Posted on 08/18/2007 8:47:50 AM PDT by dennisw
Michael Haverty believes the future of international trade hangs on a dusty Mexican port town. You take a bumpy ride on a potholed gravel road through a fishing village to a grassy riverbank to get to the most important new shipping terminal in North America. There's nothing here yet, except birds and the blue Pacific. One mile to the south you can see the old terminal, where three cranes idly wait for a few cargo ships to pull in. It's so quiet you can hear the tilapia jumping out of the water.
But when Michael Haverty stands here, at the port of Lázaro Cárdenas in the Mexican state of Michoacán, he hears the whistle of a dozen freight trains and the throaty chorus of oceangoing container ships. He sees wharves and gantry cranes dotting 11 miles of undeveloped waterfront, and thousands of acres given over to railcars and trucks stacked high with goods from Asia.
Haverty, head of the Kansas City Southern railway, has dreamed for four years of turning the dusty town of Lázaro Cárdenas (pop. 80,000) into one of the busiest shipping terminals on the U.S. West Coast. He has spent $1.5 billion of KCS money to buy up control of a 2,600-mile artery linking the tiny port to 400 million North American consumers.
Now the dream is taking shape. In one month Hutchison Whampoa (other-otc: HUWHY.PK - news - people ), the giant port operator controlled by Hong Kong billionaire Li Ka-shing, will break ground on a $200 million terminal that will eventually handle 2.5 million containers per year, more than the ports of Oakland or Seattle.
Haverty bore the brunt of industry scorn for his Mexican investment. It trashed KCS' balance sheet and subjected the company to four years in the byzantine Mexican legal system. The Mexican government still owns the land under KCS' rails south of the border and can revoke its concession at any time. "There were times when I had doubts, and I spent many sleepless nights," he says. "However, we are determined and we persevere."
It's likely that little Lázaro Cárdenas will reshape trade in the Pacific, and KCS has the monopoly on rail freight in and out of it. The trip to Houston is 400 miles shorter than the trip from the congested port of Long Beach, California; the trips from Lázaro Cárdenas to Chicago and Kansas City are only 200 miles longer than from Los Angeles but likely a day or so quicker. Lázaro, blessed by nature with a deepwater channel, will be able to unload the world's largest container ships at 30% of the cost of California dock operations.
Haverty's Mexico bet has made what was once a second-tier railway a valuable acquisition morsel for Burlington Northern and Union Pacific (nyse: UNP - news - people ). Its revenue ($1.5 billion) and profit ($100 million) are one-tenth those of the bigger railroads, but KCS sports a higher multiple on its earnings.
Imports from Asia are growing 18% a year, and Los Angeles and Long Beach, which handle 80% of the trade, are maxed out. Ships can spend as many as eight days in San Pedro Bay waiting to unload. Each day delayed costs retailers importing goods from Asia an extra half-percent of a product's costs, estimates Boston Consulting Group's George Stalk Jr.
"The light is finally coming to Lázaro Cárdenas," says Gonzalo Ortiz, general manager of Hutchison's Lázaro Cárdenas operation. "We can't screw this up."
The port project would have impressed Arthur Stilwell, who founded KCS in 1887 as a belt rail around Kansas City. He often spoke of taking the line all the way to the Pacific Ocean in Mexico. But his vision didn't begin to become a reality until Haverty took over as chief executive in 1995.
Haverty, 62, grew up in Atchison, Kansas, dreaming of running a railroad. Both his father and grandfather were conductors on the Missouri Pacific, and Haverty started there working summers as a brakeman after high school, climbing the ranks at the Missouri. In 1970 he went to work for the Atchison, Topeka & Santa Fe, rising as high as president. When he was later offered the chief executive job at the smaller KCS, he took it.
Haverty arrived eager to play the massive southward shift in manufacturing activity. Mexico privatized its rail lines in 1997. Haverty jumped at the chance to bid for one of the three major concessions. He spent $300 million for 36% of the equity in a rail line running south from Laredo, Texas to Lázaro Cárdenas. His partner, a Mexican logistics company called Grupo TMM, put up $300 million for 38% of the equity. The Mexican government owned the rest. The port was an afterthought.
As part of the deals Haverty got an additional 157-mile line from Laredo to Corpus Christi, Texas and the rail bridge at the Mexican border that carries 60% of trains crossing between Mexico and the U.S. His company could now collect $11 per loaded car. Haverty helped secure use of 400 miles of Union Pacific's track, giving the company a straight shot from Lázaro Cárdenas to Kansas City. Today KCS runs 2,300 carloads a day in Mexico of everything from steel to beer. In 2005 those goods accounted for more than $540 million in revenue.
But when it first bought the company, most of the track in Mexico was outdated and in bad shape, despite heavily staffed repair crews; trains were featherbedded with manned cabooses. KCS and TMM replaced the cabooses with wayside detectors to spot overheated trains and began increasing spending on Mexican tracks from $45 million a year to a projected $100 million this year, doing things like relaying ties and mending cracked rail. KCS struggled to trim the bloated payroll. The first time Haverty went down with his chief operating officer, Arthur Shoener, to meet with national union boss Victor Flores (usually referred to as Don Victor), Flores did not take kindly to their straight-talking ways. KCS fell victim to union grumbling and a work slowdown.
After many long meals Haverty and Shoener won the unions to their side. KCS was able to cut workers per train from eight to three. But it was labor unrest in the U.S.--a walk-off in 2002 by West Coast longshoremen--that reshaped KCS' plans. Shortly before that dock strike Hutchison Port Holdings had bought the Lázaro Cárdenas concession. Haverty had worked with Hutchison in Panama, where KCS co-owns a rail line that runs along the canal. Haverty figured he could work with Hutchison to pitch shippers on an American-run, unbroken rail line from Lázaro Cárdenas to the U.S.
But first Haverty had to gain full control of the railroad. And that meant dealing with a country emerging from decades of corrupt leftist politics. When KCS won the original rail concession in the 1997 privatization, it was expected the Mexican government would refund $200 million in value-added taxes paid. After several requests for the refund were denied, the government said, You know, we never meant to give that back. So KCS sued the finance ministry in Mexican fiscal court in 1997 and won five years later--but the government appealed the decision.
After two years of negotiations KCS reached an agreement in 2004 with TMM to buy out the joint venture for $200 million in cash and $305 million in KCS stock (22% of its float). A few months later TMM mysteriously tried to back out; it was suspected they were shopping for a better deal. Haverty took TMM to arbitration in New York and was able to force it back to the table.
But the Mexican government, which still owned part of the joint venture, continued to hold out on that tax credit, with accrued interest now valued at $1 billion. Last September the parties settled the suit, with the government handing over to KCS its 20% of shares of the railroad in lieu of the tax credit. Haverty finally had total control of the railroad.
But Haverty was edging his balance to the limit. Capital spending went from $117 million in 2004 to $276 million in 2005, and debt to total capital rose from 40% to 57% during that period. Then KCS missed the March 2006 filing deadline for its 10K, because of problems with 2002 deferred taxes in Mexico that were found by KCS' auditors.
A $40 million one-time charge for personal injury claims pushed the company over the edge and caused KCS to miss its May 15 dividend payment. S&P declared the move a default and downgraded its rating on KCS' preferred stock to a D. The rating agency may downgrade the rest of the company's credit. Amazingly, the company's stock has remained strong. KCS is trading at $26.25, 38% above its 52-week low of $19. Rick Paterson, an analyst at UBS, says the worst of the merger costs are over and further consolidation of the Mexican and American halves will wring out more efficiencies.
Haverty has gotten smarter about doing business in Mexico, especially the need to schmooze often. He was one of five U.S. businessmen to meet in March with Presidents Bush and Vicente Fox of Mexico and Stephen Harper, prime minister of Canada, at their Cancún summit. KCS recently named as its highest-ranking Mexican executive a former federal antitrust attorney who breakfasts often with Don Victor. And Haverty has been courting Michoacán Governor Lázaro Cárdenas Batel, the grandson of the former Mexican president (and port's namesake), to help him develop a 450-acre rail yard and secured customs zone near the new port.
Too bad the NAU/SPP/I-35 is going to be rammed down our throats no matter what we say or do.
Law of supply and demand-—>>
-We allow qualified foreigners to come here and teach business on a university level.
-We give them accelerated accreditation. We flood your field with them and your value as a laborer will plummet
I realize there are current legal restrictions on all of the above. But remove them and we’ll see if you can howl louder than the libertarian wolves. You phony baloney free trade, free market, ideologues talk tough until your ox is gored
You still refuse to debate the central point of my argument. You result to personal attacks and changing the topic. Here are some questions to focus your augmentative skills.
Do you not agree that there is a labor monopoly in the west coast ports? Do you think that competition will increase capacity, lower costs, and bring benefits to consumers? Do you think that we should use the force of government to prevent a new transportation corridor from being built? Do you have a vested interest in maintaining the labor monopoly on the west coast ports?
You do not demonstrate much knowledge about university faculty employment. Universities already hire many foreign faculty. There is no official certification for university faculty. If you want a tenure track position at a major research university, you need a doctorate and demonstrated research skills, typically published papers. If you want a tenure track position at a teaching university, you still need a doctorate. If you want to teach as a lecturer, you typically only need a masters degree or advanced knowledge of a subject area. Faculty positions are competitive so you need a doctorate from a recognized school, good skills, and good recommendations. Faculty members from good foreign universities do not need any certification here. Earning a doctorate can take 3 to 6 years beyond a masters degree. There is no way to expedite the process. Perhaps you are confusing faculty positions with requirements to practice medicine and law.
If you have a business model to lower the costs of university education, you should invest your time and money. University education costs desperately need lowering. If you or someone else finds a way to lower costs through usage of advanced communication costs, master professors, learning centers, and outsourced labor, I would not object. The university education establishment would probably fight hard against it but I doubt that legislators would stop an effort.
The transcontinental railroad was more popular though - probably.
There is a labor monopoly at West Coast ports and no I'm not interested in seeing Mexican ports compete with them. We import enough Asian crap to run a huge trade deficit. We don't need more port capacity. The search for additional port capacity is a sickness
Do you think that competition will increase capacity, lower costs, and bring benefits to consumers?
I could give a shit as long as we are running 850 billion dollar trade deficits
Do you think that we should use the force of government to prevent a new transportation corridor from being built? Do you have a vested interest in maintaining the labor monopoly on the west coast ports?
Yes. If that labor monopoly must be broken then do it by competitive forces within the United States. Don't use a foreign country to bludgeon American workers
You do not demonstrate much knowledge about university faculty employment. Universities already hire many foreign faculty. There is no official certification for university faculty. If you want a tenure track position at a major research university, you need a doctorate and demonstrated research skills, typically published papers. If you want a tenure track position at a teaching university, you still need a doctorate. If you want to teach as a lecturer, you typically only need a masters degree or advanced knowledge of a subject area. Faculty positions are competitive so you need a doctorate from a recognized school, good skills, and good recommendations. Faculty members from good foreign universities do not need any certification here. Earning a doctorate can take 3 to 6 years beyond a masters degree. There is no way to expedite the process. Perhaps you are confusing faculty positions with requirements to practice medicine and law.
If you have a business model to lower the costs of university education, you should invest your time and money. University education costs desperately need lowering. If you or someone else finds a way to lower costs through usage of advanced communication costs, master professors, learning centers, and outsourced labor, I would not object. The university education establishment would probably fight hard against it but I doubt that legislators would stop an effort.
Here I admit you know more about the university labor situation. Barriers to entry.
I have sympathy for Americans affected by global trade. I am open to retraining programs and temporary help. In the long run, I do not see how to protect Americans from foreign competition. We either learn to compete or accept a lower standard of living. On balance, increased trade has provided substantial net benefits for the US economy.
In any dynamic economy, there will be winners and losers. It seems that you focus on the losers in a dynamic economy. I see the larger picture of benefits to the entire economy. I also see the potential of Americans to innovate and prosper in a dynamic economy. The villian in the picture are politicians who make it more difficult to compete because of high taxes, onerous requlations, lawsuit madness, and other bad policies.
I have no sympathy for union thugs. Unions are monopolists whose goals are to limit choices and increase costs to consumers. The west coast unions are especially egregious because they have effectively blocked competition. I see no way to open competition to the west coast ports.
I do not see why private individuals should not be allowed to open new ports in Mexico. There are legitimate issues of subsidies for the new transportation corridors. I do not favor subsidies for new transportation corridors.
You indicate that we should not increase shipping capacity. In a private economy, investors and consumers make that decision, not politicians. If investors sense a demand for additional capacity, they should be able to invest. If consumers do not want the shipped goods, the investors will lose money.
Can someone explain what the citizens of the USA get out of this super-corridor? It seems that only Mexico, China, and India make money, and any other Foreign entity that will be colleting tolls. But what about the people of the USA and Canada? What are we going to produce that will be shipped out to China and Mexico? What will stop these foreign governments from controlling the USA? IF we do not act the way they want, will they stop all shipments of products? Why do we need this volume, unless they expect to move most of India and China here also? This sound more like away to take over the USA, and to move foreign made items along with foreign workers into the USA at a fantastic rate.
Why does the USA need this ONE-Way volume of items following into it? What will stop an increase in immigration along with this highway? Why does the USA need it? And how come NAFTA includes China, India, Spain, and the other foreign countries moving in?
My but you have such high minded economic thoughts and principles that’s I’m sure you must pass on to your students. Oh what wisdom!
But with the fatal flaw that you provide no context. But I will provide the context: which is that we are running an 850 billlion dollar trade deficit. It is national suicide to make that trade deficit even larger and your crack pot free trade theories have provided the foundation for the one we have
Free trade (more precisely less restrictive trade policies) is not a crack pot idea. The vast majority of economists think that policies that encourage more trade are preferred. Trade involves voluntary transactions. Both parties benefit; otherwise no trade would occur.
Tariffs and other restrictive trade practices will only raise prices here. The trade deficit has been growing for many years. However, we have had incredible amounts of economic growth during the same period. Along with strong economic growth, millions of high paying jobs have been created through the 80s, 90s, and now 2000s.
The American worker needs lower government spending, less regulation, lower taxes, and fewer restrictions on energy exploration and development. Taxes, regulation, and energy development restrictions will price the American worker out of the world economy. Entitlement spending at the federal level and runaway pensions at the state and local level threaten to undermine our economy. The trade deficit does not threaten our future economy. Government policies are making our economy less competitive.
We have free markets here but there is also government regulation of these markets. For example this week the Feds will make a major change in our labor markets by allowing Mexican truckers to drive here. This also changes our trucking markets by allowing in new competitors from Mexico
History is full of currency collapses and drastic devaluations. We are bound to repeat this due to our huge foreign borrowings. This day of reckoning has been delayed due the USD status as reserve currency and our military power. If it were up to me, tariffs, drilling for Alaskan oil, exploiting our coal reserves, making manufacturing easier here with less government hassles, and other measures would be instituted to close our trade deficits. I would not allow the trade deficit to just run its course
I’ll also add that the United States had tariffs for many years of our existence. Prior to the income tax they were a main source of Federal revenues. So to say our import-export markets are sacrosanct, must never be regulated or taxed, is absurd. I would re-institute very precise tariffs and cut Federal taxes by whatever amount of tariffs are collected.
I agree that trade agreements are not free trade. These agreements are complex with some good provisions and some lousy provisions. Since we are in the WTO, we cannot just raise tariffs without instigating countering action. Although I have sympathy for some tariffs that have short lifetime, most tariffs never seem to end. For example, the sugar tariffs and ethanol tariffs just go on with terrible side effects. Because of the sugar tariffs, candy production is moving out of this country. The remaining products produced here use corn syrup, a poor substitute in my opinion.
The Mexican truck issue was part of the NAFTA agreement. I agree that this is a one-sided provision given the state of Mexican highways and lawlessness. It is part of NAFTA so we will be forced to allow Mexican trucks. The Mexican drivers should speak English and the trucks should pass appropriate safety standards. I understand that individual states will enforce safety standards on the trucks. I am also concerned about transport of illegals and drugs. If reasonable inspections are not in place, we will have significant problems.
The extension of trade agreements to labor movement is controversial. I think that most economists view labor as just another factor of production. Most economists would favor open borders and less regulation on labor movement. However, Milton Freedman understood the uniqueness of labor as a factor of production due to the modern welfare state. Open borders is incompatible with the modern welfare state.
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