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June 20, 2002

6 Min Read
Molding in Puerto Rico


Diversification in Nypro Puerto Rico's customer base has contributed to its growth and $70 million in sales. The facility operates 72 presses, from 30 to 400 tons.

For more than 20 years, manufacturing in Puerto Rico has presented some attractive advantages. One tax law in particular, IRS Section 936, exempts U.S. companies from paying taxes on profits generated by manufacturing operations in this U.S. territory. Droves of pharmaceutical and medical firms set up shop, including Johnson & Johnson (which has been manufacturing in PR for more than four decades), Wyeth Pharmaceuticals, Abbott Laboratories, Baxter Fenwal Div. and Baxter I.V. Group, Pall Corp. and Pall Biomedical, Medtronic, and Edwards Life Sciences. Hewlett-Packard also has a 68-acre manufacturing site in Aguadilla, which produces 40 percent of the company's inkjet cartridges sold worldwide.

Now, recent changes in the tax law that would phase out this exemption through 2005 appear to threaten the region's growth, but many molders in the territory that followed their OEM customers remain optimistic.

Resurrection of a Molder
"It's a good business climate here, especially now that the government is giving new incentives to businesses to locate manufacturing down here," says Florencio Fernandez, the new owner of SPC Moldings in Rio Grande, PR. Fernandez purchased the facility from bankrupt custom injection molder Security Plastics of Miami Lakes, FL.

As the general manager of Security for 13 years, Fernandez worked to build the molding business serving the electronic and electromechanical industries on the island. In February, an open house was held to celebrate the "new" SPC Moldings. Fernandez notes that the company was able to retain all of its key employees and "didn't lose a single customer" during the rocky phase of Security's bankruptcy and his purchase of the facility.

Currently, SPC operates 32 presses, ranging from 55 to 500 tons, and employs 92 people. SPC continues to serve the electronics and electromechanical industries, but Fernandez emphasizes the company's 6500-sq-ft Class 100,000 cleanroom with 13 presses to attract the medical device and pharmaceutical industries on the island. "That is key for our future success," he says. "We are seeking to partner with companies with cleanroom manufacturing requirements, which will be the main focus for us next year."

Watch for Potholes
One company serving the medical and pharmaceutical industries that is successfully operating in Puerto Rico with a Class 100,000 cleanroom assembly facility is The Tech Group. Eleven years ago, the company sited a plant there at the request of one of its major customers, Baxter. What the company found, says Bill Gerard, managing director of The Tech Group's operations in Cayey, was a good business environment with opportunities to serve its OEM customers that established local manufacturing plants to take advantage of the tax incentives.

Apparently, the move has paid off. The Tech Group recently invested $6 million in building renovations and equipment upgrades, including two material silos to accommodate the 3 million lb of polystyrene consumed annually at the plant. "We're very optimistic about the state of business here," says Gerard.

However, manufacturing in Puerto Rico has its challenges, he notes. "Machinery service is a huge problem, and spare parts are a problem," he says. To solve that, Gerard gives suppliers space in The Tech Group's warehouse to store parts, and then issues POs and pays for the parts as needed. He recommends running primarily the same types of equipment to minimize the number of suppliers needed to provide service.

Alternately, some molders collaborate with competitors to meet challenges. Gerard says there's a "lot of sharing and cooperation between plastics companies here" when parts or materials are critically needed.

Electricity supply is also a challenge. Gerard says it's not unusual to have as many as 22 power interruptions a month, ranging from a power spike to a full outage. To compensate, the company installed three generators at a cost of half a million dollars to provide 100 percent backup power.

Current overcapacity in Puerto Rico has presented difficulties as well, fostering a highly competitive environment. That's why Gerard advises anyone thinking about putting a molding plant in Puerto Rico to "overspend on the infrastructure and underspend on capacity, and then ramp up gradually."

Finally, the area is prone to supply problems. As a provider of extensive contract manufacturing services, The Tech Group keeps two weeks of finished goods inventory and three weeks of raw material inventory to avoid stoppage in its supply chain. "Fifty-five percent of all the parts we mold here are assembled," Gerard notes.


Following its OEM customers looking to take advantage of tax incentives, The Tech Group set up Class 100,000 cleanroom assembly operation in Puerto Rico. The molder remains optimistic about business in the region.

Profitable Markets
Contract manufacturing has been the feather in the cap of another heavy hitter in Puerto Rico. Nypro, which established its first operation outside the continental U.S. on the island in 1973, is the largest custom injection molder in the territory. It plans to expand its building dedicated to contract manufacturing to 150,000 sq ft.

"Custom molders who just mold plastic parts are struggling," says Reynaldo Encarnacion, regional vice president for Nypro's Caribbean and South American operations, adding that contract manufacturing capabilities will help Nypro's growth. "We've been doing contract manufacturing for the health care industry since 1985, and we knew for many years that other business segments were moving in this direction."

Today, Nypro Puerto Rico operates 72 presses ranging from 30 to 400 tons, and has $70 million in sales. Diversification in its customer base has been a major part of this growth, says Encarnacion, adding that business in the region is good. He notes that Nypro's plants occupy seven Puerto Rico Industrial Development Co. buildings in Cayey and Aguadilla and serve a good cross section of clients.

"All of my health care customers are growing after 9/11," he states. "Electronics and telecommunications slowed dramatically last year, but they are now picking up again." Those facilities also contract manufacture inkjet printer cartridges for HP.

Change in Tax Laws
Part of the optimism that molders in Puerto Rico are feeling comes from a provision in the new IRS Section 956 tax law, which will be fully enacted in 2006, that allows multinational companies to send profits to the U.S. for reinvestment and receive a reduced tax rate. Nypro's Encarnacion, who also represents the plastics industry sector of the Puerto Rico Manufacturers Assn. board of directors, notes that the proposed changes to 956 will present advantages for manufacturing in Puerto Rico over controlled foreign corporations (CFCs) established in Ireland, Singapore, and other countries.

The Tech Group's Gerard agrees that there are advantages to the new tax law, adding that "[IRS Section] 956 allows us to repatriate part of our profits back to the U.S. and not get hit too hard with taxes."

SPC's Fernandez adds that it's really about benefiting all of Puerto Rico's manufacturing sector. "It is good that the local government also provides incentives for local companies that buy components made in Puerto Rico for their worldwide facilities," he says. "The idea is to promote local business growth."

Contact information
SPC Moldings
Rio Grande, Puerto Rico
Florencio Fernandez
(787) 888-4545, ext. 230
[email protected]

Tech Group PR, Cayey, Puerto Rico
Bill Gerard;
(787) 747-4900, ext. 222
[email protected]

Nypro PR, Cayey, Puerto Rico
Reynaldo Encarnacion
(787) 738-4211
[email protected]

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