Advantages of Localized Manufacturing

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1 Reiny Giesecke, Cubic Corporation, Director of Business Development Advantages of Localized Manufacturing The advantages of near shoring are quickly outweighing off shoring. China s rising costs, long distance and intellectual property concerns are driving companies to rethink their manufacturing strategies. Mexico, in comparison, offers distinct advantages over off shore manufacturing to China. Mexico is closer, less expensive and offers advantages like ITAR control and ISO 9001 compliance. Mexico s GDP rose 4% in 2011, despite the country s problems with drug cartel violence, which hasn t slowed foreign direct investment in new manufacturing facilities in all regions of the country. Mexico has a low inflation rate and debt levels, and a huge population of young people available to meet employment demands of the large multinational companies. That has put Mexico on par with China and other low laborcost countries in Southeast Asia, particularly since labor costs as well as other manufacturing-related costs are rising in Asia. The consulting firm AlixPartners, named Mexico the most attractive country for moving manufacturing operations closer to the United States. Only 19% of the companies reported supply-chain disruptions in Mexico as a result of security issues, and 50% reported they expect things to improve over the next five years. Most of the violence that has taken place has been between one drug cartel and another, not affecting manufacturing operations. Mexico helps reduce operating costs, offers operational flexibility and provides shorter product/service lead times. Companies that want to launch products faster find Mexico to be an ideal supplier for products that require ISO and ITAR certification. Those that have manufacturing facilities already in Mexico are increasing their footprints. Foreign direct investment in Mexico rose 9.7% in 2011 compared to 2010 to reach $19.44 billion. This indicates a strong belief in Mexican manufacturing. The growth rate is anticipated to increase 4.5% in Manufacturing has been a major driver of the economy, growing 8% over the past year and creating 1.8 million jobs. Mexico s growth is fueled by its large labor pool. The average age in Mexico is 29, making it one of the youngest nations in the world. Every year, 90,000 engineers graduate from Mexican universities or about 3X the number who graduate from U.S. schools. In a report released in August of 2011 by the Boston Consulting Group, it stated that by 2015, wages in Mexico would be significantly lower than in China. In 2000, Mexican factory workers earned more than 4X as much as Chinese workers. The report notes that maquiladora industrial zones bordering the U.S. suffered a large loss in manufacturing when China entered the World Trade Organization in That has changed. By 2010, Chinese workers were earning only two-thirds as much as their Mexican counterparts. By 2015, the report forecasts that the fully loaded cost of hiring Chinese workers will be 25% higher than the cost of using Mexican workers. 1

2 According to a report from Maquila Reference, manufacturers producing goods for the U.S. market are reconsidering their manufacturing options in China, and looking at Mexico s dual benefits of low-cost labor and reduced tariffs under various NAFTA clauses. A maquiladora in Mexico is a factory that operates under preferential tariff programs established and administered by the United States and Mexico. Materials, assembly components, and production equipment used in maquiladoras are allowed to enter Mexico duty-free. Products made can be exported into the U.S. at lower tariffs than those from other countries. One example of the cost differential is the cost of distribution. For example, an average truck from Guadalajara, Mexico to Dallas, TX with 60 pallets costs about $3,500, and transit time is 3 days. A container shipped from Shanghai, China to Dallas, TX with 40 pallets costs about $6,800, and transit time is 30 days. That is about 50% cheaper freight price wise, and transit is one tenth the time when shipping from Mexico. These benefits have not gone unnoticed. The aerospace and automobile industries have been taking advantage of the cost savings for years. Between 2010 and 2011, total sales in Mexico s aerospace businesses have increased by 25% to $4.5 billion, according to the Aerospace Industries Association, far outstripping the industry s overall annual growth rate of 15%, according to data from the World Bank. More than 250 aerospace companies and suppliers, including Aernnova, Bombardier, Cessna, Eurocopter, Hawker Beechcraft Honeywell, and Messier Dowty, now operate in Mexico and employ 29,000 people. As large OEMs set up shop, suppliers follow. In Sonora, located in Northeast Mexico, manufacturing has been growing at 25% a year for the past five years. The number of companies serving the aerospace supply chain has grown from 21 in 2007 to 45 in 2011; and employment in the sector has more than doubled at the same time, from 2,520 to 7,000. The city expects employment will exceed 10,000 jobs by the end of Government incentives include training, infrastructure and tax incentives was a year of record production in terms of total vehicle consumption and export in the light- and passenger-vehicle market segments. This is due to announcements of sizable investment in the country in new production platforms over the last year by large automotive-industry OEMs such as Nissan, Mazda, BMW, Volkswagen and General Motors. In 2008, Mexico became the largest supplier of auto parts to the United States. In 2010, Mexico ranked as the sixth largest automotive exporter in the world. The country exports 80% of its vehicles to the United States, and 11 of every 100 autos sold in the United States are made in Mexico. Forecasts are that by 2014 automotive production will reach 2.4 million units. Eight of the 10 leading automotive OEMs have assembly plants in Mexico, and more than 300 Tier 1 suppliers have plants in Mexico. Heavy-truck manufacturers include Dina, Navistar, Kenworth, Daimler, Volvo, Isuzu and Scania. On the supplier side, over 1,100 companies manufacture auto parts in Mexico, including: Robert Bosch, Denso, Delphi, Magna, Visteon, Eaton, Valeo, Bridgestone/ Firestone, Johnson Controls, Michelin, Goodyear, Lear, ThyssenKrupp, Faurecia and Siemens. In terms of exports of hightech manufacturing, Mexico is the second largest supplier of electronic products to the United States. Exports of consumer electronics and devices reached $71.4 billion in 2010, an increase of 20% over the previous year. In fact, Mexico is the third largest global exporter of cell phones. Mexico s exporting structure has been based on the U.S. market where 90% of the products land. But during the recent economic downturn, in the past three years, they have reduced this number to less than 80%. Their export markets are more diverse, with Latin America growing. Fueled by a young, increasingly educated population, low labor rates and aggressive promotion by Mexican government officials, Mexico 2

3 appears well situated for years of sustained growth. By 2050, Mexico will be the eighth largest economy in the world. In another recent Boston Consulting Group study, it estimated that wage and benefits will increase by 15 20% per year. This will level the labor advantage and bring jobs back to both the U.S. and Mexico. In their research, they project over the next five years wages will rise 18% to approximately $6.31 an hour in Shanghai, Zhejiang and Jiangsu. Re-shoring will return to the U.S., Canada and Mexico as labor rates become less of a cost factor. Cubic Corporation which is strategically located in San Diego, CA has been transforming ideas into quality products for more than 60 years. Near shore contract manufacturing has become a key advantage. Their engineering services, based in San Diego, California, and high rate manufacturing facility in Tijuana, Mexico, are within 25 miles of each other. This close proximity of operations makes the entire manufacturing process highly adaptable and responsive to manufacturing needs. There are no hidden costs for logistics, travel, quality, and additional management fees associated with off shore manufacturing. References markets mexico growth mexico investing/8/18/2011/id/36412 Henri Duhot, Transportation and Logistics Manager, Echostar Technologies LLC China Federation of Logistics & Purchasing en/news China Knowledge China Law Blog Digitimes HSBC China Manufacturing Purchasing Managers Index com Marbridge Consulting South China Morning Post Taiwan Printed Circuit Association CADELEC CANIETI Guadalajara High Tech Maquila Portal Mexican Association of Industrial Parks (AMPIP) Mexico Now now.com The Offshore Group CIA World Factbook world factbook Colliers International Council of Supply Chain Management Professionals Doing Business Database Transparency international p://charliebarnhart. com/archives/are your requirements being met/ Their engineers, technical and program management professionals have specialized knowledge and the experience required to meet the most challenging technical problems. Quality is applied to all phases of production. The high rate production facility in Tijuana, Mexico achieves a 99% final inspection pass rate. All facilities are ISO 9001/AS 9100 certified and International Traffic in Arms Regulations (ITAR) compliant. Together they provide scalable contract manufacturing services at the most affordable cost, without sacrificing quality and loss of intellectual property. Cubic offers a wide range of contract manufacturing and engineering services to adapt to the changing needs of businesses, assuring you fast go-to-market solutions. A single point of contact for testing and manufacturing provides end-to-end support from initial design to final production. 3

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