Rail and Ports Cause Auto Companies Concern

Mazda's Egawa Weigh in on Logistics Challenge

By Graeme Stewart

Logistics came under the spotlight at the recent MexicoNOW’s Auto Industry Summit in Leon, Guanajuato with Keishi Egawa, President and CEO of Mazda Motor Manufacturing of Mexico, questioning the effectiveness of rail freight and port facilities.
Addressing the audience at the Summit, he said: “There is one concern that we have and that is that we face a logistics constraint in Mexico. We have a concern about the capacity of the railroad, the rail track and the capacity of the rail wagons specially designed for the automobile industry. We also have concerns about the vandalism on the rail track and even on the highways.”
“We can foresee some capacity constraints in the future in the ports on the Gulf side as well as the Pacific Ocean side. And we hope that the country’s infrastructure will be improved in the future.”
Later, Mr. Egawa sat down with MexicoNow to expand on his concerns.
He said: “We are relying on most of our export transportation by rail and we cannot get 100% wagon or car transportation. There is a lack of rail wagons at the moment so we have to use trailer and truck to transport to the ports of Veracruz and Mazatlan. So we are trying to use rail and road to fulfil our logistics requirements.”
“Our other main concern is the vandalism issue, particularly vandalism to the rolling stock. We have been working with the government and the police departments to strengthen security on the rolling stock. This is a fairly serious issue, not only for us but, for instance, Honda is having the same problems too.”
While carmakers in Mexico continue to voice their concerns over the adequate provision of rail services, the country’s biggest rail provider, Ferromex, has said it will have the capacity to support the demands of increased production in the country.

Since the rail industry in Mexico was privatized in 1995, Ferromex has invested US$8 billion in its network and continues to reinvest 27% of its revenue in infrastructure annually, the highest among North American railways. It will invest a further US$5 billion over the next five years, including US$500 million in automotive, according to Alberto Sanchez, Assistant Vice-President of the automotive business at Ferromex.

He said: “The evolution of investment in rail in Mexico shows where we are going and how we will answer the infrastructure issues.”

The company now provides services along 7,108km of main track with direct services to the US border at five different locations as well as serving eight ports. In addition, it is increasing its services at the border with new projects running from Monterrey and Silao.

Ferromex has around 800 locomotives and has recently increased its multilevel fleet for moving vehicles by 950 wagons, a growth of almost 60%. It currently has a rail market share of 65% and the automotive sector accounts for 13% of its revenue.

That 13% share translates into the movement of 1.65 million vehicle units, based on 2014 figures. According to Sanchez, Ferromex moves around 70% of the vehicles made in Mexico.

Nissan, which is Mexico’s biggest carmaker customer, moves 70% of US-bound vehicles by rail and uses Ferromex services from its facilities in Aguascalientes across the border at Eagle Pass and El Paso at the Texas border. It also uses Ferromex’s rival, Kansas City Southern de Mexico, which moves volumes for Nissan across the border at Laredo.

“Without rail, Mexico would not be able meet the needs of the automotive industry in terms of transport,” exclaimed Sanchez. “One of the main advantages for the automotive sector is how we have evolved to take the share we have. Most automotive plants have direct access to rail.”
Nevertheless, fears that OEM production will outpace the growth in services persist and there are also concerns over the costs of rail services, both in terms of inbound and outbound services.
Mr. Sanchez said that the high capacity rail wagons it had invested in made its rail service more cost effective than the alternative modes but also highlighted that it was a strong part of the intermodal network.

Asked about the problems with security on the rail network, Mr. Sanchez admitted that it had been an issue but was one that Ferromex was dealing with, spending millions to protect the cargo it was carrying for the automotive industry and working with government on a joint strategy to solve the issues that threaten quality.
Mexico’s ports have also come under scrutiny by auto manufacturers and Mr. Egawa said Mazda had increased its reliance on the Gulf port of Veracruz after facing “capacity issues” on Mexico’s railways. He hopes the country will expand its railways in addition to boosting port infrastructure.
He said: “At this moment it’s OK, but we are concerned about the capacity of the Port of Veracruz in coming years.”
According to business news organization, Bloomberg, some auto industry executives are worried that production will slow in coming years as exports get bogged down by congestion at the nation’s ports.
The government has targeted 70 billion pesos (US$4.6 billion) for port infrastructure through 2018, including building four new terminals in Veracruz. Some automakers are skeptical that the goal will be met or will be enough to handle the more than 5 million vehicles Mexico expects to produce annually by 2020 - a 56% increase from the country’s 2014 output.
In the past two and a half years, car manufacturers including Toyota Motor Corp. and Daimler AG have invested or promised US$22.6 billion for auto and parts plants, according to the government. That success story, which made the sector the largest source of foreign cash in the country, may be imperiled if the government doesn’t speed up plans for infrastructure improvements.
For Nissan, bottlenecks on the docks could delay a quarter of its planned maritime shipments to the U.S., Europe and the Middle East in five years. In 2014, Mexico became the world’s biggest exporter of Nissan vehicles, according to the automaker.
President Enrique Pena Nieto has made investing in the country’s infrastructure a priority.
His administration is boosting operating capacity at ports by 50% through 2018 and doesn’t foresee any bottlenecks at docks as new plants come online
Mazda, Nissan and Honda Motor Co. are experiencing massive jumps in the number of vehicles exported from Mexico. Nissan shipped a record 538,972 cars in 2014, 20% more than in 2013, according to the company and data from the trade association AMIA, but had 3.8% less volume in 2015.
Mazda, which opened a US$770 million factory in early 2014 that’s slated to become the biggest overseas facility for the Japanese producer, exported 16,017 vehicles in April, 2015, triple the amount of a year earlier. Honda exported 14,880 cars and light trucks out of the country in the summer of 2014, more than double the number a year earlier; and had an all time export volume of 162,000 units in 2015, up 55% from 2014.
It’s easy to see why logistics capacity remains a priority for Mexico’s automobile manufacturers.