As automakers move more vehicles via ship, investments pour into North American ports

Finished-vehicle logistics tends to go unnoticed in the automotive sector compared with manufacturing and marketing — until a shipping delay creates a shortage at dealerships. Consumers don't care how their shiny new car got to the lot, but for automakers, transportation efficiency is an important part of keeping costs down and remaining competitive.

Ports are an important node in that supply chain. In North America, the sector has witnessed a flurry of investment activity in the last 12 months as logistics providers and port authorities work to increase throughput and reduce the expense of getting vehicles from factory to showroom as the volume that is traveling longer distances grows.

Last year, the U.S. imported nearly 8.3 million vehicles, a 19 percent increase from 2012, according to U.S. Census Bureau figures. Automakers in the U.S. export about 2 million passenger vehicles annually.

Vehicle exports from Mexico to the U.S. have increased 71 percent over the last five years to 2.4 million, as more automakers open plants south of the border to take advantage of cheaper labor and the country's burgeoning supplier network. Although the Trump administration's revised trade deal with Mexico and Canada is expected to raise automakers' operating costs, forecasters still expect Mexican production to reach 5 million vehicles by 2020 as exports increase to other countries that enjoy liberal trade terms with Mexico.

Automakers' efforts to reach global markets and avoid railroad bottlenecks by using water routes to the U.S. are pressuring Mexico's auto ports, which were designed with general cargo in mind. For their part, U.S. ports and private partners are ramping up to handle the extra water traffic from Mexico, while building additional auto terminals to serve niche markets.

Many U.S. port investments, notwithstanding recent trade tensions and uncertainty about the North American Free Trade Agreement, have been influenced by the continued growth of auto manufacturing in Mexico and automakers' desire for a rail transport alternative.

Most of the 3.9 million vehicles built annually in Mexico are exported to the U.S. and Canada. Traditionally, more than 80 percent of finished vehicles built in Mexico were shipped north by rail, but about 40 percent now move by water because of rail car shortages and much cheaper ocean shipping rates, said Bill Kerrigan, vice president of logistics for SSA Marine's auto division.

SSA Marine, of Seattle, is a marine terminal operator and stevedoring company with global operations. It touches about 2 million vehicles in North America, most of them in Mexico at its terminals in Veracruz, Lazaro Cardenas and Tuxpan. At U.S. ports, the company just loads and unloads vehicles and provides ancillary services.

Global seaborne vehicle shipment rates declined the last couple of years as new vessel orders entered the fleet, increasing supply and pressuring car carriers to cut freight rates, according to shipping industry analysts.

Meanwhile, railroad performance has waned as the industry struggles to manage a rail car fleet stretched over much longer supply chains. The key for efficiency is turning assets quickly once a delivery is made. But little southbound demand for finished vehicles leaves railroads attempting to recirculate empty rail cars at the lowest possible cost because there is no revenue generated by those moves. At the same time, many rail cars are tied up hauling products in and out of U.S. ports.

And with auto industry production now heavily tilted toward SUVs and pickups, there is a shortage of bi-level rail cars with sufficient height clearance, while tri-level equipment suited for sedans increasingly sits idle.

"It's a huge chess game to have the proper equipment in the right place at the right time," Kerrigan said.

Vandalism on the railroads also has been a long-running problem, said John Felitto, senior vice president of Wallenius Wilhelmsen Solutions, the vehicle services division of the Norwegian WW ocean line. He noted, however, that Kansas City Southern and other railroads have done a lot to improve security and are making significant investments in equipment to meet customer demand.

The land-transport challenges have led automakers to consider ocean transport out of Mexico as a safety valve, port and logistics industry executives say.

Many in the port sector entertain the idea of regular shuttle services with smaller roll-on/roll-off vessels going back and forth between Mexican and U.S. ports, but experts say the lack of two-way volume makes such a scenario impractical in most cases.

Felitto said carriers are adding port calls to existing international routes, scooping up vehicles in Mexico and dropping them at U.S. ports, rather than creating dedicated shuttle runs.

As for Mexico, auto imports represent a much smaller share of port traffic than exports, though the disparity is narrowing with rising economic prosperity. Light vehicles built domestically tend not to be sold to consumers there. Most Mexicans seek more entry-level cars, which creates good two-way business for car carriers bringing imports from Asia, Kerrigan said. In 2016, the Mexican government granted a long-term concession to SSA to build and operate the first specialized auto terminal on Mexico's west coast to serve the growing vehicle market.

Kerrigan said the auto industry and ports should consider building some inland facilities, as has been done in South Carolina and Georgia for containerized trade to relieve congestion at the docks, where space is at a premium.

Such facilities are essentially marine terminals located 100 miles or more from the coast and serviced by regular shuttle trains that quickly move product to and from a seaport.

The goal is to increase efficiency by storing and processing shipments away from the crowded seaport, and Kerrigan said it can be adapted for autos as well.

Even though such a setup adds another step to the shipping process, he said the economics of storing and prepping cars closer to population centers makes more sense than doing that work at the port.

"You probably couldn't do it with a single manufacturer, but if you did it with multiple manufacturers, I think it makes a lot of sense," Kerrigan said.

WW Solutions is studying the idea of opening inland facilities throughout the country as ports become more congested, Felitto said.

"You could then serve many different masters," he said. "You could not only do import/export processing, but serve the local market, maybe, and different businesses that need fleet or repair services."