Opportunities Exist Including Supply of Components
Demand for consumer and industrial electronics, coupled with advanced production capabilities and proximity to customers may well explain the surge in growth of electronic manufacturing services in Mexico.
What began with nearly a few companies in 1967 has grown to be nearly 5,000 performing this type of work, according to Carlos Gomez, president of Cadelec (Cadena Productiva de la Electronica) which works to integrate the industry with the international supply chain.
"We are speaking about electronics manufacturing, that is computers, consumer electronics, medical products and automotive electronics," Gomez said. "We are also involved in services such as IT, software development, aerospace manufacturing and multi-media development." That multi-media development includes devices for video and animated games.
Gomez predicted employment associated with the industry, now at more than 87,000, should reach 100,000 employees next year. The economic wallop remains close to $17.5 billion (U.S.) from this region to the different global niche markets, with the majority of the sales being to the U.S. market.
An interesting development for electronics manufacturing in Mexico is that it has "clustered" primarily in the Guadalajara region whose more than 600 electronics manufacturing firms – he called them an "eco-system" – produce about 27 percent of Mexico's total exports of electronics.
CUSTOMERS BACK MEXICAN LOCATIONS
Randall Sherman, president, New Venture Research Corporation, which provides market research and business development services, said the relentless drive to lower cost in products is going across the whole industry beyond manufacturing alone.
"Big companies like HP didn't want to pay their manufacturing engineers the same salary that they are paying their software engineers. They basically looked at a way to rationalize this and basically outsourced it to another company that could then take that and make that more efficient. It is part of the outsourcing trend. They came to electronics manufacturing and had a major impact. Now that outsourcing has been accepted the trend is to go to lower cost countries."
Sherman pointed to geography making Mexico a more attractive location for electronics manufacturing because of its proximity to the U.S. and because it offers a very competitive solution. "It is as competitive as anything in China and perhaps more so. China may have a slightly lower cost but that doesn't take into consideration all the issues involving locations, logistics, overhead, travel time and so forth."
Frank Lize, vice president of Flextronics, which has five centers in Mexico, noted his organization followed customers to Guadalajara and expanded from there to other locations depending on customer requirements. "For example our factory in Tijuana is dedicated to medical, just because the fact the medical industry is very heavily concentrated in the Tijuana area. It was making sense for us to be there. In the case of Juarez our customers also needed a solution close to the border. Time to market is very important, so that is why we have Juarez. We also have an operation close to Monterrey."
Lize further explained that use of plastic "needs to be close to where the customers are." He pointed out that putting plastics in trucks is not the most efficient mode as "you put in lots of air into it, so of course the ability to be next to the final assembly is a key. It is very easy to see how we got our presence in Mexico."
Another trump card for Guadalajara and surrounding Jalisco state cluster is language and the supply of educated bilingual people. Gomez went on to note that Cadelec and the industry in Jalisco have strong relationships with the universities. "We have here in the region fourteen of the largest universities. This supplies us with close to 6,500 engineering students from the universities who are engaging with our companies during the last two semesters of their education. They are engaged based on projects. They are fully engaged on the new activities or roles they will take when they finish with their university."
Another geographic advantage for the electronics manufacturing industry in Mexico tends to be overlooked. That advantage is through the time zones which are generally in lock step with those in the U.S. markets. Guadalajara, for most of the year is on the same time as Chicago, Houston or Dallas. Tijuana follows California; the state of Sonora stays with Arizona.
PRODUCT MIX CAPABILITIES
Concerning product mix capabilities, Sherman offered the opinion that Mexico is very good in medium-, low-to-medium volume and high complexity products. "High complexity is different configurations of products. For example take a medical product, a certain kind of pacemaker may have a certain design to it, but for a certain group of people it may even have a different design type. That is called a mix."
From his view, Mexico is also very well positioned for assemblies in the automotive industry electronics assemblies which include safety, instrumentation, and entertainment systems. "Mexico is very well positioned to deal with industrial assemblies, things like process control equipment, test and measurement, and robotics.
It is well positioned to take advantage of medical products because of their complexity."
Lize said his industry encounters seasonal spikes for manufacturing of certain product lines, and experience showed that Mexico handles this challenge very well, something that not every country can. "You can have a temp agency providing you labor for short periods of time. You also have the ability to find lots of workers on the market in a city like Guadalajara, for example.
I can offer you lots of flexibility from this point of view. So we are usually able to run very aggressively in a very short period of time because you also find people who are not starting from scratch. They already have knowledge of the industry and what they are doing. You can find very quickly people who can ramp up your products and get the spike, yet very efficiently serve your customers."
Lize and Sherman each acknowledged the ever-present "China" question when addressing competitiveness from Mexico.
From his financial position within Flextronics, Lize spoke of China's wage increase plans of 15 to 20 percent per year, continuing to do so for at least the next five. On top of this, he predicted depreciation of the dollar against the Chinese yuan to add another five percent. "If you do the math you can see that China is not so far from where Mexico is. You will see in three to four years from now you will have similar wages between China and Mexico. Therefore because of freight considered, most of the products will be more. It will be cheaper to process in Mexico than in China."
Sherman raised an additional caveat about China and its labor pool. "They can churn people but they are not able to keep cost under control. They have to go inland to get lower and lower cost. The type of training needed to do this sort of thing is a skill and although they have an enormous number of skilled workers -- for example they graduate a quarter of a million engineers every year and the U.S. graduates 50,000 about a fifth of them -- they are not skilled in terms of this industry and in terms of improving manufacturing process technology.
Within the promise of electronics manufacturing services in Mexico, Gomez, Lize and Sherman each see risk and opportunity within the supply chain. Mexico does not supply a large percentage of the raw electronics components needed in the manufacturing process.
"This should be the next step in strategy for the government together with the chambers and the industrial people," Gomez stated.
"We are one of the major consumers of electronic components. What we produce at the assemblies, we test, we design and also the direct fulfillment of the final assembly. The next generation that we should be focusing on is clean rooms and to bring more production of electronic components into Mexico. That is what we offer in a portfolio of services to the rest of the communities. The only dependency we have now is the electronic components that are coming from China."
Lize posed the question about Mexico having the supply chain in place to be able to optimize. "Everybody learns the hard way that if you don't have the supply chain next to where you do the final assembly, then you will have lots of hidden costs that will impact you. Everybody understands this, so I think in a few years from now when Mexico will be able to offer competitive wages better than China, then the next challenge will be to have the supply chain."
Sherman noted that many OEM customers want to control certain parts of the supply chain, especially the critical components.
"A number of them will do that and they will bring in the supply to the border cities like El Paso and then ship it across the border. They have use of Mexican labor to assemble it and ship it back, usually in a very seamless, frictionless way. It works, works for both countries.
Gomez noted work continued through the government and the chambers to see if more supply companies can be established in Mexico. Of concern is time due to high capital investment for these types of initiatives. "Actually at the moment we still have a dependency from Asia for some of the clean rooms and die manufacturing. This is a big opportunity for investors to look at Guadalajara since we have the design for this type of activity in Guadalajara."
When it comes to operational effectiveness and the ability to keep up with the velocity of change, Sherman said Mexico has made extraordinary progress. "Particularly you will see this in the automotive industry, also the aerospace industry, where they come from a non-skilled background to being a highly-skilled one. So the products they make are virtually indistinguishable from the ones made in the U.S. The quality is there; they use Six Sigma manufacturing process technologies, total quality management.
All those technologies have been transported to Mexico. Now it is indistinguishable. If you are in the plant in Mexico it would look identical to the one you see in the U.S. Mexico has come a long way in being able to make that totally transparent.
Product and process technology in the electronics manufacturing services from Mexico may be in a more imperative situation, especially at a time when the velocity of change keeps accelerating. "It is very intense and we see that the market is getting faster and faster," Lize said. You can see the Apple; you are now at the Apple 4 and probably the Apple 5 won't be far away. Consumers really want new products, new gadgets almost every day. Product technologies are evolving so fast. You need to have new products on the market. On the software side, what you will find in software today on the phone compared to what you could find even one or two years ago is completely different and the world is changing.
While generally positive about doing business in Mexico, Sherman cited a few weaknesses from the entrepreneur's viewpoint.
He said Mexico tends to have a fairly steady inflation in cost that is sometimes mandated by the government. "They require wage increases; they impose holidays, and certain benefits which add to cost. Mexico could be more competitive if they wanted to. Another area is the whole infrastructure question and for contract and other electronics manufacturers that infrastructure has to be in place. They can't build it for Mexico. Things like roads, power, telecommunications, water all those things have to be in place. That is why they go to the large cities -- because it is in place.
On the other hand, Gomez pointed to government support and also location. "They provide a good incentive in location, programs and support, that means they provide us incentives or grants. We have a well-controlled level of salaries in all the areas. That means all the industrial people get together and get an agreement based on job profiles as to the range of salaries that people should get. People can access a very competitive salary.
It means avoidance of high turnover of people moving from company to company.
"For Guadalajara, this gives the city a good reputation for security. The standard of living is quite good. We have good flight connections all over the world. We have direct connections to the west coast through highway and rail. That enables the competitive advantage and decreases the cost of the finished good to the final consumer."
Gomez and Cadelec see as future markets the aerospace industry, the 'green' technologies, and medical devices. "This means we can have a full integration from software development, equipment development and talent development. This could be of help in terms of medical and tourism for people to enjoy the benefit of medical treatment in Mexico."
Lize pointed to additional devices supporting Cloud computing: "You see the tablet starting to come on board. You will see more devices that will allow you to connect to this computing Cloud world, where you will have most of your information. I think you will have lots of the new products coming in with new players that we don't really see today, that are more software or internet oriented."