Site Selection May 2013: Central Mexico – Mexican Manufacturing’s Secret Is Out

This article in Site Selection by Doug Donahue looks at the cost savings manufacturers are realizing by transitioning operations to the interior of Mexico

Mexico as a nearshoring manufacturing destination is hot. Coverage in mainstream media attests to that. Mexico exports more manufactured products than the rest of Latin America combined, according to Financial Times. Trade between the US and Mexico is now well over $1 billion per day, and Mexico is the third-largest trading partner of the US.

What is less known in the popular press is that central Mexico,though not the leading region in terms of production volume, is the gem of Mexican nearshoring, with a bright future ahead. This has been the real news in Mexican manufacturing, and something that companies large and small from many industries — automotive, aerospace, electronics, medical devices — have known now for a while. They have been expanding into Mexico’s interior to leverage the region’s greater cost savings, a less-competitive labor environment and lower turnover compared to border areas.

Cities in this central Bajio region — like Aguascalientes, Guanajuato, Leon, Queretaro, San Luis Potosi and Zacatecas — are now home to an array of companies including Volkswagen, GM, Bombardier, Flextronics, 3M, ThyssenKrupp, Datwyler, Triumph Group and many more. As a result, a multitude of suppliers have also made, or plan to make, the transition to central Mexico, meaning a significant percentage of Mexico’s production is clustered in the area. This is because suppliers want to be in the area to leverage affordable production and because OEMs are demanding a presence here from suppliers who want to quote on projects.

Our company, the Entrada Group, which helps companies of all sizes establish and run their own cost-effective operations in central Mexico, has similarly expanded in the Bajio region, on top of our existing park in Fresnillo, Zacatecas. Encouraged by the promising signs of investment and commitment in Bajio, we committed to a greater presence in Bajio, so we can better serve the needs of the OEMs and suppliers of all sizes who are themselves joining the rush into central Mexico.

Operating Costs in Mexico’s Interior Up to 40% Lower
Central Mexico helps companies attack their three greatest costs: labor, overhead and supply. For starters, labor in central Mexico costs roughly half what it does in border states. In our manufacturing facility in Fresnillo, Zacatecas, for example, entry-level, fully-fringed direct labor costs can be as low as $1.40 per hour. This is lower than in some regions of China, let alone the border regions of Mexico.

In addition, the center of Mexico is at higher elevation, keeping HVAC expenses lower, and further minimizing operating costs. For example, as we have seen in our facility in Fresnillo, well-managed companies of all sizes can achieve total Mexican operating costs as low as $4.50-$7 per hour. Manufacturing locations near the border simply cannot compete with that.

Finally, the competition for talent is less in central Mexico. Indeed it’s the same heavy demand for both direct and indirect labor near the border that pushed costs higher in those areas. But in central Mexico, not only is competition less, turnover is lower too. This helps manufacturers maintain high efficiency and productivity,
all at a lower cost.

Central Mexico — It’s About More than Just Location
Establishing and running operations successfully in central Mexico is not as simple as site selection, even for companies that already have a presence in the country. And companies entering for the first time will have to choose where to locate their facility, set up as a legal entity in the country, secure permits and leases, and more — all of which requires huge amounts of know-how, management attention, time and risk. And that is just for the startup phase.

Furthermore, the site still has to be managed on a day-to-day basis. This entails hiring staff, learning about and complying with ever-changing Mexican employment laws, dealing with unions, managing payroll and taxes, ensuring compliance with environmental health and safety legislation, maintenance, security, accounting, gaining customs permits, logistics and warehousing. The list seems endless.

Rather than going it alone, and exposing their company to tremendous risk, many manufacturers are doing what Entrada Group’s clients have done for the past decade-plus — handing the administrative and support responsibilities over to an experienced partner. We have a track record of helping manufacturers establish their own operations in Mexico to leverage cost efficiencies quickly. Our start-up process allows companies to be up and running in as little as 90 days. Best of all, our clients maintain full control over production and quality, while leveraging the low operating costs in central Mexico, the region that is fast becoming the smartest in North America for manufacturing.

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