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Setting Up Shop in
Mexico
As featured in the March/April 2001 issue of
Wiring Harness News
By Jennifer Read
Wiring Harness News
Moving manufacturing to lower cost regions of the world began when U.S. companies
started competing with Japanese products that were better made and less expensive than
anything made at home. At first, companies went to Asia and set up facilities in Malaysia,
Taiwan, Singapore and Hong Kong and countries nearby; however in 1965, the Mexican
government began to ease regulations to encourage U.S. companies to find the same
benefits on a closer continent. Unlike operations in Asia, "maquilas" perform final
assembly only, using components and designs from up north. That is because up until
recently materials and components could be imported into Mexican manufacturing facilities
duty-free, as long as they were exported back out as finished products within a certain time
period. Transportation costs to and from Mexico are considerably less than for the Pacific
Rim, and companies are able to maintain more control, so many U.S. corporations,
especially in the wiring harness industry, find this a very favorable arrangement.
Today, globalization drives companies to set up manufacturing operations close to
customers. OEMs want to be close to the end consumers, suppliers and contract
manufacturers want to be close to OEMs, and so on throughout the supply chain. This
changes the strategy somewhat, making Mexico perhaps even more attractive because of the
huge North American market. Companies from all over the globe not just the U.S. have
set up manufacturing facilities in Mexico, providing increased opportunities for everyone.
Today the maquila industry has over a million employees with more than 3,000 plants all
over Mexico.
In spite of the slowdown in electronics on this side of the border, business is booming in
electronics manufacturing down south, according to Chet Frame of Border Business
Consulting, based in El Paso, Texas. "Things are on a steep growth curve. The Mexican
government just revised its predictions down to 7% growth for this year. But that is on top
of 11% last year, so overall it is still very good," he said in a recent interview with Wiring
Harness News. Frame has been helping companies improve operational controls and use of
resources at Mexican plants for 16 years. He has seen quite a few changes in how plants
are managed in Mexico. "When I first started helping companies down here, there was a
disconnect between operations in Mexico and the rest of the organization. Purchasing,
engineering, planning was all done somewhere else, and the plant in Mexico was just the
receiving station. Now the facilities here have people that are actually doing the purchasing,
etc. There are some good engineering universities in Mexico, and that is one of the reasons
it is such a good place to set up an operation."
Now companies can hire local engineering talent to run operations, drawing from an
emerging Mexican management-level middle class. These professionals earn $3.50/hour,
which is high for the country, where the minimum wage is still $0.90/hour. Wages are
increasing, according to Frame. "When I started, $0.60/hour was pretty standard, but no
one can pay even minimum wage anymore. But clearly these wages still provide
considerable cost savings."
Companies can save an average of $17,000 per employee per year, according to some
estimates. The maquila industry now represents over 15% of the total employment in
Mexico's manufacturing sector. In the last eight years the sector has maintained an average
annual growth rate of 16%.
Companies entering the Mexican manufacturing arena have three business models from
which to choose. "You can hire a contract manufacturer, where you provide the materials
and they provide the labor. Then after awhile, once you learn the ropes, you can take off on
your own," Frame explained. "Or you can just buy out a competitor and take over their
operations. That happens fairly often. Or the third option is to lease a facility and then
slowly move operations out of other locations. This requires the most expertise of the
three."
For all three options, there is plenty of help available. Consultants can offer advice. Some
of these are specialized in doing business in Mexico and can help with the cultural and legal
implications of manufacturing in Mexico. These are called "shelter" services. In addition,
all the border cities have development boards that provide services and information. And the
Mexican industrial parks where the facilities are located have on-site personnel to provide
direction.
NAFTA 2001 May Change Everything
The North American Free Trade Agreement (NAFTA) was signed to encourage the use of
NAFTA-originating materials and components in manufacturing. However, in this
increasingly global economy, one provision may complicate maquila operations. In January
2001, regulations have been passed to bring the industry into compliance with NAFTA --
specifically those rules that waive duties for components and materials being exported to
NAFTA participating parties.
In the past, duties were waived if the final product was exported, regardless of whether the
components or products conformed to Rules of Origin. Now, companies must prepare and
analyze detailed bills of materials for each product to determine whether duty is owed. If the
material or component is non-NAFTA originating, and the product is then imported into the
U.S. or Canada, duty is owed on the non-NAFTA originating components. If the product is
imported into a non-NAFTA country, no duty is owed.
In order to comply with Article 303 of the NAFTA, and with input from the private sector,
Mexico created promotion programs for certain industries, including electrical and
electronics. The programs are modeled after the "end-use tariff provisions" in U.S. and
Canadian law, and will allow maquilas to import materials and components paying duties
that in most cases will not exceed 5%. These programs were established late in 2000, and
will help ease the transition. Companies must register with the programs to benefit.
Automotive Early Adopters
One of the early adopters of maquila manufacturing was the automotive harness industry.
Delphi Packard has been manufacturing in Mexico since 1978. At that time, harnesses were
assembled in Mexico for competitive reasons, according to Delphi Packard Media Relations
Manager Michael Hissam. "More recently, we locate plants to follow our customers. And
the OEMS are located in Mexico to build for the North American market. We serve all the
major global OEMs in Mexico GM, Ford, Daimler-Chrysler, Honda, VW, Nissan,
Renault, BMW
We have 55 plants there, and around 30 of them are for wiring harnesses.
Most of these customers still source components in the U.S., but now the management of
these plants is staffed by local Mexican professionals."
These Mexican plants have been internationally recognized for excellence, said Hissam.
"They are dedicated to the pursuit of excellence, always exceeding customer expectations.
One of the wiring harness plants, Rio Bravo 2, was chosen to train people in our Shanghai,
China plant," Hissam continued. "That factory went on to win other awards. It was very
exciting. The Mexican management team went to China, and the Chinese team came to
Mexico."
The market for automotive electronics typifies what has driven many manufacturers to seek
out lower cost manufacturing options, such as the Mexican maquila. According to Joerg
Dittmer, a transportation analyst for market research firm Frost and Sullivan, automotive
wire harnesses are becoming technologically more advanced, but in this market it is often
difficult to pass along these costs to auto OEMs through higher prices. "Automakers need
to restrain vehicle prices while offering more and more features. Thus, they are very price-
sensitive, expecting their suppliers to provide better components at lower costs every year."
Global manufacturing in this environment is increasingly important for at least four reasons,
according to Dittmer.
Automakers want suppliers to follow them into foreign markets
Assembly of wire harnesses is labor intensive, best done in low-wage countries
Foreign manufacturers are increasingly challenging North American manufacturers
in their home markets
Imported vehicles reduce the North American market for OE components.
Tracking the automotive industry as a whole, total wire harness revenues are slated to dip
this year, from $7.59 billion in 2000 to $7.024 billion in 2001; and again in 2002 to $6.76
billion, according to Frost and Sullivan.
Suppliers' suppliers follow the leaders
Distributors are also heeding the globalization call. Avnet Electronics Marketing recently
opened a new facility in Guadalajara as part of its strategic plan to increase its services to
OEMs and contract manufacturer customers in Mexico. "Guadalajara is sometimes
referred to as the Silicon Valley of Mexico and is clearly a hub for the electronics industry,
with 50-plus OEMs located here," said Beth Ely, vice president/director of Avnet
Electronics Marketing sales in Latin America. "Customers are demanding high quality, low
cost manufacturing, close to their end markets, which has driven the growth of the
electronics sector in Mexico. This trend has given companies, including Avnet, the
opportunity to increase their activities there. As a result, Avnet has grown its electronic
component sales significantly.
Last fiscal year Mexico's sales run rate increased by 191 percent," Ely continued. "Our
customers are expecting the same value-added services in this region that they receive from
Avnet in the United States," she noted.
Border Business Consultant's Chet Frame agreed. "Companies have gotten much smarter
about manufacturing in Mexico since I began here. When you are linked to GM, or
Goldstar, or whatever, then you are moving forward in a marketplace and are linked to
customers and vendors to develop efficient supply chains. Then you can focus on your own
productivity issues. There is now less of a disconnect between operations in Mexico and the
rest of the business."
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