The lack of investment in Mexico’s supply base offers good opportunities for third party providers to bring in their expertise and improve their competitive standing. DHL Supply Chain is one such provider that is making inroads
Mexico has been producing cars for the best part of a century. Yet over the past decade the country has not seen the explosive growth experienced in newer production locations such as Central Europe, Turkey or Thailand. While production of 1.5m cars and trucks a year is comparable to Canada, it is questionable if Mexico has fulfilled its potential.
In part this is down to productivity issues. In the past assembly plants in Mexico often suffered from quality problems and, despite the lower cost of labour, other costs were higher. Consequently, Mexico was less attractive for carmakers and a typical reaction was seen when VW decided to create a new greenfield site in the US rather than complement its long established Puebla plant (pictured above), despite the major investment it had made there. Perhaps this was just a desire to diversify, or possibly nervousness about over-dependence on a Mexican production base. Yet it is precisely the weaknesses in technology and investment that offers logistics providers opportunities in such markets by contrast to those in North American or European countries. A good example is DHL Supply Chain, which has established itself as one of the leading providers in Mexico.
In the key area of inbound logistics DHL has been able to create the sort of integrated consolidation of operations that so many 3PLs in developed markets have aspired to but have so often been frustrated in realising. Gary Allen, vice president of production development and innovation for DHL Supply Chain North America, says that major assembly plants in the country still leave some room for technology improvements: “They don’t use EDI, they don’t use barcode scanning, but the way they circumvent that is to get 3PLs to perform that function for them.”
The result of this, in the case of DHL Supply Chain, is that inbound component flow at Volkswagen’s plant in Puebla relies heavily on DHL resources, with consolidation, cross-docking, labelling and line feeding done by the LSP. What appears to be happening here is that the vehicle manufacturers are drawing upon the capital and management resources of a large LSP, a situation that must be viewed as satisfactory by such providers as it improves their competitive position.
That said, it is Allen’s opinion that this success is related to the outsourcing culture at the different vehicle manufacturers and variations in the sophistication of tier one suppliers, rather than only geographical factors.
Another typical issue found within these types of markets is the quality of transport provision. Although trucking resources in Mexico are good, the management of those resources is a different matter. DHL has been able to capitalise on this by establishing its own managed road freight network. This gives it an ability to penetrate a sector to a degree that in North America would be difficult.
Although big LSPs do operate ‘less-than-trailer load’ networks for vehicle manufacturers–BMW uses DHL’s network in Germany, for example–this is unusual. Milkround planning and operational control remain firmly in the hands of carmakers. In markets such as Mexico the transport options for OEMs are reduced, making them more reliant on the resources of larger providers.
The situation in Mexico is complicated by the regulations concerning road freight. Operators of physical assets must be Mexican companies whilst cross-border traffic is limited to a specific zone. Consequently, DHL, like other non-Mexican LSPs, have to use Mexican partners. Nonetheless, the network is still capable of injecting sophisticated network management capabilities into the Mexican market.
A further aspect of this capability is management of product crossing the border. As with so many newer production locations, the movement of both components and finished product across national boundaries is often difficult. In the case of Mexico road freight across the border is difficult because of limitations on access to the country’s roads.
Whilst DHL operates a combined freight forwarding and road freight network designed to cross the border, this is not unique. Large US truckers, such as Schneider National, offer a similar service. However, the existence of the border is a clear opportunity for adding value as far as larger LSPs are concerned, as well as being a good differentiator from smaller trucking firms that otherwise pose strong competition.
There is now more optimism directed at the future for Mexican automotive production than its past. Despite a major wobble during the recession when production fell by more than a third, Mexico is set to resume its upward trajectory. The type of product that Mexican plants are producing has changed substantially away from light trucks and towards small models such the Fiesta and the Fiat 500. The problem here is that Mexico is still heavily exposed to production by the old Big Three. The up-side is that the country is increasingly being used as a production base for growing South American markets. This, combined with higher levels of integration with US production bases, will only make the issue of cross-border traffic more salient.
These factors mean that the big LSPs are re-orientating themselves towards emerging markets such as Mexico to retain major exposure to the automotive sector. Allen says that the combination of growth and sophistication of service offering is why DHL Supply Chain is focusing investments on Latin America and Mexico. “That is why the issue of crossborder transport is crucial. The amount of trade will continue to increase at a higher rate and because of this a lot of growth will be with the tier ones.”
Although the major LSPs are generally wary of admitting that they are placing less emphasis on automotive markets in the West, there is a clear awareness that the prospects in regions such as Central and South America are better than in traditional production locations. This is not just to do with high growth levels in production but is heavily influenced by the different behaviours exhibited by the vehicle manufacturers in these markets.