By James H. Renzas, Principal, The RSH Group, Inc.
Companies based in the U.S. frequently consider locating manufacturing operations in Mexico. At the RSH Group, we often consider Mexican locations in our site selection studies along with domestic and Canadian locations. We subject Mexican locations to the same criteria we use to evaluate U.S. manufacturing locations in order to determine the optimal location for new or relocated operations.
Major advantages of a Mexican location for manufacturing are in the area of labor cost, labor availability, reduced regulatory costs, taxes, real estate and support infrastructure. The average manufacturing wage in the United States is nearly $21 per hour. In Mexico, the average manufacturing wage is just over $2 per hour — an historic low. The result is a continued trend of companies moving or establishing manufacturing activities in Mexico. These include: Brake Parts (auto parts); Carrier Corporation (air conditioners); Ford (automobiles), General Motors (automobiles); Illinois Tool Works (auto parts); Nucor (steel); Mondelez International (cookies); Rexnord (bearings); TE Connectivity (connectors); Triumph Group (aviation parts); and Firstronic (automotive electronics).
Many of Mexico’s states and communities have heavily invested in upgrading labor force skills and engineering/programming professionalization. Mexico’s median age is 26 years old and the manufacturing infrastructure is strong. There are over three million citizens enrolled in post-secondary education and over 120,000 graduating with engineering degrees from Mexican universities each year.
Mexico has signed trade agreements with the United States as well as 49 other countries, including countries in North America, Latin America, Europe, and Asia. As wages between Mexico and Asia-Pacific nations reach parity, supply chain advantages, including delivery times and transportation costs, will increasingly favor a Mexican location. Many products are manufactured in several plants requiring close coordination between suppliers, contractors, sub-assemblers, final assembly, and distribution. Locating in Mexico allows easier and cheaper access to U.S. supply chains. Low cost truck and rail transportation links developed between U.S. and Mexico offer efficient distribution to world markets.
In order to take advantage of this natural economic interdependency, several U.S. border communities have developed Cross-Border Economic Development programs to assist companies seeking locations on both the U.S. and the Mexican side of the border. These include the San Diego-Tijuana Regional Economic Development Corporation – encompassing the communities of San Diego County, California and Tijuana, Mexico; the Borderplex Alliance, encompassing the communities of El Paso, Texas, Las Cruces/Santa Teresa, New Mexico, and Cd. Juarez, Mexico; and the Sun Corridor, Inc., supporting Pima County, Arizona (Tucson) and Guaymas/Empalme, Sonora, Mexico.
These organizations help to facilitate the location of manufacturing business operations on both sides of the national border and, in some cases, state borders – the definition of regional cooperation. Many companies have found these organizations to be invaluable in helping link U.S. businesses with government resources in Mexico. Studies have shown that such symbiotic relationships can actually create more economic activities and interdependencies between the two countries. For example, a company that wants to keep engineering, management and distribution operations in the United States but needs to lower manufacturing costs can place manufacturing operations in Mexico, and shuttle management and engineering between the U.S. location and the plant in Mexico. This makes relocation of U.S. technical personnel much easier than relocating them to a foreign country while keeping them near manufacturing operations for development and production purposes.
The RSH Group recently assisted one of our clients to explore the possibility of relocating a manufacturing operation from Silicon Valley, California to other areas such as Dallas, Charlotte and Tijuana. Based on our analysis, the annual cost of goods made per year would decrease by 17 percent if manufacturing operations were relocated to Mexico versus keeping operations in Silicon Valley, as shown in the accompanying chart. Alternative domestic locations such as Dallas and Charlotte would only slightly lower the cost of goods.
The Automotive Industry in Mexico
For many years, automotive assembly and parts companies have been locating in Mexico in order to take advantage of lower labor costs and rising productivity. Daimler and Renault were the first companies to place their auto manufacturing plants in Mexico to service the Mexican government back in 1910. Today, there are many automotive manufacturers in Mexico, employing over 335,000 workers. Primarily, these plants have been built to supply the U.S. market.
Among the major automotive plants are Chrysler (three plants), Ford (three plants), GM (four plants), Mazda (one plant), Honda (two plants), Nissan (three plants), Toyota (one plant), and Volkswagen (two plants). Audi, Kia and BMW have recently announced manufacturing facilities in the States of Puebla, Nuevo Leon and San Luis Potosi. In addition, hundreds of auto parts manufacturers have located in border zone areas such as Ciudad Juarez. Almost 60 percent of the manufacturing jobs in the border city are related to the production of automotive parts, automotive electronics and final assembly. Major automotive companies include Bosch, Delphi, Johnson Controls, Valeo and Yazaki. In the northern city of Saltillo, the Big Three U.S. automakers maintain high profile manufacturing presences. Recently, investments from newcomers to Mexico such as Nissan, Honda, Toyota and Hyundai from Asia and Daimler AG’s Mercedes, Audi and BMW have announced and built plants representing an aggregate investment of over eight billion U.S. dollars.
Aerospace Manufacturing in Mexico
The aerospace industry in Mexico is one of the three largest manufacturing industries in Mexico today. Over $3 billion U.S. dollars have been invested during the last three years, employing over 20,000 workers. Over 300 companies have chosen to locate aerospace manufacturing plants in Mexico.
Rising skills levels and increased engineering support have made Mexico a prime location for companies looking for a low-cost North American manufacturing location. Nearly every component of a plane can be manufactured in Mexico, including turbines, fuselages and sensors for jet engines.
In response to the influx of aerospace companies coming to Mexico, educational programs were significantly improved to better serve the technical needs of aerospace companies. Companies have established their own technical training and research centers. General Electric has established a turbo machinery research center in Coahuila, Mexico and Delta Airlines is sending its aircraft to Mexico for maintenance and repair. Other leading aerospace companies in Mexico include:
- Bombardier. This Canadian company manufactures regional jets, having relocated operations from Ireland to Queretaro, Mexico.
- EATON Corporation. This major aerospace supplier has operations in Tijuana, Baja California. The company originally started with hydraulic and mechanical components and has since broadened its manufacturing activities to include aerospace components.
- GKN Aerospace. The company has shifted some of its operations from the United Kingdom to Mexico. For the last 30 years, GKN has operated in Mexicali, Baja California, within 2-3 hours of existing U.S. facilities. The company is manufacturing composite structures in Mexico for the aerospace industry.
- Honeywell. This major U.S. company has shifted much of its aerospace manufacturing and assembly plants to Chihuahua, the Northern State of Mexico. Products include: turbine blades, gears and other airplane parts. In addition, Honeywell has located an engineering and development center in Mexicali, Baja California to develop a new generation of electric systems for airplanes.
- ITR. This company specializes in the maintenance of airplane engines, manufacturing airplane parts, and components and design and engineering services. ITR’s aerospace plant is located at Zona Industrial Benito Juarez.
- MD Helicopters. This company specializes in commercial, military, law-enforcement and helicopters. Based in Mesa, Arizona, the company has a wholly owned manufacturing subsidiary in Monterrey-Nuevo Leon that makes fuselages for a number of models.
- UTC Aerospace Systems. This venerable aerospace company is operating a manufacturing plant in Guayas, Sonora, Mexico as a result of an acquisition of Goodrich Corporation.
- TE Connectivity. This $12.1 billion company operates multiple manufacturing locations in Mexico, including those related to aerospace connectors and sensors. The company recently shifted pressure sensor manufacturing operations from New Jersey to Hermosillo, Mexico.
Medical Device Manufacturing in Mexico
Over 91 percent of medical device investments into Mexico come from the United States. Workforce skills, intellectual property protection, and lower operating costs have served as a catalyst in the attraction of medical device companies to Mexico.
Savings are an important driver in the selection of Mexico for medical devices. Larry Angione, President of Coastline International, has been operating a manufacturing operation in Tijuana for 35 years and works with a variety of medical device and electronics companies based in the United States. According to Mr. Angione, the cost differential between manufacturing in the United States and Mexico has increased as labor costs have increased in the U.S. For example, costs for clean room contract manufacturing can be as low as ½ of U.S. costs.
Over 60 companies are clustered in the Baja California region, including: Cardinal Health, DJ Ortho, Gambro, Hudson ACI, I Flow, ICU Medical, Intuitive Surgical, Lancer Orthodonitics, Medimexico, Medtronic, North Safety Products, Pall Life Sciences, Smiths, Sunrise Medical, Tristate, and Tyco Healthcare.
Products manufactured in Mexico include: anesthesia circuits, breathing machines, catheters, connectors, dental appliances, gum elastic bougie, hemodialysis tubes, latex gloves, medical supply systems, nebulizers, needle less sutures, ophthalmic lenses, orthopedic devices, pipettes, surgical and diagnostic equipment, and valves.
About the Author
James Renzas is a Principal with The RSH Group, Inc., which has offices in Northern and Southern California. He has over 30 years of experience working with companies seeking locations for office, manufacturing and distribution operations and regularly evaluates Mexico for operations serving new markets or supplementing existing high-cost locations. He can be reached at firstname.lastname@example.org, www.theRSHgroup.com, or at 949-305-7290 x 01.
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