Increased road and port capacity to boost connectivity in Mexico

Mexico’s transport and logistics system is of vital importance for its economic development, transporting inputs to the country’s manufacturing centres and consumer goods to its major cities, and carrying exports to the US and other trading partners. While investors have faced some uncertainty, notably in the aviation segment following the 2018 cancellation of the planned international airport in Mexico City (Nuevo Aeropuerto Internacional de la Ciudad de México, NAICM), other segments are set for continued expansion. Significant programmes are under way to further extend and upgrade the country’s port, road and railway network, bringing increases in transport efficiency and security that provide the basis for sustained growth in other sectors, notably manufacturing and retail.

Infrastructure Investment

Between late 2012 and early 2018 total investment in infrastructure, from both the public and private sector, amounted to MXN7.7trn ($398.2bn), according to the Ministry of Communication and Transportation (Secretaría de Comunicaciones y Transportes, SCT). These investments – which took place under the administration of former President Enrique Peña Nieto – prioritised the allocation of resources to railways, roads and ports, in addition to the energy sector. Infrastructure investments carried out under this administration marked an 87.8% increase on the MXN4.1trn ($212bn) under the previous government. Public investment in infrastructure stood at 2.8% of GDP in 2018, up from 2.7% in 2017, according to government investment agency Proyectos México. Most of this went to oil and gas infrastructure, in addition to telecoms and transport.

The administration of President Andrés Manuel López Obrador, better known by his acronym AMLO, is seeking to build on this legacy, making public investment in infrastructure a central policy priority. The government has also emphasised the upgrade of transport infrastructure in the southern part of the country, where it remains underdeveloped. Under the 2020 budget the Ministry of Finance allocated MXN54.4bn ($2.8bn) to the SCT, with MXN5.16bn ($289.6m) – the largest share of public investment in transport – earmarked for the construction and upgrade of the nation’s motorways.

Ports

Trade in Mexico depends greatly on port infrastructure. Manzanillo, in the state of Colima, and Lázaro Cárdenas, located in the state of Michoacán, are the two main industrial seaports on Mexico’s western coast. The port of Altamira in Tamaulipas, on the eastern coast, serves the north-west industrial corridor surrounding Monterrey, while the port of Veracruz, which is located in the south-eastern state of the same name, serves as the main export centre for the oil and gas sector.

“The most important centres of import flows are on the Pacific coast, which connects to the Asian market,” Jorge Monzalvo, head of delivery at Maersk México, told OBG. “The Atlantic coast is more significant for exports, with connections to the US, Latin America and Europe.”

In addition to hydrocarbons, the port system transports automobiles and automobile parts, retail goods and agro-industrial products. The total volume of imports and exports passing through Mexico’s ports has risen steadily in recent years, from around 3.5m twenty-foot equivalent units (TEUs) in 2013 to over 5m TEUs in 2018, according to the SCT.

However, despite significant improvements, the country’s ports continue to operate at around 60-70% capacity, according to Monzalvo. The most important port upgrade under development is that at Veracruz. The MXN30bn ($1.6bn) project is being undertaken in two phases, the first of which was completed in 2018 and the second of which is scheduled for completion by 2030. The expansion is set to include the addition of 35 new docks and cargo terminals – raising the total to 53 – two new breakwaters of 4.2 km and 3.5 km in length, and railway access to all port services. The ongoing expansion of this facility will be key to meeting the current administration’s objective of increasing onshore and shallow-water oil and gas exploration (see Energy chapter). Nevertheless, as throughput rises, some ports are experiencing increasing strains on capcity. For example, the port of Manzanillo handled 2.2m TEUs in 2018, up from 2.01m in 2017, with this figure rising 4.8% year-on-year (y-o-y) in the first five months of 2019, according to the SCT. This has led to extended waiting times of six to eight hours for trucks entering the port facility. To improve capacity, the government announced an expansion project for the port, requiring MXN23.5bn ($1.2bn) in public and private investment. The proposed upgrade includes the construction of four new terminals, which would include specialised units for minerals, agricultural goods and hydrocarbons.

Logistics & E-commerce

Mexico’s increasing importance as a global manufacturing exporter and rising domestic consumption are driving a need for improvements in the logistics network. One of the driving forces in the transformation of the warehousing and transit of goods is the e-commerce sector, the value of which reached MXN396bn ($20.5bn) in 2018, up 20% from the previous year, according to the Mexican Association of Online Sales (Asociación Mexicana de Ventas Online, AMVO). The Valley of Mexico region surrounding the capital city is one of the main distribution hubs for e-commerce products, and firms operating here are increasingly in need of warehouse storage and logistics services. In the first quarter of 2019 warehousing companies in the area had 10.3m sq metres of warehouse space, a 6% y-o-y increase. In response to rising demand 500,000 additional sq metres of warehouses were under construction as of June 2019, according to AMVO. Mexico City’s Cuautitlán, Tultitlán and Tepotzotlán zones have seen the most construction of logistics warehouses since 2009, but suitable land has become scarce.

“The growth in the logistics sector is facing some limitations due to the lack of adequate infrastructure,” Seungchan Park, president of CJ Logistics Mexico, told OBG. “This in turn has restricted the potential growth of companies in the sector.” Faced with these constraints, logistics firms have turned to innovative solutions for last-mile distribution, utilising small storage spaces located closer to areas of high demand.

Railway Network 

Mexico’s rail cargo system spans a total of 26,891 km, connecting port terminals, industrial regions and cities. The rail system is managed through concessions to a number of private companies, with Ferromex and Kansas City Southern de México (KCSM) operating in the two main northern areas, while Ferrsur operates the rail network in the southern region. Ferromex and Ferrosur operate as separate companies, but the Grupo México mining and rail conglomerate owns them both. Meanwhile, Ferrovalle – which is owned by Grupo México and KCSM – operates a line in and around Mexico City.

Previous administrations have prioritised passenger train services, especially those linking urban centres. The most notable of these projects is the ongoing construction of the 57.7-km Mexico City-to-Toluca light rail link, connecting the Santa Fe area of the capital with Toluca airport, work on which began in 2014. Upon completion, the line – which is scheduled to open in 2022 – will have capacity to carry up to 230,000 passengers a day and travel at speeds of 160 km per hour. The total value of the project is expected to be MXN51.4bn ($2.7bn), according to the SCT.

In December 2018 work began on another major rail project, the Maya Train. The 1460-km railroad is designed to connect travellers from the popular tourist resort of Cancún to remote parts of the Yucatán peninsula, in a move that the government hopes will help encourage tourist-led rural development. The project is being developed by the National Trust Fund for Tourist Development and is expected to cost MXN150bn ($7.8bn) in public and private investment. “The Maya Train will not be profitable from a purely economic standpoint,” Iker de Luisa Plazas, managing director of the Mexican Association of Railroads, told OBG. “However, the economic activity, social development and employment it will generate provide valid reasons for the business community to invest in the area.”

Project finance can, however, prove to be a stumbling block in some cases. In January 2015 work on a proposed high-speed train link between Mexico City to Querétaro state was suspended as a result of fiscal pressures and irregularities in the bidding process. However, in May 2019 the government announced the revival of the project, with Gilberto Herrara Ruiz, state coordinatior of development programmes in Querétaro, telling local media that both national and local companies would be invited to participate in the project.

Urban Transport

In order to reduce road congestion in the country’s major cities, the country’s municipal authorities are expanding inner-city rail networks. In Guadalajara, work in under way on the completion of the 21.5-km third line of the city’s light rail network. The project broke ground in 2014 with an original investment of MXN17.7bn ($915m). While it has since exceeded its original budget, the government announced the allocation of an additional MXN1bn ($51.7m) and it is now expected to be completed by January 2020. The finished rail link will include 18 stations and carry up to 233,000 passengers each day.

Further afield, the state of Nuevo León granted separate contracts in July 2017 for the construction of eight new stations of Line 3 of the Monterrey Metro system. However, in July 2019 city authorities announced that the project would need additional federal funds and take up to 15 months to reach completion.

Roads

Mexico has an extensive road network, facilitating the movement of goods and people, and linking it to neighbouring trading partners, most notably the US. In the 2018 “Global Competitiveness Report” published by the World Economic Forum, the country ranked seventh out of 140 countries in terms of road connectivity. Nevertheless, in the same index, it scored comparatively poorly in road quality, coming 47th. Upgrading and expanding the road network is therefore crucial for maintaining its international competitiveness. To address this issue, the government has allocated funds for the construction and maintenance of motoways, along with the paving of rural roads (see analysis). In addition, the government has encouraged private sector involvement, and as of September 2019 investors had allocated MXN27.3bn ($1.4bn) for 20 new roads to be build under public-private partnerships.

Another challenge is the growing prevalence of ageing fleets, with the average truck being around 19 years old. “People usually buy commercial heavy vehicles on credit,” Fernando Zapata, CEO of Freightliner and Mercedes-Benz distributor at Zapata Camiones, told OBG. “Currently, the interest rate is very high, at 8.25%; therefore, in order to make a good return on investment, companies feel forced to minimise costs, which can affect the quality of the service, maintenance of the vehicles and security.” Given that around 80% of freight is currently transported using trucks, further steps will likely need to be taken to ensure that fleets can be upgraded to more efficient and road-safe vehicles.

Security

Improving security for the drivers of freight vehicles is also a pressing issue in Mexico. The number of roadside cargo robberies totalled 17,270 in 2018, up 17% from 2017 and up 76% from 2016, according to figures from Sensitech, a US-based logistics firm.

Mexico’s government responded to this rise in organised criminality in January 2019, with an announcement that it would recruit a new 60,000-strong National Guard to patrol the country’s most dangerous areas. Freight companies are also seeking ways to tackle the issue, equipping trucks with tracking and alarm technology, and improving communication between drivers.

Airports

Mexico’s airport infrastructure is experiencing significant growth, driven mainly by tourism demand, but also by rising business travel and air freight. In late 2019 Mexico had 64 international airports and 12 national airports, according to Proyectos México. Air passenger traffic has risen steadily in recent years, from 29.5m in 2011 to 64.6m in 2018, according to the World Bank. Freight transport carried by plane has grown risen, increasing from 617.5m tonnes per km in 2014 to 1.1bn tonnes per km in 2018.

Mexico’s airports are operated by four regional groups: Grupo Aeroportuario Centro Norte, which manages 13 airports in the north and centre of the country; Grupo Aeroportuario del Pacifico (GAP), which operates 12 airports on the Pacific coast; Grupo Aeroportuario del Sureste (ASUR), which runs nine airports in the Gulf of Mexico region and in the south; and Aeropuertos y Servicios Auxiliares (ASA), a government-run agency that operates 19 airports and co-manages five others, including Mexico’s City’s Benito Juárez International Airport; in alliance with Grupo Aeroportuario de la Ciudad de México (GACM). The GACM operates four further airports in tandem with a number of state governments and private firms, namely Tuxtla Gutiérrez, Toluca, Querétaro and Cuernavaca. Of the private operators, GAP reported the largest growth in passenger numbers, with a 9.8% y-o-y increase in June 2019, followed by ASUR with 3.4% y-o-y over the same period.

The construction of NAICM was cancelled in October 2018 following the outcome of a referendum sponsored by incoming the president, AMLO. The $13bn project at Texcoco had been planned as a solution to overcapacity at Benito Juárez International Airport.

Government discussions are ongoing regarding whether a second airport construction located at the Santa Lucía air force in Zumpago base will serve as a replacement for the Texcoco airport (see Construction & Real Estate chapter). “There is still some uncertainty over how Santa Lucía airport would work and how it would interact with the other airports near Mexico City,” Fernanda Reséndiz, chief of staff at Aeroméxico, told OBG. “Meanwhile, the government is committed to upgrading the Benito Juárez International Airport.”

Airlines 

Mexico’s airline industry has undergone a recovery following a series of bankruptcies that were part of the fallout from the 2008 global financial crisis. Low-cost domestic airlines have come to dominate the domestic market in 2019, with Volaris and VivaAerobus overtaking the traditional market leader Aeroméxico, according to the latest industry figures. In August 2019 the two relative newcomers had a market share of 30% and 22.4%, respectively, followed by Aeroméxico with 22.8%. The remainder of the market was made up of Interjet with 20.1% and Otros with 4.7%.

Competition among low-cost carriers has been high, with firms seeking to offer lower fares while also increasing the capacity of their fleets. This has contributed to low levels of return on investments for airline companies, with profitability averaging around 2.4% per annum. By contrast, Mexico’s airport operators generate profitability closer to 30-40%. Nevertheless, while domestic demand for air travel has received a boost from Mexico’s growing middle class, uptake has been less strong than expected, and many consumers still opt to travel by bus, highlighting considerable growth potential for the industry. “There are still people who take buses all the way to the US that take 20-30 hours and are actually more expensive than flying,” Reséndiz told OBG. “Many travellers feel more at ease with a bus full of people speaking their own language, and they feel more comfortable should something go wrong.”

International Trade 

Mexico relies significantly on cross-border trade with the US, mainly as an export destination. It also relies heavily on Asia-Pacific markets for imports to service its manufacturing industry. Mexico maintains a trade surplus with its northern neighbour, with the total value of exports going to the US standing at $371.9bn in 2018, while imports stood at $299.1bn, according to data from the Office of the US Trade Representative. Given the importance of these trade links, concerns have been raised over the impact on both the transport sector and the broader economy given increased trade tensions under President Donald Trump. Nevertheless, the country may be well positioned to benefit from the outcome of increased disagreements over trade terms between the US and China.“If there is a positive outcome resulting in a new China-US trade deal, then China would commit to consuming more US products. Given that the installed capacity of the US is already being very well utilised, additional production may come from Mexico,” Monzalvo told OBG. “Meanwhile, if China and the US do not reach a deal, then Mexico may emerge as the main international trading partner with the US.”

Outlook 

Both the current and previous administrations have shown a commitment to updating and expanding the capacity of the transport system. Nevertheless the country is facing increasing overcapacity at its ports, rural roads remain unpaved and developers are struggling to find suitable locations for new warehouses. Certain segments face specific challenges, notably in terms of security concerns for road freight. With rising domestic consumption and a growing manufacturing sector, demand for Mexico’s transport network appears will rise further over the medium and long term. Therefore, addressing these challenges and charting a clear policy path, one that combines public investment with policies designed to increased private sector involvement in transport, will be necessary for the ongoing growth of the sector.