The Mexican Connection

Although China -- with its cheap labor -- may be a very attractive plant location for U.S. manufacturers, when all the costs of an extended pipeline are calculated, Mexico may still be the better option.

An American business executive was asked if he'd ever been out of the country. "Sure," he replied, "I've been to Mexico." His inquisitor tartly stated, "That doesn't count; it's connected." Indeed, Mexico is. And if your business demands globalization, why not remain connected? Since Jan. 1, 1994, when NAFTA took effect, and North American trade barriers fell further, Mexico has been particularly attractive, enabling U.S. manufacturers to move parts of their production to the south where the Mexican workforce has provided a cost-effective alternative that's benefited the bottom line. But Mexico is experiencing its own China challenge. The average wage of a semi-skilled employee in China is US$0.50 an hour, according to a March 2004 study by Frost & Sullivan of the electronics manufacturing services markets in China and Mexico. For Mexican workers, wages range from $2 to $2.50. "With declining profit margins, many electronics manufacturing service (EMS) providers operating from Mexico are finding it increasingly difficult to compete with electronics companies that have manufacturing facilities in relatively inexpensive regions such as Asia and Eastern Europe," says Keith Robinson, a Frost & Sullivan industry manager. So why would a U.S. manufacturer stay with Mexico? Aware that China's minuscule labor costs are beating them up, Mexican manufacturers are trying to fight back. They're touting location, quick turnarounds, a stable political relationship with the United States and a better-trained workforce that is capable of not only manufacturing highly technical products, but also of protecting the intellectual properties of those products. Across The Border Mexico has been manufacturing on a global scale for 30 years, its political system is more transparent than China's and it has dozens of free-trade agreements, stresses Steven A. Colantuoni, director of market research and communications at The Offshore Group, a Tucson, Ariz.-based provider of outsourced manufacturing support services in Mexico. "Mexico has more free-trade agreements than any other country on the planet," claims Colantuoni. "They just finished negotiating a free-trade agreement with Japan, and they negotiated a similar treaty to the NAFTA with the European Union. So if you're an American country, and you have a global marketplace, ship from Mexico duty free into more places than any other place in the world." In addition to Mexico's global presence, the country caters to just-in-time demands. Having products closer to the point-of-consumption makes economic sense. It also reduces shipping costs. "Labor costs aren't the only things people ought to take into account when looking at [China and Mexico]," insists Colantuoni. The cost of additional inventory over goods in transit over long distances also needs to be considered. "You've got things floating on a boat," stresses Colantuoni. "Number one, you're paying the transportation. And number two, even though it's floating, it's inventory, and you own it, and there's a cost associated with that." Then there's the issue of China and intellectual property protection, a particular concern of U.S. manufacturers who contend they are regularly ripped-off in the PRC. At the April 21 meeting of the U.S.-China Joint Commission on Commerce and Trade, China promised by yearend to add to the range of intellectual property rights violations subject to criminal sanctions and to get tougher on piracy and counterfeiting. Manufacturers, among others, say they appreciate the promises but want to see results. "Intellectual property is better protected in Mexico," judges Colantuoni. "In China, let's say the intellectual property issue is not as solidified as it is in Mexico." Going To Guaymas Reacting to the requests of key customers for lower prices, nearly 20-year-old Smith West Inc., a Tempe, Ariz.-based manufacturer of precision components and assembler of electromechanical devices for the aerospace and semiconductor industries, five years ago expanded its operations to Guaymas in Mexico's Sonora state despite concerns the quality of work would not be at the level of its 100-employee Arizona plant, 400 miles to the north. The company, however, was pleasantly surprised at the ability of "very unskilled people" to learn to do skilled work, says Ed Mason, director of operations at the Guaymas plant. Also surprising was "the flexibility of the workforce," he says. "They will do anything you ask to get the job done. You always hear 'not my job' in the U.S. That phrase doesn't exist down here." Smith West initially planned to do rough work at the 65-employee plant in Mexico and send it to Arizona for finish work. Not anymore. Now the company ships directly to the customer from Mexico. Smith West has thought about China, cheaper labor and even lower costs for customers. "But the benefit of lower labor costs doesn't offset the time and cost of an extended pipeline," stresses Mason. Foreign-based companies with plants in the U.S. also understand the business appeal of producing in Mexico while still being close to the huge American consumer market. JVC Americas Corp., a subsidiary of Victor Company of Japan Ltd., recently expanded its television plant in Tijuana, Mexico. "JVC manufactures TVs in Mexico because it offers the best combination of costs and location," explains Shigeharu Tsuchitani, the chairman of JVC Americas Corp. "While some manufacturing costs might be lower in other markets, Mexico's proximity to the U.S. makes it the most logical location for manufacturing TVs that will be sold in the U.S.," he says. "Americans prefer large-screen TVs, and the higher freight costs of shipping large TVs from China, for example, outstrip any manufacturing cost savings. In addition, insurance costs for shipping keep going up." Ask Jean-Francois Phelizon about globalization, and he will tell you that his company, $37 billion Compagnie de Saint-Gobain, a materials producer that has been in business since 1665, believes that serving the market means being close to customers. With industrial operations in 46 countries, Paris-headquartered Saint-Gobain has 10 plants in Mexico, nine in China and 186 in the U.S. None of its Mexican plants were closed and relocated to China in search of lower labor costs, says Phelizon, president and CEO of Valley Forge, Pa.-based Saint-Gobain Corp., the company's U.S. subsidiary. "If you have a global market, localization of the plant is mainly dictated by cost. You would not ship a window beyond 300 miles," says Phelizon. Indeed, he advises manufacturers to manage all sorts of distances. "When you are relocalizing your plant, you can find some issues. Obviously distance, even in Mexico. You have a distance in terms of language you have to manage. You also have different cultures," he says. To be successful a company must successfully manage all those distances, he stresses. "It could be very costly [if you don't]."

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