July 26, 2016 Offshore Strategies

Volume 11 | Issue 1

It’s a competitive world out there; Mexico offers companies many advantages in cost savings that can help them achieve their goals.

In an increasingly competitive marketplace manufacturers are under pressure to aggressively control and reduce costs. While this can be achieved through the implementation of lean manufacturing, consolidation and automation strategies, some firms seek to reach their goals through the shift of labor-intensive operations to lower cost countries such as Mexico.
Mexico’s low landed costs are attractive when considered in comparison with other developing country options. It is particularly well-suited to serve as a manufacturing venue for short to medium-run products that have a high degree of engineered content. Its proximity to the United States enables technical and production personnel to coordinate activities to bridge temporal and physical distances. This nearness to market, as well as to the consumer base, also fulfills the just-in-time requirements of both. Additionally, Mexico’s efforts to enforce patent and intellectual property laws are advanced compared with those in place in other low-cost nations. Political risk associated with the country is minimal.

Manufacturing of a product in Mexico can be achieved in a number of ways. Companies are well advised to consider the subcontract manufacture option when the work to be performed requires approximately 25 individuals or less, or is sporadic. Once this number is surpassed, other options would provide savings as a result of economies of scale derived from increased labor content.

Companies with high quality requirements must be certain to identify and
work with firms capable of meeting and maintaining their exacting standards.
If quality standards can be maintained, subcontract manufacturing can be the
best option for firms seeking to manufacture product without making
the large capital and organizational investment required on their own.
Manufacturers with high intellectual property content must be assured that such property is protected.

A second means by which manufacturers can set up operations in Mexico is through the establishment of a joint-venture agreement with an indigenous party. Joint venturing can be an effective means to achieving organizational goals given the local partner’s detailed knowledge of the market and its prevailing conditions. Relationships with firms that have established distribution channels may be of particular value to parties seeking to supply product to domestic markets.

Establishing and maintaining a joint-venture relationship can be challenging in that both parties must share compatibility of organizational culture, as well as pursue similar goals and objectives. Encountering a partner with sufficient similarity of process and purpose can often prove to be a significant challenge.

A firm can establish itself in Mexico through the formation of a wholly owned subsidiary. As is the case with initiating operations in any foreign environment, this can be the most complex, costly and risk-laden alternative. In addition to committing the organization to the investment of “bricks and mortar,” the manufacturer must take the time, make the effort and assume the cost of assembling the skill sets required to navigate new waters. Expertise must be sought, acquired and retained in such diverse areas as labor law, environmental law, customs law,real estate law, etc. Although there is much involved with the establishment of a wholly owned subsidiary, it does enable the organization to have 100 percent control over all of its activities.

Says George Kase, vice president of operations at the Guaymas, Sonora facility, of Novacap manufacturer of multilayer ceramic capacitor products for application in the aerospace, medical device, telecommunications and PC markets, “When deciding how to establish manufacturing operations in Mexico, there are several options that should be investigated. Companies must pursue strategies that are commensurate with their particular needs and circumstances, and make the choice that will most effectively enable them to accomplish their unique goals and objectives.”

Steve Colantuoni is director of market research and communications at The Offshore Group, the largest provider of integrated shelter services in Mexico. The company has 57 manufacturing clients from the medical device, aerospace, automotive, electronics, optics and metal processing industries. The 17,000-plus direct labor workers employed are housed in three industrial parks. Two modern parks are located in the northwestern Mexican state of Sonora, while the group’s newest manufacturing location is in the north central state of Coahuila, in the city of Saltillo. Visit: www.offsIregroup.com

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