Tuesday, 04 September 2012 03:30

Low-cost and lots of room to grow

When Mexico makes headlines these days, it’s usually because of rare but shocking drug-related violence. Unfortunately, this dark spot has blocked an expanding bright spot that is helping many U.S.-based global manufacturers to stay competitive. A variety of companies have set up plants south of the border and are counting on Mexico’s proximity, cultural similarities and highly skilled and motivated workforce to fuel growth plans that support domestic job security.

According to the manufacturing trade journal IndustryWeek, foreign direct investment in Mexico rose 9.7 percent in 2011 compared with 2010 to reach $19.44 billion. After a 5.5 percent growth rate in 2011, the Mexican economy is expected to grow 4.5 percent in 2012. Mexico is still considered a lower-cost option compared with the United States, but increasingly, manufacturers are putting production in Mexico for other competitive advantages that benefit the entire company, including U.S. operations.

One such company is Miamisburg, Ohio-based CBC Connect, a global supplier of wiring harness design and assembly, and value-added electrical products. The company employs 150 people at its Saltillo production plant, which ships mostly to customers in the United States, but also to some in Canada and China. (CBC Connect is owned by WESCO Distribution Inc., which employs roughly 6,000 people globally.)

“Having a manufacturing location in a low-cost country helps us to win business,” said Jeff Trosper, CBC Connect Branch Manager. “In addition, the La Angostura Industrial Park, where our plant is located, provides room for us to grow. They owners (The Offshore Group) have plenty of land, so we won’t outgrow our available space because the space is virtually limitless.”

CBC Connect has been manufacturing in Mexico since 2004. The company uses a shelter company in Mexico, The Offshore Group.  In addition to the La Angostura Industrial Park in Saltillo, The Offshore Group operates industrial parks in Guaymas/Empalme, Sonora. The company has also begun to offer its outsourced manufacturing support, or “shelter,” services in Guadalajara, Jalisco.

Fundamentally, the Mexico shelter business model mimics outsourcing, but the manufacturer maintains control of critical functions such as manufacturing processes and quality control, strategy planning, hiring decisions and product-specific parts and materials procurement. The shelter company handles the non-core function administrative side of setting up and managing a plant: permitting and regulation, the import and set-up of production machinery and raw materials used in production, utilities relationships, the recruitment of both direct and indirect labor and even the payment and benefits administration of employees.

Beyond economies-of-scale cost savings, the biggest benefits of the Mexico manufacturing shelter model are that manufacturers can launch production much faster; the entire process of setting up a foreign site is simplified and handled by experts; and the producer can devote resources to core manufacturing competencies and serving customers.

“The shelter company takes care of everything from human relations to provision of manufacturing space to local purchasing for MRO and more,” Trosper said. “It would be very difficult for us to assume these responsibilities state-side, and do them correctly according to local regulations. The shelter company comes at a cost, but being able to focus our efforts on other facets of the business is beneficial.”

Another Ohio-based company, DCM Manufacturing Inc., Cleveland, has also found that the shelter model supports its strategy of focusing on what adds value for customers.

“We were a little concerned that with the scale of our operation we would add a great deal of overhead with human resources, payroll, safety, union negotiations—all of those things that are attendant to operating in Mexico,” said Joe Golla, Vice President of Strategic Planning & Global Sourcing for DCM, which manufactures fractional horsepower motors, centrifugal blowers, axial fans and plastic louvers at its plant in The Offshore Group’s Bellavista Industrial Park in Empalme, Sonora—about $1 million a month in product.

“That would have been a lot of overhead relative to our volume. We lacked the expertise, and we were impressed that The Offshore Group had that infrastructure in place. We decided we would ride that infrastructure—for a fee of course, but it was still less expensive than if we had done it ourselves.”

For DCM, a Mexico-based manufacturing plant enables the company to offer shorter lead times, a less expensive product, and a less time-consuming and complicated partnership model than an Asia-based plant for its large OEM customers in the transportation industry. Golla said the Empalme plant is running at 50 percent capacity right now, but that won’t last long.

“We expect that capacity to be filled in short order because we are in a position to offer the larger customers and OEMs a completely non-dependent-on-Asia model,” Golla said. “In Latin America there’s a 20 percent duty on products from China, so we were able to immediately drop our costs by 20 percent by near-shoring.”

Those who think a near-shoring strategy is taking jobs away from U.S. workers would be surprised to learn that the opposite is true. With the emergence of a global economy, companies have had to build global operations. DCM’s near-shoring model is not in place to push down costs as low as possible—rather, it’s to respond to the needs of their global clients.

“Our model is not Mexico-dependent,” Golla said. “Our parent company has greatly expanded our manufacturing opportunities in Cleveland and elsewhere in the U.S. We have stocking facilities in the U.S., and our sales, engineering and other technical positions are in the United States. And we’re hiring in those areas.”

Published in Cincinnati