For manufacturers, Mexico is a balance of promise and complexity.
Mexico has had a strong selection of electronics manufacturing services choices for decades. Now that its manufacturing cost structure is reaching parity with China, however, there is increasing interest from regional EMS providers. Companies that have been located in a single facility now see Mexico as a good “next step” in terms of offering a low cost country (LCC) manufacturing alternative.
Mexico remains a country full of complexity when it comes to establishing a viable operation, however. There isn’t one right answer for best location or business structure. This month we look at some of the tradeoffs to consider when establishing a small operation in Mexico.
Don’t fall in love with minimum wage. Minimum wage represents just a small part of mandated compensation under Mexican labor laws. Mandated benefits plus the perqs needed to compete for labor can represent two-thirds of total compensation. Areas with strong growth and near zero unemployment will require higher salaries than less popular areas.
Size and labor content matters. Operations with fewer than 25 direct labor employees won’t save money in Mexico because of the overhead necessary to operate there. Highly automated assembly won’t save much money either. A good rule of thumb is labor content should be between 20 to 30% to save money by moving to Mexico. Consequently, if a company is engaged predominately in SMT assembly and plans to mirror that in Mexico, the cost savings is likely to be low even once the operation is fully established.
Shelter or greenfield. Shelter providers are companies that essentially “shelter” companies wishing to establish in Mexico from the complexities of doing business in Mexico. While there are a number of variations in the shelter business model, in the classic model the shelter provider leases a building or space to the company, provides the labor and handles all administrative support necessary to do business in Mexico. The company using the shelter provides equipment and technical/process expertise. The cost of the shelter is normally a markup on all expenses paid by the shelter provider, known as cost plus, or a fixed monthly fee plus expenses.
The main negative of the shelter model is cost. An EMS provider that operates independently on a size scale large enough to absorb the overhead costs and has a team that understands Mexican legal requirements will cost less than a shelter. That said, a lot of smaller companies don’t have the management knowledge or scale to absorb the overhead of an independent operation. In those cases, a shelter can provide a cost-effective option with minimal learning curve.
The one major benefit a shelter provider can offer to smaller companies is economy of scale on shared services. Not all shelter providers will provide shared services, and it is an important distinction to make in evaluating options. The most common area of shared services is administrative support such as human resources, accounting and customs support. In some cases, shelter providers may be willing to subdivide a building between noncompeting companies. In that scenario, services such as cafeteria, medical support, day care or third-party employee transportation may be shared. This can be helpful in addressing turnover issues as these benefits can increase job satisfaction.
Another key benefit of exploring the shelter model is that most shelter providers create detailed quotes designed to not only show the cost of their fees, but also a cost for the desired operation. They normally prepare a costed manning table and estimates for all recurring monthly expenses. This is a good way for companies to sanity-check their cost assumptions.
Location, location, location. While most people familiar with Mexico have an opinion on best location, the right answer is that it depends on a company’s requirements. Virtually every major (and minor) manufacturing center in Mexico has advantages and disadvantages. For companies looking to establish a smaller operation, alignment with a shelter provider offering the right cost structure may be more important than a particular location. Roads in Mexico are not universally good or secure, so logistics and insurance costs tend to increase in interior locations such as Guadalajara. Border locations also have challenges. Popular border locations may have slower crossing times due to congestion for both freight and commuters. Turnover and competition for labor is also generally higher in popular manufacturing centers, but there is usually a large labor pool with additional migrants arriving daily. The downside to less popular locations is that more training may be required, and there may be shortages of qualified personnel for some skilled positions. Fast ramp-ups of large numbers of employees may also be more difficult in those regions, and their border crossings may have shorter hours of operation.
Customer preferences and demand variability should also be part of the equation. In some cases, customers are looking for suppliers to co-locate facilities to minimize logistics costs and transit time. Border regions provide the convenience of enabling customers to visit the factory by day and spend the night in the US. This may be a consideration when customers prefer to minimize their time outside the US.
Safety. While violence is far less than it was even one or two years ago, Mexico is still a country where personal safety is a concern. Violence can run in cycles, and today’s “safe” zone can be tomorrow’s “hot” zone. Make sure US employees are adequately trained on best practices for maintaining personal safety, understand the laws that apply to them in Mexico, and have a list of numbers to call in an emergency.
Financing. Not all equipment leasing companies will permit leased equipment to move to Mexico. This is because once equipment is in Mexico, a leasing company would need to work through Mexican courts to repossess the equipment.
Termination liability. Mexico’s labor laws provide protection for employees who are terminated. Terminated employees get several months pay depending on their length of service. If considering a shelter arrangement with a move later to a wholly owned facility, the path for continuation in the facility and for transferring employees to the new business entity should be agreed on upfront. The two ways shelter providers lock a company permanently are either to refuse to sell or lease their space if they want to leave the shelter or to force them to pay termination costs for employees if they opt to leave the shelter. Some providers offer a startup shelter model specifically designed to eliminate learning curve but provide a smooth transition to an independent facility. Others will negotiate a smooth transition to independence after a set time period of two to three years. Have the discussion about transition options before signing a contract.
There isn’t one best solution for establishing an operation in Mexico. Companies that take the time to consider a range of options are likely to make the most cost-effective decisions.