Mexico may be the next China for U.S. importers and manufacturers

Low cost transportation coupled with minimal import barriers allowed U.S. importers to access the low wages of China and turn that country’s manufacturing base into a U.S. workshop. Chinese wages are now rising to the point that Mexico is becoming the more competitive manufacturing base for the U.S. market.

If Mexico can maintain a safe investment environment and enhance its infrastructure, U.S. businesses increasingly will find it more desirable to manufacture in Mexico than in China. U.S. businesses that can benefit from lower cost goods should investigate that option now.

China in transition

Over the last 50 years China became the leading source country for U.S. businesses seeking lower costs and acceptable quality on a broad range of goods. These advantages arose primarily out of the low wages paid in China. At times the prevailing wage for a month of labor in a China factory was equal to about 10 hours of the U.S. minimum wage. That meant that a Chinese factory worker would perform a month of labor (working six days a week) for about the cost of employing an American for one day.

With that 25-to-1 labor rate advantage, manufacturing jobs rushed from the U.S. to China

But China’s fast growing domestic market has caused Chinese wages to rise rapidly, particularly over the last 10 years and especially on the eastern seaboard. In fact, wages in eastern China have risen so high that little of the country’s manufacturing is done there any longer. Eager for lower cost labor, Chinese manufacturers have been moving inland, just as U.S. textile manufactures began abandoning the U.S. Northeast for the Southern states about 45 years ago (before moving offshore).

But even in the interior, wages are rising. This turns out to be good for the people of China and, indirectly, Mexico.

Over the past 30 years Mexican manufacturing wages have been higher than those in China, the Mexican infrastructure less developed, and some believe the Mexican labor force less productive. Consequently, Mexico captured a relatively small share of U.S. offshore manufacturing work, despite its close proximity to the US.

Conditions are evolving

But conditions have changed and perceptions are catching up. Many large and medium U.S. businesses are performing operations in Mexico that would have gone to China a decade ago. Rising wages in China, positive internal developments in Mexico, and duty-free exports to the U.S. under NAFTA are rebalancing the cost savings equation increasingly in favor of Mexico. U.S. political sensitivity to China’s growing power and U.S. businesses’ interest in accessing Mexico’s growing domestic market are additional long term factors that favor Mexico.

Mexico is not the only attractive alternative to China for low cost manufacturing. Vietnam, as only one example, offers many of the features that enticed U.S. manufacturing and U.S. importers to China decades ago. But Mexico’s proximity to the U.S. and the shared contiguous border are unique among low labor cost nations serving the U.S. market.

One of the most obvious benefits is that a container of Mexican manufactured goods can reach the U.S. in a day or two compared with weeks for a crossing from Vietnam or China to California.

Eventually, as more competition develops for Mexican labor and as the Mexican economy improves the Mexican labor market will become less attractive relative to other regions, including certain areas in South America. But that day is still far off.

For the next couple of decades at least Mexico will become a less expensive, closer to home option. U.S. manufacturers and importers would do well to take a careful look at Mexico now, and again from time to time as this dynamic situation regarding China develops.

Jerry McLaughlin is the co-founder and former CEO at Branders.com.

U.S. groups fear Mexican trade war over Obama tomato move

WASHINGTON, Tue Oct 2, 2012 – U.S. business groups said on Tuesday they were worried about a damaging trade war with Mexico if President Barack Obama’s administration follows through on a preliminary decision to end a 16-year-old tomato trade agreement.

They also expressed concern that last week’s Commerce Department decision was politically motivated to sway voters in Florida, the second largest U.S. tomato producer and one of a handful of battleground states expected to play a decisive role in the November 6 presidential election.

“We think the U.S.-Mexico economic relationship is tremendously important,” Patrick Kilbride of the U.S. Chamber of Commerce told reporters on a conference call. “We don’t want to see another trade war ignited,” he added, referring to a previous dispute over cross-border trucking.

Florida tomato growers have pressed the Obama administration since June to terminate a 1996 agreement with Mexico on the grounds it fails to protect them against Mexican tomatoes sold in the United States below the cost of production.

Terminating the pact would clear the way for Florida growers, who compete with Mexico for the U.S. winter and early spring tomato market, to file a new anti-dumping case against their Mexican rivals.

Last week, the U.S. Commerce Department stopped short of immediately tearing up the agreement, but took a preliminary position in favor of ending the pact. It promised a final decision “as soon as practicable” and in no more than 270 days.

A model plant in Mexico

When Mexico makes headlines these days, it’s usually for 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 to the United States, 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 The Intec Group of Palatine, Ill., a global supplier of automotive parts and systems. The company employs 375 people at its Guaymas manufacturing plant, which accounts for $33 million in annual U.S. sales. In addition to U.S. customers, the plant serves customers in Mexico, Canada and China.

According to Intec President and CEO Steven M. Perlman, having a Mexican location improves Intec’s performance both directly and indirectly.

“Directly, it is the highest performer of all our global facilities, including those in Asia,” Perlman said. “The skills and work ethic of the staff there have resulted in Intec Mexico delivering the highest margins to us and the best quality and service to our customers.

“Indirectly, Intec Mexico’s performance has motivated our customers in sourcing more business with Intec’s U.S. and Asia facilities. Intec Mexico is also developing technology that will be used by our other factories.”

Intec has been manufacturing in Mexico since 2002. It has operated under the “manufacturing shelter” business model administered by The Offshore Group, an outsourced manufacturing support or “shelter” company. Fundamentally, the shelter business model mimics outsourcing, but the manufacturer maintains control of critical core functions such as production and manufacturing processes, strategy planning, hiring decisions and product-specific parts and materials procurement. The shelter company handles the administrative side of setting up and managing a plant: permitting and regulation, recruiting both direct and indirect labor, the importing and set-up of production machinery and raw materials, utilities relationships, and the payment of salary and benefits to the workforce.

The Offshore Group runs two industrial parks in Guaymas and Empalme, Sonora, as well as a third park in Saltillo, Coahuila.  The company has also begun to offer its services in Guadalajara, Jalisco.

Beyond cost savings, the biggest benefits of a shelter model in Mexico 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 value-added manufacturing competencies and serving customers.

“Using the shelter model offered by The Offshore Group allows us to focus our attention and efforts on our technology, development of our people, and our customers,” Perlman said. “These are the critical activities for any company’s success.”

Our partner in Mexico handles “essential, but not necessarily value-added activities,” Perlman said.

“Those are many of our ‘back office’ or administration requirements, including payroll and benefits administration, tax administration, non-direct material purchasing, recruiting and employment screening. This frees up the top-level people in our organization to work on strategies that provide a better value proposition for our clients.”

Some of the other benefits of the shelter model in Mexico that have helped Intec be more competitive include support and networking with other Offshore Group clients, management of labor-union negotiations, instant credit from suppliers and accurate estimates on how long new building projects and infrastructure upgrades will take.

Perlman said Intec Mexico is an important part of the company’s growth strategy. Because the plant is so efficient, the company has been able to “reclaim” factory floor space for additional growth.

“This has delayed our need to expand beyond the current facility, but we believe we will be expanding our capacity beyond our current facility within five years. In the meantime, the current plan is to increase output and revenues at the existing Mexico facility by at least 20 percent and as much as 50 percent.”

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.”

Going global with less hassle

When Mexico makes headlines these days, it’s usually for 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 Atlanta-based Whitepath Fab Tech, a contract manufacturer for wiring and wiring harnesses, control panel assembly, custom molding and value-added assembly. The company employs 70 people at its Saltillo plant, which primarily serves one Mexico-based client but also enables it to be a global player in the electronics assembly marketplace. The company’s other three plants are based in Georgia.

“The Mexico plant gives us flexibility,” said Randy Durden, CEO of Whitepath. “If we really needed to get a low-cost volume to someone because we know they aren’t going to pay the U.S. price, it helps to have that option. Plus, we have an international presence. We are not just some small shop from Georgia.”

Whitepath has its own plant in Saltillo, Coahuila, but is a client of The Offshore Group, a shelter-services company in Mexico. The Offshore Group runs two industrial parks in addition to Saltillo, at Guaymas/Empalme, Sonora, and Guadalajara, Jalisco, and has initiated service to manufacturers in Guadalajara, Jalisco.

Fundamentally, the shelter model mimics outsourcing, but the manufacturer maintains control of critical functions such as production processes, engineering and quality control, in addition to strategy planning, hiring decisions and product-specific parts and materials procurement. The shelter company handles the administrative side of setting up and maintaining a plant: permitting and regulation, the importing and set-up of production machinery, utilities relationships and even recruitment of labor, both direct and indirect.

“They take care of all the headaches and hassles,” Durden said. “Just being able to focus on transitioning the product has been huge instead of worrying about paperwork, hiring, working with the local government, water, power, Internet service. We wouldn’t have known where to start without them.”

Beyond economies-of-scale cost savings, the biggest benefits of a 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 competencies and serving customers.

“All of our conversations with our Mexico team are about making deliveries, about quality, about production schedules,” Durden said. “I don’t know that we have ever had a conversation about paperwork or notifying local authorities about something like putting in a driveway. We just let The Offshore Group take care of it.”

The Saltillo plant accounts for about 10 percent of Whitepath’s business, and business in general is expanding, Durden said. Here again, the shelter model has been beneficial.

“If we need to add people very quickly, they have the resources that enable us to do that. You don’t have to go through the process of finding and screening them. As a matter of fact, we called them today and said we need five new people Monday. We’ll have five candidates there Monday.”

For companies looking for a shelter partner, a crucial differentiator can be workforce support. Whether the employees work for the client company or the shelter company, there should be a strong training-and-education offering from the shelter company. Manufacturers need an abundance of skilled workers in order to build long-term viability, and such workers are going to be in higher demand and shorter supply in the developed world in the near future.

According to Armando Lee, general manager for The Offshore Group’s Mexican subsidiary, Maquilas Tetakawi, S.A. de C.V., the company created a manufacturing technology training center where it can train on a variety of skills such as CNC machining, plastic injection, metrology, lean manufacturing and Six Sigma. Open courses are offered for client employees and customized training is developed as requested by clients. In most cases, the state government provides financial support.

Another initiative started in 2010 offers teenagers attending public technical schools the opportunity to apprentice at client companies. The program runs for two years and includes four days of hands-on education at a manufacturing site each week and one day of classroom instruction. About 100 students are enrolled, and indications are that the program will be highly successful. Already, one company has offered one of the students a scholarship to study engineering.

Another program, Metromatematicas, addresses skilled labor needs on a deeper level. The Offshore Group is paying for public school teachers to be trained on how to teach applied mathematics. (Traditionally, only math theory has been taught.) The company also lobbied the regional governor to support the program and won his agreement to supply public money to build applied math laboratories at schools. The labs will include modern production equipment that is used in aerospace and other industries.

“We wanted to give something back to the community, and we decided the best way to do this is through contributing to the education of future generations,” Lee said. “This effort is long term.”

PMG International ex-chairman joins Wal-Mart board

BENTONVILLE, Ark., Mon Jul 30, 2012 – Wal-Mart Stores Inc. on Monday said that the retired chairman of accounting and consulting firm KPMG International KPMG.UL has joined its board of directors, effective immediately.
Timothy Flynn, 55, will serve as a member of the retailer’s audit committee and becomes the seventeenth member of Wal-Mart’s board.
Flynn joined the board of JPMorgan Chase & Co. earlier this year.
Wal-Mart has been embroiled in a bribery scandal at its Mexican operations, which are the subject of investigations by the U.S. Justice Department and the U.S. Securities and Exchange Commission.
In April, a New York Times report said that management at Wal-Mart de Mexicob orchestrated bribes of $24 million to help it grow quickly in the last decade and that Wal-Mart’s top brass tried to cover it up.

Exxon CEO says hopes Mexico extends oil reforms

NEW YORK, Wed Jun 27, 2012 – Exxon Mobil would be interested in investing in Mexico’s oil and gas sector, but only if the Mexican government allows the company to own some energy reserves, its chief executive said on Wednesday.

“We’re not real keen on service contracts, we’re not real keen on fixed margin contracts. Although we have some of those, they’re not particularly great for us,” Exxon Mobil CEO Rex Tillerson told reporters after a speech.

Mexico’s constitution bars outside exploitation of the country’s oil resources, making joint ventures or profit sharing with private companies difficult.

But the country has been seeking to open the door to attract investment from foreign oil and gas producers to help tap the vast reserves there.

Mexico’s state oil monopoly Pemex awarded contracts to some foreign companies earlier this month to help develop offshore fields, but those contracts pay bonuses based on performance and do not allow for ownership of oil and gas.

Tillerson said he was encouraged by the initial moves to open the Mexican energy sector, which could eventually attract financing and technology from the global industry.

“I think it’s going to be a long process. And what we’re advocating is just for Mexico to take the next step,” he said.

In addition to its offshore oil fields, Mexico has the world’s fourth-largest reserves of shale gas, according to the U.S. Energy Information Administration.

But so far, Pemex has drilled relatively few wells in those fields near the Rio Grande because it has little capital to develop those areas.

Wal-Mart bribery review includes Brazil, China

WASHINGTON, Tue Jun 12, 2012 – Lawyers for Wal-Mart Stores Inc. have flagged Brazil, China, India and South Africa in addition to Mexico, as countries that represent the highest corruption risk in a global review, according to a letter from lawmakers investigating the company.

The lawyers said they were retained to review Wal-Mart policies in Mexico, Brazil and China, and later recommended the company also evaluate its operations in India and South Africa. The lawyers referred to those five countries as regions where the risk was the greatest, according to the lawmakers.

The company has acknowledged it is investigating bribery allegations involving its Mexican operations, and that it is conducting a global review of its anti-corruption compliance program, but has not provided details about the review.

The new details came in a letter from two Democratic lawmakers, Representatives Elijah Cummings and Henry Waxman, who are the ranking members, respectively, of the House Oversight and House Energy committees.

The pair wrote to Wal-Mart Chief Executive Michael Duke on Tuesday and asked him to provide additional documents and allow certain witnesses to cooperate with a congressional investigation into the bribery allegations.

Outside lawyers for Wal-Mart briefed the lawmakers on May 21 about the company’s program to comply with the Foreign Corrupt Practices Act, a 1970s-era law that bars bribes to officials of foreign governments.

But the lawyers did not answer any questions about the substance of the bribery allegations, which were brought to light in an April 21 New York Times report that said that management at Wal-Mart de Mexico orchestrated bribes of $24 million to help it grow quickly in the last decade and that Wal-Mart’s top brass tried to cover it up.

The two lawmakers have previously expressed frustration about the information they have received from Wal-Mart.

Wal-Mart representatives did not immediately respond to a request for a comment, but the company has said it is “committed to a full and independent investigation,” and that “it would be inappropriate for us or others to come to conclusions before the investigation is complete.”

Wal-Mart urges worker integrity amid bribery probe

FAYETTEVILLE, Ark., Wed May 30, 2012 – Top executives of Wal-Mart Stores Inc. did not directly mention a Mexican bribery scandal at an employee pep rally on Wednesday, but asked their international workers to focus on “integrity” as a core value.

The world’s largest retailer has been under fire from shareholders and activists after the New York Times reported in April that management at Wal-Mart de Mexico, or Walmex, allegedly orchestrated bribes of $24 million to help it grow quickly last decade and that Wal-Mart’s top brass tried to cover it up.

The matter is being investigated by a number of government agencies in Mexico and the U.S. Department of Justice and the U.S. Securities and Exchange Commission. Wal-Mart is also conducting an internal probe.

Executives talked around the allegations in Mexico, the company’s first and largest international market. They referenced integrity as one of the company’s core values and underscored the importance of complying with local laws.

“It’s doing the right thing, every single day,” Wal-Mart President and Chief Executive Officer Mike Duke told international workers gathered at the University of Arkansas’ Barnhill Arena.

Doug McMillon, president and CEO of Walmart International, said it was up to every employee – from new associates to top executives – to guard the company’s principles.

“If you see something in your business that you don’t think is right, you need to say something,” McMillon said.

Scot Rank, president and CEO, Walmart Mexico and Central America, may have come the closest to directly commenting on the allegations, without specifically mentioning bribery.

“Over the years we have faced difficult and challenging times in Mexico and Central America. These events have united us even more, they have motivated us to continue, to continue pursuing excellence, and work with respect and integrity,” Rank said at the end of the Mexico and Central America unit’s presentation.

Ford to invest $1.3 billion in northern Mexico plant

DETROIT,  Fri Mar 30, 2012 – U.S. carmaker Ford Motor Co. will invest $1.3 billion in its stamping and assembly plant in the northern Mexican city of Hermosillo, creating 1,000 jobs, a top company executive said on Friday.

Ford surpassed General Motors, to become Mexico’s No. 1 car exporter last year, exporting nearly 450,000 vehicles, up 17 percent from 2010 levels. Mexico overall exported a record 2.14 million cars in 2011, a 15.3 percent jump from a year earlier.

“This investment allows us to produce the all-new Ford Fusion and the Lincoln MKZ line-ups, helping us to meet growing consumer demand,” Mark Fields, who is Ford’s president for the Americas, said at an event with Mexican President Felipe Calderon in Mexico City.

Calderon said the investment would help Mexico edge up the list of the world’s top auto exporters.

“Mexico in January rose to fifth place in global auto exports … and I think we are about to move into fourth place,” he said.

Ford’s announcement comes as Mexico has been at loggerheads with regional powerhouse Brazil over the car industry after a surge in Mexican auto exports in 2011 compounded a glut of cheaper imports which are hurting Brazil’s manufacturers.

Mexico gave in to Brazilian pressure earlier this month and agreed to slash auto sales to the southern giant, fixing an export quota for the next three years to save a decade-old trade agreement.

Ford’s Hermosillo plant, which opened in 1986, already employs around 2,700 staff, according to the company’s website.

Ford, the No. 2 U.S. automaker, said in a statement that the new investment comes on top of $3 billion invested in Mexico over the past decade.