Low-landed costs and robust IP laws make south of the border an attractive site.

Electronics manufacturers are under competitive and pricing pressures requiring them to take measures to control and reduce costs. While this can be achieved through the implementation of Lean manufacturing, consolidation and automation strategies, some firms seek to reach their goals through the shift of labor-intensive operations to lower-cost countries such as Mexico.

Yes, Mexico. Mexico’s low-landed costs are attractive compared to other developing countries. It is particularly well suited to serve as a manufacturing venue for short- to medium-run products that have a high degree of engineered content. Its proximity to the U.S. enables technical and production personnel to coordinate activities to bridge temporal and physical distances. The proximity to both the OEMs and the consumer base also fulfills many just-in-time requirements. Additionally, Mexico’s patent and intellectual property laws are well enforced compared with those of other low-cost nations. Political risk associated with the country is minimal.

Manufacturing product in Mexico can be achieved in  numerous ways. Companies are  advised to consider the option of subcontracting work when the operation to be performed requires approximately 25 individuals or fewer. Once this number is surpassed, other options could provide savings as a result of economies-of-scale derived from increased labor content.

Companies with high quality requirements must be certain to identify and work with firms capable of meeting and maintaining their exacting standards. If quality standards can be maintained, outsourcing can be the best option for firms seeking to manufacture product without making the large capital and organizational investment. Firms with high IP content must be assured that such property is protected.

Other means by which manufacturers can set up operations in Mexico is through the establishment of a joint-venture agreement with an indigenous party, or the formation of a wholly owned subsidiary. The pros and cons of these options are well-defined.

A less well-known option is the manufacturing shelter. The manufacturing shelter permits firms to completely control production and quality, to benefit fully from the experience of an organization that knows the local market, and significantly eliminate the need to make sizeable investments in physical and human assets. Working through a shelter service provider, foreign-based manufacturers are generally able to initiate operations quickly and profitably without actually establishing a legal presence in the country. In such situations, they are “in” Mexico as a department of their chosen service provider. In essence, firms opting to use this vehicle are protected from many of the risks and liabilities that normally affect firms that choose to incorporate directly.

Under the typical shelter arrangement, manufacturers send raw materials and supervisory personnel to train and manage workers, while the shelter company performs the tasks and functions not core to the manufacturing process. Shelter companies typically offer clients services in some or all of the following areas: human resources, payroll and benefits administration, logistics, procurement, environmental and customs compliance, plant and park management, and real estate leasing.

This outsourcing arrangement adds unique value in that it gives manufacturers a means by which to greater leverage core competencies and intellectual assets. An organization that does this can become more nimble and experiences faster and higher levels of innovation. This arrangement is attractive to firms seeking to pursue strategies of leveraged growth. As a manufacturer expands under a shelter arrangement, it absorbs only a portion of the additional overhead the new growth requires.

Novacap, a Valencia, CA-based manufacturer of multilayer ceramic capacitors, operates in Mexico under a shelter program. The company builds products for aerospace, medical device, telecommunications and PC applications.

According to George Kase, vice president of operations at the company’s Guaymas, Sonora, facility, “Our company chose to start in Mexico to enhance profitability by benefiting from lower cost labor. We did not want to spend time and monetary resources developing the in-house expertise to handle non-manufacturing aspects of the business. The shelter option was one that was suited to our needs.

“Since we have been manufacturing in Mexico, our labor and overhead costs have been reduced, and quality and productivity are on par with our U.S. operations. Line labor and engineers at Novacap Mexico have learned the process requirements of our complex MLCC assembly operation.”

Companies like Novacap have learned there are several options to investigate when deciding how to establish manufacturing operations in Mexico. No single option is best for all firms, however, and to be successful, companies must pursue strategies commensurate with their particular needs and circumstances.

Steven A. Colantuoni is director of market research and communications at The Offshore Group (offgroup.com); stevec@offgroup.com.