Article on Doing Business In Mexico
Mexico Comes on Strong
by Darrell Dunn
See also: Which Region Will be Next?
Long a center for low-cost manufacturing by electronics OEMs
utilizing border-town maquiladora operations, the interior of Mexico
has exploded in the past year to emerge as the hottest "must-be"
location for contract electronics manufacturers (CEMs).
Mexico, and in particular Guadalajara, which has lived in the
shadow of several Far East locales during the earlier growth years of
contract manufacturing, is rapidly gaining stature as a center for
world-class manufacturing.
CEMs with operations currently in Guadalajara or under construction
include Avex Electronics Inc., Dovatron International, Elamex S.A. de
C.V., Flextronics International Ltd., Jabil Circuit Inc., NatSteel
Electronics Pte. Ltd., SCI Systems Inc., and Solectron Corp.
"Guadalajara is rapidly becoming the Penang [Malaysia] of North
America with the concentration of manufacturing that is being
developed in that area," said James J. Savage, an analyst with Alex.
Brown & Sons Inc., New York.
"It does seem pretty extreme how quickly the [CEMs] have all flocked
to that same geographic region," he said. "But I think most of the
contract manufacturers have said they are building to meet forecast
demand. And rather than a total creation of brand-new manufacturing,
it's been a situation of them moving manufacturing from the U.S. into
Guadalajara, or from other low-cost sites in Asia."
In what seems to have been a domino effect, virtually every top-tier
CEM and emerging CEM with its sights set on the top tier has moved to
establish operations in Guadalajara within the past year.
"When it comes to Mexico these days, I think you can just say
Guadalajara," said Thomas A. Sansone, president of Jabil, St.
Petersburg, Fla.
"Even the guys who have previously had spots outside of Guadalajara
are looking to get into the city one way or another," Sansone said. "We
actually had a greater affinity for some other areas of Mexico, but we
wound up changing our plans to Guadalajara because we saw that city
emerging as the center of manufacturing in general, and contract
manufacturing in particular.
"We would ordinarily want to stay further away from our competition,
but we came to realize that locating in Guadalajara would be easier for
us because the infrastructure that is coming together there would not
emerge elsewhere in Mexico for decades, potentially," he said.
Jabil, like another half-dozen CEMs, has a plant under construction in
Guadalajara that should be in production by late this year.
CEM giant SCI, Huntsville, Ala., has been in Guadalajara since 1988,
when it opened a joint-venture plant with a Mexican partner. SCI
eventually bought out its partner and operates its facility there to serve
U.S. and Canadian OEMs seeking a low-cost, North American
manufacturing site. The site also serves some European and Mexican
OEMs.
"Our long-term goal worldwide is to build in-region for the region at
competitive prices," said Olin King, chairman and chief executive of
SCI.
"It hasn't always been a solid strategy, but it's been an emerging
strategy," he said. "We've been seeking to build capacity in every world
region. We don't want to have all our low-cost manufacturing in Asia.
We do need to maintain facilities in Asia to provide for that region, and
that concept is true for North America, South America, and Europe."
SCI currently derives around 8% of its total revenue from its Mexican
operations.
As part of its effort to continually expand its regional manufacturing
capabilities, SCI moved in June to acquire the Mexican and Brazilian
operations of financially struggling Group Technologies Corp., Tampa,
Fla.
SCI will acquire a 70,000-sq.-ft. manufacturing operation in Mexico
City, and two plants totaling about 70,000 sq. ft. in Campinas, Brazil.
King said SCI's presence in Mexico will likely continue to grow. The
company has been expanding its current Guadalajara plant steadily
through the years, and will look to expand more, potentially through
both acquisitions and greenfield projects.
"Although every country is different and every city is different, in
reality, there is not that much difference from setting up a plant in
Mexico from another region," King said. "We can build in Mexico for
basically the same price as in Asia."
The Guadalajara "gold rush" is in response to customer demand, said
John Tuck, publisher of the industry newsletter "Manufacturing
Market Insider," Needham Heights, Mass.
"Contract manufacturers typically won't open up a new site unless they
have customer demand to justify it, and I think you can draw that
inference from the activity in Guadalajara," Tuck said. "There are some
major OEMs in Guadalajara like IBM who have been expanding down
there, but I don't see how that alone would be enough to sustain all the
contractors that are coming into the city. There has to be more demand
from other OEMs who want manufacturing completed in that location.
"All that said, Mexico has to remain a question mark because of the
number of contract manufacturers going in all at once," he said. "It
leaves a question in your mind as to whether they all have the demand
to justify it. Time will tell."
Push from the OEM
Vahram V. Erdekian, vice president of manufacturing and product
operations for networking products at OEM Bay Networks, Santa
Clara, Calif., said he has encouraged the company's CEM partners, of
which Solectron is the primary contractor, to expand efforts in Mexico.
Solectron opened its first Mexico-based plant in Guadalajara earlier
this year.
"If you're looking at cost and technology, Mexico has equal capabilities
to Penang and Bangkok, [Thailand]," Erdekian said. "The reason to get
into Mexico is access to the market, and even though the Far East, in
terms of circuit-board assembly and test, is further along than Mexico, I
think when we look at this in five years that is not going to be the case."
The Guadalajara plant "expands Solectron's global operations and
positions us to serve an important Latin American market," said Koichi
Nishimura, chairman, president, and chief executive of Solectron,
Milpitas, Calif. "The location allows us to better meet the needs of our
current multinational customers, as well as future customers."
Sandra Fox, vice president of Technology Forecasters Inc., Alameda,
Calif., said a convergence of factors has caused the accelerated move by
CEMs to Guadalajara.
"In the past, it's been hard to find skilled workers in Mexico, and it's
been hard to keep them when the infrastructure wasn't very strong," she
said. "The region has become more sophisticated and reached a level
where contractors can work there more easily. At the same time,
NAFTA has eliminated the duties coming out of Mexico. It's a
favorable time for trade with Mexico, and it may not last forever, so
they want to move in quickly to take advantage."
The major advantage of CEM operations in Mexico is the proximity to
U.S. OEMs. Operations in Mexico are generally at the most only an
hour or two different in time zone from U.S. OEMs. The OEM
customer can also have relatively quick access to the Mexican
operations via flights of four hours or less from major U.S.
transportation hubs, allowing for day trips to visit manufacturing sites,
as opposed to commitments of at least several days to visit sites in the
Far East.
Labor rates in Mexico are on par with rates in Malaysia and other
low-cost Asian locations.
Guadalajara is quickly supplanting border-town maquiladora
operations in the eyes of CEMs primarily because of issues related to
the work force. Although maquiladoras have operated successfully for
more than two decades, one of the main problems with the border
plants that has kept some CEMs and OEMs from establishing
operations there has been an unstable work force.
A large percentage of the maquiladora work force are transplanted from
the larger interior cities, leaving the workers with little attachment to
the border towns. The work force has typically been highly transient,
resulting in large turnover rates as the workers move from town to town
and from maquiladora to maquiladora. Worker loyalty has been
considered minimal.
Some OEMs and CEMs have also expressed dissatisfaction with the
educational level of the typical maquiladora worker.
Twin-plant, or maquiladora, operations have also typically used U.S.
managers who often live on the U.S. side of the border, leaving the
plant and Mexico each night.
Guadalajara seems to provide a solution to many of those lingering
problems.
The city has a population of several million, and is home to major
universities. Guadalajara is also located within 250 miles of Mexico
City, providing another large pool of potential workers.
"The cultural dynamics of those border towns were not ideal for good,
solid companies, although there are some good operations there," said
Jabil's Sansone. "The maquiladora concept just didn't achieve
world-class manufacturing levels. Enlightened manufacturers are
looking for locations where people have strong local roots."
One Mexican-owned CEM that has used border-town plants
successfully, and has operations in Guadalajara as well, is Elamex.
Elamex has 15 plants throughout Mexico, including eight at its
headquarters in Ciudad Juarez, across the border from El Paso, Texas.
The company also has plants in Delicias, Nuevo Laredo, and Torreon.
The company was a pioneer in Mexico's Border Industrialization
Program, first established in the mid-1960s, which has come to be
referred to as the maquiladora program.
Elamex's business has evolved from the early concept of supplying real
estate and labor for foreign managers to include management, assembly
services, and turnkey manufacturing.
Even CEMs that currently don't have operations in Mexico are
interested in investigating Guadalajara.
"What intrigues us is the availability of the work force more than
anything else," said Paul Plante, chief operating officer of Reptron
Electronics Inc. and its CEM subsidiary, K-Byte Manufacturing,
Tampa.
"It's an issue with all growth companies here in the States: the
availability of a qualified work force," Plante said. "In the U.S. today
we have a 24-year low in unemployment, and the vast majority of
people who want to work have a job. Growth companies are investing
in productivity-enhancement tools and automation, but that only goes
so far. You need more people."
Another issue pushing CEMs into Mexico is the dramatic growth of
system-level, or box-build, services in the industry. Virtually all CEMs
have seen significant growth in system-level services, which can be
labor-intensive, increasing the value derived from low-cost
manufacturing.
Direct-order fulfillment
Many system-level contracts also include direct-order fulfillment, and
the proximity to the U.S. market enables greater flexibility in shipping
finished goods directly to distribution centers or end users.
Avex Electronics, Huntsville, has leased a 90,000-sq.-ft. plant in
Guadalajara that the company plans to have in operation by late this
quarter. Avex plans to move within the next year to build its own
permanent facility in the city.
"Obviously, in a place like Mexico, the more final assembly, the more
labor-intensive, the more it plays into the strengths; so we expect a lot
of North American box-build contracts will be done there," said Mark
Ogburn, general manager of Avex's Pulaski, Tenn., plant, who is also in
charge of the Guadalajara startup.
"There is also a market for electronics in general in Guadalajara," he
said. "Approximately 60% of all of Mexico's PCs come out of
Guadalajara. We looked at other locations in Mexico, but as far as the
infrastructure, availability of skilled people, proximity to supplier base,
proximity to customers, and employee turnover, Guadalajara came out
on top."
The concentration of CEMs and OEMs in Guadalajara is expected to
translate into a growth in support of companies such as board suppliers,
plastics companies, and other related infrastructure.
Mike McNamara, vice president of North American operations for
Flextronics, San Jose, said the growing infrastructure and a climate of
economic expansion generated by local government officials in
Guadalajara led the CEM to establish a 100,000-sq.-ft. facility there
that is going into production this month.
"The model of that facility is going to be quite similar to what we have
in China," he said. "We're going to have some plastics production, sheet
metal, and full assembly and production lines all on one campus. We're
in the mode now to track down suppliers to locate with us on our
32-acre campus in Guadalajara."
With its large facility, Flextronics will be able to offer good lease
arrangements on portions of the facilities to on-site suppliers to ease
their entry into Mexico, McNamara said.
A few distributors are also taking the plunge.
Insight Electronics Inc., San Diego, has established sales offices with
field applications engineers in Monterrey, Ciudad Juarez, Mexico City,
and Guadalajara, according to Greg Provenzano, director of marketing.
Insight is currently in negotiations with a CEM in Guadalajara, and
expects to establish an in-plant warehouse in the near future.
"Mexico has always been intriguing to everybody, but it's also been a
risk on return as far as investment analysis," Provenzano said. "The
reality is that it's a fast-developing area, and there is not a lot of
information available on what the actual TAM [total available market]
is, or what ROE [return on equity] will be. It's a situation where you
have to make a commitment and step out a little on faith, and that's why
it has taken some time for this region to develop."
Which region is next?
Guadalajara, Mexico, is only now emerging as the latest center for
low-cost contract manufacturing, but CEMs have already identified the
next manufacturing hub: Eastern Europe.
Although full realization of large-scale contract manufacturing in
Eastern Europe is still likely a few years away, major CEMs
acknowledge they are investigating sites to provide low-cost
manufacturing support for their growing base of OEM customers in
Western Europe.
"In the future, we hope to have something to offer our European
customer," said Olin King, chairman and chief executive of SCI
Systems Inc., Huntsville, Ala.
"Right now, we're shipping product from Guadalajara to Europe, and I
would like to find a suitable cost structure where we didn't have to do
that," he said.
King added that SCI has not decided where in Eastern Europe it might
set up a manufacturing plant. But Sandra Fox, vice president of
Technology Forecasters Inc., Alameda, Calif., said it appears SCI may
be in the process of establishing an operation in Hungary.
Mark Ogburn, general manager of the Pulaski, Tenn., plant of Avex
Electronics Inc., Huntsville, said that although efforts are "very
preliminary," the company is looking to set up operations in Eastern
Europe for the same reasons it has recently expanded into Mexico.
Flextronics International Inc., San Jose, which made a leap into Europe
in the past year when it acquired Ericsson Business Networks AB's
facilities in Karlskrona, Sweden, a move that is expected to generate
around $350 million annually in revenue, is looking to expand in
Europe to support Ericsson and other European customers, said Mike
McNamara, vice president of North American operations.
"There are many European OEMs who over the years built factories in
every single country in Europe in an effort to penetrate the market, but
are now finding it too uncompetitive, and are trying to outsource
multiple billions of dollars in business," he said. "These companies are
going to wind up getting rid of these factories and consolidating, and
there may be opportunities in some low-cost regions."
- Darrell Dunn |
