Mexico – Page 2 – The OM Blog by Heizer, Render, & Munson

Good OM Reading: Reshoring Revisited

A recent study, Where in the World, compiled by the Entrada Group, provides some interesting insight as to why small- and mid-size manufacturing executives are now ranking the U.S. and Mexico as “prime locations” for lower-cost production of goods bound for North America.

Here are some of the findings from Entrada’s survey:

Proximity is appealing — While the U.S. is the most attractive low-cost manufacturing location among all respondents (at 33%), it’s worth noting that among respondents from companies that already manufacture in 2 or more locations (their headquarters plus one), Mexico and the U.S. tied as the top choice, each with 23% of the response.
Experience with expansion matters — Respondents from companies that currently manufacture at 2 or more locations revealed a greater appetite for future expansion to a low cost location or locations, when compared to firms producing solely at their headquarters. Of companies that manufacture in 2 or more places, 67% said they plan additional expansion in the future, compared to just 33% of single-location manufacturers that plan future expansion.
Quality and the bottom line both count — While respondents overall rank high-quality production as the most important factor when choosing a manufacturing destination, low operating costs was tops among companies when reflecting on motivation for past expansion, by more than 2-to-1 over high-quality production.
Cost savings are not always realized — Companies that expanded to a “low-cost manufacturing location” achieved their goals to a large extent just half of the time, with half realizing just moderate savings or worse.
Today China is the most common low-cost location, followed by Mexico — More than half of survey respondents (51%) currently manufacture product in China, with 35% manufacturing in Mexico, the 2nd-greatest response.
China, Mexico not “either-or” — Out of firms that manufacture product in China, 40% also produce in Mexico. Indeed, for many manufacturers, a presence in both countries makes sense for delivery to regional markets.

OM in the News: American Manufacturing Heads to Mexico

With labor costs rising rapidly in China, The New York Times (June 1, 2014) reports that American manufacturers of all sizes are looking south to Mexico with an eagerness not seen since the early years of the NAFTA in the 1990s. From border cities like Tijuana to the central plains where new factories are filling farmland, Mexican workers are increasingly in demand. American trade with Mexico has grown 30% since 2010, to $507 billion, and foreign investment in Mexico last year hit a record $35 billion. Over the past few years, manufactured goods from Mexico have claimed a larger share of the American import market, reaching a high of about 14%, while China’s share has declined.

“When you have the wages in China doubling every few years, it changes the whole calculus,” says Chris Wilson, at the Mexico Institute in D.C. “Mexico has become the most competitive place to manufacture goods for the North American market, for sure, and it’s also become the most cost-competitive place to manufacture some goods for all over the world.” Wilson calls for a focus on “globally literate workforces in both countries.”

Many American companies are expanding and spending billions in Mexico — including well-known brands like Caterpillar, Chrysler, Stanley Black & Decker and Callaway Golf. Economists say that the U.S. benefits more from outsourcing manufacturing to Mexico than to China because neighbors tend to share more of the production. Roughly 40% of the parts found in Mexican imports originally came from the U.S., compared with only 4% for Chinese imports.

Yet Mexico is still a country of vast differences in efficiency and education, where only a small minority of the population has the training needed to compete with the world. The kinds of companies succeeding now in Mexico are those big enough to manage their own factories and those that did not give up their technical knowledge by outsourcing to China. To draw more companies now, experts say, Mexico and the U.S. will need to be more focused on sharing labor and moving products.

Classroom discussion questions:

1. Why Mexico?

2. Why does Chris Wilson say that “a globally literate workforce” is needed in both the U.S. and Mexico?

OM in the News: Japanese Auto Makers Drive Into Mexico

Mazda's new Mexico plant will churn out 230,000 vehicles a year by 2016 — Mazda’s new Mexico plant will churn out 230,000 vehicles a year by 2016

When three-tiered car haulers packed with Mazda3s pulled out of the dusty Mexican rail yard here last month, they did more than mark Mazda’s return to North American manufacturing after pulling the plug on Michigan production in 2012. They represented the latest volley in a south-of-the-border blitz by Japanese automakers. Within four months, Nissan, Honda and Mazda have opened assembly plants in what is becoming one of the world’s hottest auto hubs. Mexico is on pace to become the world’s No. 1 auto exporting country to the U.S., thanks largely to the addition of 605,000 units of capacity by those three Japanese automakers, reports Automotive News (March 10, 2014).

Japanese manufacturers are poised for a new assault from Mexico because they can:

• Reap fatter margins from lower cost manufacturing, largely a function of cheaper labor.

• Avoid tariffs on car and truck imports into the United States.

• Mitigate exchange rate losses from yen-based Japanese exports.

• Improve product availability with a shorter pipeline to dealers.

With all this new Japanese capacity, Mexico will eclipse Canada and Japan as the No. 1 exporter to the U.S. next year. Labor and logistics savings are expected to be substantial compared with building cars in Japan and shipping them across the Pacific Ocean. Mexican labor costs are 1/9th those in the U.S. But any savings are initially offset by the upfront costs of the new factories. Honda, for example, sank $1.2 billion into its assembly plant and a new transmission line. And successfully building an export hub in Mexico means developing a network of high-quality local suppliers.

Classroom discussion questions:

1. What reasons are driving the massive Japanese investment in Mexico?

2. What are the advantages and disadvantages of this move from an operations perspective?

OM in the News: Wal-Mart Ramps Up Global E-Commerce

A worker at Wal-Mart's "dark store" in Mexico City — A worker at Wal-Mart’s “dark store” in Mexico City

Wal-Mart says it has cracked the code for speedy, same-day grocery delivery—in Mexico. As retailers like Wal-Mart and Amazon.com rush to expand home delivery in the U.S. to groceries, the retail giant is looking across the border for help: Its high-end Mexican grocery chain, Superama, already delivers groceries in as little as 3 hours.

Wal-Mart has ramped up its global e-commerce operations over the past few years, writes The Wall Street Journal (Feb. 19, 2014), in hopes of catching up to online rival Amazon.com. The company vowed to match Amazon’s service offerings within 2 years. Currently, only about 2% of Wal-Mart’s sales come from the Web.

The company has been testing home-grocery delivery in Colorado and California, but it hasn’t announced a timeline for taking the service nationwide. It is also experimenting with grocery delivery in such cities as Buenos Aires and Santiago, Chile. Wal-Mart says it is “committed to being the online global leader in grocery delivery.”

Mexico provides $27 billion in sales and contributes 6% of the company’s global sales. Superama helped Wal-Mart achieve a 92% market share in the home delivery of groceries in Mexico. A fifth of its grocery orders arrive via mobile-phone apps, computers and tablets. The service is strongest in Mexico City, where much of Mexico’s wealth is concentrated. The capital’s snarled traffic and cramped grocery stores make delivery from Superama appealing for the well-to-do.

The majority of the grocery deliveries in Mexico come from supermarkets that are open to the public. But in the future, Wal-Mart de México plans to deploy more “dark stores”— spaces used exclusively to fulfill online orders. Such “closed” stores are more efficient: Wal-Mart’s inaugural dark store in Mexico City handles the same volume of orders as 5 stores open to the public.

Classroom discussion questions:
1. Why is Wal-Mart pursuing this global strategy?
2. What has happened to previous firms who entered the on-line grocery business in the US?

OM in the News: Whirlpool Jobs Return to U.S.

Whirlpool is shifting some production from Mexico to this Ohio plant

Whirlpool is moving some of its washing-machine production to a plant in Clyde, Ohio, from one in Monterrey, Mexico, reports The Wall Street Journal (Dec. 20, 2013). The shift—another sign of the trend for U.S. manufacturers to bring back some of their production from abroad—will create 80-100 jobs at the Clyde plant, which currently employs about 3,300 people and is the company’s biggest washing-machine factory.

Wages for production workers in Clyde, typically around $18-$19 an hour, are roughly five times higher than in Monterrey. But the shift should lower costs overall. The Clyde plant is more automated and electricity costs are much lower than in Monterrey. Whirlpool also expects to save on transportation because the products won’t have to be shipped across a border before going into the company’s North American distribution network. Like many other companies, Whirlpool is trying to make products closer to where it sells them. That reduces the time needed to respond to changes in demand.

Since 2010, companies have created more than 80,000 manufacturing jobs by moving production to the U.S. from foreign countries, states the head of the non-profit Reshoring Initiative. “The U.S. continues to lose other manufacturing jobs to offshore plants, but those losses now are being offset by inflows,” he says, adding: “We’ve stopped the bleeding.”

Apple, which relies heavily on plants in China for its top selling gadgets, recently began making some of its high-end Mac Pro desktop computers in Austin, Texas. Wal-Mart Stores Inc. has been prodding some of its suppliers, including makers of socks and light bulbs, to provide U.S. made alternatives.

Classroom discussion questions:
1. Why are more firms “reshoring” in recent years?

2. Name several companies (besides the 3 in this article) that have brought manufacturing back to the U.S.

OM in the News: Reinventing the Maquiladoras

Jordi Muñoz, a 27-year-old Mexican entrepreneur, makes small drones for civilian use. Muñoz’s Tijuana plant is a maquiladora, a factory that enjoys special tax breaks. When Mexico set up the first maquiladoras 50 years ago, they were sweatshops that simply bolted or stitched together imported parts, then exported the assembled product across the border to the US. America got cheap goods; Mexico got jobs and export revenues. “Now, with competition growing from other low-cost locations (such as Haiti), and with the government cutting some of their tax breaks, the maquiladoras are having to step up their efforts to become innovative,” writes The Economist (Oct.26, 2013).

Over the years, the maquiladoras have already lost much basic work, such as stitching fabrics, to cheaper places in Asia. Recently, rising pay in Chinese factories has made Mexico an attractive location again. Exports grew by more than 50% between 2009 and 2012, to $196 billion. Carmakers, in particular, have been investing heavily in Mexico in response to a recovery in US sales. Increased Mexican taxes risk prompting a fresh wave of departures to cheaper shores. So the maquiladoras are having to move into more sophisticated types of manufacturing and do more product design. On the first score, there has been some progress: much of the stitching done in Tijuana these days is not of T-shirts but of medical devices such as stents, made of fine pig tissue. The aim of Muñoz’s company and others is to go a step further and to get involved in design and development.

Aerospace and defense companies are among those thought likely to “nearshore” some of the manufacturing currently sent to China. The Tijuana maquiladora zone already has more than 50 firms in these industries, and it is here that the efforts to become more innovative are most visible. To become a plausible aerospace “cluster” and attract more investment from the world’s top manufacturers, the maquiladoras need to bolster the local supply chain, as well as produce more engineers capable of product design.

Classroom discussion questions:

1. What are the advantages of locating manufacturing plants in maquiladoras?

2. Why has Mexico announced a tax increase (from 17% to 30%) on maquiladora exports?

OM in the News: In the Race Between China and Mexico, Mexico Tries to Edge Ahead

The Wall Street Journal (Sept. 17, 2012) reports that China’s rising wages are giving a chance for Mexico to wrest back some of the business that chased cheap labor across the Pacific a decade ago. Mexico may already be a less-expensive place to make products for the U.S. market, as China’s average manufacturing wage topped Mexico’s this year, when accounting for differences in productivity. Mexican workers typically produce more per hour than Chinese workers, and the proximity to the U.S. means companies can ship faster and at a lower cost to American customers. Mexico’s average wage is $3.50 an hour. The average across China has climbed to $2.50 an hour, from 60 cents in 2000.

As global location and outsourcing decisions go, there will not be a wholesale rush back to Mexico. The drug war there scares away new business, and the country has built neither the skilled labor pool nor parts-supply chain to mount a serious challenge to China’s manufacturing prowess. But as Chinese wages continue to rise, Mexico looks the best-placed to benefit, as it is the least-expensive country outside the U.S. to manufacture for the U.S. market.

Customers who buy a Dell computer at a big-box retailer get a product made by Foxconn in China. But shoppers on the company’s website can customize their orders –and those computers are assembled and delivered from a massive Foxconn plant near Ciudad Juárez, which churns out 35,000 laptop and desktop computers a day, and can have a truck on the U.S. side in a few hours.

Here are a few World Economic Forum competitiveness rankings (out of 142) on the 2 countries: Overall– China 26, Mexico 58; labor market efficiency-36 vs. 114; available scientists– 33 vs. 86; infrastructure quality– 25 vs. 73. Mexico’s homicide rate is nearly 18 times that of China.

Discussion questions:

1. Why would businesses prefer to locate or outsource to Mexico?

2. Why would they prefer China?

OM in the News: Shipping Our Batteries to Mexico for Cheaper Recycling

When we discuss the 3R’s of Sustainability in Supplement 5 we emphasize how important it is to build sustainable production processes. But the lead article in The New York Times (Dec.9,2011) asks what really happens when our American car battery industry claims to have the highest recycling rate for any commodity–97% of the lead is recycled–and most states mandate that stores take back old batteries. It turns out that spent batteries we turn in are increasingly being sent to Mexico, where their lead is usually extracted by crude methods that are illegal in the US, exposing plant workers and local residents to dangerous levels of a toxic metal.

The rising flow of batteries is the result of strict new EPA standards, making domestic recycling more difficult and expensive. (The allowable lead levels have dropped by a staggering amount in the past 3 years and cost of compliance is about $20 million per plant). So about 20% of batteries (20 million) are being legally shipped to Mexico this year (up from 6% since the new EPA rules), with many more smuggled across covertly. “Along the border, where US vigilance focuses on drugs and illegal immigrants, there is little effort to staunch the flow”, writes the Times.

Whereas lead battery recyclers in the US now operate in sealed, highly mechanized plants outfitted with scrubbers, the vast majority of Mexican plants just break the batteries, releasing the lead as dust and emissions. Spent batteries house up to 40 lbs. of lead, which can cause high blood pressure, kidney damage, abdominal pain in adults, and serious neurological development in children. Lead pollution remains in the ground for decades. The EPA says it “does not inspect, monitor, or verify the Mexican facilities.” Adds a Dallas recycler: “We’re shipping hazardous waste to a neighbor ill-equipped to process it and we’re doing it legally, pretending it’s not a problem.”

Discussion questions:

1. Do your students view this as an ethical dilemma?

2. What other harmful products do we ship abroad for recycling, and why?

OM in the News: What Do China, Mexico, and South Carolina Have in Common?

The answer to this question about Mexico, China, and S. Carolina is good news re American jobs. But specifically, it’s that The Wall Street Journal (Oct.6,2011) just ran three articles in the same issue that are all tied to the theme of globalization coming full circle.

In the 1st, we find that Otis Elevator is moving production from its plant in Nogales, Mexico (which it opened in 1998) to Florence, S. Carolina. Otis says the move will save money. The cost of producing abroad has risen and Otis has devised more efficient ways to make the product closer to where it sells it. Since designers and engineers had stayed in the US, it meant a lot of cross-border travel. “We needed to rationalize our supply chain”, says the CEO. Net to US: 360 jobs. (Also see the 5 min.video link in the article).

Second, the Journal reports that German tire maker Continental AG is building a new $500 million plant in S. Carolina, bolstering a major turnaround in the US tire industry. Eventually, 8 million tires will roll out annually, creating 1,600 jobs. The strategic shift comes amid reduced labor costs (partly from new 2-tiered wage plans) and a supply of highly-skilled workers, making the US competitive globally. As a bonus, Japan’s Bridgestone Corp, also announced a $1.1 billion expansion of its existing tire plant. Where? Why S. Carolina, of course!

“China is Getting Too Expensive”, talks about a S. Carolina furniture maker who moved production to China a few years back, only to be bumped aside by his Chinese partners who started selling directly to the US market. The Journal writes: “But with labor, materials and shipping costs rising, the advantage will tip (back) to the US in 4 years” in 7 major industries. Among the forces: rising costs in China, more flexible American unions, state subsidies, higher productivity here, and shorter turnaround times, meaning shorter supply chains. Automation, however, means a furniture maker can accomplish with 135 employees what took 250 to do in the past.

Discussion questions:

1. Why are some US companies abandoning Mexican production?

2. What factors are working against China?

OM in the News: Mexican Truck Drivers and the Supply Chain

July 6, 2011 marked the resolution of a long-simmering NAFTA dispute between the US and Mexico over long-haul, cross-border trucking. Although NAFTA came into effect 17 years ago, the trucking deal was still bogged down over two legitimate issues: (1) border security and (2) union and independent trucker opposition to the loss of high-paying jobs to lower-priced Mexican drivers (who earn about 1/2 of their US counterparts).

Businessweek (July 20-27, 2011) reports that transporting goods across the Mexican border is a complicated business, involving customs brokers, warehouses, and lengthy inspections for drugs and illegal immigrants. Under the current system, Mexican trucks haul their merchandise to the border, where a transfer truck takes it across. A US truck picks it up on our side. In time, a Mexican driver will be able to haul goods from any Mexican city straight through to Chicago or New York. To qualify for service on US roads, Mexican drivers will have to learn rudimentary English and US highway laws.

Is it a good trade-off? Businessweek strongly endorses the idea. With trade among Canada, Mexico, and the US at$1 trillion (triple since the start of NAFTA), the magazine writes: “US potato farmers, along with producers of pork, cheese, and other goods, can look forward to reduced Mexican tariffs with the resolution of the trucking deal. Higher wages and wider prosperity in Mexico are very much in the US national interest”.

US truckers will strongly disagree. While Mexican drivers will surely benefit, American drivers are loath to travel into Mexico. The country lacks the smooth roads, fuel stations, and accommodations available in the US–and has violent drug gangs to boot. In effect, the trade-off balances a more efficient supply chain with the disruption of workers in this industry. It’s no wonder the Obama administration announced the agreement with little fanfare.

Discussion questions:

1. Is the lower transportation cost good, or bad, for OM?

2. How does this change impact the supply chains served by the truckers?

OM in the News: Locating in China and Avoiding Mexico

Chapter 8 opens with a list of key success factors companies use in making location decisions, and Table 8.1 ranks the global competitiveness of 133 countries. China comes out #29 and Mexico #60. Back-to-back headlines in The Wall Street Journal (Dec.16 and 17, 2010) deal with two very different location strategies. The 1st involves US firms opening outlets in China.

We may be losing manufacturing jobs to China by the hundreds of thousands, and outsourcing engineering jobs to India and call center jobs to the Philippines by the 10,000s. But US companies are making very successful inroads in China in one field—fast food! McDonald’s is opening 200 new stores in China next year, adding to the 1,100 locations it already has. (KFC, by the way, leads with 3,200 outlets, including many in lesser-developed cities where there is less competition). California Pizza Kitchen plans to expand, while Starbucks is tripling its stores to 1,500 in the next 5 years. Half of the new McDonald’s will have drive-thrus and 550 will include delivery service. Currently, the firm just does not have the supply chain to allow it to expand beyond the 150 cities it is already in.

On a less favorable location note, the Journal headline declares,”Companies Shun Violent Mexico”. Electrolux just announced it had chosen Memphis over locations in Mexico for a $190 million appliance factory sporting 1,200 jobs. The decision involved factors such as proximity to suppliers,but Mexico’s deteriorating security and spiraling drug-related violence played more than a minor role. “We won’t put a factory in Mexico until some of this violence gets addressed”, says the CEO of Terex, a heavy equipment maker. Whirlpool’s concern about safety was also a factor in building an oven plant in Tennessee, rather than Mexico. Toyota’s approach was to build a plant deeper inside the country, in a relatively safer area.

Discussion questions:

1. What is the long-term danger to Mexico in terms of foreign investment?

2. Why are US fast-food chains trying to penetrate Chinese markets?

3. Discuss the difficulty McDonald’s faces in a rapid expansion abroad.