There's a chance your Honda — or GM or Chrysler or Ford or any of five other makes of vehicles — was made in Mexico.
Lower costs and cheaper labor in Mexico are drawing foreign investors, particularly auto manufacturers. The country has grown into the world's eighth-largest maker of vehicles, exporting about 80 percent of the more than 2.5 million it made in 2012. The majority of vehicles went to the United States.
In fact, about 1 in 10 cars sold in the United States is made by its southern neighbor's plants.
The surge in Mexican manufacturing operations along the 2,000-mile border with the United States is swelling the need for transportation companies to haul goods, and that means big business for the Omaha-based Union Pacific Railroad.
It also means big challenges as railroads continue to battle the movement of drugs hidden in trains across the border. U.P. has spent millions of dollars to address that issue.
Last year, U.P. business in Mexico represented about 10 percent of the railroad's total revenue of $20.9 billion. U.P.'s volume from business in Mexico increased 5 percent, outpacing overall volume growth.
"The silk route is now for Mexico into the U.S.,” said Foster Finley, co-head of the transportation practice at business consulting firm AlixPartners. “Railroads and intermodal carriers are enjoying that because it's a time of burgeoning trade flow.”
The Mexican Automotive Industry Association estimates the country will make more than 3 million vehicles in 2013. That makes for good future economic prospects for Mexico as a whole. And for U.P.
“We view this trend as a positive for Union Pacific,” said Robert Knight, U.P. chief financial officer, at an aviation, transportation and defense conference last week. “And if you focus just on Mexico automotive traffic, we currently handle roughly 90 percent of the rail market share in and out of Mexico. In fact, around half of our automotive business is cross-border traffic with Mexico.”
One of the railroad's primary advantages, said Bernardo Ayala, U.P. vice president of Mexico markets, is that it's the only American railroad with access to all six rail entry points to Mexico. It also owns 26 percent of Ferromex, Mexico's largest railroad.
“We feel that our access to Mexico is unique,” Ayala said. “Our Mexico business has been growing in the last several years at a very consistent, strong basis.”
Other railroads also have noticed the region's potential. Ferromex and Kansas City Southern de Mexico have made significant capital investments to repair rail on key lines between the United States and Mexico. Ferromex recently announced a five-year investment program of more than $400 million per year.
Union Pacific works with both railroads at border interchanges. Berkshire Hathaway-owned BNSF Railway also works with Ferromex and Kansas City Southern de Mexico to access Mexican markets.
Union Pacific currently is investing $400 million in the Santa Teresa facility in New Mexico that will serve the port entry at El Paso, Texas.
Ayala called the investment worthwhile because of growing opportunities in surface trade between the United States and Mexico. Rising costs in China have helped Mexico gain more than $100 billion in foreign investment in the last five years. Additional foreign investment, particularly by auto manufacturers, is forecast for 2013.
But with all the good news about Mexico, U.P.'s growth there has come with some challenges.
After a lengthy legal battle, the railroad and the U.S. government agreed in 2011 that U.P. would pay $50 million over the next five years to address drugs hidden on trains while still in Mexico. The railroad had been facing $500 million in fines.
At the time of one suit, Tim Johnson, acting U.S. attorney for the Southern District of Texas, said that “along with the profits of doing an international transportation business comes the legal obligation to ensure contraband is not also brought into our country.” The lawsuit, he said, was the consequence of failing to meet that obligation.
Then, in December 2011, a federal judge in Omaha sided with the railroad over nearly $38 million in fines not part of the $50 million agreement — signing an injunction that said the government couldn't seize U.P. equipment or collect fines for drugs on trains while still under Mexican jursidiction.
What goes into making a single car?
Omaha-based Union Pacific hauls materials into Mexico and hauls finished vehicles out. Those materials include:
>> For headlights and windshields, silica sand, cullet (recycled glass), soda ash and limestone. In 2010, the average car required 94 pounds of glass and 5 pounds of soda ash. U.P. ships about 85,500 tons of soda ash into Mexico each month.
>> Aluminum. A foundry requires about 344 pounds of aluminum to construct a single car's engine, and each month U.P. ships 15,000 tons of aluminum into Mexico.
>> Plastics. One automobile requires 100 gallons or more of petroleum to make its plastic parts like seats, dashboards, roof panels, bumpers and engine components. As part of its chemical business, U.P. ships about 107,000 tons of plastics to Mexico monthly.
>> Steel, delivered via rail into stamping plants and rolling mills to make trunks and doors. U.P. hauls about 76,000 tons of steel sheet and 11,000 tons of mini mill steel to Mexico each month.
U.P. also hauls scrap iron, foundry brick, lime and clay, as well as rubber and carbon black, a byproduct of petroleum, to make tires, seals, hoses and other rubber parts in a car. The average car, for example, includes 200 pounds of rubber and 2,444 pounds of steel and iron.
Source: Union Pacific, from 2010 manufacturing numbers
In May of last year, the government appealed that injunction.
Spokesmen for the U.S. Customs and Border Protection and the U.S. Justice Department declined to comment on the progress the railroad was making on the security issues. U.P. spokesman Tom Lange said the company expects the 8th U.S. Circuit Court of Appeals to hold oral arguments within the next few months.
“The issue to be decided,” Lange said, “is whether Customs has the power to impose fines on U.P. for drug smuggling when U.P. is not implicated in the smuggling and does not have control over rail operations in Mexico. U.P. takes every precaution to remove illicit drugs upon receiving the train at the border.”
U.S. Customs and Border Protection, an agency within the Department of Homeland Security, doesn't break down drug apprehensions by mode of transportation or company, but data from the agency show a nearly 16 percent decline in the pounds of narcotics confiscated at eight south Texas ports between 2011 and 2012.
The numbers include a more than doubling of the amount of meth seized.
Ayala said U.P. has had fewer drug issues at the border because the railroad continues to work with the government to make the flow of trade safer and more efficient.
The railroad has funneled money into technology, rail lines, training and more workers and drug dogs. Technology includes video scanners, GPS systems and radio frequency identification that tracks rail movement. One system helps to identify riders who aren't supposed to be on the train, plus detect objects that could cause a mechanical malfunction.
The railroad also now has in place a rail targeting unit, previously known as a “fusion center.” It serves as a central point for railroads, customs agents and others to track shipments and handle security issues. Lange called it an example of a successful effort between the public and private sectors to strengthen safety at the southern border and achieve a common goal.
“If you look at the capital we spend, our relationship with the CBP, our U.P. police efforts and you put those all together, there's no doubt,” Ayala said. “We've developed this expertise of getting freight across the border, second to none. It's not just about efficiency but also about safety.”
And it's all critical to the company's growth.
The railroad's volume growth last year in chemicals, automotive and intermodal (container) shipments helped to offset declines in coal and agricultural products. Even with the overall ag products decline, U.P. saw growth in imported beer from Mexico.
Intermodal too has remained strong, in part, because of the movement of appliances between Mexico and the United States. Mexico has become a major producer of TVs, refrigerators, washing machines and stereos.
Both the chemicals and automotive shipment volumes, which each rose 13 percent for the year, reflect the booming auto industry. U.P., for example, moves about 107,000 tons of plastics each month for vehicle seats, dashboards, roof panels, bumpers and engine components.
The ability to get those materials from the United States is one of the incentives for manufacturers to locate in Mexico. For U.P., a weeklong transit time between the United States and Mexico would be on the long side, while typical transit times are closer to two or three days.
That compares with usually more than 20 days when dealing with China. The Import Price Index for China is also on the rise, making for more expensive Asian imports.
While proximity has worked against China, consultant Finley cautioned not to count out China anytime soon. It's still a massive industrial country with an almost limitless amount of labor, and it remains the No. 1 exporter of vehicles to the United States.
“But there's no getting around the fact that goods produced in China have to spend two to three weeks on the water and have to go through ports,” he said, noting labor strikes as an issue at coastal ports last fall.
Ayala said investments in the railroad's southern network will benefit both the United States and Mexico. The two countries exchange more than $1 billion of goods each day, and Mexico has risen to one of the United States' top trading partners.
While U.P.'s birth was rooted in the flow of trade from east to west, early railroaders sensed the possibilities of the Mexican market. Those visionaries were on point, Ayala said.
He said that U.P.'s trade between the two countries is balancing out — about 45 percent of its shipments are northbound and 55 percent are southbound. Ayala said the railroad's growing involvement with Mexico in an increasingly global marketplace “really reinforces the whole story” of the railroad's success.
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