How to do business in Mexico II -

A maquiladora case study

The great sucking sound south is the blood transfusion many U.S. manufacturers need to stay competitive against slave labor rates in China and other parts of the world. What follows is a true case in which a California electronics manufacturer has managed to grow market share and remain profitable through sound engineering, good management and a maquiladora in Tijuana. The choice was $15 dollar an hour fully burdened labor rates in California or $3 for the same work across the border a few hours from the office.

Let the truth be known. A well managed $18 million Dollar a year company may retain around 6 of that money in the form of profits if everything works right. More than 6 will trigger competitors, less than 6 will not allow expenditures on better tooling, new product development, and will stagnate the company. Of the $18 million roughly 10 is in direct labor if performed without automation in the United States. If automated, then roughly 2 will be in direct labor. Automation costs money. A lot of up-front money and payments that often are equal to what a body of workers would be charging. Picture a factory floor where all the work is being done by robots. Now picture the second floor and look at all the programmers and support staff, then Xray vision through the wall to accounting and the endless checks mailed to leasing companies, banks and the like. Automation, even the flexible kind, makes it difficult to bring about engineering changes and everybody knows that the life cycle of almost any new product is measured now in months - not years. A maquiladora evens the field by putting direct labor at 5 while allowing instant design changes; flexibility and no inventory on the Pacific ocean on slow boats to China.

Survival, flexibility and market share are the key motivators to starting a maquiladora. So what is a maquiladora? Our case study is Elpac Electronics makers of external regulated power supplies. Elpac Mexicana is a U.S. company established in Mexico with permission to temporarily import machinery, tools and supplies into Mexico free of duties for processing and return to the U.S. On the U.S. side it is Customs collecting duties only on the value added due to direct labor content. A kit containing all the resistors, capacitors and the like for a thousand power supplies will cross the border, through customs brokers, and arrive at the assembly plant - the actual maquiladora. Paperwork to the Mexican government and U.S. customs is automated. The product is assembled, tested, labeled, packaged and put in containers with the documentation showing all kit components were used and are now on their way back. Another piece of paper shows the standard times and actual direct labor costs which determines the payment to U.S. Customs. Everything is automated by computer.

In Mexico the maquiladora approval is done through SECOFI, the equivalent of Dept. Of Commerce who guide foreign companies through the maze of paperwork and permits. No lawyers are required, in fact they tend to slow things down and hinder the operation. A notary public is the key contact from which all paperwork starts. Runners are hired to take paper and fees to the different government agencies. In two to three months the U.S. company will have legal presence in Mexico which will allow them to hire, make leases and manage the business. Starting wages for a factory assembler is $24 Pesos a day ($3.50 U.S.) times seven days ($24.50 U.S.) for 48 hours of work. Multiply the base wage times 1.5 to get the actual cost per employee. The 50 markup is for Christmas aguinaldo (minimum two weeks pay), two weeks vacation per year, Social Security (medical insurance, retirement, etc.) and miscellaneous costs such as mandatory training, time off for environmental and safety committees, etc. At Elpac Mexicana, my latest startup, I hired recently graduated college people, with some experience in the field, trained them and put them in charge of the factory. There are seven managers; production, materials, accounting, mfg/ind engineering, facilities, personnel and general manager. There are no resident U.S. people since everything is being handled by the Mexican staff. Average wage for these managers is in the $600/800 Dollar per month range. There are seven supervisors working at something like $200 a month and some 130 people on the floor. Total fully burdened labor rates which include rent, insurance, medical, power, water, sewage, supervision, management is in the $3 per hour range. Compared to a minimum wage fully burdened labor rate in California of at least $15, it makes a lot of sense.

Quality is as good as management wants it. In Elpacs case we opted for implementing ISO9000 standards to comply with home office who are registered. The Mexican worker is trainable, responsible and likes the work. Forty-eight hours a week is performed at 9.5 hours per day for five days giving everybody Saturday and Sunday off. When the weeks quota is done early Friday afternoon the crew is let go. This is the greatest motivator of all, even more than money. Somebody from headquarters will make a trip to the plant once a week, not that it

A lot of people believe that at these wages it is nothing more than a sweat shop. On the contrary. There are some 600 maquiladoras in Tijuana and 90 of them are state-of-the-art manufacturing facilities with clean bathrooms, lunchrooms, rest areas, facilities and excellent machinery and tooling putting out high quality, low cost products sold world-wide. Maquiladoras are now popping up everywhere in Mexico. IBM and HP in Guadalajara, GM, Nissan, VW from Puebla to Guanajuato. Our Korean friend who measures his wealth by the share of GNP he controls in each country, GoldStar, is in Chihuahua and expanding. Kenworth, Fender Music, Kimberly Clark, Sony, Sanyo, Matsuchita, Plantronics, and a thousand other well known brands are made in Mexico.

Problems? Yes, if you allow yourself to be suckered into the bribe market. But if you determine up front that your strategy is to do business without ever paying a penny in bribes you are making the right choice. We made that decision and certainly had our share of government inspectors do their best to wear us down but we never gave in. Comply with the rules, document what you are doing, and you can enjoy years of manufacturing glory without blackmail. Research first, get to know people who are in the business, listen well, take notes and then just do it. Mexicans love good food, music, family affairs. They are among the most sociable people on earth. Humble yourself to be a good listener and you will do well in Mexico.

Do not hesitate to Email for additional information. I am traveling into Mexico every other week and have the pulse of the country as it changes day to day. Look for my future articles on Mexico in this section. They will deal with buying and selling, travel, food, customs, and having fun doing business in Mexico.