In the past five years the Mexican electronics industry has enjoyed a remarkable turnaround, returning to growth and challenging overseas outsourcing.
With gross domestic product growth of 9.6 percent in 2004, $982 million in foreign direct investment (FDI) in 2005, and accounting for 26.8 percent of total exports for the manufacturing sector, the electronics industry in Mexico has bounced back from the doldrums that afflicted it at the start of this decade.
The industry in Mexico was hit hard following the September 11 attacks and the subsequent economic downturn in the United States. Companies seeking cost cuts moved to China and India, and Mexico couldn’t compete with low labor rates and part costs.
But today, the electronics industry makes up 8 percent of the total employment within the manufacturing sector, and more and more companies are looking south of the border instead of across the ocean. Why?Location, location, location.
With its proximity to the United States, Mexico has advantages that other outsourcing countries can’t match (and the panacea that was to be China is increasingly not the reality.) In the event of design changes, for example, companies can alter products more quickly, as opposed waiting several weeks for an overseas shipment from Asia.
Meanwhile, instead of working harder to mirror China and India, Mexico learned to compete smarter. Marco Gonzalez Hagelsieb, senior VP of Mexico operations for Sanmina-SCI, an electronics manufacturing services (EMS) provider, noted that the country needed to find its niche.
“You’re always going to hear about the next cheapest country,” he said.
Mexico has also shifted from low-mix/high-volume manufacturing to high-mix/low-volume manufacturing and expanded its service offerings to include areas like design, build-to-order, and configure-to-order manufacturing support and post-manufacturing repair.
And while it may not always be able to compete on labor rates, Mexico has its own financial advantages.
“NAFTA provides a ‘zero duty’ environment for products manufactured and exported to the U.S. This is a competitive advantage for Mexico, as there are still products from China that have to pay a ‘duty’ to be imported into the U.S.” Hagelsieb said. Other tax advantages available to companies working in Mexico include exemption of property tax, exemption of permit costs, training costs redemption for new hires and cash returns for R&D activity.
Mexico also does not have the “hidden costs of working in China,” which include soft costs like excess travel expenses, schedule flexibility and late night conference calls to Asia, Hagelsieb said.
IPC, a trade association for the electronics interconnection industry, said that transportation costs for U.S. companies that are involved with offshoring to Asia are much higher than the costs of doing business in Mexico. Not only does it take longer for products to travel from point A to point B, but employees that have to travel back and forth also add to costs. And with a longer pipeline for the supply chain, there are more chances for major delays.
In research on the Mexican electronics industry, Technology Forecasters Inc. (TFI), a consulting and research group for outsourcing and the environment, quoted an EMS executive as saying: “To transport cell phones by sea freight that takes up to six weeks wastes 25 percent of the product lifecycle.”
Confidentiality agreements are also difficult to enforce overseas, according to IPC, and overseas companies may be more likely to use unauthorized component substitutions, affecting product quality. Moreover, in an attempt to cut costs, companies actually tie up their cash flow by paying offshore companies when a product is shipped.
The automotive electronics sector was the largest sector of the Mexican electronics industry in 2005, with 20 OEMs, including 8 automotive and 12 commercial vehicle manufacturers, as well as more than 760 automotive components companies. It also accounted for 25.4 percent of manufacturing exports. The Ministry of Economy estimates a 13 percent increase between 2000 and 2010 in the value of electronic and electrical components in cars produced in Mexico, TFI said in a recent report.
Also in the report, TFI forecasts foreign direct investment to reach $18.5 billion in 2007 and within the next five years, the top growth segments in the industry will be automotive electronics, home appliances and aviation and aerospace.
However, as is common within the manufacturing sector, training and retaining qualified employees will be a roadblock that the country needs to overcome, notes Hagelsieb.
Organizations like Consejo Nacional de Ciencia y Tecnología (CONACYT), a group that supports the advancement of sciences and technology in Mexico, have grants available for businesses and entrepreneurs, as well as schools and universities. And Hagelsieb said that universities are implementing programs to help improve the quality of the workforce.
From increased innovation and R&D tax incentives to the Ministry of Economy’s program for the competitiveness of the electronics and high-tech industry (PCIEAT), the Mexican government, according to TFI, is also seeking to help the electronics industry continue to grow.
“The industry has progressed over the years and will continue to progress.” Hagelsieb said.
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