Viva La Mexico – Mexico is shaping auto logistics in North America and beyond. Just like retailers were compelled to develop a “China Strategy,” OEM’s now finding it necessary to put Mexico into their planning. While the auto trade is about as big, widespread and global a marketplace as imaginable, a whole lot of attention these days is focused on one small town in southeastern Mexico called San Jose Chiapa (see Paul Scott Abbott’s interview with Scott Goodwin on page 18). There, the world’s second largest automaker, the Volkswagen group, is building a $1.3 billion plant to make the luxurious Audi Q5 SUV. The first car is scheduled to roll out next year. Audi has designs to supply not just the US, but Europe, Latin America and most of Asia as well. The new factory is huge. It’s reported the facility will be the size of 45 football fields and is transforming the nearby landscape. It is a potent symbol of Mexico’s rise in the ranks of vehicle producers. German rivals BMW and Mercedes Benz have announced that they, too, would make luxury vehicles in Mexico. These plants underscore an increasingly complex set of calculations that drives automakers in where they locate and why. They have implications for vehicle-related transport and infrastructure, for logistics and for trade. “The balance in manufactured goods has been shifting from Asia to Mexico,” said Foster Finley, a managing director of the consultants AlixPartners and the leader of the firm’s operations group. “The automotive industry is one of the leading sources of that shift.” So saying, the moves by Audi and its rivals represent only part of that global calculus. Mexico is on a roll, producing 3.4 million cars and trucks in 2014, with projections of 5 million by 2020. But that still ranks the country as seventh in the world. Last year, global production totaled just shy of 65 million vehicles, almost 20 million more than a decade past. Japan is proving surprisingly resilient. Korea is holding its own. Poland has emerged a European manufacturing darling. US manufacturers are cashing in on American penchant for trucks. And don’t forget China, which is solidifying its position as the biggest producer of cars in the world today. (See article on page 21) That geographic spread is evident not only on the roads, but in the ports and rails as well. Still the most lucrative and sought-after market, the US becomes a kind of transcontinental crossroads. West Coast Vehicle Trade Take San Diego, for example. Last year, some 400,000 vehicles came through the port. It was pretty well divided in a three-way split, according to Stan Gabara, San Diego-based executive vice president of business development and logistics for Pasha Automotive Services. Hyundai and Kia brought vehicles from South Korea. The VW Group imported from both Mexico and Europe. Mazda transported its vehicles across the Pacific from Japan. Up the coast at the Port of Hueneme, CEO and port director Kristin Decas rattles off brands that made up the 299,000 vehicles that came through her gates last year: Mini-Cooper, Rolls Royce, Volvo, Ford, Land Rover, BMW, Hyundai, Mitsubishi, Kia. This year, Decas forecasts 320,000 vehicles. “There’s been a significant increase from these players,” she said. “It’s a very healthy market for autos.” That’s good news for the port as vehicles-related Ro/Ro traffic accounts for 60% of revenue. Like others in the port trade, Decas must scan the globe for car production trends, but she has at least one eye trained on what is happening to the south. “We’re all watching closely what’s in Mexico,” she said. “It’s all happening now and it will be interesting to see how the story plays out.” Mexico’s rise in the ranks of auto producers has the potential of not just major shifts in global production, but in shipping routes as well. Mexico exports more than 80% of the cars it produces. Almost three-fourths of these head north to the US and Canada. Traditionally, rail has been the transport of choice, due primarily to cost. Last year, about two-thirds of vehicles were exported by rail. Projections by WWL, as cited by Finished Logistics Magazine, show that rail will become even more dominant in the years ahead. But growing Mexican production has put a huge strain on rail traffic on both sides of the border. Mexico is working hard to build spurs, sidings and links necessary to accommodate the new plants, although some of the projects won’t be completed until well after the factories start producing cars. Ferromex, the dominant Mexican rail carrier, is investing more than $2 billion on engine and systems upgrades. Both Mexico and the US are experiencing an acute railcar shortage. That is expected to worsen. As car plants are being built deeper into Mexico’s interior, turnaround times lengthen. “These [rail]cars are going further than they traditionally did,” said Gabara. “If you have a capacity issue today, it’s just going to be exacerbated.” The port of Veracruz has congestion and capacity issues of its own, however. Last year, it shipped 680,000 cars. That represents a substantial drop from its peak in 2012 of 875,000, when it was North America’s busiest car carrying port. (Baltimore eclipsed Veracruz for the title last year.) Port officials have promised a new Ro/Ro terminal in three years to handle some of the increased traffic, but the auto industry remains skeptical that port and intermodal infrastructure can keep pace with all the car plants being built. That’s a major concern. Audi built its plant in San Jose Chiapa in part, it has said, because Veracruz port lies less than 200 miles east. From Veracruz, car carriers sail Atlantic routes to Bremerhaven, Bristol, Barcelona and Zeebrugge in Europe. They travel to Brazil and Argentina. The port of Veracruz has blamed these economies for the decline in Ro/Ro movements, especially South America. Then there’s the US. “More and more steamship lines are assessing short sea,” said Gabara. Connecting the Dots: The Puzzle of Auto Movements Last year, Mitsui O.S.K. Lines, Ltd. began a weekly shuttle service linking Veracruz with Jacksonville; Brunswick, GA; Baltimore; Port Newark; and Davisville, RI. Others are tapping smaller ports such as Altamira, on the Gulf of Mexico, and Lazaro Cardenas, on the Pacific Ocean. Lazaro Cardenas already services Nissan, VW, Renault and Suzuki. It is set to construct a dedicated car terminal, it claims will be the first such specialized facility in Latin America. Plans call for two berths, channel depths of as much as 39 feet and about 100 acres of open yards. Movements in these other ports have so far been relatively modest, but as production of new car plants ramp up, that could change dramatically. Last year, for example, some 1,100 Dodge Rams were exported from Altamira to Jacksonville and Baltimore, according to Altamira port. In March, Honda shipped its first compact SUVs via Lazaro Cardenas, with service scheduled for San Diego and Richmond, CA. One question is whether short sea can begin to rival rail – or at least provide an alternative – not just for the West and East Coasts, but the interior as well. “If cars are going short sea into San Diego, what would prevent you from moving cars by rail to, say, Kansas City?” Gabara asked. “San Diego to Kansas City is much shorter than Mexico to Kansas City.” Siem Car Carriers offers one possible model, Gabara believes, giving auto manufacturers extreme flexibility. In the depths of the 2008-09 recession, Siem chartered three car carriers and began to offer scheduled service from Lazaro Cardenas to San Diego, Pasha’s Gray’s Harbor, WA terminal, then onto China. The beauty of the service, Gabara said, is that shippers could book whether they wanted to transport one car or 4,000. Mexico is no newcomer when it comes to car assembly. Henry Ford opened a plant there in 1925. A Mexican factory has the distinction of producing the last of the original VW Beetles in 2003. Ford, VW and Nissan have been making small cars in Mexico for decades. But the country’s vehicle manufacturing industry has experienced a monumental boost this decade, with one automaker following another. “It’s just exploding,” said Frank Camp, director non-containerized sales at the Port of Jacksonville. “Nissan, Volkswagen, US manufacturers, they’ve been there for a long time. Now everyone is coming in. And “it’s not just your smaller compact cars.” Manufacturers are pouring money into Mexico right now. According to figures compiled by Bloomberg, global automakers have made or committed some $20 billion in investments over the past five years or so. The Tier One and Tier Two auto parts makers have followed and may have invested another $20 billion. Mexico’s attraction transcends lower labor costs and proximity to market, however. The country has penned free trade agreements with more than 40 countries, including those in the European Union. That’s critical for an operation like Audi, which wants to export its SUVs back to Europe. Audi officials cited the tariff-related cost differential, which can amount to thousands of dollars per car, as the primary reason they chose Mexico over an existing North American operation near Chattanooga, TN.