Global Logistics: Proceed with caution in América Latina

A study by the Boston Consulting Group (BCG) shows that a series of global economic factors over the next few years will cause China to lose part of its cost advantage. The result, according to BCG, will be the relocation of many industries into Latin American economies that offer new incentives.

Many other leading trade analysts agree, but offer certain caveats. “Further investment in transport infrastructure—and better logistics performance in general—is certainly needed in the region,” says Enrique García, president and CEO of CAF, the Development Bank of Latin America. “Latin America’s supply chain and production structure is more fragile than that of countries comprising the Organization for Economic Cooperation and Development (OECD).”

He adds that the share of time-sensitive exports in Latin America, such as pharmaceuticals, is three times that of the OECD countries. This fact underlines the importance of improving logistics to strengthen overall economic performance.

The Latin American Economic Outlook, a study done by the OECD earlier this year, says that technological innovation and economic diversification will be key to boosting productivity and potential growth. Latin America’s contribution to global gross domestic product (GDP) growth has remained virtually unchanged—between 7 percent and 9 percent—since the early 1990s, while that of emerging Asia markets has more than doubled in the same period.

Many Latin America economies remain heavily focused on natural resources. In fact, commodities make up 60 percent of the region’s goods exports, up from 40 percent at the beginning to the last decade.

The OECD report encourages countries to use their natural wealth as a foundation for transitioning to production processes that use technology and knowledge. It also advocates that Latin American economies diversify exports, particularly toward the services sector, which offers greater opportunities over the medium and long-term future. “Deepening the regional market would offer additional room for the services sector to grow and diversification to flourish,” says Garcia.

However, transport infrastructure remains deficient, with an urgent need for investment in roads, railways, ports, and airports. Garcia suggests that investing 5.2 percent of regional GDP per year in infrastructure projects would help Latin America close the infrastructure gap with other emerging regions and could increase GDP growth by an estimated 2 percentage points per year. 

“Much can also be done in the short term to improve the transport of goods and services using existing infrastructure,” Garcia says. “This can be achieved with integrated logistics policies, modern storage facilities, efficient customs and certification procedures, as well as promoting competition in transport.”

Brazil’s play
As host of the World Cup this year, many soccer fans had high expectations for Brazil to win it all. But just as the nation failed to meet that goal, international logistics giants have also been disappointed in a different score. According to Soren Karas, vice president and head of group strategy for ocean giant A.P. Møller-Maersk,“significant transport bottlenecks” remain in Brazil and much of the rest of Latin America.

“However, Brazil is one of the most vocal countries about the need to overcome these problems to realize its export ambitions and drive continued social progress,” says Karas. “To that end, the government is stepping up its investments in infrastructure and is inviting private capital.”

One of the key challenges in Brazil is the relatively high cost of logistics—corresponding to some 15 percent to 18 percent of GDP as compared to 8.2 percent in the U.S. According to Karas, reducing these logistics costs would help boost trade.

At the same time, major maritime players are targeting the region in an effort to maximize their extra capacity. Last year, Maersk Line introduced a new type of container vessel to the South American market, the so-called SAMMAX (South America Maximum) vessels.

These ships carry 72 percent more containers per vessel compared to Maersk Line’s previous vessels on that trade lane. In spite of their larger size and capacity, the ships have been constructed to pass through shallow waters, which historically have limited the benefits of larger ships in Brazil.

“The ships have a positive effect on the ports at which they call,” says Karas. “For example, in Brazil’s biggest port, Port of Santos, their average berth productivity is now 37 percent higher than with the previous Maersk vessels.”

According to Karas, this accelerates port turnaround and reduces the overall waiting time for shippers. That has a “trickle-up” effect offering a trade growth potential for the markets the ships connect. In Santos alone, this trade growth potential is estimated to be worth up to $1.4 billion annually without upgrades to the port.

Meanwhile, Brazil has significant social, environmental, and economic reasons for “going coastal.” Today, coastal shipping only transports cargo volumes corresponding to 4 percent of that moved by road transport. Switching freight to coastal shipping would cut road accidents, road maintenance, medical and material costs, as well as emissions.

Maersk estimates that about 2.7 million twenty-foot equivalent units (TEU) can be moved from trucks to coastal ships. This may not sound like a lot, but it corresponds to an 800 percent growth of the coastal shipping industry. According to Karas, this modal split could reduce road accidents by approximately 36,000 per year at a cost of up to $1.7 billion.

Multiple models to development
These indirect, highway-related external costs may at times not receive the desired attention, say analysts for the World Economic Forum. However, if they did, the case for countries expanding coastal shipping appears convincing.

“Throughout Latin America, governments and civil society have pursued the development of logistics, with specific approaches reflecting national challenges and limitations,” says Rodolfo Sabonge, vice president of market research analysis, for the Panama Canal Authority. “In Central American countries such as Honduras, for instance, the focus is on developing road infrastructure and north-south connectivity.”

Guatemala is pursuing a grand plan for a “Technological Corridor” that includes a 372-mile highway system, a transnational railway for container transport, upgrades of container port terminals on both its coasts, and construction of hydrocarbon storage facilities.
Costa Rica’s capital city lies in an agriculturally-rich highland valley in the middle of the country. Logistics managers there are preparing for expanding light manufacturing activity and government investment in road development to facilitate exports.

Colombia, an agricultural powerhouse and oil and natural gas exporter, with decades of experience in light manufacturing and a much-improved security situation over the last decade, is expanding its logistical capabilities on both coasts investing in its duty-free areas and dredging its ports.

Looking only at Central America, the U.S. Census Bureau expects the population to expand by 25 percent between 2010 and 2030. The Mesoamerican sub-region, understood as a common economic space, spanning the area between Colombia and Mexico, is home to over 200 million people. It lies on a relatively narrow strip of land between the Atlantic and Pacific oceans, making it a global east-west link as well as a north-south trade corridor for people and goods within the hemisphere.  At its narrowest junction—connecting different regions and continents—lies the Panama Canal.

Canal expansion on schedule
Industry-wide consensus is that the Panama Canal expansion currently under way constitutes a paradigm shift for world maritime trade. At the very least, say experts, it will create greater economies of scale in sea transport, allowing 12,600 TEU ships to use the new locks.

At present, the canal can accommodate container vessels of up to 4,400 TEU. The expansion project will be a boon for other sectors indirectly linked to Canal traffic, further benefiting from the many competitive advantages. This includes Panama’s “dollarized” economy, fiscal incentives, and favorable legal framework for services industries including merchant marine registry, an international banking center, and legal services.

The Canal is the main driver within Panama’s logistics cluster, and, in turn the cluster strengthens the Canal’s position as an optimal transit option.

“This cross-sector synergy has a multiplier effect and increases the country’s overall competitiveness, as well as that of other countries in the region that can use Panama as a hub,” says Nelson Cabrera, manager of business development at Lilly and Associates International, a Miami-based global freight forwarder.

Furthermore, says Cabrera, Panama is turning into the main “transport hub” for the region’s markets as it’s broadening a trade corridor that connects existing and future consumption centers. “The canal, together with a modern and efficient ports system, makes the country the ideal place for cargo consolidation and distribution,” he says.