Listen to the full episode on the Industrial Talk
Doug Donahue: I kind ofbacked into what I'm doing. I finished graduate school, I guess it's now 35years ago. Like all graduate students, I had to do an internship. They werenegotiating the NAFTA agreement at the time.
Scott MacKenzie: Oh yeah.
Doug Donahue: And I got aninternship with a division of the Mexican embassy that was responsible fornegotiating the NAFTA agreement. I worked for a Mexican economist there, andwhen I finished my graduate degree I said, "I don't know what I'm going todo." He said, "Avoid real life for a while and go work for my brotherin Mexico City and learn some Spanish." I thought I'd be there a year,maybe two. I ended up in Mexico City for 12 years, three different jobs,learned some Spanish, got a Mexican wife. The whole thing.
Scott MacKenzie: Yeah.
Doug Donahue: And Ienjoyed it. I had a couple of different jobs. One was in the entrepreneurialspirit: I set up an Asian Mexican joint venture trading company and built itfrom zero to about $10 million in sales, and made the owners a decent amount ofmoney. I decided that someday I was going to do this for myself. But I then gotrecruited to work for the State of Ohio to run their commercial office inMexico City. That was pretty fun.
Scott MacKenzie: See, Ididn't know that. I'm looking at your LinkedIn and I'm going, I don'tunderstand that. I'm looking at it: Ohio Department of Development, Director ofMexico Office. Right there.
Doug Donahue: Yeah, theState of Ohio was very aggressive at the time in helping its manufacturers setup distribution networks and sell throughout the world. Mexico was one of itslarger offices, and that was a great experience. I have nothing but good thingsto say about it. But in the end, government work is a little too slow for me.
Scott MacKenzie: Is that whatthe internet says?
Doug Donahue: You know, Idon't mean to speak poorly of podcasters, but I hear a lot of podcastersrepeating that about government.
Scott MacKenzie: Not me. I'mnot going to join those voices.
Doug Donahue: And so,around that time, my brother-in-law, married to my sister (not my Mexican wife,ironically), was leaving his company, which did something similar to what we'redoing now, and asked me to join for sweat equity. He had been living inArizona; we're all originally from Arizona. He was doing it in Sonora, theMexican state just below Arizona.
Doug Donahue: He decidedhe was either going to go out on his own or he was never going to do it. Heasked me to come along for sweat equity. He had a non-compete in Sonora, so wemoved to Texas and drove through every community from Mexico City north toLaredo, Texas. We were looking for a community of about 250,000 people: largeenough to have a labor force to support it, but not so big that the OEMs wouldmove in and dominate that labor force.
Doug Donahue: At the time,this is 23, 24 years ago, China was eating Mexico's lunch on cost. So we wantedto go into the interior, where labor was more cost effective. It also had tohave an airport people could get in and out of, and where trucks could reachthe border in a reasonable amount of time. We narrowed it down to about threelocations and finally chose the state of Zacatecas, Mexico.
Doug Donahue: And I'vebeen doing that for 23 years now.
Scott MacKenzie: Yeah, yeah,it's 23 years and 10 months?
Doug Donahue: There yougo. That's correct, to be precise.
Scott MacKenzie: Now, that'san interesting approach, and we'll get into your organization. This is alwaysinteresting: so you find that location, you set up shop, don't ask me how tospell the name, but I trust you, and then you have a workforce, and you startpulling clients in. How do you train your workforce?
Doug Donahue: Well,without getting into the model in too much detail, Entrada Group is really thelegal entity that the manufacturer piggybacks onto in Mexico. We have all thepermits to manufacture under what's called the IMMEX program, which peoplebetter know as the Maquiladora program. Our clients piggyback onto our legalpresence, and they're responsible for the manufacturing of their widget.
Scott MacKenzie: Sure.
Doug Donahue: We'reproviding the labor force, doing all the trade compliance work, and basicallyindemnifying them from everything that is the Mexican government. But they aremanaging the manufacturing day in and day out.
Scott MacKenzie: Got it, thatmakes sense. So you need it: I'm a manufacturer, and I want to take advantageof nearshoring, so I'm going to go across the border and do it. There's a lotof paperwork that needs to happen to make that happen. I might have grandvisions and the ability to manufacture something pretty spectacular, but thereality is I need that structure and paperwork in place.
Doug Donahue: That'sright. Our clients are small to medium sized, first and second tier suppliers,typically privately held, often still family run. They don't have the internalMexico knowledge. They're not GE, they're not GM. So they're thrilled to say,"You guys take care of all this, and we'll train anybody to build ourwidget if you give us the right labor, but we don't want to deal with anythingelse. We don't have the internal knowledge to deal with Mexico."
Scott MacKenzie: No, that isa definite service, that's a must if you want to do that. So let's go into theprocess: I'm Scott, I'm a manufacturer, I'm interested. I've got a greatwidget, I check the right boxes. What's that process? How long before I canstart breaking ground?
Doug Donahue: Assuming ourdirector of business development has gotten to you first, and convinced youthat we're the only option, so you're not going to run a multi-site selectionstudy, and assuming he's done his job correctly, we'll build you a cost modelfor your manufacturing. We'll also analyze your bill of materials to make sureit qualifies as NAFTA-made, depending on where all your components come from.If those two things fit, the cost structure and the tariff structure, then youcome down and visit us. We have a campus of a million square feet in onelocation, another relatively new campus with about 100,000 square feet, andanother 100,000 under construction. You'll tour all the different operationsand plants, and you'll say, "All right, this makes sense."
Doug Donahue: Then there'sthe contract work, and once you start, depending on your widget, for example awire harness, if we already have a facility, you can be up and running in 9 to12 weeks. If you're more complicated, like a medical device, and you need tofit out a clean room and more sophisticated processes, we've had a number ofmedical device companies in full production within four to six months.
Scott MacKenzie: You've gotto admit, that's pretty impressive. What you're saying is, you already have acampus, you have land, you have a facility already built. Is that what I'mhearing?
Doug Donahue: That is whatyou're hearing.
Scott MacKenzie: Then Iwander in, I look at it, it's an enormous amount of square footage, I'mexaggerating, but because the brick and mortar is already there, I could seethat.
Doug Donahue: The onlything in the buildout that takes time is your electrical buildout and thedesign of your floor, because that's customized to your processes. But thebrick and mortar is there.
Scott MacKenzie: That's cool.That's a heck of a business model. I like it, and it fits with your persona,Doug, of doing things a little faster.
Doug Donahue: Yeah,absolutely. And again, although my business partner, who's a lawyer bytraining, hates when I say this, the number one thing is that we'reindemnifying you from what is Mexico.
Scott MacKenzie: I have anote here that says "stability." The reason I want to talk aboutstability is, when you talk about power, quality of power, stable power, that'sall part of my decision-making process, so I can feel comfortable heading downthere and saying, "I've got Doug, I've got it all." Stability.
Doug Donahue: Yep.Stability, and just minimizing your risk.
Scott MacKenzie: Exactly,that's what your model does. So here we are, I've heard it in the news, we'rehaving some sort of dispute with Mexico and Canada, specifically around NAFTAand trade and tariffs. How do you, at Entrada Group, keep up with that dynamicenvironment of trade?
Doug Donahue: We have fouror five large departments, and one of them is trade compliance. For basicallyevery widget our clients produce, we break it down using that bill of materialsprocess I mentioned, and we see what it takes to qualify as NAFTA-made, orUSMCA-made. If it isn't there, we coach our clients and help them get it there,because that's really been the saving grace over the last 35 years.
Scott MacKenzie: Everythingyou hear in the news is interesting, and it has created a lot of confusion. Itmakes people very nervous to consider manufacturing anywhere in the world,including Mexico.
Doug Donahue: But when youreally get down to it, whether it be Trump 1.0, Biden, or Trump 2.0, they haverespected the NAFTA and USMCA agreement from the beginning to today, includingthe announcement last week.
Scott MacKenzie: Yeah, theannouncement last week, where President Trump indicated he's, I don't even knowthe exact words he used, not happy with NAFTA.
Doug Donahue: Not gettinginto NAFTA. It was rhetoric. He didn't say the second part, that he's pullingout of USMCA. The agreement itself says that any of the signature countries canpull out with six months' notice. But in the US's case it's not an executivedecree, it has to be approved by Congress, and he didn't say that.
Scott MacKenzie: So what doesthat mean?
Doug Donahue: That meansthe current agreement lasts another 10 years. I know he has the image of adoer, and I don't want to offend anybody, but he kicked this can down the road10 years to the next administration.
Scott MacKenzie: So here'sthe thing: I imagine you have a phone, and the people at your campus and yourclients who are listening to this, I bet your phone starts to chirp prettyquickly.
Doug Donahue: Yeah, and Iwon't tell you it's been easy. We had, I would say, 40% of the workforce, notin terms of clients but in terms of workforce, manufacturing wire harnesses. Wehad a client that ships at 10 o'clock at night on a Monday, and it's driving tothe border Tuesday morning. I'm not sure of the exact dates, but theyimplemented a 35% tariff on copper, and the whole product is copper. We workedthrough it and worked through it, and got it through under NAFTA, but it tookan extra day. That's what our trade compliance department does. They figure outhow to do it.
Scott MacKenzie: So it'sreally NAFTA that hasn't been the issue.
Doug Donahue: Yeah.
Scott MacKenzie: But this iswhere you need a trusted sherpa to help you along on this journey ofinternational trade and manufacturing. You just do.
Doug Donahue: Yep. I wantto make one last point, because I've really been talking about USMCA, but Ithink this is important. Take USMCA out of it, and just talk about tradebetween Mexico and the United States. We had our corporate event last April,and we brought in speakers who deal with everything, not just USMCA and theMaquiladora or IMMEX program, but agriculture, services, everything across theboard. The average tariff on a product produced in Mexico into the UnitedStates is 4%.
Scott MacKenzie: Oh, come on.
Doug Donahue: 4%, at theend of it, with everything included.
Scott MacKenzie: All of therhetoric, and it's 4%?
Doug Donahue: 4%. I know,when he told me that I didn't believe him either, and I challenged it, but itturned out to be true. Nobody wants their avocados taxed, nobody wants theirtomatoes taxed. It's 4%.
Scott MacKenzie: Guilty ascharged.
Doug Donahue: Yeah, allthat drama, all that tension, all that talk. It's not worth it. But it doescreate an environment of macro instability, and that's where it's hurt us. Notnecessarily our current clients, but our prospects don't want to makemillion-dollar investments right now, and that's true today, and that's whereit's hurt us.
Scott MacKenzie: I was justgoing to get into that point about the market going forward. If I have aconfused mind, I'm not going to make any decision. If I see a glimmer, just asliver of risk, I'm going to slow down and pull back until I properly evaluateeverything. It's got to be challenging.
Doug Donahue: That's fairenough. But there are two other things going on that companies can't wait for.You can't find labor in the US, much less labor that wants to work in amanufacturing operation. In Mexico, manufacturing is still the mostsought-after job there is. People want to work in manufacturing, and it's notjust basic labor anymore like it was 20 or 30 years ago. You have engineers whoknow continuous improvement methods, whether it's Kaizen or Six Sigma, and whenan engineer comes out of college, international manufacturing is the jobthey're seeking. So if you can't find labor, you're limited on growth.
Doug Donahue: People arebeing more cautious, as you said, but at some point, we're at what, 10 yearsnow of insecurity? Trump 1.0, Biden wasn't much different on trade, he didn'tadd more but he didn't change Trump's policies either, and now Trump 2.0.That's 10 years of macro insecurity. People can't grow if they don't havelabor. We have two prospects right now, one in Iowa and one in Michigan, andthey can't get labor, or the labor they can get isn't cost-effective. One toldme they left $2 million on the table last year because they didn't have anoperation that could support their clients. The other left $8 million.
Scott MacKenzie: Yeah, so iteventually catches up.
Doug Donahue: I reallyrespect them for taking the risk, but at some point, am I going to grow thebusiness or not?
Scott MacKenzie: This is aninteresting topic, I speak on it all the time. I've got the technology, I'vegot everything, and the technology is fine, but I can't find people. I believe,and this is just my own view, that our education system in the United Statesisn't nimble enough to deal with the demands of the labor market.
Doug Donahue: Which iscompletely different, and I don't have an answer for it.
Scott MacKenzie: Yeah, I'mnot a big fan of government policy getting too involved, but you've put meright in the thick of it.
Doug Donahue: Mexicoactually copied the German technical training programs and really customizedthem. If you came in as a foreign direct investor and needed people who couldlearn how to maintain a mold, not build one, just maintain it, you could hiresix people with some experience and send them to a school with your program,and the government will pay for them to be in that program for a period oftime. And you don't have to take the top six, only the two you like the most.
Scott MacKenzie: When I was alineman, when I first started out and had hair, I worked for SouthernCalifornia Edison, and we had an apprenticeship program. You're not just goingto stick me on a tower and say, "Do the work." I had to learn, and Ihad to get yelled at by a bunch of old crotchety linemen. But it was theprocess. Every segment of industry here in the United States is struggling withpeople, and with retaining them. It's like, it's too dirty for me, whatever thereason is, retaining them. Then you add the fact that people are older andleaving the workforce, going off to Mexico and retiring on the beach. How doyou extract that knowledge? It's a challenge of our time.
Doug Donahue: So that'swhere we're getting a lot of interest, just from the labor side.
Scott MacKenzie: I think it'sa cool thing. With all this going on outside, I see the risk, I understand it,I see the hesitation and the realities. I think the market will eventually cometo terms with it, and I've got to keep my business open, which means I needpeople, so I need to figure it out. So we still have, from your words, about 10more years of NAFTA. I didn't know that, is that accurate?
Doug Donahue: Yeah, underthe current rules and conditions. And this is just my own view, but I believethe Mexican government and the US government, led by the Trump administration,will come to some deal in the next year or two, and that President Trump willdo a good job getting the automotive manufacturers back to the US. There was aperiod where, whether it was Toyota, Honda, or the Big Three, every new OEM wasgoing to Mexico, and they said, "Enough, that is enough." That hasbeen the focus of the Trump administration to date. I think they will get adeal. Mexico doesn't need the OEMs, they need the suppliers to the OEMs.
Scott MacKenzie: I agree withyou. All right, Doug, you're absolutely fantastic, I hate to wrap it up, but Ihave to. For somebody who's saying, "I hear what Doug's saying, he seemslike a nice guy," how do I get a hold of you?
Doug Donahue: The easiestway is my email, ddonahue@entradagroup.com. You can also go through the website,entradagroup.com, and get a hold of me or our director of business development,JP McDaris. We'd love to have an opening conversation. Also on the website, wedo a monthly webinar, a big overview of Mexico, the areas we're in, and ourservices. There's really no commitment. You don't have to let me or JP push youinto business to come on down. You can watch the webinar and see if we reallyhave any depth to what we're saying.
