Many in the logistics industry had hoped that 2017 would mark a turn-around year after three consecutive years of stagnant to negative US-LatAm trade growth. Those hopes were dashed by the election of Donald Trump, whose anti-Mexico rhetoric, retreat from the TPP, and support for the Republican proposed border adjustment tax combine to threaten a two-decade trade liberalization trend in Latin America.
To find growth, the logistics industry must re-define itself, pull assets from areas of slow or negative demand and refocus sales efforts. After growing without pause for 10 years from 2004-2013, Latin American industries grew fat and inefficient. The era of cost cutting and rationalization which began slowly in 2014 will continue in earnest in 2017 and logistics providers can benefit in the process by convincing their LatAm clients to fully outsource their supply chain management and assets. Additionally, the disruptive economy, symbolized by e-commerce platforms that streamline commerce, represent an opportunity to logistics players to find new customers as well as engage in their own cost cutting.
The pace of change in Latin American logistics will be brutal over the next few years. Those who keep up will prosper while those who cling to old business models will suffer dwindling margins and/or market share loss. Understanding those changes begins with the study of four trends that we have identified in the course of our client project work.
#1 Mexico Cross-Border Trade with the U.S.
Mexico-US trade represents close to 35% of all of Latin America’s trade (with all partners). The Washington-led threat to the region’s greatest trade corridor puts at risk the regional P&Ls of an entire logistics industry which long ago made Mexico the cornerstone of its Latin American strategy. Trump-inspired political risk has frozen the investment plans of hundreds of foreign and Mexican companies who rely on a fluid border to support the world’s largest cross-border manufacturing supply chain.
By AMI’s estimates, upwards of 60% of foreign direct investment in Mexico’s manufacturing sector will be cancelled or postponed in 2017. That translates into a 25-30% overall drop in Mexico bound FDI flows for 2017 versus 2016. Mexican manufacture exports will continue to grow in 2017 thanks to the cheap peso but without new investment, Mexican plants will not be able to keep expanding their output.
The real threat to US-Mexico trade flow will come in 2018, once the US congress takes concrete action on trade policy via both a proposed border adjustment tax and possibly the renegotiation of the NAFTA. Aggressive action against Mexico will almost certainly be met with protectionist counter-measures from Mexico, whose governing party cannot afford to be seen as appeasers in an election year (July 2018 Mexican presidential and legislative elections).
Recently, cross-border logistics has moved towards deferred delivery in an effort to save costs. That cost-cutting prioritization of cross-border traffic will continue in an environment that may become more costly thanks to a border tax and stricter security protocols.
#2 Air Cargo Overcapacity
A disproportionate percentage of US-LatAm air cargo volumes pass through Miami International Airport (MIA), the largest international cargo airport in the Americas. Traditionally, south to north planes carry Latin American perishables into the US market and north to south planes carry high-value technology and finished goods.
The collapse of Latin American currencies in 2014, triggered by lower commodity prices, led to lower demand for larger ticket consumer products and capital equipment. Though LatAm-MIA flow of perishables has grown, it has been at anemic rates (0.3% per annum in 2016, 3.8% in 2015) compared to the 12+% decline in MIA to LatAm volumes. As a result, air cargo yields for MIA based air cargo capacity have dropped steadily since 2014.
Competing with air cargo for delivery of LatAm perishables to the US market is an increasingly competitive ocean cargo option, where overcapacity has also led to cut-throat yield declines, pushing ocean vessels into higher value perishables. Better cool-chain technology and protocols adopted by the ocean carriers help them compete with air, particularly on short-mid length runs, extending the competitiveness to important horticulture producer markets like Colombia, Peru and Chile, the latter boasting the region’s most efficiently run ports.
US-LatAm air cargo will face another difficult year ahead with further declines in yields, given the slow recovery of LatAm consumer markets. Though the economies of Brazil, Argentina, Peru and Colombia show some signs of life, consumers there are still strained by high levels of debt and weak currencies. With three Fed hikes predicted in 2017, LatAm currencies will make only modest gains against the greenback in 2017. A degree of rationalization is in store for the air cargo industry as smaller and costlier carriers pull capacity to stop the bleeding.
#3 Outsourcing to Save Costs
Latin American exporters still rely heavily on internal resources to manage their supply chains and export to the US. For some, a lack of reliable third party logistics providers (3PL) services in their remote locations force them to internalize logistics functions. But for others, a true comparison of the full costs in-sourcing versus out-sourcing has never been undertaken and as a result, they run highly inefficient logistics departments. This phenomena is particularly evident in countries where foreign direct investment in logistics reliant industries has been low, e.g. Ecuador, Colombia, Venezuela, Argentina and parts of Central America. The arrival of foreign manufacturers and retailers who have long outsourced their entire supply chain function provides competitive evidence to local companies that outsourcing works. Without that impetus, Latin American owned firms tend to be distrustful of letting go control of their inventories and supply chain management where so much of their balance sheet assets are concentrated.
There are many different arguments used by 3PLs to sell outsourcing. In Latin America, the most compelling are i) stretching your working capital by speeding up the time it takes to deploy it on inputs and collect it back from customers, otherwise known as accelerating your working capital rotation; ii) freeing up investment capital to grow your core business instead of buying new delivery trucks, and other logistics assets; and iii) cutting costs by first diagnosing all the hidden costs (security, maintenance, training, management, etc.) of operating your own supply chain function and assets and then rationalizing through the outsourcing of all or some of the logistics functions. For the next two years in Latin America, the rising costs of capital, weak currencies, and soft demand will make it very challenging to raise revenue volumes or pricing. Instead, the only way to grow the bottom line will be further cost cutting. Therefore, 3PLs should find a receptive audience to their outsourcing offer, if they take the time to diagnose their customer’s needs.
#4 The Disruptive Economy
The exhausting pace of business disruption that has rocked the US economy over the last decade is just now gathering steam in Latin America. Imported digital product/service models like Uber, Netflix, and Airbnb have found a receptive market in Latin America, already the third-largest social media market in the world. Physical product e-commerce, exemplified by the likes of amazon.com, has been slower to gain traction due to the fulfillment challenges in Latin America. However, thanks to the ingenuity of some local companies, payment and delivery obstacles are disappearing, breathing new life to e-commerce, especially cross-border e-commerce that puts Latin American consumers and small scale importers in direct contact with suppliers in the US, Asia and Europe.
For now, these disruptive forces represent a pin-prick to traditional business models but growing as fast as they are, they will soon prove to be more painful competition. Vertically integrated companies in Latin America need to shed non-core assets and double down on where they most add value. A new wave of corporate rationalization, this time among family-run privately held companies, will provide growth opportunities to those logistics providers who take the time and build the skills required to holistically diagnose their customer’s supply chain challenges. Never before have the consulting skills of a 3PL been as important to winning business in Latin America.
The disruptive economy will also create new companies and invite mostly American e-commerce competitors. Amazon’s incursion into Mexico promises to shake up an efficient but old fashioned brick & mortar retail industry. Companies like Dicex, Mexico’s largest customs broker, who has partnered with Amazon, will experience significant topline growth, even while being forced by Amazon to rationalize its operating costs.
New e-commerce platforms that are invented in the region tend to be started by industry specialists who neither understand nor wish to learn the complexities of supply chain management. Their gaze is fixed upon gaining new customers and climbing revenue. Such fast growth enterprises will be attractive targets for 3PLs who can move as quickly as their customers.
As a traditionally asset heavy industry, the logistics sector faces an uncomfortable new reality in Latin America. Traditional lines of asset heavy cross-border cargo business are likely to decline while asset light/consulting led supply chain management service demand will grow. Navigating the transition will require fearless decision making, careful but accelerated planning, and a massive learning process.
Contact Americas Market Intelligence to obtain strategic insights into the political, economic and cultural landscape in Latin America that will drive your business decisions successfully in areas such as healthcare, logistics, payment, consumer initiatives, natural resources, industrial, automotive and more.