On the move: Strong transport connections offer potential for the development of logistics businesses

With its central location complemented by strong transport connections that link the state both to the large consumer market of Mexico City next door and destinations further afield – including ports that provide access to imports and exports – it is no wonder that Hidalgo is promoting its transport links as a key incentive for businesses looking for a Mexican base to set up shop.

Strong Connections

Most obviously, there is Hidalgo’s inherent strategic geographical location, lying in the centre of Mexico and thus close to not only both Pacific and Gulf ports, but also accessible to north and south of the country. Additionally, the state lies directly to the north-east of Mexico City. Beyond that, some 11,000 km of roads and 800 km of railway lines ensure that Hidalgo is well connected, as well as being strategically positioned.

Indeed, its location and infrastructure have been instrumental in securing recent industrial investments. In November 2017 Grupo Modelo, the local arm of global beer giant AB InBev chose the municipality of Apan, in the south of Hidalgo, to construct what will be one of the largest breweries in the world.

Mauricio Leyva Arboleda, CEO of beer maker Grupo Modelo, told OBG it was Hidalgo’s transport infrastructure – which boasts both strong internal links and connections beyond Mexico’s borders – that was the first factor in making the state the ideal location for its latest major investment.

“The motorway network will allow us to distribute to the centre of the country, especially, and at competitive costs,” Leyva told OBG, adding that, “The railways that connect Hidalgo to the ports mean the state is also a strategic location for exports.”

Like the states in the Bajío corridor to the north, Hidalgo has easy access to the US via the so-called Nafta Highway, Carretera 57, which goes straight through Tepeji del Río in the west of the state, opening access to another strategically important market.

Connectivity between Carretera 57 and the rest of Hidalgo was significantly improved in 2009, with the opening of the Arco Norte (Northern Arc) motorway, a bypass around the Mexico City metropolitan area that passes just 25 km from Hidalgo’s state capital Pachuca on the way to Puebla.

Eastwards there is access to Gulf ports. Grupo Modelo’s chosen site for the brewery, the municipality of Apan, for instance, is 246 km from Tuxpan and 318 km from Veracruz, both home to major ports. Additionally, Apan as just 12 km from the Arco Norte, putting domestic markets within easy reach.

When the Arco Norte was extended to the west of Mexico City in 2011, as far as Atlacomulco, it further facilitated road access from Hidalgo to Guadalajara, Mexico’s second-largest city, and the Pacific ports.

Closer to the capital city than the Arco Norte is the Circuito Exterior Mexiquense, Mexico City’s peripheral motorway. The circuito also connects with the Pachuca-Mexico City motorway, which itself was widened to four lanes in each direction in 2016, reducing congestion and lowering journey times.

Intermodal Advantages

Yet, if many states can lay claim to a highly advantageous location, there are perhaps two major factors that allow Hidalgo to stand out in terms of logistics infrastructure.

The first is the state’s high level of inter-connectivity of the national rail network, which largely comprises three main networks owned by two companies. Of the five places where the two rail operators meet, two are in Hidalgo: one in Apan, and the other at the Intermodal Logistics Terminal of Hidalgo (TILH) in Tula, where a joint venture between local conglomerate Grupo UNNE and global ports group Hutchison operates an inland port.

“The rail convergence contributes to making the TILH the best-connected inland port in Mexico,” Noé Paredes, head of Grupo Corporativo UNNE, told OBG. “No other port directly connects both Kansas City Southern de México (KCSM) and Ferromex rail services, meaning this is the only terminal where a client can switch directly from one to the other.”

As an example, cargo can be sent from Nuevo Laredo, the US-Mexico border town served by KCSM, to Manzanillo – the port on the Mexican Pacific coast served by Ferromex – via the TILH where the connection between one line and the other is carried out.

Capital Gains

The other clear advantage Hidalgo can boast compared to its northern neighbours in the Bajío, for example, is that it is far closer to, and boasts much easier access to, Mexico City – the largest consumer market in Latin America.

According to Don Ratliff, founding executive director of the Supply Chain and Logistics Institute at the Georgia Institute of Technology, Hidalgo’s proximity to Mexico City is what gives the state its biggest logistical advantage. The Atlanta-based university collaborated with Monterrey Institute of Technology and Higher Education on a study called “Strengthening Hidalgo State’s Logistical Capacities”, which was presented in January 2018.

However, Hidalgo’s geography is interesting because it is in between major ports on both the east and west coasts, without being particularly close to any. “When I got involved in the state, the first big question I had to answer was: could Hidalgo become a logistics centre?” Ratliff told OBG. “The state’s biggest advantage is that it is located directly between the US and Mexico City. The southern half of the state has huge potential as a logistics hub serving Mexico City, in particular.”

Logical Investments

This is the thesis that local private real estate investor Artha Capital was betting on when it invested in a new industrial park, the Logistical Platform of the State of Hidalgo, known as Platah, being promoted by the state government.

Located just outside Villa de Tezontepec, just five minutes away from intersection of the Arco Norte and the Pachuca-Mexico City motorway and 20 minutes from the Circuito Exterior Mexiquense peripheral road, the proposed 343-ha park is a clear example of an initiative looking to make the most of all the state’s geographical advantages.

Describing it as “the new industrial destination of central Mexico”, Artha Capital’s presentation of the Platah project highlights its access to the main supply chains of the country, which it hopes will optimise logistical and production costs for tenants.

Not only is Platah close to Mexico City, it is also accessible from other manufacturing centres, being 128 km from Puebla and 180 km from Querétaro via the Arco Norte motorway route.

Another key investment is under way just to the east of Tula in Atitalaquia, where US logistics company Bulkmatic building a fuel storage unit. Due to be completed in the first half of 2019, it is the first such plant in Mexico to be constructed privately.

Bulkmatic’s facility will connect with both the road network and KCSM railway, and will have storage capacity for 600,000 barrels (see energy analysis).

Distribution Hub

All this ties in closely with the authorities’ vision for the state to become a logistical centre. “New distribution centres in Mexico City are out of the question, and Hidalgo is a logical location for them,” Ratliff told OBG. “Like everywhere else in the world, Mexico City will be served by the likes of Amazon, Walmart and Alibaba; this is where people will buy from in the future.”

These large-scale, largely online retailers require massive logistics and distribution facilities, and as a natural midpoint between Mexico City and the US, Hidalgo is ideally placed to take advantage of this demand, according to Ratliff.

Whereas its proximity to Mexico City has in the past been a drain on resources and investment (see overview), Ratliff believes that Hidalgo’s greatest potential and biggest opportunity lies in learning to serve the nearby capital city, which has a rapidly growing population but is running out of land.

Indeed, these infrastructure developments are designed to allow Hidalgo to reap the economic benefits engendered by the ease with which goods and services flow from it to the capital.

Projects such as Platah and the TILH “are allowing us to stop seeing having Latin America’s biggest consumer market on our doorstep as a bad thing,” Edgar Espínola, president of the Business Coordinating Council of Hidalgo, told OBG. “Trucks and trailers should no longer have to enter Mexico City, but can use Hidalgo as a base for more agile distribution in smaller vehicles, around the capital,” he added.

A related benefit for investors is the space Hidalgo offers as it is not yet pressured by the urban development needs of Mexico City and its suburbs, Miguel Yáñez, general manager of the TILH, told OBG. “Many companies are looking to relocate and this is where Hidalgo is competitive. There is lots of space here.”

Hidalgo’s moves towards becoming a logistics centre are well under way. Indeed, US supermarket chain Walmart already houses its distribution centre for all of southern Mexico in the state. Mexican logistics company Frialsa runs Walmart’s distribution facility in the Tepeji del Río industrial park.

The US supermarket chain is the largest client at Frialsa’s Tepeji base, which is itself the Mexican company’s biggest facility in terms of space capacity and the numbers of palettes in operation. The local firm has invested MXN12m ($648,000) in its refrigerated facility, which opened in 2014.

“The company began the Hidalgo project with the idea of getting out of the [capital] city,” Igor Rogelio Flores, manager of the Tepeji plant, told OBG. “Walmart was very interested in finding a larger space.”

Initially, Frialsa started with capacity for 30,000 palettes, with possible expansion projected for six years after opening. But due to high demand the firm installed 10,000 more in June 2017. At the time OBG spoke to Flores in February 2017, the facility was at 85% occupancy – even though it was low season.

With most of Walmart’s major providers coming from the north, and the distribution focused on the south, Frialsa’s experience is a good demonstration of the suitability of Hidalgo as a logistical hub.

Food Focus

Some 95% of Frialsa’s storage is used by food companies, with the company’s speciality being cold storage of either frozen or processed products. Ratliff believes Hidalgo particularly lends itself to the food and agricultural industry.

“Every state wants to do manufacturing because it brings in highly paid jobs, but it’s not always the best option,” Ratliff told OBG. “I’m not saying Hidalgo should eliminate heavy manufacturing altogether, but when it comes to becoming a logistics hub, I do recommend it focuses on its strengths. With the transportation infrastructure already in place, food and agriculture is a logical place to start.”

Ratliff said that Grupo Modelo’s new brewery is an “ideal” place to start, given that many agricultural products are transported by rail, and Hidalgo’s location allows it to serve Mexico City and the rest of the country. “Hidalgo has the land and they have the transportation, so focusing on developing the agro-industrial sector is a very logical move,” he said.

Domestic Market

Although Hidalgo has reasonable access to ports – a necessity for industries that require imports from Asia, for example – its railway infrastructure and access to Mexico City is where it really stands out from other states.

Thus the bulk of companies investing in the state produce goods for the consumer market. That said, some heavy manufacturing companies still find Hidalgo to be a suitable location for their business needs, with several operating in Ciudad Sahagún, a key industrial centre in the state.

But while other industrial belts in Mexico are geared towards exports, most companies in Sahagún focus on the domestic market. For example, Giant Motors Latin America, a local company that picked Sahagún as its base for a vehicle assembly plant in 2006, serves the domestic market exclusively. “Sahagún offers good connections to ports and railways, and allows us to transport quickly from the factory to the rest of the country,” Elias Massri Sasson, CEO of Giant Motors, told OBG.

Similarly, when Brazilian steel company Gerdau invested $600m on a new mill in Sahagún in 2014, it was to serve the Mexican market.

Flying High

An extra advantage to being so close to Mexico City is the short distance to the second-busiest airport in Latin America. Pachuca is less than an hour and a half – approximately 90 km – by car from the Mexican capital’s international airport, while Platah and the TILH are even closer.

And though the new Mexico City airport will not be built in Hidalgo itself, as once mooted, its chosen location at Texcoco – in Mexico State – will further reduce the journey between the state and the facility. The government estimates the travel time from Pachuca to the new airport will be less than one hour via existing roads and a proposed shuttle service.

Taking Advantage

The vision for the development of Hidalgo’s economy outlined by the Secretariat of Economic Development (Secretaría de Desarrollo Económico, SEDECO) is largely focused on ensuring that the infrastructure is in place to turn the western side of the state into the logistical hub that its location gives it the potential to be.

In its 2016-22 development plan, SEDECO highlighted that the Mexico City-Pachuca and Arco Norte motorways have generated a “dynamic of important movement of goods, people and products” in the western area of the state. What remains now is for the authorities to tie together the existing transport infrastructure and logistics facilities with the raft of business-friendly initiatives being put in place by the current administration. Effective use of its built environment should enable the state to take advantage of its privileged geographical position in the growing megalopolis of the Valley of Mexico.