Manufacturing in Mexico: Time for a rebound?

Will OEMs disillusioned with China''s long pipeline re-establish Mexico as a leading parts supplier? It just may be the right time.

The inventory pipeline from China to the U.S. is a long one. It can be very costly to set up and maintain, and quality can be an issue. Yet the cost of this pipeline, pointed out Steve DeHoff of Stress Engineering at the American Mold Builders Assn. (AMBA) annual convention in Cabo San Lucas, Mexico, is something many American OEMs don''t address when deciding to take molds and molding offshore.

Ultimately, the realities of the Chinese supply line could create new opportunities for Mexico to regain its status as an optimum alternative, providing low-cost manufacturing, reduced transportation costs, and excellent access to the huge U.S. marketplace.

In fact, says Sergio Sosa, whose family has been in the plastics business in Mexico for more than 50 years, many manufacturers are returning to base their North American manufacturing operations in Mexico after finding out just how long the pipeline from China really is. Sosa is Financial Commissioner of ANIPAC (the plastics industry association in Mexico).

The outlook for Mexico''s economy is improving; the Finance Ministry reported in May that GDP for the first quarter of 2004 rose 3.7% from Q1 2003. Industrial output rose 3.2% in the first quarter from the same period last year, and the key manufacturing segment rose 2.8% during the quarter, with about 90% of Mexico''s manufacturing exports heading into the U.S.

Optimistic assessments

Jim Meinert, a former moldmaking company owner and now a consultant, told attendees it makes him "crazy that U.S. moldmakers don''t take advantage of this favorable situation," adding that he foresees strong imports of molds into Mexico in the future. "[U.S. moldbuilders''] biggest resource is our people," he said. "There is a lack of skills [in Mexico], which makes this a prime market for us."

The market seems good for Precision Mold Inc. (San Antonio, TX), which has plants in LaFeria, TX and Reynosa, Mexico, across the border from McAllen, TX. Domingo Auces, sales manager, says that he''s "going deeper in the interior" to get new business. "Every time I go there, the business is spreading, plastics is growing."

In February, custom injection molder Thermotech Co. announced plans to close its El Paso plant and move to a leased 35,000-sq-ft facility in Ciudad Juarez, El Paso''s twin across the border.

John Bonham, president and CEO, noted continued competitive pressures and the labor intensiveness of Thermotech''s work as reasons for the move. The company also has a plant in Queretaro in central Mexico, which opened in 2001; it closed a plant in St. Petersburg, FL later that same year. Thermotech will eventually have 20 presses in Juarez.

"We''re still heavily tied to the U.S.," Bonham emphasizes, "but we''ve become very comfortable with how to do business in Mexico, so the move from El Paso to Juarez was not a big deal. With the cost-competitive issues in the automotive industry, it didn''t make sense for us to stay on the U.S. side of the border."

Customers lead

OEMs also continue to shift work from the U.S. to Mexico. In October of 2003 Electrolux announced plans to close a refrigerator plant in Greenville, MI sometime in 2005, laying off 2700 employees and moving that work to Juarez. The company plans to invest $150 million over the next two years in its Mexican operations.

When customers relocate manufacturing facilities, processors respond.

Evco Plastics (DeForest, WI) and a privately held partner in Mexico built a 70,000-sq-ft facility in Guadalupe in 2001. The venture, Evco Plastics de Mexico S de RL de CV, operates 20 presses with room to expand to 24.

Dale Evans, president of Evco, says a customer had asked them if they would make the move to support an assembly operation. "Through our customer, we found a great partner that had a small injection facility doing some commodity molding," says Evans. "We invested in the business, which at the time was doing about a million dollars in sales annually. A year later, we were doing a million dollars a month in sales."

Evco''s sales for the facility are still increasing and opportunities are improving. "We should be between $15 [million] and $18 million in annual sales, and we''re looking at a second plant to split up some of the work, the majority of which is contract manufacturing," explains Evans.

Contracting on the border

Anchor Tool & Plastics Inc. (Minneapolis, MN) added an all-electric 330-ton Milacron molding press, bringing to 13 the number of machines in operation at its Nogales molding facility. Ron Rogers, president, says that contract injection molding work continues to grow along the border and he expects to add more presses this year.

Anchor began operating in Nogales six years ago, opening with no customers but a lot of hopefulness about the OEM community in Mexico. "We''ve built this from scratch and have been increasing our business here year over year, except last year, which was a no-growth year," Rogers says. This year he expects 15% to 20% growth.

Logistics play a large part in doing business in Mexico. It is a huge country divided into areas that are difficult to access internally because of a lack of infrastructure. "Distance is a barrier, more so here than in the U.S.," Rogers explains. "In Minneapolis we can do business in Chicago with no problem, but to ship parts to Juarez, although it''s not far away, we have to cross the border into the U.S., go to Tucson, take I-10 to El Paso, then cross the border into Juarez. We get customs twice."

Anchor''s geographic market runs from Phoenix to Oregon. Although Anchor is doing well, Rogers says there hasn''t been a lot of new business or expansion in Mexico; the growth of the 1990s has been reduced somewhat by the recession in the U.S.

Ford Motor Co., however, is substantially expanding its plant in Hermosillo, so some suppliers from Michigan are locating additional facilities in the region, Rogers adds. "We''re finding some opportunity to do automotive—we are at about 20% now—but we haven''t actively pursued it." As business picks up in the U.S., companies in Mexico are increasing their demand, Rogers says.

For their part, a few molders are expanding. One of them is the Tech Group (Scottsdale, AZ), a global contract manufacturer for Fortune 500 companies, which announced expansion plans for Tech Group Mexico''s facilities in Guadalajara to accommodate increased demand beyond the U.S.

Moreover, the expansion involves installing an FDA-validated cleanroom and manufacturing site to meet demand for cleanroom molding and assembly, as well as manufacturing for both the health care and consumer markets the Tech Group serves in Latin America. Two major medical companies have committed to moving the manufacture of key devices to Mexico. These products involve full contract manufacturing services. Tech Group Mexico intends to apply for FDA registration once the assembly line is completely installed; it is awaiting a formal FDA audit.

"There are very few cleanroom molding and assembly operations in the interior of Mexico," states Tom Podesta, Tech group VP of sales and marketing-health care. "Over the past two years, we have seen additional requirements for cleanroom manufacturing in support of injection molding and contract assembly. As Mexico''s economy expands, we anticipate continued growth in the consumer products sector as well."

Clare Goldsberry [email protected]