Right-shoring - Good News for Mexico, right?

2014-01-03 10:00:00

By Philip Stoten, previously published in Mexico EMS & Global SMT & Packaging

Yes, I think so, the future looks bright for the electronics manufacturing sector in Mexico, not least in the outsourced sector of the market.  And the truth about re-shoring, right-shoring, on-shoring, regionalization or whatever you want to call it is that most of the beneficiaries are not going to be the higher cost environments like North America and Western Europe, they will be the lower cost regions closer to the consumer like Eastern Europe and Central America.

Terms can be confusing, so let's get those out of the way at the offset.  To me it seems clear that the trend to manufacture all of the world's electronics in China made no sense.  I suspect it never made sense to anyone, save perhaps a few people in China and perhaps some of the sheep on Wall Street.  The over zealous move to produce in Asia, and in particular China, has skewed the EMS geography and the time for correction has come.  Many things are driving this including proximity to customer, the desire for direct custom fulfillment, the cost of transport, rising salaries in China and a growing understanding of the need for the right supply chain, not just a cheap supply chain...  Anyway, this is the topic for another article, but the upshot is supply chains will become smarter and more practical and will be designed around customer and product need, rather than existing EMS capacity.

So, all good news so far for Mexico and any other low cost environment that can get its supply chain and logistics into good shape.

As I started to write this piece I reached out to a couple of friends active in the outsourcing industry with an in depth knowledge of Mexico.

Eric Miscoll, Managing Pricipal of Charlie Barnhart & Associates told me "Mexico is one of the most important electronics manufacturing regions globally due primarily to its lower labor costs and proximity to the United States.  It has been one of the biggest beneficiaries of the return to a regionalized manufacturing trend as evidenced by the increased capacity utilization we see there. "

Eric went on to say "Guadalajara is one of the best sites for electronics manufacturing in the world, and even the concerns related to the drug war violence along the border zone seem to have abated since their new Presidential administration came to office last year.  I think the best testimonial for Mexico is that even Chinese companies are investing in facilities there to serve the US market."

China investing in Mexico is indeed testament, as is the large number of tier one EMS players already enjoying success in the country.  Flextronics has six facilities in Mexico which include design as well and manufacturing, Foxconn has multiple sites including facilities acquired from Motorola and Cisco, Jabil operate out of three locations in Mexico, Sanmina have facilities in three cities and Celestica has a factory in Monterrey.

It seems that smart outsourcing companies have always seen the opportunity that Mexico offers, not least because of its proximity to the largest consumer market in the world - North America.  Smart outsourcing requires the buyer to understand the true costs and if they take the time to do so it seems Mexico comes out well.

Riverwood Solutions MD for Mexico, Juan Francisco Fregoso says "In the great wave of outsourcing over the past 15 years, many companies outsourced production driven by a fairly narrow, too narrow in many cases, view towards reducing cost.  But many OEMs have since realized that costs come in many forms, and not all costs are easily represented by the dollars and cents elaborated on the purchase order.  One of the biggest cost factors that many OEMs didn't consider, and still don't today, is Inventory Related Costs (IRC) which include all of acquiring and owning inventory including acquisition costs, financing costs, the depreciation of inventory values over time, risk of obsolescence etc.  An efficient supply chain out of low cost central china - some place like Chengdu - might have finished goods inventories in transit for 32 days before they reach the front end of the distribution channel.  Assuming financing costs of 10% per annum, inventory depreciation of 9% per year, and normal obsolesces risks of 7% annualized probability, your inventory in transit would cost you about 2.3%.  Add the actual logistics costs of 2 to 3% and sourcing from central China has costs you about 5% before supply chain management costs and overheads."

Francisco explains "Contrast this to sourcing from Mexico for the US market.  In transit times from border areas such as Juarez, Nogales, Tijuana etc. are typically 2 to 3 days to major US distribution center hubs.  This lack of in transit inventory can save some OEMs 2 points or more.  Couple that with the improved supply chain response time associated with both closer time zone proximity and reduced transit times, and Mexico looks pretty good for many products.  Lastly, and often forgotten aspect of the NAFTA trade pack is the elimination of import duties and tariffs on almost all manufactured goods.  This can save certain OEMs another 2% to 4% on a wide range of products from LED light bulbs to high-end home audio.

Labor rates are always a factor and over the last five years, while rates have risen substantially in China, Mexico labor rates in US$ terms have been flat, and are expected to remain so in the future.  In many ways Mexico, which showed promise from the outset, has suffered from the hype around China as 'the factory of the world' and the whispers of safety issues and corruption...

Another key factor that people often ignore is the need to manage suppliers wherever they are.  That may present cultural issues, time-zone challenges, or simple the cost of staff travel and materials movement.

Riverwood CEO, Ron Keith told me "Many OEMs, especially smaller companies, find the process of locating, engaging, and especially managing an EMS provider 7,000 miles away to be extremely difficult and often quite costly.  If something goes terribly wrong at your EMS factory in China you can't have people on site for at least two days.  If something goes horribly wrong at your EMS supplier in Mexico in the morning, most US OEMs can be onsite fast enough to be discussing that same issue with management over dinner...and tequila.

Right now Ron's team in Guadalajara Mexico is helping a well know tech company transition some production from Asia to Mexico.  The client's primary motivation for relocating manufacturing from Asian EMS sites to Mexico was not cost reduction, but improved supply chain responsiveness and better long term predictability of product costs.  This is not an isolated incident.

So, regardless of if it's re-shoring, on-shoring or even near-shoring, Mexico is a good bet and looks likely to be a key player in the outsourcing industry with growing significance for years to come.

Thanks go to Eric Miscoll of Charlie Barnhart & Associates and Juan Francisco Fregoso and Ron Keith of Riverwood Solution.

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