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Mexico manufacturing has come a long way from the early days of simple product assembly in bare bones “maquiladoras” just over the U.S. border. Based on our experience from nearly two decades in guiding foreign manufacturers in establishing and running their own Mexico production, the current level of foreign direct investment (FDI) into Mexico by global manufacturing powerhouses is unprecedented. More importantly for suppliers, that FDI also translates to opportunity for manufacturers with a physical presence in Mexico.
By far, one of the leading sectors transforming the Mexican manufacturing landscape is the automotive industry. In recent years, Mexico has become an attractive hub for international automotive OEMs, which invested more than $31 billion dollars in establishing or expanding manufacturing plants in the country between 2000-2014, according to industry analyst group HIS Auto. Traditionally, lower labor costs and the ability to efficiently build their smaller models were the initial draws for industry juggernauts like Honda, General Motors and Nissan.
While cost-effective labor remains appealing to foreign OEMs, a more recent attraction is Mexico’s overall operating costs, which are now roughly on par with costs in China, but with greater productivity, according to Boston Consulting Group. Some of that is due to ever-growing costs in China. But it is also about proximity, as Mexico affords easy access to the Canadian, U.S. and South American markets.
Further, Mexico’s reach goes beyond the Americas. The nation has favorable trade agreements with 44 different countries, and is becoming a hub for international OEMs, particularly European manufacturers. Recently, Volkswagen announced it’s doubling the size of its Puebla operation, and BMW is putting its new plant in San Luis, Potosi, for the 3 Series, with an estimated launch date of 2018.
Entering the Fray
Many of the new automotive OEM plants in Mexico are scheduled to be online within two to three years in order to meet their vehicle launch targets, according to Daron Gifford, management consulting partner with Plante Moran. Therefore, OEMs are encouraging suppliers to setup their own Mexican operations.
In Entrada’s recent podcast interview (available here for download) Gifford elaborated that, in order for automotive suppliers to be in production, they must have completed all of the necessary certifications, PPAP and APQP processes so their parts are ready when the vehicles begin rolling off the production line. The OEMs cannot afford delays, as it is very expensive to miss those deadlines, Gifford added, and this is why many OEMs are urging, and in many cases pressuring, their suppliers to locate their manufacturing operations in Mexico too.
A New Level of Competition
With so many international OEMs and large Tier One manufacturers establishing or expanding operations in Mexico, the supplier landscape is diversifying and maturing. Where traditionally foreign suppliers had relationships primarily with OEMs from their own country, foreign suppliers in Mexico are now looking to supply to global players, regardless of origin, in an effort to maximize their return on investing in a Mexican manufacturing operation.
In this new environment, suppliers are going to have to change their output and focus, as each of the OEMs are somewhat different regarding what they expect from the supply chain. Gifford adds that this new competition also offers opportunities for North American suppliers, through their Mexican operations, to supply products and parts to those OEMs and Tier Ones also operating in Mexico.
Even though Gifford makes a valid point that this new competition offers opportunities for North American suppliers to expand relations with international OEMs, we have seen the opposite starting to materialize. A much more assertive effort by the Europeans and Japanese suppliers is underway, where they are courting business opportunities with the OEMs and Tier Ones that traditionally U.S. suppliers handled.
Establishing a Mexican Presence
There are a number of options for setting up manufacturing operations in Mexico, regardless of industry. The challenge for a smaller supplier is the level of investment that its principals can carry. There are, however, options that reduce the capital requirement and reduce the risk to suppliers, according to Gifford. Shelter manufacturing, he added, is something that is growing in popularity, affording smaller-and mid-sized suppliers the opportunity to control more of the production and quality, as well providing access to resources, skills, and capabilities of the local market. This can be a very strategic way for suppliers to initially enter Mexico.
Many small and midsize suppliers run into issues of financing when establishing their operations. This is primarily because when they bring their equipment or raw material into Mexico, banks no longer view it as collateral. The lending rules and practices hinder suppliers from being able to use those assets once they cross the border and put a lien against them. But there are strategies to overcome this is hurdle.
Establishing a business relationship with a bank that has a Mexican presence can go a long way toward eliminating many of the financial roadblocks. The global banks that have established their own relationships in Mexico try to set up the lending operation through a local entity so they have access to the assets on that side. As with any loan, banks want to have assurance that suppliers operating in Mexico can repay the loan terms. But in the case of a default, banks need access to the assets themselves. This is where working with the regional arm of a global bank, or an experienced, in-country Mexican manufacturing partner like Entrada, can prove beneficial.
The Urgency of Mexico
Supplier competition in Mexico is only going to grow over the next few years. For any supplier looking to expand into Mexico, putting the resources toward establishing operations in a timely and cost-effective manner is paramount, so that they can quickly scale up and add new clients, rather than just a single, beachhead client.
Gifford advised that choosing the right partner, such as working with a manufacturing facility already in the country, can significantly help suppliers wishing to establish a turnkey Mexican manufacturing operation quickly and profitably without actually establishing a legal presence in the country, and without making many of the expenditures typically associated with such startups. Such partnerships also provide ongoing production support services, leaving suppliers free to focus fully on manufacturing their products.