-TPAT is a certification program for shippers, carriers and brokers that allows them to establish recognized, good standing as law-abiding importers. FAST provides qualified drivers with cards that identify them and allow for much quicker crossing approval. At Laredo, there are four northbound and four southbound FAST lanes to expedite the flow for C-TPAT partners. Mexican companies and drivers can participate in C-TPAT and FAST. Major carriers like Werner Enterprises, Celadon/Jaguar and Swift/Trans-Mex have programs for effective use of C-TPAT, FAST and other standardized practices to minimize border delays. Intermodal container trains have special customs clearance processes that allow them to clear 250 containers in 30 minutes.4 There are over 135,000 trucking companies in Mexico including approximately 111,000 (82%) owner- operator companies with one to five trucks. There are 25 carriers with 1,000 or more trucks. Figure 2. Mexican Trucking Carrier Size Breakdown Source: Secretaria de Comunicaciones y Transportes (SCT) With limited exceptions, Mexican carriers have not been allowed to operate in the U.S. Similarly, with a few exceptions, U.S. truckers have not been allowed to work directly in Mexico. 4 Mark Szakonyi, The Journal of Commerce, Page 10, September 3, 2012 ©2017 Armstrong & Associates 5 TRUCKING IN MEXICO Two major U.S. exceptions are Celadon/Jaguar and Swift/Trans-Mex.