MexicoNow May 2013: What Informs the Location Choice of Foreign Manufacturers?

This article in MexicoNow by Doug Donahue examines how foreign manufacturers decide where to set up in Mexico

Entrada Group has been helping companies establish and execute a Mexico manufacturing growth strategy for the past decade. We’ve interacted with numerous manufacturing clients and prospects from around the world to learn not only what drives their decision to manufacture in Mexico, but also what informs their choice about where in Mexico they should set-up shop and how. Of course, there is no single common driver motivating all of these companies. Their priorities and pressures differ from business to business, and oftentimes even from person-to-person within each business. Nevertheless this article highlights some of the more interesting observations we’ve made from years of working with international OEMs and suppliers.

Observation 1: The shift inward

Whereas foreign manufacturers – driven purely by cost savings – used to flock to Mexico’s border to set up operations, they have increasingly migrated towards the country’s interior, attracted by Central Mexico’s less transient labor force, high quality of living, robust supply base and pro-business culture.

Importantly, manufacturers have discovered that operating from Central Mexico presents opportunities to achieve topline growth as well as bottom line savings. The region is not only well-positioned to serve North American markets, but its infrastructure is well suited to capture domestic opportunities in Mexico, South America and Europe too.

Central Mexico is also attracting manufacturers that are re-shoring operations back to the continent from China. One of the challenges these companies face returning to North America is finding a manageable solution to transition away from the supply chain network they built in Asia. Central Mexico – thanks to its ports, robust rail and road infrastructure, and efficient intermodal transport system – enables manufacturers to continue accessing their Asian supply network until they are able to replace those partners with local associates picked from the region’s own vast network.

Observation 2: It’s not necessarily about cheap labor
Central Mexican regions such as Querétaro, San Luis Potosi, Guanajuato, Aguascalientes and Jalisco have become manufacturing powerhouses, having attracted large OEMs such as Bombardier, General Motors and General Electric, plus many of the tier 1 and 2 suppliers who serve them. Because of this, these areas have cultivated a highly skilled labor force, supported by local, world-class technical and engineering schools.

We hear increasingly from manufacturers that, though these laborers can command higher wages than workers in lesser-developed areas in Mexico, the additional expense is not necessarily a deterrent. Many companies are making it clear that obtaining low cost labor is not their primary focus. Instead they are predominantly concerned about having an ample supply of trainable and retainable talent available to them, even if it costs a small premium, making the well developed powerhouses extremely attractive.

Observation 3: The culture equation
The Central Mexico manufacturing hubs identified above are vibrant, teeming with international schools and activities that cater to the many cultures that presently inhabit these areas. Thriving Japanese communities, for example, can be found in Aguascalientes and Leon. Numerous small and midsize European suppliers are establishing production lines in areas like Querétaro because of its “Old World” base, anchored by a growing German populace. And large Ame r i c a n a n d Ca n a d i a n communities also populate the metropolises of Central Mexico due in large part to the established schools and expat groups that offer accompanying family members a semblance of the lifestyle they had back home.

Observation 4: But when every dollar counts…
While low production costs vis à vis Canada and the US may be an important driver to establish in Mexico, there are definitely areas in the country that are more cost competitive than others. For industries where margins are squeezed tightest, knowing where a dollar stretches furthest may be top of the list.

Central Mexico’s popular manufacturing hubs hold numerous benefits, but the very fact that they are popular makes them more expensive to operate in. Conversely, in less saturated Central Mexico locations such as Zacatecas, an efficient, wellmanaged operation can achieve total Mexican operating costs as low as $4.50-$6.50 per hour – among the most competitive in all of North America.

Observation 5: It can pay to be a maverick
Another interesting observation about quiet gems like Zacatecas is what I call the “big fish in a small pond” advantage.

Mexico has been quite successful in courting foreign investors, and economic development incentives can and should be pursued no matter where one establishes within the country. But, appealingly, the less saturated locations have less companies fighting to gain local government attention. Therefore, many within the current wave of small and midsize manufactures entering Mexico are opting to establish themselves just off the beaten path where they can form tighter relationships with local governments, be first in line for attractive incentives and even co-develop local training programs to become leading employers within those communities.

As such, they also get the ‘pick of the crop’ among local workers for hire, and don’t have to compete against heavily resourced OEMs for the same pool of talent. Plus additional savings can be won thanks to reduced labor costs.

It’s important to note, however, that being a pioneer in these communities does have its challenges. Those who are successful at leveraging the advantages of these lesser developed manufacturing areas usually engage shelter operators or service providers to help them overcome some of the industrial challenges they are likely to face.

Off and running Based on these insights, Entrada Group has evolved its service offering over the years in line with the changing needs of manufacturers. As a shelter provider assisting companies in all practical and legal aspects of setting up and operating in Mexico, we play an important role in helping manufacturers weigh what matters to them most; translate those priorities into recommendations about where and how to set up; and work alongside them to successfully implement their offshore strategy.

Once set up, optimizing operational efficiencies is next on the list. While on the manufacturing side this may translate into lean production techniques, on the administrative side it challenges companies to consider more sophisticated models to manage G&A services.

To that end, Entrada also provides a solution to deliver these services on our clients’ behalf. Our shared services model leverages each client’s activities to deliver greater benefits to the group as a whole. In particular, it gives smaller and medium size companies similar economies of scale as those enjoyed by OEMs and their larger competitors. The division of labor allows clients to control overhead costs, concentrate on their core business and build production teams that focus on the operation’s productivity rather than being distracted by or investing in key local production support services.
Indeed, lower costs or new markets might drive manufacturers to Mexico. But companies need assurances that they are well equipped to thrive here in Mexico, too.

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