Cross-Border Trade: Made in Mexico
Got the nearshoring bug? Here are the challenges, benefits, and secrets to success for manufacturing south of the border.
Juarez Factory Adds Value
Guaymas: Breaking New Ground
In recent years, Mexico has emerged as a hotspot for firms looking to contain production costs. When U.S. companies make product in Mexico, not only do they find skilled workers at lower wages, but they still get convenient access to their North American markets and suppliers.
Automakers, aerospace firms, and other big players such as General Dynamics, Newell-Rubbermaid, La-Z-Boy, and Whirlpool operate factories in Mexico—as do many smaller non-Mexican companies. By 2017, increased manufacturing exports from Mexico could add $20 billion to $60 billion per year to that country’s economic output, according to a 2013 report published by global management consulting firm Boston Consulting Group (BCG).
Foreign firms have been manufacturing in Mexico since at least the 1960s, when the government there created the maquiladora program. Back then, U.S. companies established plants in Mexican border towns to take advantage of the labor rates that prevail in that country.
In recent decades, the search for even lower costs launched a stampede to the Far East. But Asia may be losing its allure, largely because labor there is not as cheap as it used to be. "The trend in China, in particular, has been for wage rates to increase by 15 to 20 percent each year," says Michael Zinser, a Chicago-based partner at BCG. "In Mexico, wages have been much more stable."
Adjust the equation to account for each country’s rate of labor productivity, and Mexico is often the more affordable choice. By 2015, productivity-adjusted wages in Mexico could be about 30 percent lower than in China, according to the BCG report Made in America, Again: Mexico’s Emergence as a Global Manufacturing Power.
"Factories in Mexico are more productive today because companies there have been introducing automation and lean manufacturing processes," Zinser says.
Labor Pool Appeal
The local workforce can take credit as well. "Mexico offers high-quality, skilled labor," says Gene Sevilla, vice president of international supply chain solutions at Miami-based Ryder System. "Over the past several years, the government has instituted programs to qualify and educate the country’s workforce—and those efforts have been very successful."
Foreign companies used to employ Mexican workers mainly to assemble finished products from components, but Mexico has upped its game, says Dan McGrew, vice president of operations at Velvac, a Wisconsin-based manufacturer of mirror- and camera-based vision systems for RVs and other heavy vehicles.
"Products are now being designed in Mexico," says McGrew, who runs Velvac’s main factory, located in Reynosa. "Many industries are creating high-quality goods at competitive prices."
Even in cases where China has an edge on labor costs, companies find Mexico attractive for other reasons. One is the shorter supply chain that Mexico makes possible. It costs more to ship goods to the United States from China, and the trip across the ocean creates added expenses.
"The farther production is from the U.S. end market, the higher inventory carrying costs are," says Steve Colantuoni, vice president of marketing at the Tecma Group of Companies, an El Paso, Texas-based firm offering business services to companies that manufacture in Mexico. "Most companies manufacturing at a distance carry a 30-day inventory at each stage of the supply chain."
A long supply chain also increases business risk. "Sometimes companies change a product’s design, which may make their stored inventory obsolete," says Colantuoni. And companies with long supply chains have a hard time serving customers who need just-in-time deliveries.
While those strategic calculations still hold for many companies, others head to Mexico for more tactical reasons. The latter group includes suppliers whose customers have already located south of the border. The auto industry offers many examples.
"Original equipment manufacturers (OEMs) often want their suppliers to maintain a presence in Mexico," says Ralph Biedermann, the Chicago-based managing director of Mexico Consulting Associates. Some large OEMs, such as General Motors and Freightliner, have built industrial parks near their Mexican assembly plants to house their suppliers.
"Building supply chains near the point of manufacturing is what’s driving most of the newer companies—not just U.S. companies, but also Canadian, Japanese, and German—into Mexico," says Eduardo Saavedra, vice president, business development at The Offshore Group, a Tucson, Ariz.-based provider of Mexico outsourcing solutions.
Ready to Trade
Free trade agreements (FTAs) also offer an attraction. Mexico has more of those than any other country, according to the BCG report.
In addition to the North American Free Trade Agreement (NAFTA) with the United States and Canada, Mexico has FTAs with many countries in Central and South America, plus Israel, Japan, and the European Union.
Along with advantages, starting an operation in Mexico can also pose some serious challenges for U.S. manufacturers. The first lies in the simple fact that Mexico is another country. Even if a plant in Monterrey is just a quick hop from the home office, it still sits on foreign soil.
"Newcomers need to be prepared for an environment where the currency, rules, regulations, and culture are different," says Sevilla.
It’s Close, But It’s Not Home
As in any other country, manufacturers in Mexico must comply with local labor laws, tax requirements, environmental regulations, and a host of other demands that differ from those at home. "It’s not rocket science, but it’s a learning curve, which can cost money," says Saavedra.
That curve might be forbiddingly steep for smaller firms that head south to accommodate a major customer.
"Some smaller suppliers don’t have a lot of experience outside their region or outside the United States," says Biedermann. "They’ve never had to think internationally."
Experienced or not, some manufacturers decide that the best way to operate in Mexico is to outsource unfamiliar aspects of the job. That’s why companies such as The Offshore Group and Tecma offer what’s known as shelter services.
A shelter service provider shields foreign manufacturers from the details of running a business in Mexico. "Most shelter companies have a Mexican entity, and their clients—the manufacturers—come into Mexico under the shelter’s business license," says Colantuoni. "In the eyes of the Mexican legal system, they are a department of that Mexican entity."
A company that uses a shelter doesn’t need to incorporate in Mexico, file Mexican taxes, learn the details of Mexican labor law, or wrestle with other responsibilities that apply to a Mexican business. The shelter handles the paperwork, recruits employees with the right skills, issues paychecks, and manages regulatory compliance.
Often, it also serves as a landlord and arranges for utilities. Some shelter companies provide sourcing, logistics, transportation, customs clearance, and other services.
Choosing a location is another important challenge. One factor to consider is whether you can find the products and services you need in the city where you build your operation. "If heat treating is critical to your production process, you need to ensure a heat treater is nearby," says Colantuoni.
When companies locate in Mexico, most of them don’t start out sourcing a certain portion of their raw materials from that country. "They establish themselves with the current supply chain, then try to improve it," says Saavedra. "By developing sources in Mexico—and, in particular, finding a strong concentration of key suppliers—manufacturers can make operations more efficient."
Proximity to both suppliers and customers is important, but manufacturers should remember that trading partners come and go over time, or move to different locations. "A shift of customers and suppliers might cause costs to rise—particularly freight costs," says Biedermann. "And freight is more expensive in Mexico than in the United States."
Outside large industrial centers, finding workers with specific skills may also present a challenge. "Certain labor skills may not be available in small towns that have never had manufacturing operations before," Biedermann says. "Companies will have to import labor from other cities. That can be expensive."
What is Taxable, What is Not
Although NAFTA and other trade agreements offer the chance to ship product in and out of Mexico duty-free, NAFTA has created challenges for companies that source materials outside North America. Under the old maquiladora program, a company could bring goods into Mexico from anywhere, assemble them, then re-export the finished products without paying taxes. NAFTA changed all that.
"A lot of the product companies brought in from offshore because it was not available in North America became taxable," says McGrew.
Before joining Velvac, McGrew ran manufacturing and operations in Mexico for two other companies, plus a distribution center for one of them. He serves on the board of Index, an organization that represents the interests of companies that produce in Mexico for export.
Companies moving goods across the U.S.-Mexico border don’t necessarily run into special challenges. "In general, good logistics companies operate in both countries," says McGrew. And for operations in border towns, the Mexican portion of the trip may be only a few miles. "It isn’t difficult to move merchandise back and forth," he says.
But shippers that need to move smaller volumes—especially to and from remote locations in Mexico—may have trouble finding appropriate capacity.
"In Mexico, even now, most less-than-truckload (LTL) traffic moves in small vehicles," says Ryder’s Sevilla. "If shippers want to send a pallet from Mexico City to Cancun today for delivery within 48 hours, they might have to send it in a pickup truck."
Although the situation is improving, Mexican LTL carriers don’t provide the quality or service frequency shippers expect in the United States.
3PLs such as Ryder offer services to fill those gaps, including a network of trucks, locations, and crossdocks providing nationwide reach in Mexico.
The Offshore Group uses freight consolidation to accommodate shippers that want to ship smaller loads several times per week. "We run one or two daily trucks that shippers share," says Saavedra.
On the Safe Side
Given some of the news that has come out of Mexico in recent years, it’s no surprise companies looking to establish operations there worry about security. Concerns about drug-related violence, theft, and attempts to slip contraband into trucks moving north across the border have kept corporate executives awake at night.
Some who do business in Mexico say crime has become less of a problem in recent years. "We’re experiencing far fewer disruptions," says McGrew.
But companies still must take some costly steps to secure people, property, and freight. More companies are locating within secured industrial parks, or installing fences surrounding their properties. "Around-the-clock guards—employed either by the company or by a guard service—are a must," says Biedermann. "Companies that opt for a guard service need to check them out thoroughly. More companies are also using in-plant cameras."
An Eye on the Big Picture
While they’re watching out for security risks, companies planning to locate in Mexico also need to watch out for unanticipated costs. "Whether it’s the drayage back and forth across the border, the additional cost of importing and exporting, brokerage costs, or compliance, businesses need to do their homework," says McGrew.
Zinser agrees that companies contemplating a move to Mexico must consider the whole picture, including the cost of crossing the border and keeping workers and facilities secure. "Otherwise, a company could follow the appeal of lower labor costs and a short supply chain, but fail to see other factors, which could be important," he says.
Sometimes, a company can control its costs through judicious logistics management. "It could be as simple as asking why you’re shipping three skids daily instead of a truckload weekly," says Saavedra. "Shipping truckloads 52 times per year saves a lot of money on border crossings and freight."
For companies that follow a large OEM to Mexico, it’s wise not to stick too close to that customer, says Biedermann. If the relationship dissolves someday, a location right next door to the former trading partner could leave the supplier stranded.
"Those companies might want to locate on the other side of town," Biedermann says. That will make it easier to attract business from other customers in the area. "Or think about U.S. markets you can serve from that factory as well," he adds.
As more U.S. companies consider the benefits of nearshoring, many are bound to cast their eyes on Mexico. When they do, they need to take care to examine not just the prevalent wage scale, but the cost of all the steps involved in making their products and getting them to market.
Juarez Factory Adds Value
Portage Electric Products Inc.(PEPI) opened a factory in Mexico in 2003 to handle the more labor-intensive aspects of its manufacturing processes. PEPI makes thermal control devices, which manufacturers use to regulate temperatures in appliances, small motors, and other products. One way the company distinguishes itself from competitors is by configuring its products to meet each customer’s unique needs.
“That requires a lot of hand labor,” says Brandon Wehl, chief executive officer of the firm, based in North Canton, Ohio. And hand labor can be expensive.
“As labor rates increased in the United States, and we started seeing more competition from Asia, we were in a pinch, because we couldn’t raise our prices,” he says.
The solution was to open a factory in Juarez to work in tandem with the more highly automated U.S. operation. “We perform some of the front-end manufacturing in Ohio,” Wehl says. “Then we transfer the product to Mexico for the value-added operations.”
In recent years, PEPI has started making some of its more labor-intensive products entirely in the Juarez plant, he adds.
Product made in Juarez ships to customers in the Americas and Europe. PEPI also manufactures in Asia, to serve markets in that region.
PEPI uses a shelter service, The The Tecma Group of El Paso, Texas, to handle most of the functions in Juarez that don’t directly concern production.
“They take care of the border crossing and logistics between El Paso and Juarez,” Wehl says. The service also provides buses to take employees to and from work, and amenities such as food service and a weekly visit from a nurse.
“We appreciate not having to deal with small details that are hard to manage from 1,800 miles away,” Wehl adds.
To further bridge the distance, PEPI sometimes uses Skype and web cameras to help experts in Canton analyze equipment problems in Juarez. “We can see what they’re seeing, and they don’t have to explain it,” Wehl says.
Adding a Mexican plant to PEPI’s supply chain has reduced the flexibility, admits Wehl. Shipping materials to Juarez for assembly can extend lead times by one week, making it harder to accommodate rush orders. But customers have adjusted.
Although Mexico’s lower pay scale drew PEPI to Juarez, Wehl advises U.S. companies not to skimp on salaries for the most crucial Mexican employees. “In key parts of your production, you still need to find the best people you can afford to hire,” he says.
Some of PEPI’s managers in Juarez earn salaries at the upper end of the scale for that region. Investing in a quality workforce has paid off.
“We experience very few problems with productivity, quality, or product reliability,” Wehl says.
Guaymas: Breaking New Ground
Ducommun Aerostructuresmanufactures aircraft components in six locations in the United States, and in Guaymas, Mexico. The Guaymas plant serves as an “extended work center” for five of the company’s divisions, says Paul Cappelli, director of program management at Ducommun, and the person responsible for the Mexican operation.
The company opened the Guaymas facility in 2007 to help control production costs. Thanks to Mexico’s lower labor rates, Ducommun Aerostructures has been able to keep winning contracts for products such as spoilers for the Boeing 737. “The Mexico facility gives us a strong competitive advantage,” Cappelli says.
To further control its overhead, Ducommun outsources many of its non-core functions in Guaymas to The Offshore Group, a provider of shelter and logistics services based in Tucson, Ariz. ” The Offshore Grouprecruits personnel,” Cappelli says. “It also manages imports and exports, so Ducommun does not need to employ personnel to handle customs brokerage, or logistics.”
When Ducommun moved into Guaymas, it was the only aerospace firm in that city, which made it hard to find employees with the right experience. “We had to hire workers, then train for the skill sets required to manufacture aerospace parts,” Cappelli says. “Some workers had never seen the types of tools we use.”
Fortunately, that investment in training paid off well for Ducommun, and for other aerospace companies that have since moved into the state of Sonora. “Employee turnover is a huge issue in the United States,” Cappelli says. “In Mexico, we experience less than two-percent turnover. Once we train a worker, that person stays with us.”
One challenge that still lingers is the relative scarcity of suppliers for services such as chemical processing and heat treating. That posed a big problem for Ducommun early on, especially because it can only use suppliers that are certified to meet the specifications of Boeing and other customers.
Ducommun helped one chemical processor in Mexico so it could get the necessary certifications. “We continue to do that as we add customers,” Cappelli notes.
Any company that is considering putting a factory in Mexico, and plans to outsource some of its special processing, should find out whether the services it needs are available. The necessary infrastructure has not yet been established. “They are making strides, but progress has taken a long time,” Cappelli says.