One of the perennial reasons given for order-to-delivery (OTD) delays is rail constraints. This has been an ongoing issue in the U.S., but, now, with the dramatic expansion of automotive production south of the border, rail constraints in Mexico will begin to play a greater role in fleet OTD discussions.
When the North American Free Trade Agreement (NAFTA) was signed in January 1994, it marked a new chapter in cross-border economic activity between the three signatories – the U.S., Mexico, and Canada. As trade among the three countries has grown significantly, so too have concerns about transportation and infrastructure constraints that threaten to create logistics bottlenecks.
Mexico Emerges as a Global Auto Export Hub
In calendar-year 2015, Mexico exported nearly 2.9 million vehicles, with 70% of them shipped to the U.S. Although Mexico has been a major automotive exporter for decades, the recent growth of its automotive manufacturing base has been dramatic.
For instance, in the past 15 years, Mexico catapulted from being the world’s 11th largest automotive manufacturer in 1995 to the seventh largest in 2016. In the last five years, there has been a series of rapid fire announcements by global OEMs to build greenfield assembly plants or expand existing operations.
Currently, there are 11 global automotive manufacturers in Mexico, with many of them building brand-new manufacturing facilities. For example, Honda, Mazda, Audi, Nissan/Infiniti, Kia, Mercedes-Benz, BMW, and Toyota all have new plant investments underway in Mexico, and those OEMs with existing plants, such as Fiat-Chrysler, Ford, and GM, are investing heavily to expand their manufacturing footprint. In June 2016, BAIC, a unit of Beijing Automotive Group Co., began selling cars in the Mexican market, and said it too may set up a production facility in Mexico in 2017 to sell its products in both the local and export markets.
With this expanded production volume coming online, the forecast is that automotive production in Mexico could reach 5 million units by 2020. Since Mexico’s domestic retail market is relatively small with 900,000 units sold per year, the overwhelming majority of this new capacity will be earmarked for export. OEM investments in Mexico are pointing to higher volumes of exports to the U.S. and Canada, which are already at record levels. This growth has fleet logistics implications between the two countries, since many of these products are also popular in the U.S. fleet market.
Currently, OEMs are experiencing rail capacity constraints exporting automotive product out of Mexico, along with rail infrastructure deficiencies, especially with rail lines going through cities. In addition, the increasing volume of locally assembled automotive exports promises to make railcar shortages in Mexico more frequent. Rail companies in Mexico, such as Ferromex and Kansas City Southern de Mexico (KCSM), have made significant investments in both railcars and infrastructure to secure capacity for future growth, but there is still much more to do.
In reaction to emerging rail constraints, OEMs are looking at “short-sea shipping” as a viable supply chain solution to export vehicles. Approximately 80% of automotive exports are shipped by rail to the U.S. and Canada, with the remainder by sea. For example, Volkswagen sends roughly half of its Mexican exports by short sea from its long-time assembly plant in Puebla. More recently, Honda, Mazda, Nissan, General Motors, Fiat Chrysler, and Ford have increased their use of short-sea carriers.
Spectre of Increased Rail Constraints
Another factor contributing to Mexican rail congestion is the U.S. rail industry’s migration to 286,000-pound gross rail load railcars, which are commonly referred to as GRL 286. Over the past 20 years, the majority of new railcars added to the revenue-earning fleet in the U.S. are the larger GRL 286 cars, which enable operational efficiencies since they can carry larger loads, thereby easing logistics congestion. The problem is that not all rail lines can support GRL 286 cars. In Mexico, the only GRL 286 lines are the lines are those going into New Mexico and Texas. With only three main lines serving Mexico that can support GRL 286 railcars, it creates bottlenecks resulting in rail congestion, with trains traveling, on average, as slow as 7 mph.
In 2013, the Mexican government announced a $100-billion spending package aimed at building new rail lines and improving ports. Although Mexican rail companies are making significant capital expenditures, with nearly 50 percent of Mexico’s rail lines below GRL 286, there is much more work that needs to be done.
As Mexico’s expanded auto production capacity comes on line, future discussion about OTD will need to take into account rail constraints issues that occur south of the U.S. border.
Let me know what you think.