When people think of low cost manufacturing, the first location that most often is referenced is China.
And yet, in a recent report issued by the Entrada Group, titled “Where in the World?,” covering the competitiveness of manufacturing locations worldwide, a different country emerged as one of the most attractive for low manufacturing locations, and was one that may surprise some. That country is Mexico, and in a conversation with Industry Today, Doug Donahue, Vice President of Business Development for the organization that commissioned the report, talks about the history of Mexico manufacturing that led to these results, the current success manufacturers are enjoying in the region, and why the future of low cost manufacturing isn’t necessarily an “either or” scenario between China and Mexico, but rather will most likely rely on utilization of both locations, among others, in what is an increasingly global economy. Steve Engelhardt reports.
Mexico has almost a 50 year program in manufacturing, and over those years, while low cost has always been a strength, they’ve also added quality and a high level of productivity to the country’s identity,” Donahue says, adding, “the consumer today is not afraid to see that 20 percent of their automobile’s parts were manufactured in Mexico, in fact quite the opposite.”
Donahue and his organization have been well entrenched in the Mexican manufacturing scene for quite some time, assisting foreign businesses with setting up operations and facilitating a smooth transition into the Mexican marketplace. And while they could see the progress of the country’s labor force and supply chain develop right before their own eyes, they knew they needed actual quantitative information to shed light on what perhaps is one of the manufacturing world’s best kept secrets. “Where in the World,” seeks to do just that.
Progression of Confidence
In terms of key findings, overall, respondents ranked the United States as the most attractive low-cost manufacturing location worldwide, with Mexico taking the second spot. However, among those respondents who already have one or more manufacturing locations outside of the U.S. or Canada, Mexico tied with the U.S. as the most attractive low-cost location. Donahue says that the results didn’t surprise him, given what he and his company have seen in the country over the years.
“We’ve seen this trend in Mexico over the last ten years or so, where OEM’s have gone in and established significant operations that aren’t just tailored to the North American market anymore, but for the Mexican market, the South American market, the European market, and even in some regions of Asia,” referencing Mexico’s gradual rise from a niche location, to its evolution into what could soon be a central hub for much of the world’s product flow.
It’s been a careful and deliberate effort by the country, as Donahue says. “I think Mexico has been brilliant in their strategy over the years, negotiating a slew of agreements in a number of different trading blocs and countries throughout North, Central, and South America,” he says, adding, “through these bilateral agreements it has been established that at least 50 percent of the value added needs to be produced within a specific region, and if achieved, the company will have access to over 44 different trading blocs and countries.” And where is that specific region? Mexico.
Now, companies around the world are beginning to take notice of the huge benefits that come along with opening up an operation in Mexico. Take D&M Premium Sound Solutions (D&M PSS) for example, a world-leading audio company that delivers audio solutions and services to automotive OEMs. They had been operating primarily out of China until they came into a contract with BMW, which favored parts production occurring within North America in order to qualify for NAFTA’s rules of origin requirements. “D&M PSS promptly set up shop in Zacatecas, Mexico, which offered proximity to the US border by road, links to Atlantic and Pacific ports, and the presence of a highly skilled population of blue collar workers, engineers, and managers,” Donahue says.
And the move has paid off, in an unexpected manner. “They originally moved to Mexico due to a requirement by BMW, however, they quickly realized the web of benefits that comes with investing production operations in Mexico,” he says, adding, “Their Mexican presence has allowed D&M PSS to win contracts with other OEMs they previously hadn’t sold to before in North America.”
D&M PSS’s example is a direct representation of the report’s findings, particularly on the success of those who have already established an operation in Mexico and are looking to expand. “For those companies that had prior experience operating in Mexico, much like D&M PSS did in their work with BMW, they understand that quality isn’t going to be an issue and as a result, they are inclined to continue their operations in Mexico for future partnerships, given their confidence in the fact that they’re not losing a step in any area of their process.”
Donahue says that he sees the world’s market and the corresponding demand for low cost manufacturing taking on a “regionalized” nature, stating, “It’s not about an ‘either or’ scenario, where companies have to decide between two locations,” adding, “It’s soon going to become that you need to have operations not just in China and North America, but also in Europe, South America, and even perhaps in other parts of Asia.”
Another key finding in the report found that 55 percent of respondents manufactured their products in two or more locations, and of this demographic, 67 percent had plans to expand to an additional location to meet global demand. Donahue says that many of these companies, particularly those looking to impact the South, Central and North American markets, should be seriously considering Mexico to serve as their next location. “Sixty-nine percent of respondents in the report pegged a low-cost manufacturing strategy as ‘very important’ or ‘important’ to future growth, and Mexico is as viable an option as there can be in attaining such goals.”
In addition to the report, the Entrada Group also found further support of Mexico’s manufacturing landscape in a recent study conducted by Boston Consulting Group (BCG). The study found that Mexico manufacturing exports, due to a widening cost advantage over China, could grow by as much as $20 billion to $60 billion annually by 2017, figures derived partly from Mexico’s advantage of proximity to US markets as well as more affordable energy. However, in addition to these factors, the study found that Mexico’s 44 global free trade agreements enacted, as well as the high level of productivity of the Mexican workforce, contributed greatly to its bright future forecast.
“Mexico is a low cost solution, but what separates it from other low cost areas is the quality of labor, and the increasingly deep supply chain that can open up, quite literally, a world of opportunities for businesses in areas they may never have anticipated,” Donahue says, adding, “aside from the huge conglomerates, we have smaller first and second tier suppliers that have already come in here and set up operations that are doing very well, and we hope our report provides the necessary confidence to more of those types of companies in future.”
Mexico’s manufacturing scene appears to surging full steam ahead, offering both sides of the quality and cost ‘coin’. To download Entrada Group’s study on low cost manufacturing, visit