Mexico, the new China?

Published in Imaging Spectrum issue March 2009 and Recycler Trade Magazine issue March 2009

Imaging Spectrum imageBeing flexible is often said to be a key to business success. Adapting to change is necessary as well as being able to spot opportunity, resources and trends that work for your company in your industry is imperative.

One trend the imaging industry has participated in has been opening distribution/ production facilities and/or partnering with companies in other regions of the world. At one point, the trend was China. Today however, the trend with North American companies seems to be shifting away from China and more toward Mexico. And this has left many in the industry wondering: Is Mexico the new China? And if so, why? What are the benefits?

One company that has shifted away from China and moved into Mexico is Nukote International. It opened a production/distribution centre in Monterrey, Mexico two years ago. “It just made sense,” Steve Baiocchi, president of sales, Nukote said. “It’s closer to home, and closer to our operations side.” This allows for more customer interaction than a facility in Asia could, Baiocchi explained. “Customers can visit our factories and tour the facility and can see the quality for themselves.”

Three key reasons
There are many aspects of the Mexican economy and marketplace that make it a strategic and smart location for doing business. Dr. Mel Jameson, professor of finance at the University of Nevada, Las Vegas said there are three main reasons why businesses are considering Mexico. “One is shipping costs. Two is that China is starting to lose its edge in labour costs and three, fuel costs,” Jameson said. “Not to mention that Mexico is going to be a lot better for turnaround time and for the company’s supply chain.”

According to a report by Canadian investment bank CIBC World Markets, in 2000 when oil sold for $30 per barrel, American importers were paying 90 percent more to ship their goods from East Asia than to transport them from Mexico. When oil sold for $130 per barrel in May 2008, it cost American importers 150 percent more. And most recent, in January 2009, oil was selling for $41-$45 per barrel, making it about 95-100 percent more. This makes both the shipping and fuel aspects of Mexico far more attractive than China for many American companies.

Lead times
In terms of shipping and fuel, when doing business in Mexico, the lead time is significantly lower than in Asia, Baiocchi said. “From a supply chain standpoint, when doing business in China, it takes 13 plus weeks for shipping, which is tying up your inventory and cash flow. In Mexico, it really frees that up.” Doing business in China could bottleneck transportation, drive up costs and hurt profits.

Labour costs
In addition to shipping and fuel advantages, Mexican labour is turning out to be far more competitive than Chinese labour. As of 27 January the minimum wage rate in Mexico was 48-51 pesos (about $3.37-$3.58USD), depending on the area of Mexico. Labour is considerably cheaper there compared to minimum wage in the United States and the cost of labour in China. Right now, especially, China’s workers are demanding higher wages because of the appreciation of the Chinese currency against the US dollar.

Along with the financial advantages to moving to Mexico, there are also political and cultural advantages for American businesses. According to a study done by AMR Research, “China is the region that contributes the most risk to global supply chains … Volatile fuel, energy and commodity prices are the top risk factors.”

The survey found that, “Companies must face the constant challenge of managing product across their global supply chains. The risk of IP infringement and the challenge to protect IP rights will only grow in the next few years.”

Although IP issues are a major cause for concern, China does offer an expertise in technology and engineering that Mexico or other areas may not.

During the 1990s, Nukote decided to manufacture in Mexico and opened a facility in Nugales, on the Mexico/U.S. border. However, Nukote wasn’t satisfied with the technology and engineering expertise available in the boarder area. “At that time and place, the turnover was high … and the technology was not as advanced as we need it to be,” Baiocchi said.

Location and experience has been the difference this time around for Nukote. “We specifically chose Monterrey for our new production centre. There is a tech-savvy work force there and we can draw from for professional and management talent. We’re thrilled at the quality of our operation in Monterrey. It’s really going to be a huge advantage for our customers as we grow.”

In addition to the positive aspects of opening production facilities in Mexico, the region also has an opportunity for profit.

According to Jim Martin, CEO of Network Recycling Systems, only 5 percent of the Mexican population is using remanufactured cartridges. There are about 200 small mom and pop remanufacturing businesses there, and many of them are not trained or certified.

Martin, who is also an STMC instructor, has met with many remanufacturers in Argentina, the Dominican Republic, Costa Rica and Mexico to try to get their quality up and produce better OEM alternative cartridges. So far, he has trained three companies and is scheduled to train at least five more.

According to Jameson, as of at least a year ago, the Mexican people started to see an increase of American businesses opening there. Martin agreed. “American companies are definitely there,” Martin said, “but that’s part of the reason these people are getting their act together.”

Baiocchi also sees the Mexican market as a profit opportunity. “We have operations set in place to penetrate the Mexican market. There’s a great opportunity for cross over,” he said.

Many companies feel the same way. MSE, Densigraphix and NuPrint Technologies are a couple remanufacturing companies that are breaking into the Mexican marketplace. And according to a Gulf Shipper article, Lexmark relocated its molding operations from China to Reynosa and Ciudad Juarez, Mexico.

“It’s all about being flexible for your customers,” Baiocchi said. “Times change and you have to adapt to those changes. Ten years ago, China made sense. Now, Monterrey is the right place for giving our customers what they want.”

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