Mid-market providers are responding to OEM desires for more regional approach.

As wages continue to rise in China and fuel costs escalate worldwide, some North American manufacturers are reevaluating their global operations to determine if production locations are optimal. This is reinvigorating discussion among EMS providers over whether China or Mexico is the best site for lower-cost production.

Both locations have inherent pros and cons, but unlike a decade ago when the World Trade Organization welcomed China as a new member, a comparison of China with Mexico can no longer be based solely on input costs, i.e., labor and transportation. Global electronics supply chains have evolved to be much more complex, and OEMs are demanding faster and more solutions-focused services from EMS suppliers. At the same time, the economies of North America and Asia have changed dramatically since 2000, with growth slowing in the West just as thousands of poor Chinese people are joining the middle class.

The decision for EMS providers, then, turns on cost strategy and customers; the best location, under the best circumstances, is the one that satisfies both.

According to Sonny Newman, president of Reno, NV-based Electronic Evolution Technologies (EE Tech), the EMS company’s Empalme, Sonora Region, Mexico, location gives it a unique strategic advantage over competitors without a Mexico manufacturing location.

“The strategic advantage that our customers enjoy with us in Empalme versus Reno is a lower labor and overhead cost out of our Mexican production facility,” Newman says. “By taking a few more weeks to have the product built in Empalme versus Reno, a customer can save a substantial amount. Unfortunately, the material cost is the same, and that represents a large percentage of the builds, but when you are producing thousands or even hundreds of thousands of units, that savings adds up very quickly.”

To deliver this savings advantage, EE Tech works collaboratively with The Offshore Group to run its Mexico operations. The Offshore Group is what is known in Mexico as a “shelter,” or outsourced manufacturing support company.

“The strategic advantage that we have operating in Mexico is made possible by our partnership with The Offshore Group. They handle the functions of our operations that, although not related to actual manufacturing, are critical to our being able to be and remain up and running profitably. Because they handle things like managing our payroll and worker benefits, our import and export operations and worker transportation, as well as maintaining our manufacturing facility, we can focus on our manufacturing mission, which is where we add lasting value for customers.”

Doug Besse, executive vice president, global supply chain and Asian operation manager for Creation Technologies, a global EMS provider based in Canada, also says his company takes a customer-centric approach to making plant-location decisions.

"Creation Technologies looks at it and says that we really need a Mexican manufacturing location for different reasons than we need an Asian location,” Besse says. “It's different customers looking to do different things. Large North American OEMS are looking at Asia and saying, ‘We want to be in Asia, so we should manufacture in that location.’ Then there are OEMS in North America who say, ‘I have a high labor-cost concentration in my product, but my market is in North America, and I want to be a market leader in North America’ – they tend to look at Mexico as a manufacturing alternative."

Beyond the 'China hype.' According to a 2011 report based on a research project by electronics supply chain consulting firm Charlie Barnhart & Associates, “China and Mexico both possess many world-class manufacturing facilities capable of producing any electronic product being designed today. The question, therefore, is not one of capability but fit. Which country best fits the manufacturing needs of a particular OEM? For OEMs selling high-volume products in the 3Cs (consumer, computer, communications) sector, the answer is undoubtedly still China. For mid-market USA-based OEMs selling lesser-volume products, the answer has become less clear. Many of these companies have been caught up in the China hype only to have become frustrated.”

That frustration stems from multiple factors: steadily rising wages, reduced export tax credits, longer lead times due to greater distance and more shipping requirements; language and time-zone barriers; and the uncertainty of doing business in a country that –although becoming more Westernized economically – remains a Communist country with an authoritarian government that keeps a heavy hand in commerce.

“The composition of the EMS markets in China and Mexico are quite different,” according to the CBA report, China vs. Mexico: An Objective Comparison for Midmarket Electronics OEMs. “While the Chinese market is comprised of both indigenous and global companies, Mexico is comprised almost exclusively of non-Mexican service providers primarily from the United States.” Table 1 shows the top 10 EMS companies from 2011 and whether they have a facility in China or Mexico.

Table 1. Top Tier EMS Footprint
Company    China    Mexico
Hon Hai Precision Industry (Foxconn)    X    X
Flextronics    X    X
Jabil Circuit    X    X
Celestica    X    X
Sanmina-SCI    X    X
Cal-Comp/Kinpo    X    X
Benchmark Electronics    X    X
Plexus    X    X
SIIX    X   
Universal Scientific Industrial    X    X   
Source: CIRCUITS ASSEMBLY Directory of EMS Companies

For mid-market EMS providers, though, it’s expected that EMS production in Mexico is increasing and will continue to do so, according to CBA. The past decade saw a dramatic shift in electronics manufacturing to China in pursuit of lower assembly costs, including for LV/HM (low-volume/high-mix) assemblies. But CBA and others have documented a growing return to a regional approach by some North American-based OEMs that is benefiting Mexico.

“Our research has identified a trend of electronic OEMs returning to a regional approach to their manufacturing,” states the CBA report. “Regionalization is defined as when OEMs build their product in the region into which their product will be sold. In other words, they choose to build in region for region.”

The number of EMS companies operating in China, both indigenous and foreign owned, is still too vast to list, according to CBA. The list of EMS in Mexico in comparison is fairly short (Table 2). (This is not an all-inclusive list, but does reflect what CBA believes to be the vast majority of EMS companies currently operating a facility in Mexico.)

EE Tech produces two-thirds of its sales volume at Empalme and about one-third of it in Reno. This is about 90% of unit volume in Mexico – more than 6 million printed circuit boards per year.

Newman says EE Tech chose Mexico because it was “looking for a solution that was going to be a price leader in North America not competing with the 10,000-plus shops already set up in Asia.”

Table 2. EMS Companies with Operations in Mexico
Company    Mexico Location(s)
ACDi (Fawn Electronics)    Chihuahua
Applied Technical Services (ATS)     Hermosillo, Sonora
Arc-Tronics, Inc.    Empalme, Sonora
Asteelflash (Catalyst EMS)    Tijuana
Ayrshire Electronics    Reynosa
Benchmark Electronics    Guadalajara, Guaymas
CaliBaja Manufacturing Services    Mexicali
Celestica    Monterrey, Reynosa
Elcoteq    Juarez, Monterrey
EE Technologies Inc.     Empalme, Sonora
EPIC Technologies    Juarez
Flextronics    Guadalajara
Hon Hai Precision Industry (Foxconn)    Chihuahua, Juarez
Ikor Group    Guadalajara
Integrated Micro-Electronics (IMI)     Jalisco
Jabil Circuits    Chihuahua, Guadalajara, Reynosa
KeyTronics EMS    Juarez
Kimball Electronics Group    Reynosa
Labinal Mexico    Chihuahua
Mack Technologies    Juarez
Nortech Systems    Monterrey
Northwest Circuits Co.    Tijuana
OnCore Manufacturing Services    Rosarita, Tijuana
Phoenix International    Torreon
PKC Group    Nogales
Plexus    Juarez
Prettl Group    Comonfort, Corregidora
Sanmina-SCI    Guadalajara, Monterrey
Saturn Electronics & Engineering    Juarez, Monterrey
SigmaTron International    Acuna, Tijuana
Simclar (Group), Ltd.    Matamoros
SMS Technologies    Reynosa
SMTC    Chihuahua
Sumida EMS Gmbh.    Jalisco
Sumitronics    Tijuana
Suntron    Tijuana
Synnex     Azcapotzalco
Total Electronics    Reynosa
Trivirix    Monterrey
Universal Scientific Industrial    Guadalajara
Viasystems Group    Juarez
Vogt Electronics    Jalisco
ZF Electronics (Cherry de Mexico)    Ciudad Juarez
Source: Charlie Barnhart Associates

“Our customers usually do not compare us to Asia. If they want Asia, they go there, as there are still some advantages if your supply chain is steady and large. However, if our customers are looking for some sourcing in North America that comes close to Asia pricing and better than the United States, Mexico is a great fit. Not only is it very competitive, it also is just a couple of days away via ground shipment, and none of our customers have more than a three-hour time difference. The staffing and technical expertise is an added bonus.”

Pros and cons. Ultimately, leading EMS providers weigh multiple factors before expanding operations in either China or Mexico. Sometimes, comparing the pros and cons of each location requires exceptional considering.

For example, Creation Technologies sees Mexico as a viable option, but has some concerns. “We would certainly look at Mexico as a manufacturing location,” Besse says. “Since we are focused on a niche market, we are seeking the right location. Because we are a private company, we are more cautious about entering Mexico these days, but the interest is definitely there.”

Creation’s supply base is 65% North American, 30% Asian, and 5% from elsewhere. Despite the fact that most of its suppliers are in North America, the company’s desire for an eventual Mexican location is customer-driven.

"Depending upon the customer and how they structure their manufacturing, it can be cheaper to build in North America. It's not as simple as saying, ‘We should just buy it in Asia.’”

Creation Technologies provides services for high-mix, high-complexity, medium-volume electronic assemblies or total box builds (all commercial). The company’s customers are primarily North American OEMs looking for manufacturing services for North American or overseas markets. Besse says a growing segment of customer OEMs want to get their products into Asia, mostly China, because Asia by far is the largest market opportunity –but the bulk of customer products are still built and purchased in North America. A Mexico location would provide those customers with access to a Western hemisphere low-cost manufacturing area; lower shipping costs, and a more favorable time zone – but it still comes down to the importance of those factors in the OEM’s overall strategy.

"Are those issues of time and distance so overpowering that I can't overcome them, or do I have the process and people to deal with it? Many OEMs will say, ‘I have an office in Asia already, and I am prepared to deal with the complexity.’ From a cost point of view, Asia is still less expensive than Mexico. The labor-cost gap is steadily shrinking, and most likely will continue to do so over time, but as of this moment, when you do a straight comparison of manufacturing from a cost standpoint, Asia is the leader."

Mexico: growth opportunity. Despite the attractiveness of a growing market in Asia, Mexico represents a growth opportunity for Creation because of its commercial niche, and when safety is no longer a concern, the company likely will establish a location in Mexico.

“In the past, companies have moved manufacturing to China because of cost savings, and on the consumer side, I don’t think we'll ever see it come back,” Besse says. “However, on the commercial/industrial side, the cost of Asia versus Mexico and even North America, that gap is closing. We are also very interested in looking at the shelter business model that is available to companies that manufacture in Mexico. Using such as service provider is not a possibility in China.”

China is still a huge growth market, he says, but some customers are bringing products that they moved to Asia years ago back to North America because it is now no longer economically feasible to produce them there profitably.

The CBA research concludes that neither China nor Mexico provides a full-service solution across the manufacturing life-volume continuum, and each is best suited for specific manufacturing processes, but with one distinct difference: “Volumes appear to matter more in China than Mexico." As way of qualification, Barnhart quotes one respondent's description of the optimal build volumes in China: ‘The volumes need to be minimum revenue of $3 million to get into a decent Tier 2 EMS, and above $10 million for consideration at a Tier 1 EMS.’”

CBA has documented that the regional approach is “gaining traction, as this approach is now more cost-effective than a cross-hemispheric solution. The only known remaining exceptions are the extremely large consumer, communication and computing sector relationships, which are now atypical to the balance of the EMS/ODM industry.

“The return to regionalization, which is how the outsourcing industry actually began, should continue to benefit Mexico, especially in serving North American-based OEMs and also global OEMs that are selling their products into the North American market. Clearly this is influenced by the type of products, location of end-markets, and volume levels as mentioned above.”

EE Tech's Newman says the company’s Empalme location in The Offshore Group’s Bella Vista Industrial Park is definitely part of the company’s future growth strategy.

“We still will primarily do all of the upfront prototyping, engineering, purchasing, and planning out of our Reno facility, but we will use our Empalme site to produce the volume at an economical North American price. Most of our new customers are coming to us because they ultimately want to use our Mexico price for volume builds.

“The hidden benefit to this is that we do most of all of the procurement of parts, planning, finance, customer service, and logistics out of the Reno facility, which ultimately creates business and jobs in Reno. I feel that if our Mexico facility did not exist, we would probably have about 75 Reno employees instead of the 150 that we have today. Operating in Mexico under a shelter plan has allowed us to successfully bid and take on volume work that we might have otherwise had no shot at winning.”

[BIO]
Tonya Vinas is a freelance writer.