Mexico’s Flourishing Electronics Industry: 8 out of 10 of the World’s Largest Electrical and Electronics Companies Are Doing Business in Mexico

November 23rd, 2011

By Daniel
Tue, 2011-11-22

Mexico’s economy is host to one of the fastest growing electronics industries in the world, in terms of export potential and employment generation. Currently, Mexico is the second largest supplier of electronics products to the U.S. market, which is made up of audio and video, telecommunications, computer equipment and its parts.  In 2010, for instance, the sector exported 71.4 billion USD, 20 percent more than the previous year.

Mexico is receiving increasingly large amounts of FDI, while creating it’s own ‘Silicon Valley’; between 2000 and 2010, foreign direct investment in the electronics sector registered 20.55 billion USD, invested in the production of computer equipment and the fabrication of spare parts for communication devices.

Two important factors explain the boom in the development of Mexico’s electric and electronics industries where over 730 manufacturing plants have set up shop.  According to Alix Partner [3]’s Outsourcing- Manufacturing Cost Index 2010 and to KPMG [4]’s Competitive Alternatives 2010 reports, Mexico is the country with the lowest component manufacturing costs in the industry, with an 18.2 percent savings compared to other industrial nations such as Canada, the Netherlands, the UK, France, Germany and Japan. In addition, the skilled labor workforce is growing at a tremendous pace: each year, 114,000 students of engineering and technology-related fields graduate from Mexican universities.

The electronics industry is located primarily in the northern region of Mexico, in the states of Baja California, Chihuahua and Tamaulipas [5], where 80 percent of the world’s largest manufacturing service suppliers operate, including firms such as Flextronics [6], Jabil Circuit [7], Celestica [8] and Sanmina SCI [9]. Additionally, 61 percent of the audio and video electronics industries are located in Baja California, according to the Ministry of Economy.

Well-known multinational companies such as Sony, Samsung, JVC and Pioneer have established themselves in the Tijuana and Mexicali cluster. Currently the home to flat screen TV manufacturing, production in these areas is booming with the sale of flat screen TVs representing around 25 percent of Mexican electronic industry annual exports. This sector is currently generating the highest manufacturing output in Mexico. Furthermore, Mexico was ranked the largest exporter of flat screen TVs in the world in 2009, above countries like China, Germany and the U.S.

In this prosperous environment, it comes to no surprise that the U.S. has continuously been the most important market for Mexico. Over the past decade, the industry has made significant progress and its products now include everything from systems that can be used for brain-scanning as well as 3D animation, or for financial system planning and multinational corporations’ strategic work, increasing the attractive of doing business in Mexico to American and international companies around the globe. Unbeknownst to many, manufacturing in Mexico also stands out in the domestic electric appliances [10] industry. This sector has played a large role in the electronics industry, whose 2009 exports represented an astounding 30 percent of Mexican non-petroleum exports. At the forefront of production techniques and quality, in 2010 this sector grew 11.37 percent while generating 35,000 direct and 110,000 indirect jobs.

American businesses are nervous about the Chinese New Year

January 21st, 2011

Parija Kavilanz, senior writer, On Thursday January 20, 2011, 12:07 pm EST

The Chinese New Year, which is just two weeks away, is making at least one American retailer very anxious.

“In China, everyone goes home for the Chinese New Year holiday,” said Mona Williams, vice president of buying for Texas-based The Container Store, a haven for storage and organization products.

That means the hundreds of thousands of factories in the world’s workshop that make everything from toys to televisions will shut down for 15 days straight.

This annual work stoppage isn’t a new phenomenon but it’s definitely getting more attention from U.S. businesses this year. They fear that of the millions of migrant Chinese workers that travel home for the holiday, many won’t come back to their factory jobs.

This is particularly troubling since even in the months leading up to the holiday, a chronic labor shortage in China is causing supply shortages in American stores.

Some storage products, such as wire mesh pencil holders and drawer organizers that are popular sellers at The Container Store are tougher to find.

“In the last four to six weeks, we’ve got no shipment at all. That’s millions of dollars in lost sales day for us every day.” Williams said

One of Container Store’s key suppliers recently shifted all his manufacturing back to the U.S. because he didn’t have enough workers in China.

“He still had a manufacturing plant in the U.S.,” said Williams, explaining that he restarted production at the domestic plant. “He’ll get product to us again in a month,” she said.

Williams says other vendors who rely on Chinese factories for making their products have issued a new warning: Typically supplies are delayed due to the holiday, but this year those delays will be a few weeks longer, if they ship at all.

“We’ll know more after the New Year,” said Williams.

Jitters spread: “Several of my clients are going through the same dilemma as The Container Store,” said Pratap Mukharji, partner with consulting firm Bain & Co., whose clients include consumer goods companies.

China is no longer the lowest-cost, “infinite supply” sourcing destination for many American companies, said Mukharji.

For Chinese blue-collar workers, there’s an evolution underway, said Henry Hu, a Hong Kong-based consultant to Chinese manufacturers.

Labor laws designed to increase wages plus rising energy and raw material costs have already taken the shine off China.

Add to that, government incentives to keep peasants — China’s main labor force — inland to work on farms instead of abandoning them for the big coastal manufacturing hubs has made the “Made in China” tag much more expensive.

Bruce Cohen, partner with Kurt Salmon, a consulting firm specializing in retail and consumer products, said his retail clients are seeing as much as a 10% to 15% year-over-year increase in how much it’s costing them to buy goods made by Chinese vendors.

The type of work the Chinese are willing to do is changing, too. “As the quality of life in China improves, even factory workers are aspiring to find better-paying jobs,” said Hu.

Workers who previously made T-shirts and socks are now looking for higher-paying jobs in the service industry or hi-tech and auto manufacturers.

“There’s a hi-tech client of mine that is hiring 5,000 workers weekly in China,” said Mukharji.

“You have a tsunami of unprecedented force that’s developing at a very challenging time for the U.S. economy,” said Cohen.

Therefore, Cohen is advising his clients who source in China to not put all their eggs in the China basket even though China will still be their best bet for some products.

In clothing, for example, that shift is underway, said Mukharji. “If you look at a T-shirt tag lately, you don’t see “Made in China” as often anymore. “You’ll see Vietnam, Indonesia, Bangladesh, Costa Rica.”

Manufacturing of high-margin clothing goods such as denim and swimwear is growing in southern California.

“Ordering these items from China can take 12 to 16 weeks,” Cohen said. But by making these items domestically, retailers can replenish their inventory much faster.

Some electronics manufacturers are shifting some production to Mexico. Others are bringing production of household goods back to the United States.

The Container Store is looking for alternatives to China, including Vietnam, Indonesia, India and Thailand.

“We also source 30% of our plastic products in the United States,” said Williams.

“We want the best quality products. Sometimes that’s still only found in China,” she said. “But for us, a delay in shipment, or no shipment is also a serious problem.”

Maquilas rebound: Growth drives industry on both sides of border

October 6th, 2010
October 03, 2010

(El Paso Times (TX) Via Acquire Media NewsEdge) –The Great Recession officially ended more than a year ago, and the maquiladora industry in Juarez, and its suppliers in El Paso are some of the proof.

Production and employment at Juarez maquiladoras, or manufacturing plants, and at El Paso companies tied to the industry have been growing since the last half of 2009, statistics and reports from companies on both sides of the border show.

The rebound is occurring despite the drug-cartel war in Juarez, which has claimed more than 6,000 lives since 2008.

“As soon as the (United States) economy started to rebound last summer, companies started the (inventory) restocking process,” and that got maquila production increasing again, said Roberto Coronado, an economist at the Federal Reserve Bank of Dallas’ El Paso branch.

However, with the restocking phase at an end, and the U.S. economy growing only modestly, maquila production in Juarez began slowing in the second quarter, Coronado said.

The Federal Reserve has no forecast for future maquila production. But the maquilas are closely tied to U.S. manufacturing production, which is projected to grow at an annualized rate of 4 to 5 percent in the next 12 months, Coronado said. That’s the historical average growth rate, he said.

28,000 jobs gainedThe Juarez maquiladora industry added about 28,000 jobs from July 2009, when employment hit bottom, to this August, according to the Federal Reserve Bank’s latest estimates. That means the industry still has a way to goto reclaim the estimated 54,000 jobs lost since October 2007, when employment peaked, Coronado said.

The industry now employs more than 200,000 people, according to Federal Reserve estimates.

The Juarez Association of Maquiladoras reported different numbers: 192,735 maquila employees in August, an increase of 23,902 jobs since July 2009.

Juarez had 343 maquilas in operation in June, according to the latest Mexican government data.

Carlos Olson San Vicente, of Mexico’s Secretariat of Economy, said overall Juarez employment has grown 8.1 percent in the past 12 months.

“Juarez is reactivating little by little,” he said during a meeting last week in Juarez.

El Paso jobs boosted

A healthy maquila sector is important for more than just the Juarez economy. Many El Paso jobs are tied to the industry.

“For every 10 percent increase in maquila production in Juarez, employment in El Paso grows by 3 percent,” Coronado said.

Plastic Molding Technology, or PMT, an East El Paso company that makes plastic parts for various maquilas, hired about 30 workers since last year because of increased business. It now employs 85 permanent workers, and about 35 temporary workers.

“I think our business has almost doubled over last year,” said CEO Charles Sholtis.

PMT was able to pick up new business, in part because other plastic-injection molding companies closed during the recession, he said. It completed a $400,000 plant expansion late last year and plans to add new equipment next year, he said.

“I foresee business being stable for the rest of the year, and picking up in January,” Sholtis said.

Keeli Jernigan, CEO and president of Trans-Expedite Inc., an El Paso warehousing and transportation company serving the maquiladora industry, said sales declined about 40 percent last year as customers’ shipments decreased. But this year’s sales, projected to be $20 million, will be the best in the 9-year-old company’s history, she said.

Trans-Expedite hired 50 people this year, most of those in El Paso, she said. It now employs about 110 people. It opened three small offices this year in Dallas, Chicago and Indianapolis, and plans to add 50,000 square feet to one of its two El Paso warehouses.

Auto production slides

Most of the handful of maquila suppliers at the Borderland Tradeshow in El Paso last month reported increased business this year, and most were optimistic that business would grow.

“Our business is close to where it was pre-recession, maybe softening the last month or so,” said Mike Hosko, sales manager for Michigan Spring and Stamping, which has two small metal-stamping plants in El Paso and Michigan. Some of its business is tied to the automotive industry, which is still struggling to return to pre-recession levels.

“Car sales have been down recently and that concerns us going forward,” Hosko said at the trade show. “We’re cautiously optimistic.”About 40 to 45 percent of Juarez manufacturing is tied to the automotive industry, reported Coronado at the Federal Reserve Bank. Thirty-five to 40 percent is tied to the electronics industry.

The nation’s automotive crash hit Delphi Automotive, one of Juarez’s largest maquila operators, hard. The recession and Delphi’s Chapter 11 bankruptcy reorganization have resulted in a smaller, but more profitable company, said Xochitl Diaz, a Delphi spokeswoman in Juarez.

Delphi’s work force in Mexico declined from about 68,000 people in 2008 to 42,000 today in 43 plants. In Juarez, Delphi’s work force shrank from about 20,000 in 2008 to 12,000 workers today in 12 plants and a technical center.

Delphi is a leaner, more focused company that’s been profitable since emerging from bankruptcy late last year, Diaz said in an e-mail. But Delphi isn’t likely to see a return to 2008 production levels soon “because the entire auto industry is going to take time to recover,” Diaz said.

Companies still coming

K. Alan Russell, president of The Tecma Group, an El Paso company that operates maquilas for 33 companies in 18 plants in Juarez, said production began growing again in the summer of 2009. The company hired 1,220 people since January, including about 20 at its El Paso operations, he said.

Revenues and employment should be back to pre-recession levels by the end of the year, Russell predicted. Tecma employs about 4,000 people. It employed about 4,150 people at the end of 2008.

“A hungry work force is ready to go back to work” in Juarez, and a lot of vacant industrial buildings are available for new companies, Russell said.

Four companies under Tecma’s factory umbrella closed their Juarez operations last year because they went out of business or were bought by other companies, Russell said. But Tecma has picked up five new companies in recent months, including one last week, he said.

The Juarez violence hasn’t stopped companies from locating to the city, because the economics make sense, Russell said.

China option declines

China is no longer the “obvious option” for companies looking for manufacturing locations, he said. Mexico is now less expensive for land, production costs and transportation, Russell said.

Sholtis, at Plastic Molding Technology, said his company picked up some new business from companies moving production from China.

Pancho Uranga, an executive for electronics manufacturer Foxconn in Juarez, said higher costs in China may ease moving some Foxconn production in the future from China to the company’s new manufacturing campus in San Jeronimo, Mexico, next to Santa Teresa. That campus opened last year and has acres for expansion. Foxconn, a Taiwan electronics manufacturing company, has much of its production in China.

The San Jeronimo campus has three manufacturing plants assembling about 40,000 computers, laptops and servers a day for Dell.

About 7,000 people work on the campus. That’s down from about 9,000 early in the year because as the plants mature and become more efficient, fewer people are needed, Uranga said. That employment level should remain stable until the campus is expanded further, Uranga said. Construction of a fourth plant could begin after the first quarter of next year, he said.

Foxconn also operates a plant near the Juarez airport where HP computers are assembled. The plant’s work force of about 2,800 people remained stable through the recession, Uranga said.

Mayoral pitch

Juarez Mayor Jose Reyes Ferriz, who will soon leave office, said he’s spent a lot of time going to various U.S. cities to visit executives of companies with Juarez maquilas to persuade them to stay despite the violence, and to also try to get companies to open new operations in Juarez.

“My approach has helped because they have not left,” he said.

Vic Kolenc may be reached at vkolenc@elpasotimes.com; 546-6421El Paso Times reporter Adriana Gomez Licon contributed to this story.

To see more of the El Paso Times, or to subscribe to the newspaper, go to http://www.elpasotimes.com.

Copyright (c) 2010, El Paso Times, TexasDistributed by McClatchy-Tribune Information Services.

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Rising China Wages Cut Advantage Over Mexico, Flextronics Says

September 1st, 2010
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By Tim Culpan and Frederik Balfour – Aug 29, 2010

China’s rising wages are cutting the country’s cost advantage over other manufacturing centers such as Mexico, according to Flextronics International Ltd., the world’s second-largest custom electronics maker.

“As China moves up, up and up and up, for five straight years, it’s been moving up heading towards Mexican pricing,” Mike McNamara, Chief Executive Officer of Singapore-based Flextronics, said in an interview. “Mexico’s been the same labor cost for the past five years, it hasn’t moved up at all.”

Flextronics, which supplies to Hewlett-Packard Co. and Cisco Systems Inc., has been forced to increase wages in China in line with government regulations and growing affluence in the fastest-growing major economy. Larger rival Foxconn Technology Group said this month it will move production away from China’s coastal regions after announcing a doubling of wages at its largest production bases in the south east.

The failure of Flextronics to make its components business profitable means the company will “probably not” achieve its operating-margin target of 3.5 percent this fiscal year which ends in March, McNamara said, without giving a goal timeline. Components account for about 10 percent of sales, he said. Operating income as a percentage of revenue is a key measure of profitability.

Mexico’s Appeal

Mexico, where Flextronics makes televisions for LG Electronics Inc., contributed 15 percent of the manufacturer’s sales in the fiscal year to March, compared with 11 percent a year earlier, its annual report showed. China provided 33 percent of the company’s revenue.

“Mexico’s proximity to the U.S. is phenomenal,” McNamara said. “You start thinking about freight and you think about all the green energy initiatives that are going on. It’s going to put a little bit more emphasis toward doing more products in Mexico.”

Former Mexican Economy Minister Gerardo Ruiz Mateos said in a June 29 interview that the nation will create 750,000 formal jobs this year as the economy rebounds from a recession and foreign direct investment rises. Demand for Mexican exports will help draw about $20 billion in foreign direct investment this year and a greater amount in coming years, Mateos said.

“Mexico is close to the U.S. and is part of the North American Free Trade Agreement, which is why more and more companies are building facilities for exports to the U.S.,” said Vincent Chen, an electronics analyst at Yuanta Securities Co. in Taipei. “China labor costs have been rising 10 percent to 20 percent per year for the last decade, but the cluster of suppliers is still there.”

Flextronics employs 200,000 people globally with operations in 30 countries. Around 30 percent of its workforce is the Americas and 90,000 in China, spokeswoman Valerie Kurniawan said in an e-mailed statement.

No Inland Move

Rising wages in China won’t spur an exodus or prompt Flextronics to move all of its production bases in the country, since labor remains a small cost of manufacturing for many of its products, McNamara said. Labor is about 0.5 percent of sales for computers, rising to 10 percent for power supplies, which require more manual work, he said.

“As far as a wholesale, large-scale effort to move inland, I don’t see any economics at all to it,” McNamara said. Ninety- percent of Flextronics’ production is exported, making a move away from China’s ports less economically viable, he said.

Flextronics plans to continue hiring for the next five years at a power-supply factory in Ganzhou, in China’s inland Jiangxi Province where wages are lower, offsetting the higher labor component for those products, he said. The company will hire up to 6,000 in Ganzhou this year.

Foxconn Shifts Production

Foxconn, which makes Apple Inc.’s iPad and also supplies most of the components used in the cell phones it assembles, in June announced the company would double base-wages for employees in Shenzhen, where it has around half its 900,000 workers, and cut the headcount there by about 170,000 over five years. A 40 percent expansion in its workforce over the next year will occur in inland China, where wages are lower and factories will be closer to the hometowns of its migrant workers, it said.

Foxconn controls 50 percent of the electronics manufacturing services market, double the share of Flextronics, according to researcher iSuppli Corp.

Flextronics shares have lost 30 percent this year on the Nasdaq stock market to close at $5.11 on Aug. 27. Hon Hai Precision Industry Co., the Taipei-based flagship of the Foxconn Group, has declined 11.3 percent on the Taiwan Stock Exchange over the same period.

To contact the reporter on this story: Tim Culpan in Taipei at tculpan1@bloomberg.net; Frederik Balfour in Hong Kong at fbalfour@bloomberg.net