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Articles - Publication Date
6.1.2004 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.
By Traci Purdum
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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"Mexico has more free-trade agreements
than any other country on the planet."
-- Steven A. Colantuoni, The Offshore Group
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