Thomas Black and Nacha Cattan (c) 2014, Bloomberg News.
MEXICO CITY — When Mexico’s auto production began accelerating in the last decade, Warren Buffett’s BNSF Railway Co. lacked an essential element for winning customers: tracks in the right places.
Union Pacific Corp. and Kansas City Southern reaped most of the gains as the value of U.S.-Mexico rail trade soared almost 50 percent since 2008. Now, BNSF is trying to grab more business with a new route in partnership with Mexico’s Ferromex to connect the country’s car-assembly heartland with Chicago.
The alliance shows how North America’s largest railroad by sales is trying to catch rivals whose lines offer greater access to Mexico. Investment by foreign automakers and other companies is boosting freight volumes, helping increase U.S.-Mexico trade by 5.3 percent in 2014, outstripping the pace of economic expansion in both countries.
“The biggest beneficiaries directly from Mexico are Union Pacific and Kansas City Southern just because of where the networks go,” Allison Landry, a Credit Suisse Group analyst in New York, said in a telephone interview. BNSF “doesn’t want to be shut out of the Mexico opportunity.”
BNSF’s service with Ferromex, which began in May, involves so-called intermodal cargo — containers that can be moved by ship, train or truck. They flow south full of U.S. parts bound for auto factories and go north with Mexican consumer goods.
“The intermodal agreement is a big deal for us,” said Nathan Asplund, assistant vice president for Mexico at BNSF, which is owned by Buffett’s Berkshire Hathaway Inc.
The accord with Ferromex, a unit of Mexican copper miner Grupo Mexico, helps Fort Worth, Texas-based BNSF generate more Mexico traffic on a rail network with only two gateways to the country, in El Paso and Eagle Pass in its home state.
The lack of connections into Mexico crimped BNSF’s ability to participate in the lucrative cross-border rail trade whose value surged 48 percent in the past five years to $69.8 billion, according to the U.S. Bureau of Transportation Statistics. Trucks and railroads together handled $405 billion of freight.
Union Pacific has six southern border crossings, including Laredo, Texas, the busiest land port. Kansas City Southern, the fifth-biggest U.S. railroad, has the largest bet on Mexico. It bought the eastern Mexico railroad, now known as Kansas City Southern de Mexico, starting in 1997. The line runs north from Mexico City to Laredo, the most direct route from Mexico’s industrial corridor to the U.S.
The BNSF-Ferromex route exits the U.S. at El Paso and goes to Silao in Guanajuato state, home to Mazda and Honda plants that opened in February. The trip is about 370 miles (595 kilometers) longer than via Laredo, which handled 43 percent of 2013 border truck-and-rail cargo by value, according to the statistics bureau. El Paso’s share: 16 percent.
BNSF has shipped grain, steel, ore, propane and other industrial goods to and from Mexico for years, mainly through El Paso, Asplund said.
The Ferromex partnership lets BNSF compete for other cargo that might go by truck or another carrier, helping reach surging Mexican industries such as car production. Vehicle output has almost doubled since 1999, vaulting Mexico past Japan as the No. 2 exporter of autos to the United States.
Demand for intermodal shipments has surpassed Ferromex’s expectations, and shipments are growing at more than 10 percent annually, Chief Executive Officer Rogelio Velez said in a telephone interview. The company built terminals in Silao and near Monterrey that each handle 60,000 containers a year.
“We need to begin considering an expansion at those two terminals or the construction of new terminals,” Velez said.
In working with Ferromex, BNSF indirectly backs a U.S. competitor: Union Pacific has a 26 percent stake in the Grupo Mexico unit, which began operations in 1998 after Mexico privatized its government-owned railroad.
Union Pacific, the largest publicly traded U.S. carrier, gets about 10 percent of its revenue from handling traffic to and from Mexico, and that business grew 15 percent in the second quarter, CEO Jack Koraleski said.
“We feel good being the only railroad that has access to all six rail crossings into and out of Mexico,” Koraleski said by telephone.
In May, the Omaha, Nebraska-based railroad opened a $400 million intermodal facility in Santa Teresa, New Mexico, near El Paso to capture truck traffic from Mexico, Koraleski said. It’s also adding capacity for more trains between El Paso and Los Angeles and started a route with Ferromex last year linking the northern industrial city of Monterrey and Eagle Pass.
Kansas City Southern sees more growth ahead for U.S.-Mexico traffic even as competition increases, said Doniele Carlson, a spokeswoman. The Kansas City, Missouri-based railroad got about 47 percent of 2013 revenue from Mexico.
“The intermodal market in Mexico is in its infancy in relationship to the U.S. market,” Carlson said by email.
Kansas City Southern slid 6.2 percent this year through yesterday, the most among four carriers on the Standard & Poor’s 500 Index. Union Pacific’s 28 percent advance led the gauge.
While Mexico offers higher growth, BNSF is dedicating most of its investment to its northern U.S. lines, where a bumper grain crop and surging crude-by-rail volumes created a prolonged traffic jam. Chronic delays prompted heightened scrutiny from the U.S. Surface Transportation Board this year.
“They really need to fix some of the service issues in the U.S.,” Jason Seidl, a Cowen & Co. analyst in New York, said in a telephone interview. “BNSF is spending record amounts this year trying to bolster some of its service product.”
BNSF estimates that its Mexico business accounted for about 2 percent of its 2013 carload units. The carrier probably won’t be able to dethrone the market leaders, Asplund said. The increases in Mexico cargo, he said, show there’s enough business for everyone.
“In any market, customers need options,” Asplund said. “There’s a lot of need of multiple players having multiple routes to accommodate this growth.”
— Black reported from Dallas.