Tracing the Rise of the Global EMS Supply Chain

October 5th, 2015

Capital Investment, Technology Upgrades to Bolster Mexico’s Diverse Manufacturing Sectors

August 3rd, 2015
Capital Investment, Technology Upgrades to Bolster Mexico’s Diverse Manufacturing Sectors
Whether they are manufacturing vehicles, airplanes, electrical cable, or something else, companies are finding the resources they need to compete in Mexico.
Dan Emerson (Q3 2015)

Just over a decade ago, when Quebec-based Bombardier Recreational Products Inc. (BRP) decided to try Mexico as a manufacturing market, the off-road vehicle manufacturer took a measured approach. In 2003, BRP tested the waters by leasing a facility in Ciudad Juarez, Chihuahua, to assemble outboard engines for export. Two years later, the Canadian firm decided to transfer all of its ATV assembly and engine manufacturing operations to Juarez.

Building on its first, successful ventures south of the border, over the last decade BRP has steadily increased its stake in Mexico to more than $190 million worth of manufacturing facilities in the states of Chihuahua and Querétaro, and an extensive distributor network.

Investments Continue to Rise
Business expansions like BRP’s have become “the story” in Mexico, as the country has developed into one of the world’s manufacturing powers.

“Mexico has really burst on the scene as a legitimate player in the global manufacturing sector,” says Bob Cook, president and CEO of the El Paso, Texas-based Cook Strategies Group, LLC. “Every trend I look at indicates that rise is going to continue.”

Mexico – Global Manufacturers

  1. Bombardier Recreational Products Inc. (BRP), Flextronics Manufacturing, Lexmark Internacional and Johnson & Johnson

    Juárez, Chihuahua

  2. Bombardier Recreational Products Inc. (BRP)

    Querétaro, Mexico

  3. Ford

    Chihuahua City, Chihuahua

  4. BMW


    San Luis Potosi, Mexico

  5. Toyota

    Guanajuato, Mexico

  6. Mazda

    Guanajuato, Mexico

  7. Hundyai/Kia

    Monterrey, Nuevo León

  8. Nissan/Daimler

    Aguascalientes, Mexico

  9. Honda

    Celaya, Guanajuato

  10. Audi

    San Hosé, Chiapa

Agreeing with that prediction, the Boston Consulting Group estimated in a 2013 report that Mexican manufacturing exports will increase up to $60 billion annually by 2018.

According to Banco de Mexico data, Mexico has received over $135 billion in foreign direct investment (FDI) over the last five years — almost $86 billion of that within the past three years. The largest share of FDI in Mexico comes from the United States, representing over one third (34 percent) of total FDI over the past three years. Canada has been the source of another 10 percent of FDI in Mexico over the same period.

More than half (58.6 percent) of the FDI coming into Mexico was invested in manufacturing enterprises, with the top five sectors being food and beverages; transportation equipment; chemicals; electronics; and electric equipment. The automotive sector alone added more than 93,000 jobs in 2014, growing nearly 15 percent.

However, the growth trend has also been “pretty diverse,” Cook says. “We’ve seen a lot of growth the across the board,” a trend which bodes well for the country’s economic future. The most pronounced growth has taken place in “high value” categories such as aerospace, automotive, and electronics.

Mexican manufacturing exports are estimated to increase by up to $60 billion annually by 2018. An Automotive Powerhouse
This tsunami of foreign investment has transformed Mexico into the world’s seventh-largest automotive producer and the fourth-largest exporter after Germany, Japan, and South Korea. Mexico has usurped Japan to become the No. 2 supplier of vehicles to the U.S. market, behind Canada. By 2018, industry analysts predict Mexico’s current annual production of 3.2 million cars and light trucks to increase more than 50 percent to five million vehicles. Earlier this year, The Wall Street Journal reported that seven Asian and European automakers have opened new Mexican assembly plants, or announced plans, in just over a year. Other car companies have bankrolled major expansions in Mexico, including Nissan, General Motors, Ford, Volkswagen, and Fiat Chrysler Automobiles NV.

In total, automakers and parts suppliers have earmarked more than $20 billion of new investments, Mexican officials say. The automakers’ presence has also spawned major growth of smaller vendors who supply the auto plants, according to Cushman and Wakefield’s Gonzalo Gutierrez, who is the firm’s senior director of Industrial Brokerage Services for the Northeast Region of Mexico, based in Monterrey. These vendors come from all over the world, but most hail from the U.S., Japan, Germany and, more recently, Korea, Gutierrez says.

Meanwhile, recreational vehicle maker BRP has gradually upped the ante on its Mexican investment. In 2013, BRP opened a $100 million manufacturing facility in Querétaro, which employs 1,100 people. Last year, BRP decided to build a second plant in Juarez, to expand its Can-Am product offering and meet future demand for off-road vehicles. When completed in late 2017, the $55 million facility is expected to employ about 900 workers.

Aerospace, Electronics, and Medical Devices
The aerospace sector in Mexico has also been growing rapidly. Last year, Mexico exported an estimated $1.9 billion worth of aerospace products to the U.S., an amount that has quadrupled since 2009, Cook notes. In that sector, “Mexico is rapidly moving up the global rankings.”

Regarding regional distribution of FDI, just over half accrues to Mexico City and the surrounding state, according to Cook. About a third of the balance goes to the four states of Chihuahua, Jalisco, Puebla, and Nuevo Leon.

In addition to being an automotive center, the border city of Juarez has become a manufacturing center for electronics and medical devices. Its electronics manufacturers include Electrolux, Flextronics, Foxconn, and Lexmark. Its medical device companies include Cardinal Health, GE, and Johnson and Johnson. Other northern states have benefited from the growth of the electronics industry, including Chihuahua, Baja California, and Tamaulipas.

Mexico’s developing manufacturing clusters have also drawn smaller companies. One example is Greatbatch Inc., which plans to move 170 jobs from its Electrochem Solutions Inc. manufacturing facility in Beaverton, Ore., to a new plant in Tijuana (Baja California) by year’s end.

The southern Mexican region has also benefited from lower labor costs, which have helped attract clothing and textile manufacturers to cities including Campeche and Veracruz.

Boosting Mexico’s Natural Advantages
There have been a multitude of reasons for Mexico’s manufacturing boom, including both indigenous advantages, and efforts by the government in recent years to make the country a more desirable trade partner and place to do business. Over the past decade, Mexico “has been pretty aggressive in liberalizing trade with companies around the world,” and has the most free-trade agreements of any country in the world — 44, Cook points out.

The Mexican government has been proactive in modernizing the country’s business climate to 21st century standards. Mexico’s homegrown business advantages include lower transportation and warehousing costs, an improved ability to respond to customer demands, improved control of intellectual property, the availability of proximate time zones between management and production locales, and the cultural similarities between the U.S. and Mexican markets.

Augmenting Mexico’s expansive, free-trade policies, the government has also been proactive in modernizing the country’s business climate to 21st century standards. Investing in education has been a major thrust to ensure a well-prepared, bilingual workforce.

According to the United States Embassy in Mexico, more Mexicans — almost 100,000 more — earn engineering degrees annually than Canadians and Germans. And during the past decade, Mexico has doubled the number of its public two-year colleges and four-year universities. The government financed 140 new colleges and universities, with 120 of those emphasizing science and engineering.

BRP facility in Querétaro

BRP facility in Querétaro

Another priority has been improving Mexico’s roads, bridges, and utility infrastructure to help expedite the flow of materials and manufactured goods. Revisions in the country’s energy policy have encouraged private-sector investment in new natural gas pipelines and power lines. Additionally, earlier this year, AT&T announced plans to invest $3 billion to extend its high-speed mobile Internet service to Mexico and cover 100 million consumers and businesses by year-end 2018.

Mexico also continues to benefit from the near-shoring trend among some American companies — i.e., moving manufacturing operations to Mexico from China and other low-cost countries. Average manufacturing labor costs in Mexico are now almost 20 percent lower than in China — a sea change from 15 years ago, when Mexico’s labor costs were 58 percent more expensive than China’s, according to

Are there other supply chain issues in Mexico companies need to be aware of? “There are no critical issues related to transportation inside Mexico,” Gutierrez says. “Since the last five years, the 3PL companies, such as the companies with distribution centers in multiple (Mexican) states, have handled their operations with no inconvenient events, while they have significantly increased their operations, every year.”

Some Challenges Ahead
Of course, crime and violence, much of it related to the illegal drug trade, remain a concern. However, media reports may exaggerate the hazards. Gutierrez notes that companies doing business south of the border have developed effective, operational planning strategies to minimize risk and avoid travel related hazards in problematical regions.

Yet, with such a rapid economic expansion, some growing pains are to be expected. There are several challenges facing the country, which the current Mexican administration is working to address, according to Cook, in order to help promote continued economic growth.

BRP facility in Juarez

BRP facility in Juarez

To capitalize on Mexico’s abundant energy resources, the country will need new capital investment and technology upgrades in the processing and distribution of energy. “That’s opening up as we speak,” Cook says. This year, Mexico opened its oil industry to foreign investment for the first time since the 1930s, offering for auction exploration rights to 14 shallow-water fields. And this summer, Mexico’s Federal Electricity Commission began taking bids on 24 projects that will enable the generation of an additional 1,442 megawatts of power, along with adding nearly 1,500 miles of natural gas pipeline and almost 2,000 miles of power lines.

Competition for skilled labor can be expected to heat up, along with the overall economy. “If you need specialized engineers and technology, you will not find them along the border; you need to go closer to Mexico City,” notes Sylvain Blanchette, BRP’s VP of Mexican operations. Generally, the average cost of labor increases moving south from the border to the country’s interior. That may be due to more competition for skilled labor, due to the increased number of auto, aerospace, and other manufacturers, says Blanchette.

To sustain its manufacturing expansion, Mexico is going to need “to have an even greater emphasis on skilled labor,” Cook says. However, in spite of the challenges ahead, Mexico’s ascendance as a global economic power should continue, Cook believes, citing its globally competitive cost structure, young workforce, and friendly trade policies.

Mexico’s richest resource — and the real driving force behind the growth boom — may be its people, says Blanchette, who praises the knowledge, enthusiasm, and initiative of the Mexican workforce. “When we have come to Mexico with projects, the people we work with have been extremely eager to learn and improve what they do,” Blanchette concludes.

“Hecho en México” v “Made in China”: round 2

July 25th, 2011

July 23, 2011 9:31 am by Andres Schipani

Mexican wrestlers usually dress up as animals, gods and ancient heroes. But a more recent archetype has been hard to knock out: the Chinese dragon. And just when Mexicans thought they could start chanting victory about the resurgence of its manufacturing export sector, along comes Nomura and gives the points to the Chinese.

Analysts at the Japanese bank warned on Friday that Chinese competition has moved onto higher leagues, with Mexico “increasingly being pushed out of intermediate and high value added manufacturing”, just as it has pushed it out of lower-value added since 2001.

The factors that have kept Chinese productivity adjusted labour costs below those of Mexico include, the report adds, “infrastructure investment, an undervalued exchange rate and, low interest rates.”

The duel is not a new one. “Demographic characteristics predisposed China and Mexico towards leveraging comparative advantage in labor intensive production,” states the research report. And yes, for about a decade the idea that China has cheaper labour and greater production capacity than Mexico’s manufacturing sector has been commonplace; several clothing and toy outfits went east. This was initially hard to digest for the Mexicans.

But should Mexico worry? After all, the country’s share of US imports at 12.5 per cent is the highest in a decade. This was possible not only because Mexican workers became more skilled than Chinese -stepping into areas of manufacturing such as car making and electronics assembly-, but also because they have been serving the US market for years. Analysts at Nomura recognise there is still an edge:

While Mexico is finding some success in lower-value added production that China is no longer targeting, it is possible for Mexico to make a comeback in higher value added production.

Nomura also highlights that Renmimbi appreciation and possible reductions in export tax rebates should benefit Mexico as well as identifying that in the near future there will be a loss of the “demographic advantage” from the Chinese side. And despite noting there is nothing set on stone and that investment from China to Mexico is still “marginal”, they believe ”the good days for Mexico are still ahead”:

Mexico may come to play a role in the supply chains of Chinese firms seeking to expand market share in the US. Reports indicate that Chinese automakers including Geeley and First Auto Works are planning on building production facilities in Mexico to aid penetration of North and Latin American markets. Shifting production to Mexico will likely be limited to manufacturers of products with high transport costs (such as vehicles) or for export categories for which Mexico has preferential tariff treatment under NAFTA.

So even if China advances, Mexico is still fighting its corner as a regional force and a natural manufacturer of US goods – last month Mazda said it will build its first plant in Mexico and this week it was announced that Foxconn, which manufactures the iPhone for Apple, will absorb 5,000 of Cisco’s recent layoffs in one of its Mexican units.

Mexico is still on its feet due to a handful of factors, such as the abovementioned skilled labour force, a combination of wage inflation in China and wage stagnation in Mexico, and the benefits of the North American Free Trade Agreement. But one inherent strength Mexico has over China is geography: as long as the US needs cheap and well-made parts, China will never throw Mexico out of the ring.

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; 546-6421El Paso Times reporter Adriana Gomez Licon contributed to this story.

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Rising China Wages Cut Advantage Over Mexico, Flextronics Says

September 1st, 2010
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; Frederik Balfour in Hong Kong at

Companies brace for end of cheap made-in-China era

July 9th, 2010


SHANGHAI — Factory workers demanding better wages and working conditions are hastening the eventual end of an era of cheap costs that helped make southern coastal China the world’s factory floor.

A series of strikes over the past two months have been a rude wakeup call for the many foreign companies that depend on China’s low costs to compete overseas, from makers of Christmas trees to manufacturers of gadgets like the iPad.

Where once low-tech factories and scant wages were welcomed in a China eager to escape isolation and poverty, workers are now demanding a bigger share of the profits. The government, meanwhile, is pushing foreign companies to make investments in areas it believes will create greater wealth for China, like high technology.

Many companies are striving to stay profitable by shifting factories to cheaper areas farther inland or to other developing countries, and a few are even resuming production in the West.

“China is going to go through a very dramatic period. The big companies are starting to exit. We all see the writing on the wall,” said Rick Goodwin, a China trade veteran of 22 years, whose company links foreign buyers with Chinese suppliers.

“I have 15 major clients. My job is to give the best advice I can give. I tell it like it is. I tell them, put your helmet on, it’s going to get ugly,” said Goodwin, who says dissatisfied workers and hard-to-predict exchange rates are his top worries.

Beijing’s decision to stop tethering the Chinese currency to the U.S. dollar, allowing it to appreciate and thus boosting costs in yuan, has multiplied the uncertainty for companies already struggling with meager profit margins.

In an about-face mocked on “The Daily Show with Jon Stewart,” Wham-O, the company that created the Hula-Hoop and Slip ‘n Slide, decided to bring half of its Frisbee production and some production of its other products back to the U.S.

At the other end of the scale, some in research-intensive sectors such as pharmaceutical, biotech and other life sciences companies are also reconsidering China for a range of reasons, including costs and incentives being offered in other countries.

“Life sciences companies have shifted some production back to the U.S. from China. In some cases, the U.S. was becoming cheaper,” said Sean Correll, director of consulting services for Burlington, Mass.-based Emptoris.

That may soon become true for publishers, too. Printing a 9-by-9-inch, 334-page hardcover book in China costs about 44 to 45 cents now, with another 3 cents for shipping, says Goodwin. The same book costs 65 to 68 cents to make in the U.S.

“If costs go up by half, it’s about the same price as in the U.S. And you don’t have 30 days on the water in shipping,” he says.

Even with recent increases, wages for Chinese workers are still a fraction of those for Americans. But studies do show China’s overall cost advantage is shrinking.

Labor costs have been climbing about 15 percent a year since a 2008 labor contract law that made workers more aware of their rights. Tax preferences for foreign companies ended in 2007. Land, water, energy and shipping costs are on the rise.

In its most recent survey, issued in February, restructuring firm Alix Partners found that overall China was more expensive than Mexico, India, Vietnam, Russia and Romania.

Mexico, in particular, has gained an edge thanks to the North American Free Trade Agreement and fast, inexpensive trucking, says Mike Romeri, an executive with Emptoris, the consulting firm.

Makers of toys and trinkets, Christmas trees and cheap shoes already have folded by the thousands or moved away, some to Vietnam, Indonesia or Cambodia. But those countries lack the huge work force, infrastructure and markets China can offer, and most face the same labor issues as China.

So far, the biggest impact appears to be in and around Shenzhen, a former fishing village in Guangdong province, bordering Hong Kong, that is home to thousands of export manufacturers.

That includes Taiwan-based Foxconn Technology, a supplier of iPhones and iPads to Apple Inc. Foxconn responded to a spate of suicides at its 400,000-worker Shenzhen complex with pay hikes that more than doubled basic monthly worker salaries to $290. Strike-stricken suppliers to Honda Motor Co. and Toyota Motor Corp., among many others, also have hiked wages.

Foxconn refused repeated requests for comment on plans to move much of its manufacturing capacity to central China’s impoverished Henan province, where a local government website has advertised for tens of thousands of workers on its behalf.

But among other projects farther inland, Foxconn is teaming up with some of the biggest global computer makers to build what may be the world’s largest laptop production hub in Chongqing, a western China city of 32 million where labor costs are estimated to be 20 to 40 percent lower than in coastal cities.

Given the intricate supply chains and logistics systems that have helped make southern China an export manufacturing powerhouse, such changes won’t be easy.

But for manufacturers looking to boost sales inside fast-growing China, shifting production to the inland areas where many migrant workers come from, and costs are lower, offers the most realistic alternative.

“The new game is to find a way to do the domestic market,” says Goodwin.

Many factories in Foshan, another city in Guangdong that saw strikes at auto parts plants supplying Japan’s Honda, have left in the past few months, mostly moving inland to Henan, Hunan and Jiangxi, said Lin Liyuan, dean at the privately run Institute of Territorial Economics in Guangzhou.

Massive investments in roads, railways and other infrastructure are reducing the isolation of the inland cities, part of a decade-old “Develop the West” strategy aimed at shrinking the huge, politically volatile gap in wealth between city dwellers and the country’s 600 million farmers.

Gambling that the unrest will not spill over from foreign-owned factories, China’s leaders are using the chance to push investment in regions that have lagged the country’s industrial boom.

They have little choice. Many of today’s factory workers have higher ambitions than their parents, who generally saved their earnings from assembling toys and television sets for retirement in their rural hometowns. They are also choosier about wages and working conditions. “The conflicts are challenging the current set-up of low-wage, low-tech manufacturing, and may catalyze the transformation of China’s industrial sector,” said Yu Hai, a sociology professor at Shanghai’s Fudan University.