OAK BROOK, Ill. — U.S. shippers that fail to understand the booming Mexican economy risk losing out on tapping a new market and paying too much for cross-border transportation, said a Kansas City Southern Railway executive Thursday.
Fears of directly doing business in Mexico, exacerbated by drug war violence, spur many shippers to transfer ownership at the border, said Brian Bowers, senior vice president of intermodal and automotive. Shippers also rack up unnecessary supply chain costs by transloading materials via several modes or shipping through a “maze of non-value-added warehouses at the border that adds costs and time to the transaction.”
“Times are changing and they are changing rapidly as people find new and more sophisticated ways of doing business in Mexico on a direct basis,” Bowers told attendees of the Midwest Association of Rail Shippers conference in Oak Brook, Ill.
KCS points to its strong carload and intermodal cross-border network as a way for shippers to transit the border for roughly 20 percent less than the cost via truck and gain faster customs clearance. Through its roughly $300 million investment in the last five years, KCS has tapped the explosive growth of Mexican auto and auto part production, a result of rising Chinese labor costs, skilled Mexican workers and reduced transport costs to the U.S. market. Japanese carmakers also seek relief from the strong yen by setting up shop south of the border. The KCS network connects to other Class I railroads in North America, providing shippers access to major markets, including Chicago, Detroit and New York.
“We had all time record cross-border revenues in our industrial and consumer intermodal and automotive business (in the fourth quarter),” KCS Executive Vice President and Chief Marketing Officer Patrick Ottensmeyer told investors Tuesday.
The railroad’s cross-border revenue in fourth quarter rose 2 percent year-over-year and would have jumped 22 percent if not for weak grain traffic. Intermodal volume moved across the border skyrocketed 74 percent to about 14,000 units in the same period, and revenue from intermodal shipments rose 74 percent to nearly $12.3 million.
“For the full year, our cross-border volumes increased by 88 percent to about 49,000 loads,” Ottensmeyer said. “You will remember that we estimate the size of the cross-border truck market to be somewhere between 2.5 million and 3 million units and growing, so you can see there is still a lot of room for growth for us in this area.”
The healthy cross-border business helped propel KCS revenue to a fourth-quarter record of $568 million. KCS profit slipped 4 percent year-over-year to $91.8 million in the fourth quarter, largely because of higher operating costs and sluggish coal and grain shipments.
KCS expects Mexico-related business to aid the company in exceeding 2013 volume and revenue this year, despite the period being a “bridge year” to an anticipated increase in business in 2014. The smallest Class I railroad in North America expects mid-single-digit growth in volume and pricing this year, and a high single-digit revenue gain. The railroad expects even more growth the following year, when Audi, Honda, Mazda and Nissan open new plants.
The new facilities are expected to boost Mexican auto production by 25 to 35 percent from 2012 levels, KCS President and CEO David Starling told investors. Bowers said hundreds of auto part supplier are also entering Mexico or expanding their existing presence.
KCS is also enjoying growth connected to the Port of Lazaro Cardenas, the second-fastest-growing container port in North America in 2011. KCS, which is the only railroad to serve the port, saw volume from the gateway dip 5 percent year-over-year in the fourth quarter, but revenue from the business rose 12 percent in the same period. Rail volume from the port in 2012 increased 12 percent, and revenue from the shipments jumped 22 percent. Ottensmeyer said the year-over-year drop in port volume last quarter was a result of a shorter peak season more concentrated in the third quarter, rerouting of empty containers elsewhere and a surge of volume in the fourth quarter of 2011.
“A number of our ocean carrier customers have told us that they expect to see double-digit growth in volumes in 2013,” he said. “So we believe this reduction in volume is a temporary phenomenon driven by a few isolated factors and in no way an indicator of future trends at Lazaro Cardenas.”
Planned expansion of the port supports the railroad’s optimism. APM Terminals is expected to open a $300 million terminal, the first phase of a more than $900 million planned investment at the port. Once completely built out, the A.P. Moller-Maersk Group subsidiary will have an annual capacity of up to 3 million containers at the port on the Pacific Ocean. More immediately, Hutchison Port Holding plans to install five new cranes in the second quarter of this year, bringing its crane count to 11. Plus, SSA Marine last year won a concession to build and operate a terminal at the port with an annual capacity of 750,000 vehicles. The investments could lift Lazaro’s container capacity from 1.5 million 20-foot-equivalent units to as much as 5 million TEUs.
“I think you'll see those two, (Hutchison) and APM, fighting over business, which will be to the detriment of Manzanillo, and you'll see more business coming out of Manzanillo shifting over to these two facilities,” Starling said.