More U.S. companies opening high-tech factories in Mexico

December 5th, 2013

latimes.com

Faced with rising wages in China and high shipping costs, many businesses are finding manufacturing close to home more appealing. But despite its advantages, Mexico has problems.

By Shan Li

4:37 PM PST, November 29, 2013

Manufacturing in Mexico

Oceas Verona Orocio inspects the latest-model drone at the 3D Robotics manufacturing plant in Tijuana. The company’s drones were formerly made in China. (Don Bartletti, Los Angeles Times / November 30, 2013)

TIJUANA — In an industrial park five miles east of downtown Tijuana, Ariel Ceja toils in a white room bustling with assembly workers hunched over blue tables.

A master scheduler, Ceja is in charge of all steps of production at this factory nestled inside a cavernous warehouse. A cluster of anonymous buildings surround the facility. Nearby are pitted roads, and just a few minutes away by car is the Tijuana airport and a university.

San Diego-based 3D Robotics moved into this once-vacant spot in June, producing affordable drones and electronic parts destined for customers in the U.S. and around the world.

It is just one of many American companies streaming to Mexico to open high-tech factories in a reversal of the outsourcing trend in years past. Called nearshoring, businesses are moving production to Mexico, Canada and other nearby countries to take advantage of their proximity to the U.S.

“Recently I have been seeing more American companies bringing production here,” said Ceja, who started working for 3D Robotics a month ago. During the 1990s, “there were more Asian companies coming in, Japanese, Korean, but that has changed.”

It’s not just in Tijuana. Manufacturing plants are also opening in Mexican cities such as Guadalajara and Mexico City, bringing a wave of new jobs to a country recovering from the economic downturn and still fighting constant drug violence.

From 2009 to 2012, foreign investment in Mexico jumped more than 50% to $7.4 billion, and exports from foreign-owned factories also grew 50% to $196 billion, according to one industry group that tracks maquiladoras, or assembly plants in Mexico that are owned by foreign companies. After plunging during the economic recession, employment also has jumped 25% to more than 2 million. According to an economic study from South/East San Diego, themaquiladora industry is one of Tijuana’s biggest employers, behind businesses linked to its border crossing.

“Sometime in the last year, we reached a crossover point where it became cheaper to make a lot of goods in Mexico than in China,” said Hal Sirkin, a senior partner at Boston Consulting Group. “A lot of American companies are looking or moving.”

The global recession and its aftermath led companies to rethink their supply chain. Faced with rising wages in China and high oil prices, many are reconsidering the appeal of manufacturing close to home, especially small and medium-size businesses without the bargaining clout of Apple and Wal-Mart.

Those businesses are finding a skilled workforce for high-tech manufacturing in Mexico. The country has doubled the number of post-secondary public schools, many devoted to science and technology. Former President Felipe Calderon last year bragged that Mexico was graduating 130,000 technicians and engineers a year, more than Germany or Canada.

The educated labor pool has attracted the car industry. Mexico has gained at least 100,000 auto-related jobs since 2010, according to a Brookings Institution report. Nissan, Honda, General Motors and Ford have all announced plans to expand in coming years.

3D Robotics, which makes drones and parts priced up to $730 for civilians and tech enthusiasts, is among the start-ups drawn to Mexico’s low costs and proximity to the U.S. The company once manufactured its drones and kits in Southern California and China.

But Chief Executive Chris Anderson said making products overseas was a lengthy process that meant waiting for months for merchandise to come on ships. Chinese factories also required bulk orders that tied up a lot of the company’s capital and prevented engineers from innovating quickly, which is vital in a tech sector such as drones.

“We decided it didn’t make sense at our scale and pace of innovation to ramp up in China,” Anderson said.

Instead, the company looked south.

3D’s first Mexico factory in 2011 was in the three-bedroom Tijuana apartment of general manager Guillermo Romero, who spent the first months of the test run in Mexico soldering parts and assembling drones in his living room along with one employee.

“We started with some benches and soldering stations you can buy anywhere,” Romero said. “We were like, ‘Let’s see what happens.’”

Sales of drones assembled in Mexico quickly grew after Romero got the hang of putting them together, and 3D moved into its first manufacturing space last year.

The last of the manufacturing equipment was trucked to Tijuana this spring, when the company moved to its current 12,000-square-foot facility. American engineers in San Diego design drones that are crafted almost completely by about 60 assembly workers in Tijuana.

A walk through the cavernous warehouse that houses the factory shows 3D’s quick expansion. On the second floor, a newly completed call center opened about a month ago, bringing customer service in-house for the first time. Inside the assembly room, workers solder circuit boards, attach plastic arms and test the flying machines.

“Mexico is very flexible. You can start projects here and grow them,” Romero said. “It’s very good for start-ups.”

For California companies, Mexico can be an especially attractive bet, analysts say. The ability to order in small batches means that designs can be changed quickly and production can be revved up and slowed down in a matter of days instead of months.

That can be invaluable during the holidays, as San Bernardino-based Cannon Safe learned.

On Black Friday in 2008, the safe manufacturing company received a panicked call from a major retailer that had drastically slimmed down its inventory in response the financial crash, President Aaron Baker said. But shoppers were scooping up their safes, prompting the chain to issue thousands of rain checks that it had to quickly honor.

Cannon’s Mexico facility was able to increase production and deliver new merchandise within four days, compared with weeks or months if the safes had come from China, Baker said. “That was our ‘aha’ moment.”

Today, about 60% of the company’s safes are made in Mexico, nearly double the production levels five years ago. Meanwhile, its China production has dropped by half, Baker said.

Although wages are higher in Mexico than in China, the relative ease of doing business and proximity can bring costs on par or even lower. Companies find that they don’t lose valuable time waiting for shipments. Deliveries can also be routed to another port or simply brought by truck when problems crop up, such as the eight-day strike that paralyzed the ports of Los Angeles and Long Beach last winter.

Companies looking to bring production closer to home rank Mexico as their No. 1 choice, according to a survey from consulting firm AlixPartners.

The tipping point may have come last year when manufacturing costs in Mexico, when adjusted for productivity, dropped below those in China, according to a Boston Consulting Group report. Within two years, the average cost of production in Mexico will be 6% below China and as much as 30% lower than countries such as Japan and Germany.

“Companies are bringing back parts of manufacturing to Mexico. They are saying, ‘We want our manufacturing process close to our engineers, we want our inventory next to our customers so it’s easier to ship,’” said Joe Mazza, a partner at advisory and accounting firm McGladrey in Los Angeles. “There are also many companies in China that are not exiting China, but reducing their manufacturing and bringing some to Mexico.”

With all its advantages, Mexico still has its fair share of problems. Companies that don’t produce their own goods can have a hard time finding the right third-party manufacturer in a country that can’t compete yet with China’s dense supplier base and strong manufacturing infrastructure. Mexico also just passed fiscal reforms that include raising taxes on U.S.-owned companies and other businesses, increasing worries that foreign firms might leave the country.

Despite these challenges, more U.S. companies will consider locating factories in Mexico in the coming years, analysts said.

“This is the return of manufacturing in Mexico,” said Scott Stanley, senior vice president of NAPS, which aids companies setting up factories in Mexico. “Every month it seems like there are more and more companies moving. There is no sign of that trend slowing down.”

shan.li@latimes.com

Copyright © 2013, Los Angeles Times

Tequila and Tacos: How this former Valley exec is poaching US talent for his Mexican startup lab

November 2nd, 2013

By
On November 1, 2013

It’s easy to get burnt out on the constant hustle of Silicon Valley. For Andy Kieffer, reaching for the pressure release valve after selling his Kleiner Perkins-backed startup in 2008 meant getting out of dodge. Despite having a young family, he didn’t move to Portland, San Diego, or Denver. Instead he packed up his life and moved 1,900 miles south to Guadalajara, Mexico. There he formed an incubator and contract dev shop called Agave Lab, hired some of the abundant and surprisingly skilled local talent, and began mixing innovation with margaritas to see what would come out the other end.

When we first reported Kieffer’s story, the closest he’d come to convincing another Valley veteran to join him was having his friends say on the way to the airport after a weekend visit, “You’re crazy man. How did you do this?” But things began to change as his story got out there more, first in PandoDaily, and then in the New York Times. Just a few weeks ago he got his first inbound inquiry.

The email came from out of the blue. A total stranger, Amazon engineer Eric Springer, wanted to know if there was room at Agave for another gringo with real technical chops but a growing distaste for the rat race. Kieffer invited him down to check out his operation with the promise that if he liked what he saw, there would a spot for him to join the team.

“I said to him, ‘It’s obvious why I’m interested in you, but why are you interested in me?’” Kieffer tells me in a phone interview.

The first step on any tour of the Agave Lab operation is tequila and tacos. Then, he introduces guests to the rest of his team and maybe takes them to a local meet up to give a sense of the community. Time permitting, he’ll squeeze in a trip to the company-owned beach apartment a few hours drive away. It’s a hard to turn down a combination that makes working in Mexico great, Kieffer says.

Springer’s tour was six weeks ago. He has been in living Mexico full time now for a little more than a month. Just a over a week ago he put an offer in to buy a house there. All signs point to him staying for the long term. Short-term, long-term or anything in between, Kieffer is just happy, if not a little shocked, to have someone this capable join his merry band of hackers. It also got him thinking about whether there might be more pent up frustration north of the border that he could tap into.

“Eric came down and has been awesomely productive and is having the time of his life,” Kieffer says. “I thought, why not see if there are more of him out there. I just posted this ad craigslist and, already, I’m getting tons of people who are interested.”

A little over a week ago, Kieffer posted a flippant job listing in the San Francisco section of Craigslist. The headline read, “Working vacation in Mexico’s Silicon Valley – Make almost NO money (guadalajara).” The listing went on to describe the Agave Lab operation and then dropped this offer in the laps of anyone crazy enough to join them:

We’re giving a few Bay Area developers the opportunity to rethink their life priorities and get out of Dodge for a while. You’re startup is flagging? Sick of the fog? Commute got you down? Just broke up with your partner? Why not pull the rip cord and come work with us for a while?

What do we have to offer?

-A vibrant, biggish (pop. 4M), student-oriented city, that’s full of hip bars, restaurants, and (really) beautiful, friendly people.

-A work environment that is, hands down, the hippest place to work in Mexico. Imagine programming in the hammock – poolside (yes, we have a pool).

-Use of the beach house. We have a 3 story beach house with all mod cons, 20 feet from a graceful, immaculate sandy bay in a small fishing village. Also, one of the premier left point surf breaks is 5 minutes away by boat (which we also have).

-A chance to learn (or practice your Spanish).

-An opportunity to be at ground zero for one of the most vibrant and rapidly expanding startup scenes in the world.

-Beef up your resume with experience in navigating the business climate in Mexico and Latin America.

-and, finally, ALMOST NO MONEY. Okay, not entirely true – you’ll be paid a very tidy wage (by mexican standards) which will allow you to live well here – most things are cheap here. However, if you compare what you’ll make here versus what you’re making now? It will be a disappointing exercise. Said differently, if money is what you’re after – then this is not for you. If you’re looking for adventure, fun, and to challenge yourself with something new – welcome to your new home!!!

It’s been just eight days and Kieffer has gotten a few dozen inquiries. Some were from recent college graduates with no experience and he’s likely to pass – this is a job offer, after all, and he’ll have to pay these people to work for (or with) him. But amid the riff raff have been six more senior engineers looking to leave town. None have made their exploratory visit yet, though two have booked plane tickets.

“Whatever the reason is, I seem to have hit a nerve. It’s great for me,” Kieffer says.

No one has asked about narco-terrorism or been too concerned with compensation or lifestyle, he adds. “Guadalajar isn’t even on the list of the world’s 100 most dangerous cities. It’s about the equivalent of living Denver, risk wise.”

He expects to hire two to four expats over the next 30 days and says he has a total capacity of six over the next six months. But as with Springer’s unexpected enthusiasm, the response to this latest posting has Kieffer once again thinking bigger.

The real opportunity in Mexico is to build an elite technical team and begin tackling the basic problems that are holding the nation back. For example, Mexico doesn’t have an Amazon or Gilt equivalent – or the opportunity to create one in the short term – because Mexico doesn’t have a reliable local postal service. Agave is addressing this, in its own small way, with an “Uber for bike messengers” courier service startup. But it’s barely fair to call this the tip of the iceberg.

Having lived in Mexico for nearly six years now, Kieffer has a laundry list of opportunities identified but is limited in his ability to address them all. He’s bootstrapped all of Agave Lab operations to date with his own money, adding in supplemental contract development work for cash-strapped US startups to help keep the lights on. But with a seemingly extensive supply of talent now beating a path toward his door, the thought of raising a few million dollar incubation fund is growing more and more interesting.

“$20 million?” Kieffer asks incredulously at my suggestion that he raise what would be considered a small pile of cash for a Silicon Valley incubator. “I wouldn’t know what to do with that much here. With just $3 million you could literally own Mexico.”

But all of this is just a shiny idea in Kieffer’s head today. At the moment he’s up to his eyeballs in job applicants and tequila tasting tours to schedule. Once he eventually fills out his six person expat A team, things should settle down, he says, and then he’ll be able to give some more serious thought to how to make the most of this opportunity.

Kieffer is brimming with excitement. After we got off the phone, he sent a follow up email that read:

Imagine raising a small fund ($2-$5M) and importing startup talent from the Bay Area, partnering them with local dev teams, and targeting the emerging LATAM market place. I think that combo of a bay area founder with a track record, the huge untapped market here, and the low go-to-market cost, would be attractive to investors that are seeing too many of their startups fighting over too little market opportunity.  

I can’t imagine how difficult it must be for a partner at, let’s say, True Ventures to find things to invest in.  Is there ANY unplowed field left in the US? In Mexico – it’s all green field.

There are challenges, of course. Mexico has limited institutional knowledge around startups and venture capital. For example, Kieffer recalls explaining to a local lawyer hired to draft an ESOP (employee stock option plan) agreement why on earth he would give a piece of his company to a newly hired employee. But people are learning quickly. Mexico also lacks a reliable exit market. It’s one thing to generate revenue, and lifestyle business opportunities grow on trees. But there’s no Google or Yahoo out there to scoop up middling successes, and at the same time no local hero company for newby founders to look up to in aspiration.

“One of the biggest challenges with these guys coming down from the US is recalibrating expectations,” Kieffer says.

I raised the possibility that Kieffer is letting the cat out of the bag, so to speak and alerting his potential competition to the combination of massive opportunity and hard to pass up lifestyle south of the border.

He shrugs this off saying, “It would be hard for a US founder to come here and build LATAM-focused products. There’s just too much local and cultural knowledge required. Besides the market’s almost too big to comprehend, there’s plenty of opportunity to go around.”

And so it is. Kieffer is looking to spread this opportunity around and to make a few new friends in the process. The only question is, who else will be crazy enough to join him.

Mexican Manufacturing Benefits U.S. Industry

July 26th, 2013

TECMA

When NAFTA was first implemented in the early 1990s, the fear was that Mexican manufacturing would cost the U.S. jobs and wreak havoc upon U.S. industry. Mexico was viewed largely as an economic competitor that would pilfer U.S. employment opportunities, businesses, and bring about the demise of national economic prosperity. This set of assumptions was merely the result of a misconception of the nature of the U.S.-Mexico industrial alliance.

In reality, China has been a much more formidable concern in terms of low wages and competition for industry stateside. The past decade, however, has amply shown that the best way for U.S. industry to meet this challenge is partnership – not competition – with Mexico through production sharing, or vertical specialization, which occurs when two or more countries bilaterally produce a product. In other words, Mexican manufacturing firms rely upon materials produced by U.S. suppliers. The geographic proximity of Mexico and the U.S. has actually led to greater opportunities for U.S. suppliers vs. China. This is demonstrated by the fact that Mexican imports contain ten times more U.S. content than similar items manufactured by the Chinese. In fact, 40% of the United States’ imports from Mexico contain material inputs that originated in the United States.

Thus we see that “near-sourcing” manufacturing jobs to Mexico is, in a palpable way, beneficial to U.S. industry, fostering a partnership that keeps high paying jobs in the U.S. and sustains a demand for suppliers to feed the manufacturing done in Mexico that will then be exported, in most instances, back to the U.S.. This partnership results in products that, when sitting on shelves next to those produced in China and other developing countries such as India, Brazil, Indonesia, Vietnam and Malaysia, are price competitive.

With the aforementioned in mind, it is no surprise that one in twenty-four U.S. jobs is dependent on the Mexican maquiladora industry. Over 6 million U.S. jobs are dedicated to supplying manufacturing operations in Mexico, which means there is significant opportunity for U.S. suppliers to expand to meet the demand created by Mexican manufacturing activities.

Four segments in particular presently stand out as unique growth opportunities for U.S. industry:

In 2011, the Mexican automotive industry achieved a growth rate of thirteen percent. As a result, the demand for U.S. made parts and supplies is on the rise – these include items such as spare and replacement parts for gasoline and diesel engines, electrical parts, collision repair parts, gear boxes, drive axles, catalytic converters, and steering wheel assemblies, for example.

In 2010 alone, Mexico imported approximately $3.5 billion worth of products for the manufacturing of medical devices, $2 billion of which were from U.S. suppliers. Key opportunities for medical products suppliers include anesthesia equipment, defibrillators, electrocardiographs, electro surgery equipment, incubators, lasers for surgery, etc.

Total Mexican packaging production reached 9.1 million tons of containers and materials in 2010 for a value of $10.1 billion, of which $2.5 billion came from U.S. industry. There is significant growth potential for U.S. suppliers of metal, plastics, glass, wood, and cardboard packaging materials.

$1.4 billion was invested in plastics manufacturing in Mexico in 2011, revealing a steady rise in the demand for plastic materials and resins. Additionally, Mexico exports Ethylene and imports Polyethylene, which shows the opportunity for U.S. industry to supply polymerization technology.

Mexican manufacturing, although this may be counter intuitive to some, should be viewed as a partner to the U.S., rather than exclusively as a competitor.

K. Alan Russell
President and C.E.O.

The Tecma Group of Companies
2000 Wyoming Avenue
El Paso, Texas 79903
Phone: 915 . 534.4252
Fax: 915 . 534.0205
E-Mail: Alan@Tecma.com
www.Tecma.com

Our Mission: “To create an environment where our clients and employees never want to leave us.”

How Mexico Is Becoming More Attractive To U.S. Manufacturers

March 29th, 2013
Mexico’s economy boomed when the country signed the North American Free Trade Agreement (NAFTA) nearly two decades ago. The manufacturing sector especially thrived as U.S. firms shifted their operations to Mexico to take advantage of the cheap labor costs. As a result, Mexico’s share of U.S. manufactured goods import rose from slightly about 4% in 1994 to about 13% in 2001, according to a report in the latest issue of IMF’s Finance & Development magazine.

Then the party almost came to a halt when communist China joined the World Trade Organization (WTO) in 2001. China’s entry into the WTO gave the country a strong edge over over Mexico since China could freely export its goods to the U.S. without any import restrictions. Hence China’s goods exports to the U.S. rose significantly while Mexico’s exports suffered.

From the report:

Between 2001 and 2005, Chinese manufacturing exports to the United States expanded at an average annual rate of 24%, while Mexico’s export growth decelerated sharply from about 20% a year to 3% on average each year over the same period. As a result, China’s share of U.S. manufacturing imports almost doubled by 2005, eroding the previous gains in market share by Mexico (see Chart 1).

In recent years, Mexico has been slowly regaining its lost manufacturing capacity as U.S. firms shift production to the country from China and other countries. This shift can be attributed to two reasons: labor cost and transportation cost.

(click to enlarge)

The above chart shows that wages in China are rising yearly and is getting closer to Mexican wages. Wages in the manufacturing sector in Mexico has remained fairly stable over the years while wages in China have been increasing. So China is becoming less competitive for U.S. firms.

Another factor that makes Mexico more attractive to U.S. companies is transportation costs. Since Mexico is much closer to the U.S. than China, and a stable rail and road network exists between the two countries, costs of shipping goods from Mexico to the U.S. is lower. Shorter distance also means that goods can reach U.S. destinations faster from Mexico than those transported by ships from China. Unless wage inflation in China stabilizes, manufacturing firms may continue to move out to other countries including Mexico, Vietnam, Philippines, etc. From an investment perspective, it is wise to keep an eye on the Mexican economy and equities.

(click to enlarge)

Source: The Comeback by Herman Kamil and Jeremy Zook, Finance & Development, march 2013, IMF

Some manufacturers say ‘adios’ to China

March 24th, 2013

MEXICO CITY — Robert Moser moved the manufacturing of his company’s lines of cleaning products and kitchen gadgets to China during the last decade. Now his company is moving its manufacturing again — to Mexico.

“When you look at total costs, you’re pretty much at parity,” says Moser, president of Casabella, based in Congers, N.Y.

Companies like Casabella couldn’t move out of Mexico fast enough a decade ago, sending production to China to take advantage of the cheaper wages and prices in a country keeping its currency artificially low.

But the cost of doing business in China has been rising steadily, say companies that have returned to Mexico. Salaries are surging there. The Chinese currency, the yuan, has risen in value, making goods more expensive to export. Shipping costs have risen as well, making a move to Mexico even more attractive to companies whose primary markets are in the Western hemisphere.

The Mexican peso this week rallied on optimism about the country’s economic prospects following an unexpected rate cut last week. The peso has risen 2.8% in 2013.

Recently installed President Enrique Pena Nieto, meanwhile, has promised changes to Mexico’s tax system and reforms of its government-run energy sector to attract more outside investors and businesses from the USA and elsewhere.

“Mexico is a stable country, close by, but unfortunately with cheap wages,” says Eduardo Garcia, publisher of online business journal Sentido Común.

Wages were six times higher in Mexico a decade ago, but only 40% higher than those paid in China in 2011, according to a recent report by the International Monetary Fund. Mexico is part of more than 40 free trade agreements, which tends to reduce costs further. Then there is the weariness of doing business in China what with the midnight telephone conferences and 16-hour flights to Beijing — says Ed Juline, whose Guadalajara-based company, Mexico Representation, consults and represents manufacturers moving to Mexico.

“I have a dozen projects on my plate” of companies that want to get out of China, Juline says.

The upswing in manufacturing — about 20% of Mexico’s GDP — is driving the Mexican economy. Mexico says it expects its economy to expand by 3.5% in 2013.

It’s a reversal of fortune for Mexico, which lost manufacturing jobs to China during the last decade and watched rival Brazil boom by selling boatloads of raw materials to the emerging Asian economy.

“Mexico was uncompetitive,”  Juline says.

But China was gaming the system against places such as Mexico, he says. Along with keeping its currency low, China has subsidized fixed costs to benefit its commercial activity, which hurt Mexico, he says.

Meanwhile, lead times for Chinese factories are increasing and manufacturers there are showing less interest in handling smaller orders, says Mike Rosales, whose Los Angeles-based company, Manufacturing Marvel, makes toys and trinkets in both China and Mexico.

Rosales says that shipping costs for him jumped when oil prices hit $100 a barrel, and the lack of protection in China for industrial and intellectual property became problematic.

“They would ship your product out the front and your product with someone else’s name out the back,” he says.

Some of the merchandise being made in Mexico ranges from figurines to flat-screen TVs, along with advanced items such as aerospace parts and automobiles — 2.8 million of which were assembled south of the border last year.

Some here say more manufacturing in Mexico benefits U.S. businesses because it offers them suppliers on both sides of the border. Jim Raptes, custom sales manager at Deco Products, which makes zinc castings in Decorah, Iowa, says his Mexican business has increased from 1% of total sales to 10% over the past five years, due to orders from manufacturers in Mexico.

Security remains a concern in Mexico, Juline says. But he feels the violence, due largely to drug wars, has given few companies pause about coming south.

Executives won’t travel to Mexico, he says. “But the Americans who do come down here secretly love it.”

As China’s wages climb, Mexico stands to win new manufacturing business

September 11th, 2012

McClatchy Washington Bureau

Posted on Mon, Sep. 10, 2012

By Tim Johnson | McClatchy Newspapers

last updated: September 10, 2012 03:56:06 PM

MEXICO CITY — ]

Not long ago, Mexican factories couldn’t compete with the “China price,” the ridiculously low cost of production in the Asian nation.

But some time this year, with rock-bottom wages now soaring in China, the average cost of factory labor in the two nations will be roughly the same. This is a boon to Mexico, and its industrial parks are swelling.

The trend has caught the attention of chief executives such as Rob Moser, the president of Casabella Holdings, who recently started totting up the pros and cons of where to make the housewares that his New York firm designs and sells.

China had been cheap – really cheap – when he first started buying there in 2003. But labor costs have climbed at a double-digit pace, and there were other factors that made China less convenient.

“You’ve got to get a visa to China, and that takes time. It’s a 16-hour flight, hours to the factory. It’s days at the very least to tackle some of these issues,” he said, referring to production problems that invariably arise.

“You literally can be in a facility in Mexico the same day and be fixing things. That is a huge benefit,” Moser said.

So like a number of U.S. and Canadian businesses – large and small – Casabella decided this year to bring some of its business back to North America, specifically to Mexico, the United States’ third-largest trade partner, after China and Canada.

Mexico’s charms look more attractive than ever to global supply-chain managers. Eclipsed over the past decade by the white-hot industrial juggernaut in China, and marred by an image of rampant criminality, Mexico is again seducing global business, drawing billions of dollars in investment.

The Boston Consulting Group, a major business strategy consultancy, says average factory wages in China this year have hit about $4.50 an hour – including benefits and other costs – and are likely to climb to $6 an hour by 2015. Mexico’s National Statistics Institute says average manufacturing wages stood at $3.50 an hour in June, the most recent month tallied, but that figure doesn’t include benefits.

“We’re at that point where Mexico is now getting wages that are lower than in China,” said Harold L. Sirkin, a senior partner at the Chicago office of the Boston Consulting Group. “The fundamentals are pretty favorable to Mexico.”

“This is the year that it is happening,” he added.

Yet to be seen, though, is whether Mexico can follow China’s path and leverage its low-wage status into sustainable fast growth. To do so, it needs policies to foster small and medium businesses and move them into higher-end production, and to draw workers into the formal economy and push them up the economic ladder. Some analysts have doubts.

“I would be quite cautious about talking of any Mexican euphoria over the return of these industries,” said Enrique Dussel Peters, coordinator of the China-Mexico Study Center at the National Autonomous University of Mexico.

Unlike in China, where the Communist Party identifies “pillar industries” and orders banks to shovel loans their way, Dussel Peters said, Mexicans who are eager to start or grow businesses even in strategic sectors can’t get cash easily.

“Smaller businesses in Mexico don’t have access to financing, and those that have it get it at a very high cost,” Dussel Peters said.

Even with the North American Free Trade Agreement, the sweeping 1994 accord that ties Canada, the United States and Mexico together in the world’s biggest trade bloc, Mexico suffers from an “enclave economy,” of which the vast gated industrial parks along the U.S.-Mexico border are the most visible sign. Goods are assembled there for export, but rarely from parts manufactured in Mexico. That means the country’s economy doesn’t benefit as deeply as it might from its low-wage status.

“It doesn’t make sense for Mexico in the long run to just sort of give up the production capacity by fiat to foreign suppliers,” said Frank Lange, the vice president of global development at Menlo Worldwide Logistics, a San Mateo, Calif., company that helps clients tighten controls of supply chains.

That, however, is an issue for Mexican politicians and businesses debating how best to develop their country’s economy. For multinational companies that are looking to keep a lid on costs, it’s of little concern.

“I was just on a call with a company that’s thinking of moving production from China to Mexico,” said Scott Stanley, the senior vice president of sales at North American Product Sharing, a Solana Beach, Calif., company that helps manufacturers set up and run operations in Mexico.

“There are a lot of companies that are saying, ‘China is not making much sense for us anymore. We should go to Mexico,’ ” said Vivian Olmos, another North American Product Sharing executive.

Industrial parks along the U.S.-Mexico border – even in Ciudad Juarez, once known as “Murder City” because of its homicide rate – are feeling a boom.

“This is not just a flash in the pan. These companies are inquiring about leasing space for three to five years,” said Tapen Sinha, a business professor at the Autonomous Technological Institute of Mexico, in the capital.

Moser, the 61-year-old Casabella president, said he’d been warily eyeing the prices of his suppliers in the Pearl River Delta and elsewhere in China.

“The clear cost advantage that these factories had in 2004, ‘05, ‘06, ‘07 and probably up to ‘08 and ‘09, where it was material, it was significant: that gap is virtually nil,” Moser said.

So earlier this year, Moser worked through an American consultant in Guadalajara, Ed Juline, and found a factory in Mexico City that could meet his specifications for a molded dish brush. He’ll take delivery on the first order perhaps late this month.

He expects that in five years, half of his suppliers will be outside China and that Mexico is “certainly the most logical place.”

The specialty molded plastic products that Casabella sells to chains such as Bed Bath & Beyond, The Container Store and Target aren’t simple to make.

“We do things with shapes and thicknesses and materials that are out of the ordinary,” Moser said. “I’ll just say, it ain’t easy.”

So far, the family-owned Mexican supplier has been up to the job, he said.

Other industries also are finding satisfaction in Mexico, especially when getting products to market quickly is vital.

“If I try shipping something from China to the U.S., I’m looking at 90 days for my goods to get there. There is a cost to that,” the Boston Consulting Group’s Sirkin said. That’s a long time, he noted, in a world where computers can face obsolescence issues in three months and clothes can cycle out of fashion.

That’s an advantage that could help keep Mexico competitive in a world where low-wage options continually arise – “There’s a lot of buzz going on about Myanmar as they loosen up,” Lange said, as an example.

But Myanmar doesn’t have the highways and truck fleets that Mexico can provide for moving products to the United States.

“Their long-haul trucks are as good as anything I’ve seen in the U.S. It’s a misperception that Mexican trucks have bumpers that are about to fall off,” Lange said.

Still, Mexico has underlying problems – in addition to security issues – that he said would hamper a real takeoff from the 4 percent economic growth expected this year.

“The bureaucracy is just numbing to get anything done,” he said. “Mexico needs to address its underlying issues of corruption, infrastructure and bureaucracy to make this go smoothly.”

Email: tjohnson@mcclatchydc.com; Twitter: @timjohnson4

Mexico most popular for US ‘reshoring’

June 4th, 2012

Financial Times

By Hal Weitzman in Chicago

Mexico remains a far more popular destination than the US for “reshoring” manufacturing to supply North American demand, according to research by a global business advisory firm.

The report, to be published on Monday by AlixPartners, could damp the hopes generated by US cheerleaders for reshoring – where jobs previously outsourced to low-cost emerging economies are brought back home.

US job creation slowed in May, according to official data on Friday that showed employers created 69,000 posts last month, well below average expectations of about 150,000, while the unemployment rate rose to 8.2 per cent from 8.1 per cent.

Barack Obama, US president, has cited reshoring as an example of the country’s increasing economic competitiveness in the face of competition from emerging markets. However, the trend, although real, may not benefit the US as much as some expect, the survey suggests.

Nearly half the manufacturers surveyed by AlixPartners said they saw reshoring as a good opportunity, but half also said Mexico was their top choice for relocating factories designed to supply the US market. However, that is down from 70 per cent last year. In addition, 35 per cent said the US was the most attractive place to reshore production – up from 21 per cent last year.

Some 15 per cent of respondents said they could relocate factories elsewhere in Latin America or the Caribbean, up from 8 per cent last year.

“A lot has been written of late about America’s manufacturing rebound, and there certainly has been a very impressive rebound,” said Foster Finley, co-head of AlixPartners’ transport practice. “However, Mexico still remains the near-shoring locale of choice for companies looking to overcome the higher costs of doing business today in places like China.”

Chas Spence, one of the report’s authors, said relatively low wages continued to make Mexico attractive. “Despite the logistic attraction of the US, the labour arbitrage is still a monumental hurdle for the US to overcome,” he said. “Labour costs are such a big part of the equation.”

Russell Dillion, his co-author, said Mexico was particularly competitive in low-skill assembly work. “US workers can bring more productivity to the table, so that shrinks the gap between the US and Mexico. But in some industries – such as auto – the productivity and quality gap is not as large as it was two decades ago,” he said.

Mr Spence noted that Mexico had superior infrastructure to support relocating factories. “They have an entire industry dedicated to serving a manufacturing transition,” he said. “The US doesn’t have that to the same extent, because we’ve never really done it – reshoring is a new thing.”

Of the companies that said they were considering bringing production closer to the US, almost 90 per cent said they were likely to relocate within three years.

About half the companies surveyed were from the automotive or aerospace industries. Respondents said the chief attraction of relocating from Asia was lower freight costs, followed by improved speed to market and lower inventory costs.

Mexico – Manufacturing Companies Move Toward Near-Sourcing

April 19th, 2012

April 19th, 2012

All eyes are on Mexico as the cost of manufacturing in China rises, forcing businesses to rethink their global sourcing strategies. Companies that once flocked to China because of its massive pool of cheap labor and attractive government incentives are now finding themselves at risk of losing the advantages that brought them to China in the first place. A number of factors are to blame: a diminishing population of low-cost workers, rising production costs, and government-controlled incentives to favored industries at the expense of those seen as less vital to China’s growth.

Although China’s minimum wage rates have been increasing by more than 15 to 20 percent per year according to a study by management consulting firm Cost & Capital, China’s overall wage cost remains far lower than that of Mexico, its closest low-cost competitor. It would be logical that companies without a firm understanding of their true landed costs might look at the labor costs per hour between the two countries, which were $1.40 and $5.93, respectively, in January 2012, and determine that China is still the preferred manufacturing point. However, over the next five years, industry projects that China’s wage cost will increase by 80 percent, a far sharper rate than in the past. Moreover, the growing cost differential between China and its low-cost competitors overall — from supply chain to labor to currency to other less tangibles like regulatory costs or value-added tax (VAT) policy fluctuations — is starting to erode the China advantage.

Companies that know their true landed costs account for factors such as energy costs, currency valuation, shipping costs, transit time, and taxes and tariffs. For example, currently, electricity is cheaper in Mexico than it is in China. In fact, China’s electricity cost per kilowatt-hour (kWh) stands at 15 cents, while the cost per kWh in Mexico is 9 cents. Currency valuation against the U.S. dollar (USD) is also telling. The Chinese renminbi (RMB) is expected to appreciate at an annual rate of 3 to 5 percent for the next three years relative to the USD, while the Mexican peso continues to depreciate. Finally, trans-Pacific freight costs are expected to increase 5 percent annually over the medium term. A similar December 2011 study comparing variable cost components between the United States, China, India and Mexico, conducted by the financial consulting firm Alix Partners, predicts that multiple variables of the costs of production could equal costs in the United States by as early as 2015.

In Mexico, safety and stability issues do exist, but overall there’s a business landscape in place that is very appealing to manufacturing companies. The country has a well-educated workforce and a maquiladora system that eliminates tariffs for products exported to the United States.

Moving manufacturing operations to Mexico would seem to have clear advantages — but only if those advantages can be fully leveraged by a particular company. A third-party logistics provider can help clients determine if a move to Mexico makes sense by asking some key questions in addition to ensuring they understand their total landed costs:

  1. How is an increased level of agility going to impact your ability to sell more? If you’re a garment retailer that has to shift quickly with seasonal changes and you need to be increasingly responsive to the needs of your customer base, a 40-day lead time to accommodate ocean carriage from China can be highly damaging.
  1. How important is sustainability within your operations? More customers are becoming very concerned about green supply chains — they want to know where product is being sourced for both safety and environmental reasons. China doesn’t have a reputation for strict environmental regulations, while Mexico has worked closely with the United States to improve environmental standards since signing NAFTA.
  1. Do you know who your vendors and suppliers are working with at every point in the supply chain? If your supply chain involves multiple vendors and suppliers, then the chances are high that those partners are utilizing the services of a network of subcontractors. If those subcontractors begin to have trouble accessing electricity or sourcing raw material as is happening in China today, it could have a damaging ripple effect on your entire supply chain.
  1. How important are intellectual property (IP) rights to your business and how much control do you believe you should have over them? China is notorious for disregarding IP rights, while Mexico is generally seen as being a far more stable environment.
  1. Are you shipping controlled or protected products? A growing number of companies are running into more regulatory issues shipping out of China and would like to keep operations closer to home. Moving operations to Mexico may simplify this for some companies, particularly as the United States has made it very clear that they are going to start to bolster enforcement actions on products that aren’t in compliance with U.S. trade requirements.

All signs point to the fact that near-sourcing to Mexico is no longer a short-lived trend, but — for the right company — is a strategic business formula that has staying power. A Wall Street Journal headline that ran earlier this year, likely said it best: “China’s Export Pain May be Mexico’s Gain.”

Frank Lange has over 20 years of international experience in the supply chain industry, focused on Asia, Europe and Latin America. Currently responsible for Menlo’s global strategic investment out of its headquarters in San Mateo, Calif., his most recent overseas posting was leading Menlo’s operations in China, based in Shanghai.

Mexico’s Manufacturing Base Rebounds

February 21st, 2012

Area Development

As companies expand their capabilities, Mexico’s advantages — and proximity to its biggest export market — will become evident and its manufacturing base will expand even further.
Clare Goldsberry  (Winter 2012)

It wasn’t too long ago that Mexico, like the rest of North America, was beginning to believe that China would eventually capture all the manufacturing to be had. It was true that many companies fled Mexico for the lower labor costs of China.

In a report released in August of 2011, The Boston Consulting Group (BCG) noted that by 2015, wages in Mexico would be significantly lower than in China, pointing out that in 2000, Mexican factory workers earned more than four times as much as Chinese workers. The report notes, “After China’s entry into the WTO in 2001, however, maquiladora industrial zones bordering the U.S. suffered a large loss in manufacturing. Now that has changed. By 2010, Chinese workers were earning only two-thirds as much as their Mexican counterparts. By 2015, BCG forecasts that the fully loaded cost of hiring Chinese workers will be 25 percent higher than the cost of using Mexican workers.”

And, according to a report from Maquila Reference, “Manufacturers producing goods for the U.S. market are reconsidering their manufacturing options in China, and looking at Mexico’s dual benefits of low-cost labor and reduced tariffs under various NAFTA clauses.”

Reshoring to Mexico

Mexico’s GDP is expected to rise 4 percent in 2011, despite the country’s problems with drug cartel violence, which hasn’t seemed to slow foreign direct investment (FDI) in new manufacturing facilities in just about all regions of the country. That’s because Mexico has a low inflation rate and debt levels, and a huge population of young people standing ready to meet employment demands of the big multinational companies. That has put Mexico on par with China and other LLC (low labor-cost) countries in Southeast Asia, particularly since labor costs — as well as other manufacturing-related costs — are rising in Asia.

Another recent Boston Consulting Group study notes that “wage and benefit increases of 15–20 percent per year at the average Chinese factory will slash China’s labor-cost advantage over the United States,” and that will create an attractive incentive for work to return to not only the United States but to Mexico as well. “BCG’s research projects that over the next five years, the fully loaded cost of Chinese workers in the Yangtze River Delta, which includes Shanghai and the provinces of Zhejiang and Jiangsu, will rise by an annual average of 18 percent, to about $6.31 per hour.”

Therefore, Mexico — like the United States and Canada — is seeing a rebound of its manufacturing base in a trend that is being called “reshoring.”

Mexico’s Largest Industry Sectors

While a lot can be said for the huge variety of industries that boast manufacturing plants in Mexico, the big focus is on the automotive, aerospace, and medical device industries.

Automotive: For the automotive industry, Mexico’s more than 1,100 Tier 1 manufacturing companies have been busy even in the face of “lackluster” sales of vehicles in the United States. Multinational Tier 1 suppliers include companies such as Delphi, Magna, Visteon, Johnson Controls, and many others with multiple manufacturing facilities throughout Mexico.

According to a report from Maquila Reference, Mexico became the largest supplier of auto parts to the United States in 2008. Additionally 80 percent of vehicles produced in Mexico are exported to the United States, and 11 out of every 100 autos sold in the United States are made in Mexico. Auto production in Mexico is expected to reach 2.4 million units annually by 2014 — with a projected growth rate of 5.5 percent per year — and account for 18 percent of Mexico’s manufacturing GDP, while generating 56,000 jobs.

Among the major automotive OEMs are Ford, GM, and Toyota, which have established manufacturing facilities along the northern border — the Northern cluster — in Baja California, Sonora, and Chihuahua. The Maquila Reference report notes that Baja California is a “preferred destination for the North American, European, and Asian automakers, with more than 60 foreign automotive companies in the region.”

Ford Motor Co., for example, established its Stamping and Assembly plant in Hermosillo, Mexico, the capital city of the state of Sonora, in 1986. Today the plant, which sits on a 279-acre site, has 1,650,307 square feet of manufacturing space and produces cars such as the Ford Fusion hybrid, Ford Fiesta, the Mercury Milan and Milan hybrid, and the Lincoln MKZ.

Tier 1 supplier TRW Automotive Holdings Group, manufacturer of safety systems, announced in November 2011 that it would open a new facility in the state of Queretaro, Mexico, to produce a range of advanced brake systems. Queretaro is located in the East-Central region that borders the western edge of Texas. According to TRW’s release, the 150,000-square-foot facility will manufacture hydraulic control units for a variety of electronic stability control systems, and brake actuation units including boosters and master cylinders. Production at the new plant is expected to begin near the end of the first quarter of 2012, with an estimated total employment of 450 when full production is reached.

Aerospace: Mexico’s aerospace industry sector has seen a big increase in growth over the last five years, according to a CCN Mexico Report, prepared by Cacheaux, Cavazos & Newton, LLP. Investment in the aerospace industry has exceeded $3 billion over just the last three years. According to data from the Mexican Aerospace Industry Federation, in 2011, $800 million will be added to that total, and over the next five years the sector is expected to create 35,000 jobs. Currently more than 190 aerospace companies call Mexico home, and employ approximately 190,000.

A report from Geo-Mexico notes that the number of aerospace companies in Mexico is expected to grow from 232 in 2010 to more than 350 in 2015. Exports of aerospace parts were worth $3.1 billion in 2010, and that is expected to jump to $5.7 billion by 2015. About one-half of all the jobs in the aerospace industry are in the Northern Border region, specifically in Baja California, Tijuana, and Mexicali, all of which border southern California.

One of the leaders of the growth in the aerospace sector is Canadian firm Bombardier Aerospace, which recently announced that it would build the aft fuselage for its new Bombardier Global 7000 and Global 8000 business jets, as well as major composite structures for the Learjet 85, at its Queretaro, Mexico, facility. Currently, Bombardier builds the Global 7000 and 8000 business jets at its Toronto, Ontario, facility. The company opened its business park in Queretaro in 2006, and has since enticed many of its suppliers to join them there. Bombardier Aerospace President and Chief Operating Officer Guy Hachey noted in a report in Aviation Week that the company is “ramping up in Mexico to about 2,500 employees by the end of 2012.”

Many of these heavy industries attract numerous suppliers into Mexico. In September 2011, Fridley, Minnesota-based Incertec — a specialty plating, metal finishing, and engineering solutions company — announced that it purchased the assets of CRS Aerospace in Empalme, Sonora, in order to establish manufacturing operations in Mexico. This will allow Incertec to provide cost savings and geographical efficiencies to customers in the aerospace, electronics, connector, and medical device industries.

“In the industries we serve, precision is critical,” states Tim Meador, CEO and president of Incertec. “By adding this location, we can provide manufacturers doing business in Mexico the same consistency, quality, and delivery provided by our U.S. location.”

Medical Device: Baja California is also home to a medical device manufacturing cluster, with more than 65 plants in the area dedicated to medical device manufacturing and responsible for 35,000 jobs, according to Maquila Reference.

Companies in the region include Cardinal Health; Medtronic; ICU Medical, Inc., among others, with 91 percent of medical device investments coming from the United States. These facilities are FDA, CE, and ISO 13485 certified with clean rooms ranging from Class 100 to 100,000.

Some 233 companies comprise Mexico’s medical device industry, with an estimated value of approximately $3.4 billion, contributing 0.4 percent of Mexico’s GDP. Of the medical devices manufactured in Mexico, 92 percent are exported to the United States.

An Educated Work Force

Mexico has a vibrant and well-educated work force, with an average age of 29. A report from the Organization for Economic Co-operation and Development states that 50 percent of Mexico’s citizens age 15–19 are enrolled full-time or part time in an educational program. Each year, some 90,000 engineers graduate from one of Mexico’s many universities. The country’s university system also includes technical and trade schools. The Technology University of Mexico has schools in Atizapan, Cuitlahuac, Ecatepec, Marina, and Sur.

One of the largest university systems is the Monterrey Institute of Technology, one of the largest private, nonsectarian co-educational multi-campus universities in Latin America. With over 90,000 students among 33 campuses in 25 cities in its high school, undergraduate, and post-graduate programs, the Monterrey Institute is one of the finest systems in Mexico.

Mexico’s Vocational Education Training (VET) system offers three levels of vocational and trade school training that includes Training for Work courses that can be completed in three to six months, consisting of 50 percent theory and 50 percent practice, and preparing students for entering the work force.

The Technical Professional baccalaureate program consists of 35 percent general studies and 65 percent vocational studies; 360 hours of practical training is required to obtain this degree. The technological baccalaureate that comes with the title Professional Technician is offered by both state governments and the federal government, and similar to an engineering degree. All of these programs offer excellent collaboration between the schools and employers, giving ready access to a trained and skilled work force.

A Changing Landscape

BCG noted that Mexico “has the potential to be a big winner” when it comes to supplying North America. “It has the enormous advantage of bordering the United States, which means that goods can reach much of the country in a day or two, as opposed to at least 21 days by ship from China,” the report said. “Goods imported from Mexico can also enter duty-free, thanks to NAFTA.”

Nonetheless, changes might alter the landscape and create incentives for U.S. companies to bring some manufacturing back from Mexico. For example, Ford Motor Company recently announced that due to its new national labor agreement with the UAW, it plans to move production of the Ford F-650 and F-750 medium-duty trucks from Escobedo, Mexico, to its Ohio Assembly Plant in Avon Lake. This marks the end of a decade-old Blue Diamond Truck, LLC joint venture between Ford and Navistar International, which currently manufactures Ford F-650 and F-750 trucks in Mexico for customers across North America.

But even as some manufacturing is migrating back to the United States from Mexico, other manufacturing is headed there. In October 2011, Whirlpool Corp. announced that it will close its Fort Smith, Arkansas, side-by-side refrigerator manufacturing facility in 2012 and shift that work to its manufacturing facility in Ramos Arizpe, Mexico. And although Nissan plans to boost capacity at its U.S. plants in Tennessee and Mississippi, it also plans to build a new plant in Mexico, according to a January 2012 company announcement. The new plant — which will be Nissan’s third in Mexico — will reportedly have the capacity of producing 175,000 vehicles a year, and employing 3,000 workers.

The winds of manufacturing continue to shift, as companies seek manufacturing sites that offer the best of all worlds: low labor costs, high quality, good infrastructure, access to markets, reduced shipping time and costs, and educated, skilled work forces. Mexico can fill much of that bill.

“Made in Mexico” gains ground on China

June 23rd, 2011

June 21, 2011 8:00 pm by Pan Kwan Yuk

When all eyes are focused on China, it is easy to overlook Mexico.

For the last decade or so, the common view has been that China’s vastly cheaper labour and greater production capacity are too much to handle for Mexico’s manufacturing export sector.

But a research note on Tuesday by RBC Capital Markets comes as a timely reminder that in the battle for market share of US imports, Mexico is far from beaten.

Indeed, Mexico’s share of that market, the world’s largest, finished 2010 at about 12.5 per cent – the highest in a decade. At current trends, Mexico could even overtake Canada within the next five years or so to become the US’s second-largest source of imports.

One reason, as RBC points out, is that while Chinese wages were roughly 300 per cent cheaper than those of Mexico a decade ago, wage inflation in China and wage stagnation in Mexico have combined to close the gap to almost zero.

A second reason is simply that China is a lot further away than Mexico. That may not matter in a world of cheap energy, but today’s rising transport costs give Mexico an edge, particularly when it comes to heavy and bulky items.

Factor in Mexico’s skilled labour force and the effects of the North American Free Trade Agreement (Nafta), which shield the country from the potential threat of protectionism, and it is little wonder that foreign companies keep going to Mexico.

As if proof were needed, Mazda, the Japanese car manufacturer, announced last week that it would invest $500m in a car-assembly plant with a capacity of 100,000 units a year.

RBC’s bottom line? “Mexico is becoming more attractive for manufacturing, particularly that aimed at the US market.”