The recovery of automotive manufacturing in North America, and in particular Mexico, is helping to boost earnings for logistics providers operating in the region, as third-party logistics provider Ryder System and the railway Kansas City Southern have seen significant earnings improvements compared to 2009.
Ryder has seen a 12% revenue increase in its Supply Chain Solutions division thanks in part to higher automotive volumes, with pre-tax earnings doubling to $12.6m for the second quarter. The growth in automotive movements meant that operating revenue went up by 7% as well as a favourable foreign exchange rate, according to the company.
The increases were partially offset by the closure of some locations last year, as Ryder cut underperforming contracts, and pulled out of several regions–including Europe and South America–to focus on North America and Asia.
Contractual issues prevented the company providing specific details of contracts or clients but in terms of regional growth the main strength was seen originating from Mexico, according to John Williford, president, Supply Chain Solutions in last week’s public earnings call.
Also taking part in the call was Greg Sweinton, Ryder System’s chairman and CEO, who said that higher SCS earnings were driven largely by improved automotive volumes.
“Automotive volumes with plants we serve were higher as compared to the very weak first half of 2009,” he went on.As well as the severance of underperforming locations last year, Swienton said that there were better consumer and high-tech results as well.
Mexico is seeing an increase in automotive production and the development of local content, where Ryder has a strong presence, particularly in border-crossing operations. In an interview in May at Ryder’s offices in Novi, Michigan, near Detroit, Ryder’s senior vice president responsible for automotive, Tom Jones, confirmed that Mexico was seeing the most increase in activity than any other part of North America, despite the spate of violence particularly in the border regions that have resulted from clashes with local authorities and drug cartels. “The issues they have on the border do not appear to be affecting the business climate,” he said. “But the border has always been difficult and moving efficiently across it is one of the things we work hard to offer as a service.”
A recent example of the ongoing automotive growth in Mexico, Volkswagen has been calling on parts makers to set up operations in proximity to its manufacturing facility in Puebla. Earlier this month VW opened a new section at the plant for production of the Jetta.
“Expansion of the Puebla plant is a major step towards the future for Volkswagen in Mexico,” said Prof. Dr. Jochem Heizmann, member of the Board of Management of Volkswagen with responsibility for Group Production.
With an annual production capacity of 525,000 units, Puebla is now one of the largest car manufacturing plants in the Volkswagen Group and up to 80% of the Puebla facility’s total production goes abroad, half of that to the US market. About 900 train carriages loaded with VW cars depart from the Puebla plant every day. This helped Mexico’s vehicle exports in June grow 109% compared with 12 months earlier, according to the Mexican Association of the Automobile Industry
In addition, this week Nissan announced that it was investing $600m to upgrade its plants in Mexico and start making three new low-cost cars there, making Mexico its supply hub for the Americas markets. The carmaker expects to produce 300,000 units of the three models per year in Mexico and expects 80% of them to be exported to other markets in the Americas.
Automotive growth in Mexico and increased movements across the Mexico-US border were also good for Kansas City Southern in the second quarter. The company reported increased automotive revenues of 292% compared to the same period last year because of automotive production south of the border. In the second quarter of 2009, the company moved just under 8,000 carloads and units of automotive freight but this increased to 17,500 in the same quarter for 2010. Automotive revenue for that quarter this year was $24.3m compared to $6.2m in the same quarter last year.
“The improvement in volumes, coupled with a solid pricing environment, led to a 35% increase in revenues. Automotive and intermodal traffic trends have been encouraging, and we continued to deliver strong increases in our cross border revenues,” said Kansas City Southern chairman Michael Haverty.