Sample MMI Article

Positive Sign in Mexico

(May 2013)

    According to a popular perception, the rise in regional manufacturing – making a product in the region where it will be sold – will benefit Mexico, because it can offer lower costs in fulfilling North American demand. But is this perception a reality? One way to answer this question is to look for EMS providers who are adding capacity in Mexico. As the EMS industry is well aware, providers don’t add capacity unless they have customers ready to utilize it. While MMI did not find enough evidence to indicate that demand is growing in Mexico across the board, some providers at least have been adding capacity – a positive sign for Mexico’s prospects.

    EMS giant Hon Hai Precision Industry is said to have ambitious plans for expanding operations at a site in Mexico. The Albuquerque Journal reported that Hon Hai expects to put into operation this year its third 400,000-ft2 facility in San Jerónimo, Mexico, across the border from Santa Teresa, NM. What’s more, Hon Hai plans to add 13 more factories of that size in San Jerónimo in the future, according to the Journal.

    However, the massive expansion planned for the future in San Jerónimo may be driven primarily by consolidation of operations from Hon Hai’s other facilities in Mexico. For a 2011 article, a Hon Hai executive told weekly newspaper El Paso Inc. that the main reason for a huge campus in San Jerónimo was the need to bring the operations at the company’s four other sites in Mexico into a single location.

    Sanmina is another large provider that is adding capacity in Mexico. The company is investing in five more SMT lines for its Guadalajara operations. In addition, Sanmina has funded the installation of a new failure analysis lab so that the company can provide more technical support and services to its Guadalajara customers. Sanmina is adding capacity in Mexico to meet requirements for regional manufacturing, said Javier Carral, executive VP IMS (Integrated Manufacturing Services), Mexico.

    Still, if new business were pouring in across the EMS industry in Mexico, one would expect to see indications of that at other large providers. But unfortunately, MMI came up empty looking for such evidence. Jabil told MMI that it does not have any significant expansion plans being implemented in Mexico. Flextronics did not respond when MMI asked whether Flextronics is expanding any operations in Mexico.

Responding to customers

    OnCore Manufacturing is yet another EMS provider responding to increased demand for manufacturing in Mexico. The company recently opened its second plant in Tijuana, which more than doubles the size of OnCore’s footprint there. This new plant is 84,000 ft2 in size, bringing the company’s total floor space in Tijuana to 142,000 ft2 from 58,000 ft2. OnCore reported that its business in Mexico is enjoying double-digit growth.

    In deciding to expand in Tijuana, OnCore recognized the trend toward regional manufacturing and Mexico’s role in that trend. “Many of the folks we’re talking to are moving to a ‘build in region for region’ model, as logistics costs become a larger portion of a product’s cost and as the labor arbitrage becomes ever less consequential,” said Dave Busch, VP business development/marketing at OnCore.

    Creation Technologies also launched a new Mexico facility in recent months. With the 2012 acquisition of Aisling Industries and its operation in Mexicali, Creation had planned all along to move the operation into a larger facility there (Oct., 2012, p. 7). The company is initially occupying 85,000 ft2 of the new facility, with the ability to expand into an adjacent 40,000 ft2 as the business requires. This is a significant step up from the 40,000-ft2 facility obtained in the Aisling deal.

    The need to offer North American clients a low-cost source of regional manufacturing was Creation’s main motivation for making that deal. “The acquisition of Aisling allowed us to offer ‘Right-Shore’ manufacturing to OEMs selling complex products into North American end markets,” said Jeff Lambkin, market development manager at Creation.

    He reported that less than six months experience in the new location is probably not enough time to see any significant business trends. “However, the initial response and level of interest from our customer base have been extremely positive and encouraging,” said Lambkin.

    At the core of a regional manufacturing model is proximity to end customers, a factor behind the growth that is coming Sanmina’s way in Mexico. “We are seeing greater demand, and part of that growth is based on customers trying to produce products closer to the final customer or consumer,” said Sanmina’s Carral. “They are looking for a best time-to-market solution. If the product is available, you get the sale, or otherwise you lose the sale. So flexibility and availability of the product are very, very important.”

    “We see a good, solid trend of business coming into Mexico. So the pipeline is pretty solid,” he said.

    With costs in China continually rising, has Mexico reached parity with China with respect to total landed costs? Carral was unwilling to make general comparisons of the two regions because the analysis of where to manufacture depends too much on the product and on variation of demand from forecasts. Still, Sanmina has noticed a trend in certain markets. “In some specific markets such as telecom and medical, because of the size of the product and the variability of requirement, we see Mexico more and more as being a more attractive solution in the manufacturing area,” said Carral. Sanmina has witnessed not only telecom infrastructure and bulky medical products coming back from Asia, but also industrial products such as power meters returning.

Is crime an issue?

    Crime in Mexico makes headlines, but does it deter some OEMs from choosing Mexico for their manufacturing solution? “OEMs feel very comfortable with visiting our plants in Mexico,” said Carral. “So it is not really a factor in the decision making process.”

    OnCore with its two Tijuana plants is not worried about crime either. “It never was a problem in Tijuana,’ said Dave Busch.

    But Plexus has a different view. “We believe we are currently disadvantaged in the Americas region with our low-cost solution in Juarez, Mexico. Although the site is performing well, we believe the brand at that site is tarnished by violence in Juarez. We are exploring solutions in Mexico and hope to make a decision and announce our plans in the fiscal third [June] quarter,” said Plexus CFO Ginger Jones during the company’s earnings call last month.

Observing a general trend

    “We are seeing a trend in general of more companies manufacturing in Mexico, some of which are transferring products from Asia to Mexico,” said Carral. But he pointed out, “It’s not for every product or every market because it depends on a number of factors. But being close to American customers is the most obvious one.” Analysis of a customer’s total landed cost will include the sales price, time to market, the cost of money, and the logistics of delivering finished goods.

    “We have seen that trend going on for the last few years, and we see that it’s going to continue for a few more years,” said Carral. The trend is accelerating in some areas. He cited as examples the telecom and medical sectors, where products are normally bulky, and logistics costs favor Mexico over Asia. Also, shipping goods from Mexico beats flying them from Asia when deliveries become urgent.

    But the magnitude and pace of this trend remain elusive. The rate at which OEMs convert to a regional manufacturing model will have a lot to do with how fast this trend progresses. And if this trend is indeed a major one, more EMS providers will chime in with capacity additions.

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