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Rather quietly and mostly unnoticed,
Electronic Manufacturing Service firms (EMS)
have carved an unparalleled production niche
in Mexico. Boasting double-digit growth in
the past few years, EMS companies are
leveraging their success in North America on
Mexico's privileged location, low-cost labor
and value chain opportunities.
Taiwan's Hon Hai, Singapore's Flextronics,
Finland's Elcoteq, USA's Sanmina-SCI and
Jabil lead the group of EMS firms that are
rapidly expanding their high-tech
manufacturing base in Mexico.
Manufacturing electronics in China was
overwhelmingly in vogue in the first part of
the decade. But now, certain products and
production processes are finding a lot more
value by locating in Mexico. In this article
we will analyze the amazing climb being made
by Mexico's EMS industry and learn why.
EMS Production in Naftaland
Let's recall that EMS companies are
essentially contract manufacturers that
produce finished products or partially
finished products for an OEM (Original
Equipment Manufacturer). EMS firms are
generally more efficient and price
competitive than OEM's because they maximize
the utilization of their equipment and
resources by supplying various customers.
Currently, EMS firms manufacture about 30%
of the worldwide US$ one trillion production
of electronics goods. This share will grow
to 40% by 2011, and 50% by 2015, as EMS
firms aggressively continue to gain
manufacturing share away from OEM's. (For a
more detailed discussion of the business
dynamics of the worldwide EMS industry,
please see the preceding article.)
Asia will continue to increase its worldwide
EMS share of production, denting North
America's participation along with other
regions. But, interestingly enough, within
North America, Mexico emerges as the
soon-to-be frontrunner in the industry.
Mexico's EMS production in 2001 was US$7.7
billion and it remarkably doubled itself by
2006, when US$15.5 billion was reached.
According to the forecast of Electronic
Trend Publications (ETP), Mexico will repeat
this extraordinary feat during the ensuing
five-year, 2006-2011 period.
As a result of saturation of manufacturing
floor space and plant capacity utilization,
EMS companies have intensively expanded by
building out and leasing additional
facilities. By the end of 2007, EMS plant
capacity in Mexico is expected to surpass
eighteen million square feet.
Besides expanding in the Guadalajara area,
the EMS original turf in Mexico's so called
Silicon Valley, EMS firms have made a run to
the border, particularly to Juarez and
Reynosa.
Employment by EMS firms in Mexico at the
close of 2007 is estimated to reach 80,000
direct, technical and administrative
employees. Please see the geographical and
employment illustration of the EMS
manufacturing footprint in Mexico provided
ahead in this piece.
While most product segments boast
double-digit annual growth rates,
communications systems grow at a staggering
20.6% average annual rate for the scope of
the forecast.
According to Randall Sherman, author of the
ETP study: "Growth in the communications
equipment sector exceeded all expectations
and continues to be the sweet-spot of many
EMS companies. Innovations in networking,
data communications and switching equipment
continue to drive demand for EMS assembly in
North America. The trend in the USA has been
to incubate the latest innovative technology
and then transfer it to Mexico once there is
a need for high volume production and cost
efficiency."
Now let's look at some of the reasons for
the underlying success of EMS firms in
Mexico.
Time to Market
The best evidence that Mexico's winning
combination of a location near the USA and
low-cost manufacturing is permeating through
the electronics industry, is the recent
announcement by China's largest OEM, PC
maker Lenovo, to open a 260,000 ft2 facility
in Monterrey. It will have a manufacturing
capacity of five million PC's and offer
employment for about 750 workers.
Lenovo, which purchased the IBM PC business
in 2005, will invest US$20 MM in the Mexico
plant. This represents its largest
manufacturing investment to date outside of
China. The move is evidently market driven.
Lenovo simply needs to service its USA
customers' requirements faster and the only
place to do it cost effectively is from
Mexico. To ship a PC from China to the US
takes about 30 days, while the same product
sourced from Mexico reaches the consumer in
3 or 4 days.
Lenovo is evidently following the example
set by its cousin Taiwanese EMS firms. They
discovered Ciudad Juarez as an ideal
location to perform final assembly and
warranty, post-manufacturing service of
computers for Hewlett Packard, Gateway, Dell
and other OEM's.
Taiwanese EMS companies in Juarez include
Wistron (formerly Acer), ASUS, Inventec,
Tatung, Enlight, ECS, Bizlink and the
largest of them all is Hon Hai (Foxconn).
Collectively,
the Taiwanese EMS firms' headcount in Ciudad
Juarez already reaches almost 10,000
workers. And most of them have expansion
plans, particularly as some of them start
diversifying into flat-screen TV's, which
can be shipped from Mexico to the USA not
only cheaper but faster compared to sourcing
them from Asia.
Francisco Uranga, Latin America VP for
Foxconn said: "Our strategy is very clear:
to supply the NAFTA market from our
locations in Mexico. It is the place where
market proximity is the key to an efficient
supply chain, particularly for
Build-to-Order and Configure-to-Order
requirements."
Complexity
Indeed, products that have Custom-Order
requirements are ideal for manufacturing in
Mexico. These type of goods are generally
classified as "Low-volume / High-mix" in
manufacturing jargon. Whereas mass
production goods, "High-volume / Low-mix"
are better suited for manufacturing in
China.
But consider further product complexity, not
only from a manufacturing badge perspective,
but also across the board in the product
value chain, to include, for example,
design, distribution and value added. In
fact, the more "Complex" a product is, the
better it is suited for manufacturing in
Mexico.
According to Ernesto Sanchez, Jabil's
Operations Director in Guadalajara:
"Manufacturing in Mexico is growing with
projects with a different profile than what
had been made years ago. The new projects
include products of higher value, with
complex logistics and more engineering
input."
"We have moved away from commodities such as
cell phones to high-complexity products.
Often times these need to be designed from
scratch, with higher technology and higher
value components, and require many shipments
to different destinations." He added that:
"Mexico's design capabilities are world
class. They have attracted business from
small and medium-size customers, including
prototype development."
"The EMS industry in Mexico has been
reborn," says Maria Via Urista, an analyst
with the consulting firm Technology
Forecasters of Alameda, California. "EMS
companies have expanded. They are providing
a wider range of services such as building
enclosures, box build, final configuration
and logistics services for North America,"
she said.
According to Jim Walker, Research VP for
Gartner Dataquest: "EMS are trying to
provide more value-added services. They are
going up and down the food chain offering
technical and design support, inventory and
supply chain management. What is really
happening is that the EMS firm is being used
as a virtual customer factory."
Mexico's EMS shift to more complex products
is nothing but good news to the OEM market.
This is because they now enjoy more choices
if they decide to outsource. Simply put,
higher capabilities are now available near
shore at a more competitive price.
Landed Cost and Total Ownership Cost
Landed cost (LC) is the ratio obtained by
dividing the cost of goods plus all the
expenditures made to deliver a shipment, by
the cost of the goods.
LC= Cost of goods + All Expenses Cost of
Goods
David Cooper, Solectron's VP of Global
Program Management indicated: "Purchasing
departments' main objective is to reduce
costs. But sometimes they are so narrowly
focused on labor costs and nothing else, and
then they decide that China is best before
they look at the total LC of the supply
chain."
Now consider the notion of "Total
Ownership". This concept includes not only
the element of LC, but also other factors
such as: Product quality, intellectual
property, supply risk, customer satisfaction
and retention and even traveling costs and
management wear down.
OEM customers are wising up to the hidden
costs of doing business in China, and are
carefully analyzing the total cost of owning
a product. In the case of Lenovo's new
operation in
Mexico, it appears that even the Chinese
agree that China is not always the best
alternative.
William Emilio, Lenovo's CEO said: "Our
objective is to lower the cost of the total
value chain. The new concept to accomplish
this is "World Sourcing". This means that we
must go to places where the value creation
for customers is maximized."
The "Domestic" Market
Mexico's EMS industry has two clear foreign
market sources: They are USA and Canadian
operations primarily looking to lower their
manufacturing costs, and there are also
Asian companies seeking to better serve
their customers in the NAFTA region.
But there is a third important market for
EMS companies in Mexico, namely the
"domestic" market. This includes various
OEM's that started to manufacture in their
own facilities in Mexico and are now asking
EMS firms to take over their operations.
Also, there are OEM's that simply started to
source components from existing EMS
companies in Mexico. In this sense, Mexico's
ample high-tech manufacturing base is now
breeding some "organic" growth for EMS
firms. This is the case of Epic Technologies
taking over Philips 125,000 ft2 electronics
assembly operation. And there is
Flextronics' landing of an important
contract to supply metal stampings to
Electrolux's appliances facility in Ciudad
Juarez.
Flextronics also took over Xerox's facility
in Aguascalientes and Sanmina-SCI runs the
former IBM mobile and servers operation in
Guadalajara. Elcoteq, Jabil and other EMS
companies have reportedly taken over other
OEM operations in other regions in Mexico as
well.
Support from Within
Electronic parts and components move freely
in and out of Mexico with surprising
agility. Mexico's network of free trade
agreements and electronics industry specific
duty-free provisions, such as the ones
contained in the Information Technology
Agreement (ITA+), practically eliminate
frontiers when moving parts within Mexico,
the USA and Asia.
Collaboration between industry and academia
in the development of electronics
technicians and engineers excels in the area
of Guadalajara. Other electronic clusters
regions such as Monterrey, Tijuana and
Juarez are effectively ramping up the
brainpower supply pipeline directly into the
EMS's engineering departments.
According to Jacobo Gonzalez, Director for
the Guadalajara's Electronics Supply Chain
Association: "About 3200 electronics
technicians and engineers graduate annually
from area universities. We have many
academic programs with direct interaction
between the companies and the universities
but there is a lot more to be accomplished."
Those states in Mexico with EMS clusters are
not coincidental, they have embraced the EMS
industry with incentives, infrastructure and
industry specific promotional and academic
plans.
Conclusion and Challenges Ahead
MEXICONOW identified 36 EMS companies
operating in Mexico. The largest ones have
multiple locations. At least a third of them
have on-going plant expansions and/or
definite plans for expanding within a year.
Mexico's EMS industry is undoubtedly the
fastest growing industrial sector in Mexico.
It is our take that ETP's forecast of 13.5%
annual growth for the next five years will
eventually prove to be conservative. Asia,
the USA and the domestic market will
continue to fuel EMS growth in Mexico at an
even faster pace.
But constraints and challenges lie ahead. As
EMS firms expand, there will be more
competition for skilled labor and
engineering talent from other EMS companies
as well as other industrial sectors. Mexican
universities need to broaden and deepen
their production of technical workers.
EMS firms may consider importing senior
engineering talent from their operations
abroad, mainly to strengthen lean production
practices in Mexico and not lose a bit of
competitiveness to Asian electronics
manufacturers.
EMS firms are the worldwide leaders of
manufacturing competitiveness; they earn
their contracts in a fierce cutthroat
business environment. It is comforting to
see that Mexico is host to such a formidable
group of companies. , But at the same time,
it is disturbing to think about the lost
opportunities in EMS firms and other
industries that Mexico otherwise would
enjoy, were it not for the lack of more
globally competitive education, energy, tax,
telecom and labor legislation.
By Sergio Ornelas, MEXICONOW magazine.
Sergio L. Ornelas has 30 years of experience
in international trade and direct foreign
investment. He has business degrees from
Bobson College, Southern Methodist U. and
Harvard; he was head of the State of
Chihuahua Industrial Promotion Agency in
1980-5 and General Director for Intermex
Industrial Parks through 2000. He is
MEXICONOW's editor.
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