Case Study: Mexico as an Enabler
“For us Mexico has been an enabler…”
A testimonial of one of Entrada’s more quiet customers as they explain the “how, why and what” that led them to Mexico, to Entrada and toward a successful business model.
We are a midsize engineering company that manufactures primarily for the transportation industry, but not entirely. We’re the behind the scenes guys. We do the research and manufacture the technology to solve specific customer problems that help make their products better.
For nearly 50 years we operated solely from our headquarters in the US, which housed research scientists and engineers at one end of the building and our full manufacturing capabilities at the other end. Engineering, design, tooling, injection molding and assembly were all under one roof and then the product went out the door. When Entrada’s Doug Donahue contacted me in 2004 talking about manufacturing in Mexico, I remember saying, “Are you crazy? We have zero interest. We are happy clams doing everything ourselves under our own roof right here where we are.”
A Changing Landscape
Then a couple things happened. First, our workforce was starting to change. For years our company had been fortunate to employ long-term, loyal workers, often even entire families, with first and second generations working alongside each other within our company. But the labor environment started to change and became incredibly competitive.
Then two other things happened simultaneously. First, our product mix started to vary. In the early days of our industry, manufacturers would have single platforms, meaning they would basically take the same model and differentiate by giving each a different trim and such.
As competition grew, however, OEM’s started restyling every three years. So while before we used to produce one fairly straightforward product that would go on all of these different applications, the customer eventually started demanding variations, which meant that our products required more complex designs with multiple components. So assembly shifted from more-automated systems to less-automated systems, requiring more people.
At the same time, some of our customers started requesting that we do more of the system. After a careful examination, we realized that in fact there might be a business in doing more of the system, which would add more value.
As a result, in 2005-2006 we started considering China. We drafted a detailed business case, and during that process I suddenly remembered Mexico and wondered what that would look like for our needs. So we reached out to Doug and took a few trips to that country too.
China vs Mexico
When you’re in our industry and launching programs, changes happen. OEMs aren’t going to suddenly change the overall platform, but they may change the routing of something, which could impact the shape or length of our product. So we thought, ok, we could make our products in China, and put it on the boat for twelve weeks, or fly it to the US, which is incredibly expensive. But then one of these program changes could occur, and then what? We understood that sudden changes in a long supply chain would be a big issue. On top of that were real concerns about communication and the protection of our intellectual property. Consequently, we took China off the plate, and I think that has proven to have been a good idea, as labor costs there have since increased, leading to recent talk of manufacturers re-shoring to North America.
Subcontracting vs Going it Alone
We also toyed with the idea of subcontracting, but again, we are quite proprietary over our technology and patents. The idea of handing over our designs to a second party was not at all attractive, particularly when Entrada proposed their alternative model that permitted us to fully control and manage the manufacturing process ourselves.
Entrada vs Other Shelter Operators in Mexico
We definitely looked at other shelter companies in Mexico but chose Entrada because we wanted to be in the most cost-competitive part of Mexico, which is where their manufacturing park is located. We compared the various cost models of the different shelter providers and locations in Mexico, triangulated them and saw that there were indeed other towns that had better infrastructure or technical capability. However we were interested in going where no one else was, somewhere smaller and cheaper like Fresnillo.
At the end of the day, though, we also trusted Entrada’s principals, Paul Karon and Doug Donahue. These guys have a lot of integrity. They are trustworthy and they deliver what they say they will deliver. They are honest and they are a good partner. To this day we unquestionably trust them, and that’s very important when you are a small or midsize company operating outside of your comfort zone.
While doing our research into Mexico, we won part of the systems program. When we began modeling that business within the context of a Mexico labor environment, the numbers worked. We decided to try Mexico out.
We started off doing assemblies. That was a way of dipping our toe in the water without risking our principal business and technology or having to transfer equipment. We had eight people in Mexico, and I remember having a five-year plan that would get us to 103 people. I don’t remember what that plan was based on, but it was definitely conservative. Quite quickly, we won another assembly job for Mexico, and we said: “Seems like this is working. Let’s try to manufacture one of our key products there.” And that worked too, so we brought another product to Mexico and that worked. And after a couple of years, we decided to bring it all down there.
Now I don’t want to make light of this period. As much as I knew it was the right thing for the company – a need for the highest in cost efficiency is ingrained in the automotive industry – the transition required a big restructuring of our business. As the manufacturing plant in Mexico grew and we kept winning new business, ultimately our US plant became home to a growing corporations of highly-skilled engineers, scientific researchers, tool makers, set-up technicians and molders who are required to keep delivering the innovations our customers are accustomed to receiving from us.
Today and Beyond
In 2008 and 2009 there was a huge depression in the automotive sector. Because we were well underway in our move to Mexico, however, we were able to weather the storm. Then when the industry came back, we were popping! We were winning programs, and ready and able to grow.
Today we are at 650 people in Mexico and we have gone from our initial 24,000 sq. ft. to 35,000 sq. ft. to 60,000 sq. ft. to now 70,000 sq. ft. We’re already looking at next options in terms of space expansion.
Our entry into Mexico has been an enabler. Labor availability is of particular note. The truth is I don’t know if I could find 700 people where our plant is in the US who would take this job at the going pay rate for an assembler.
What Entrada sold us in the mid-2000s was “We’re going to give you the lowest cost of labor in North America and Mexico know-how, and we’re going to handle the Mexico administration, human resources and legal, the import and export, and the smooth transport of parts to the border. And as long as you do as we advise, you’re going to be just fine.”
Over five years later and that story has held true, and is still working.