Strength on the Road, Weakness on the Rails

Aug. 14, 2007
By Ricardo Castillo Mireles Just outside the township of Ramos Arizpe, on the NAFTA (North American Free Trade Agreement) highway between Saltillo and

By Ricardo Castillo Mireles

Just outside the township of Ramos Arizpe, on the NAFTA (North American Free Trade Agreement) highway between Saltillo and Monterrey, there is a swimming pool atop a hill from where the road can be seen. Back in the mid 1990s this reporter used to take his family swimming there and after the dip, he would sit on an easy chair and practice his finest logistics hobby—counting trucks on the freeway.

It was then I discovered that Contract Freight International (CFI) was the King of the Road. So many of the company's trailers passed on the way to the US that I would eventually stop counting and just keep on watching them pass by.

Ramos Arizpe is a municipality with strong industrial ties. There is stiff competition among carriers. Virtually thousands of trucks drive away loaded with everything from auto parts (Chrysler has an assembly plant there) to toilet paper from Kimberly Clark to cement from Apasco—just three of the dozens of companies operating in Ramos Arizpe.

It made good business sense hearing that San Mateo, CA-based Con-way acquired CFI for $750 million. But the deal makes one wonder why such a profitable enterprise as CFI was sold.

CFI was founded in 1951 in Joplin, MO, and developed into a leading carrier. In 1985, before there was a NAFTA, CFI set up shop in the heavily industrial and transportation hub of Monterrey. It serviced import-export industries in the region. The carrier then expanded operations into Canada, creating a unique logistics network within NAFTA. These operations, of course, will be a plus for Con-way. CFI boasts more than 2,600 tractors, 7,000 trailers and 3,000 employees, including approximately 2,500 drivers.

This will make Con-way the unquestioned leader within NAFTA, as recognized by Douglas W. Stotlar, Con-way president and CEO.

"Acquiring CFI is a significant addition to Con-way's ability to serve the customer," notes Stotlar. "It establishes a superior platform for growth, clearly differentiating Con-way as a premier provider of supply chain and freight transportation solutions. This acquisition is a cornerstone of our strategic plan to grow the company, build competitive advantage and increase shareholder value."

Along the border, Con-way already operates Menlo Logistics which is bound to gain in strength in combination with CFI's lead in cross-border logistics operation.

"We are excited to join the Con-way family of operating companies. CFI will benefit from Con-way's infrastructure, broad service capabilities and strong brand recognition," claims Herb Schmidt, president and CEO of CFI. "Becoming part of the Con-way organization will allow us to penetrate new markets and provide new services to our customers. In addition, Con-way and CFI share service philosophies and common values such as safety, integrity, commitment and excellence." The companies expect to realize a number of strategic benefits from the combination, including a diversified revenue mix; improved truckload operations; retained contract carrier margins; and an enhanced Mexico presence. Stotlar and Schmidt both cited similar cultures and a focus on service integrity—inherent to both organizations—as a key in joining the companies. Con-way will acquire CFI's parent holding company, Transportation Resources, Inc., CFI and all of its other subsidiaries. The acquisition is subject to customary review by regulatory authorities and fulfillment of closing conditions.

Not riding the rails
Short line railroad operator Genesee & Wyoming (G&W) is not having the best of times in its Latin American operations. At the end of June, the company informed the Mexican government it was terminating its 30-year concession to operate the ChiapasMayab 1,805-kilometer line, connecting the cities of Merida in the Yucatan Peninsula and Tapachula, on the Guatemalan border.

Then, in July, the company was notified by the Bolivian government, led by Socialist president Evo Morales, it was nationalizing railroad operations—G&W was no longer needed to operate the concession.

In Mexico, the railroad dropped out of the business because the federal government had failed to reconstruct some 70 bridges destroyed in 2005 by devastating hurricane "Stan," making the railroad line inoperable on a 175-mile tract along the Pacific Coast. The Chiapas-Mayab short line had been profitable but since the hurricane traffic to the Guatemalan border was suspended. Rail operations ceased at the end of July.

"The uncertainty of the reconstruction in Chiapas combined with the deterioration of our railroad traffic means we can not continue to take the financial loses or make new investments," explains John C. Hellman, president of Genesee & Wyoming.

At Mexico's Secretariat of Transportation and Communications, one official indicated the government would not rebuild the damaged bridges because the contracted insurance company refused to respond to requests for payment for the repairs. The government accepted suspension of the railroad's concession without penalties. The government wanted G&W to pay for the reconstruction.

The short line will temporarily be taken over by the government since G&W is willing to rent its equipment. It seems likely the concession will now be awarded to Ferromex, that operates the Tehuantepec Isthmus railway. If not, G&W will transfer all its equipment back to the US.

For companies that export to Central America through Guatemala, the hurricane has meant higher logistics costs since they must resort to road transport, which significantly hikes costs.

Hardest hit is the government's oil monopoly, which had used the railroad to transport its gasoline to Tapachula from the Port of Salina Cruz. It now has to do so by road.

Another user, Talleres y Aceros, in Jalapa in the state of Veracruz, exports about 6,000 tons of steel to Central America each year. "Not only are our costs way up, but we are not as efficient" notes Oscar Chain, owner of the company. "What has saved us has been an increase in steel prices."

As a result of the closure of rail service, aluminum exporter, Rexam, claims to be spending half a million dollars a month for truck transportation. It is seriously considering setting up a plant in Central America.

Cement giant, Cemex, did just that, purchasing a plant in Costa Rica and exporting to six other countries from there.

As to the matter of reconstruction of the damaged bridges, the government is just not responding.

Within Bolivia, G&W was operating the Empresa Ferroviaria Oriental, a 1,243-kilometer short line on the eastern mountains with headquarters in Santa Cruz de la Sierra. The company has operated as a "strategic investor" since 1996 when the railroads were divested. Now the government wants the operation back. For last year, G&W had $30.6 million in sales with a $7.9 million net profit.

Bolivian President Morales says that foreign investors "have to go." Negotiations for the nationalization of Empresa Ferroviaria Oriental and the Empresa Nacional de Ferrocarriles—managed by Chileans and railroad operator, Luksic—are underway.