DC Velocity May 2011: So near and yet so far

Shifting production to Latin America sounds like a can’t-miss for companies looking to boost speed to market. Unfortunately, it’s not as simple as it sounds. By James A. Cooke

Companies that engage in “near shoring”-manufacturing in countries that are close to target markets-may think they have it made. After all, they’ve cut transit times, reduced transportation costs, and improved their products’ speed to market. But those that shift production from Asia to Latin America will find there’s more to the story. While the distances may be less daunting, they’re likely to confront a whole new set of transportation challenges.

For starters, there’s infrastructure. Few Central and South American countries boast the kind of transportation infrastructure found in the United States. That means that with some exceptions (like Mexico or Colombia, where manufacturing sometimes takes place in the country’s interior), a company looking to locate a plant in Latin America will likely find its options limited to sites near an airport or seaport.

Another potential complication is access to suppliers. While companies that offshore operations to China have little difficulty finding domestic sources of parts and materials, that’s not the case in most of Latin America. In order to run an assembly operation in that part of the world, a company will most likely have to bring in parts and components via ocean.

Despite these obstacles, Latin American countries continue to generate interest from companies interested in pursuing the near-shoring option. Four nations in particular are drawing attention these days: Mexico, Costa Rica, Honduras, and Brazil. What follows is a capsule look at the transportation climate in each of these countries.

Mexico. If it weren’t for the country’s ongoing drug war, Mexico would be the site of choice for virtually every company contemplating near shoring. There are a number of reasons for that. To begin with, there’s proximity. Because Mexico borders the United States, it offers the shortest transit times of any Latin American country. Plus, exporters have the option of using trucks, rather than steamship lines, for U.S.-bound shipments. In addition, Mexico offers a trained work force, with skills acquired during decades of maquiladora manufacturing. On top of that, the North American Free Trade Agreement (NAFTA) has virtually eliminated trade barriers.

As for inbound transportation options, companies bringing materials into Mexico from Asia typically use the Port of Lázaro Cárdenas. Located on the country’s Pacific coast, Lázaro Cárdenas can accommodate large containerships. With inbound shipments from Europe, companies typically use Veracruz, Mexico’s oldest and largest port.

Export shipments, by contrast, typically move north by truck (the one exception being shipments of cars, which generally are moved via rail). For the most part, Mexican truckers are still mom and pop enterprises, although many have formed relationships with major U.S. motor carriers and third-party logistics service companies.

Companies looking to hire truckers in Mexico should be aware that practices differ south of the border, says Paul M. Karon, president of The Entrada Group, which helps clients set up manufacturing operations in Mexico. For example, he says, they can’t assume the carrier will provide insurance coverage for their cargo. “None of the [Mexican] trucking companies carry insurance,” he says. “You have to make sure that the shipment is insured door to door.”

At the moment, Mexican truckers haul cargo only as far as the U.S. border, where they interchange trailers with U.S. carriers for delivery to destinations in the United States. That’s because Mexican motor carriers are prohibited from operating in the United States beyond a 25-mile commercial zone along the border. A tentative deal announced by President Barack Obama and Mexican President Felipe Calderón in March would change all that, allowing Mexican truckers to operate deeper into U.S. commerce. But most experts believe that even if the ban is lifted, the practice of swapping trailers at the border will continue for the foreseeable future. “We’re not banking on overcoming that restriction anytime soon,” says Chad Spence, a director in the enterprise improvement practice at the consulting firm AlixPartners LLP.

Costa Rica. Costa Rica’s highly educated work force has proved a powerful draw for makers of electronics and medical devices, prompting a number of manufacturers to shift operations from Puerto Rico to this Central American nation.

As for transportation options, the country has a major port, Puerto Limón, on the Atlantic Coast as well as a smaller port, Puerto Caldera, on the Pacific side.

Karon says that companies manufacturing in Costa Rica generally set up shop within 10 miles of the airport in San José, the country’s capital. That’s because most of them are makers of high-value products, which typically ship their goods via air freight rather than ocean, as is common in other Central American countries.

Honduras. Low labor costs have attracted a number of apparel makers to Honduras. And easy access by water has only added to this nation’s appeal. The country boasts the only deep-water harbor in Central America, the Port of Puerto Cortés. “The logistics are good in Honduras, if you can live with moving your product by boat,” says Karon.

Most of the manufacturers that do business in Honduras set up plants near Puerto Cortés and truck their finished goods to the port. In many cases, they don’t even have to go out and find their own truckers. Typically, major steamship lines have relationships with trucking companies to handle the freight movement to the port, explains Guillermo Coindet, a lecturer in logistics at UNITEC (Universidad Tecnológica Centroamericana), a university in the Honduran capital of Tegucigalpa.

Brazil. Because of the country’s protectionist laws, most of the foreign-owned plants in Brazil produce goods strictly for domestic consumption. Still, Brazil has considerable promise for near shoring. For one thing, unlike other Latin American nations, it offers an abundance of domestic sources of raw materials and parts. For another, Brazil is much closer to the United States by ocean than, say, China. “From Brazil, it’s 8,000 miles to the United States [by sea] versus 12,000 miles from China,” says Harry Moser, founder of the Reshoring Initiative, a non-profit group that promotes near shoring.

Brazil’s railroads are used mostly to haul commodities, minerals, and agricultural products, making trucking the default choice for companies looking to move goods to one of the seaports on Brazil’s Atlantic coast.

But trucking in Brazil presents some challenges, says Carlos Thome, a vice president with AlixPartners. Individual states within Brazil tax truckers at different rates, and the government imposes onerous insurance regulations on cargo shipments, he says. Plus, some truckers will refuse to move shipments at night for fear of hijacking.

On the plus side, shippers don’t have worry about sudden rate hikes due to a spike in fuel prices. “Petrobras [the government-owned energy monopoly] controls the price of diesel, so you don’t see fluctuations or fuel surcharges like in Europe or the United States,” Thome says. (For more on Brazil, see “The rocky road to Rio: What shippers need to know about doing business in Brazil.“)

The challenges don’t necessarily end once a shipment reaches a port. It’s not uncommon for shippers to encounter transit delays due to port congestion, a byproduct of Brazil’s thriving export trade. “These ports are saturated in terms of capacity because export movements have doubled,” says Thome.

Time to market
In the end, of course, transportation is just one of many factors companies consider when weighing the near-shoring decision. Taxes, wage rates, labor availability, tariffs, and duties all play a role as well.

Nonetheless, the prospect of slashing time to market and reducing the amount of overall inventory in the supply chain pipeline holds undeniable appeal for corporate decision makers. “Companies are looking at near shoring because of speed to market,” says Karon. “Being closer to the U.S. market is the number one reason to be in Latin America as opposed to Asia.”

Source: Article published by DC Velocity


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