How EMS companies with plants in the US or Mexico can benefit.
One thing I’m hearing universally across the electronics manufacturing services (EMS) industry is fear about a border tax with Mexico. While I believe that at this point a border tax is more likely political posturing than actual reality, it doesn’t change the fact that uncertainty is never a good thing when it comes to OEM outsourcing decision teams. From an OEM behavior standpoint, while I’m seeing projects come back to North America from China (more to Mexico than the US), I’m not seeing projects come back from Mexico to the US. This is consistent with the lag that often occurs after market dynamics change. OEM outsourcing strategies don’t turn on a dime but will change over time if a new region appears more advantageous. What can EMS companies do to mitigate or capitalize on the fear factor?
If your company only manufactures in Mexico. The companies most vulnerable are those whose manufacturing capability exists only in Mexico. While currently those companies have a big cost advantage over companies with multiple locations, they offer no flexibility insofar as being able to shift production if a border tax is put in place.
The best strategy in this case is to focus on building strong customer relationships and staying informed on developments and strategies for mitigating the impact of tax policy changes. Most manufacturing cluster zones in Mexico have a maquila association that shares information among members about legal and tax issues that can impact their businesses. This is one source of potential “what if” information. Similarly, many multinational law and accounting firms publish updates on changing tax/duty policies and possible mitigation strategies. Make sure customers know you are watching developments and have relationships that will help minimize costs, should it occur. Keep in mind that Mexico has many free trade agreements. Product built in Mexico and shipped directly to those countries won’t be impacted. Understand the end-markets your customers ship to and evaluate whether your current fulfillment strategies with those customers take advantage of those agreements.
Watch customer behavior. Is there an unanticipated change in demand patterns or forecasts? Has there been a request for updated documentation files? Are meetings difficult to schedule? Are you hearing rumors from the supply chain that projects you are building are being bid elsewhere? All are signs a customer may be considering a change.
From a sales and marketing strategy, continue to reinforce business expertise and cost competitiveness to existing customers. However, also look to increase business with companies manufacturing in Mexico to serve the Mexican market or customers manufacturing in Mexico to serve non-US markets. Consider expanding resources to support the needs of customers wishing to sell product in Mexico because, while these can often be the most margin-sensitive customers (particularly if the sourcing team is located in Mexico), they will not be impacted by a border tax.
If your company only has US manufacturing capability. Companies in this situation typically have projects that for one reason or another don’t make sense to build in Mexico. This is the time to build relationships with companies that have business that could be impacted by a border tax. If a tax is announced, OEM sourcing teams would immediately start evaluating other options. EMS companies with established relationships would be in a better position should that happen.
From a sales and marketing standpoint, evaluate existing customers carefully. Is there additional business that is a good fit for US manufacturing that your team should be pursuing? Are there additional divisions of a customer your team could build relationships with? Do any of your customers or the prospect accounts your team is working with have projects in Mexico with quality or responsiveness issues? These may be the first projects a team looks to move.
If your company has US and Mexico manufacturing facilities. Companies in this situation have the best of both worlds because they offer a very cost-competitive Mexican manufacturing solution today and the flexibility to change production location if US manufacturing becomes a more competitive manufacturing solution over time. The core strategies outlined in the Mexico-only manufacturing situation described above apply here as well. The one big difference is these companies have additional tools to reassure customers. From a marketing and sales standpoint, areas of expertise that underlie this flexibility should be highlighted as often as possible. Discuss the robustness of the transfer of work process. Highlight examples of successful dual plant sourcing strategies. If there is equipment commonality, highlight ways this will reduce nonrecurring costs in a transfer among facilities. In short, assuage the fear factor by making it easy for decision teams to understand how you could rapidly respond should a border tax be implemented.
The reality is that even with a border tax there will be many reasons to manufacture in Mexico, and there will likely always be cost advantages. That said, from a total cost standpoint, when demand variability, logistics and automation are considered, there are also projects that even with today’s costs are advantageous to build in the US. Talk of a border tax may simply be political posturing. The fear factor aspect of the Trump Effect is opening the door to conversations with OEM decision teams that would likely not happen in an atmosphere with more cost trend certainty. EMS companies that understand that and take appropriate action will fare better than those that don’t.