How to make it in Mexico

Mexico has once again become attractive as a manufacturing and distribution location. In the last year or two, a number of companies have relocated some manufacturing and distribution capacity from Asia to Mexico. Those that make the move can expect to gain important benefits, but to be successful, they will have to overcome challenges in the areas of security, infrastructure, and human resources, says Rolando García.

García, a consultant and CSCMP member, knows both the rewards and challenges of managing supply chains in Mexico. For the past 14 years, he's worked in the fields of strategic planning, logistics, and finance for both Mexican and global corporations. During that time, he's participated in such projects as manufacturing plant startups, enterprise resource planning (ERP) implementations, and lean operations initiatives.

In a recent interview with Editor James Cooke, García offered some practical advice for companies that want to set up operations in Mexico.

Why are more companies considering moving some manufacturing and distribution operations from Asia to Mexico right now?
I can identify three main motives. The first is the quality of the workforce. Mexico has a workforce with many years of experience manufacturing to the highest standards. With the current economic downturn, it's easy to find experienced engineers, managers, and operators at very competitive salaries.

Second, Mexico has accommodating legal and labor laws. A new company can easily arrange to have a "white" union—one that is basically controlled by the company. In addition, the legally mandated minimum wage and benefits are very low compared to the United States, Canada, and Europe. And there are incentives for establishing manufacturing plants in many states. A common example is an exemption from payroll taxes granted for a specified number of years by state governments. I was personally involved in a food manufacturing plant startup for a U.S. company, where one of our main raw materials was water. The company was granted a permit by local government to extract ground water for a number of years at a fraction of the commercial value.

Finally, Mexico offers savings in transportation costs not only to the United States but also to other Latin American countries, such as Brazil. And because Mexico itself is a major consumer market, goods produced here can be made for local consumption.

What are some of the challenges companies face when operating in Mexico?
The first is security. For the past two years, Mexico has been going through an unprecedented crime wave. This translates into an increased risk of shipments being robbed en route—and that increases insurance rates, or it must be factored as shrinkage into logistics costs. There's also an increased risk of robbery in warehouses, which must also be factored into insurance rates and costs. The incidence of crimes like car theft and kidnapping has risen in recent years and can affect individuals, but they can be avoided by maintaining a low profile as well as identifying problem zones and staying out of them.

Besides security issues, there are logistics infrastructure challenges. While Mexico is in a privileged geographic position next to the United States and has vast coastlines, its infrastructure is seriously lacking. Public roads, with a few exceptions, are in bad shape. Suspensions and tires on trucks will need to be changed more often than in the United States. There is a vast railroad network, but few stations are configured for loading or unloading cargo.

There also are great differences in the quality of the workforce from region to region. My previous comments about the high quality of the workforce hold for the traditional industrial cities like Mexico City, Guadalajara, San Luis Potosí, Puebla, Monterrey, Saltillo, and others. Once you get out of these cities you will find very low-cost, very willing workers, but you will struggle to find qualified whitecollar workers.

Finally, there's corruption. While the higher levels of government will put in place programs like the tax exemptions I mentioned earlier, companies will encounter corruption in some local offices while trying to perform such basic tasks as obtaining building permits.

How do you find supply chain talent in Mexico, and what kind of education and experience do they typically have?
Regarding white-collar positions: In the three biggest cities—Mexico City, Guadalajara, and Monterrey— and in medium-sized industrial cities like San Luis Potosí, Aguascalientes, Puebla, Toluca, and Chihuahua, you are going to find an abundant pool of very qualified, motivated, and experienced candidates for any supply chain specialty you need.

The reasons are many. First, these cities have been home for many decades to global industries such as car manufacturers and their suppliers, American retailers and their distribution centers, pharmaceuticals, petrochemicals, and steel and cement. So the people in these cities have experience in these industries and are used to working with high quality standards.

Another plus is that many candidates who have worked with global companies will have experience in projects outside of Mexico. Although that experience will be reflected in higher salaries, they may still be lower or comparable to salaries in other countries. For example, an analyst or a manager in these cities will earn maybe 30 to 50 percent of what he or she would earn in the United States. Higher-level directors or chief operating officers will earn just as much in these cities as in the United States.

Second, these cities are where the best schools in the country are located, including Tecnológico de Monterrey, Universidad Nacional Autónoma de México, Instituto Politécnico Nacional, and so forth.

Third, for years there has been a shortage of whitecollar jobs in these cities, which in turn has made candidates very competitive. You will find many candidates, not just with bachelor of arts degrees but also with master's degrees, specialization diplomas, and/or professional certifications. You will also find that most candidates in these cities—in my experience more than 50 percent—will have English-language skills, at least enough to understand an e-mail and have a business conversation.

In the rest of the country you have a different scenario. As you go into smaller cities, most of the job opportunities are in local companies. Work conditions and standards are lower than in the larger cities, and there are not many opportunities to get a quality education. You will find that many good candidates who have the opportunity to study in one of the big schools outside of the small cities will eventually stay in the big cities.

Regarding blue-collar workers, you will find that their skills and experience tend to be approximately equal in both kinds of cities; the main difference will be that salaries could be up to 50 percent lower in the small cities. For example, a forklift operator trained to use bar-code scanning hardware can earn maybe US $15 a day in a small city like Zamora, in the state of Michoacán. That same operator can earn up to US $25 a day in Monterrey, in the state of Nuevo León, and he would probably earn around US $80 a day in the United States.

What advice would you give to a company that is planning to move some of its distribution operations to Mexico?
I would start by approaching a high level of government. The Secretaria de Economía (Office of the Secretary of the Economy, which is in charge of promoting industry) is a good starting point. Try to reach them through an official agency of your own country, or contact your chamber of commerce and ask if they have contacts in the Mexican Secretaria de Economía.

I would work on a detailed project plan and create a core project team before anything else. The team should be a mixture of experts from the home country, who will bring the know-how of your industry, and local talent, who will have the know-how related to local conditions. Contract the services of an accredited headhunter to hire local talent. You want to have on the core project team strong local players that line workers can relate to. In my personal experience, the best practice is to hire the local key players months ahead of the go-live date and send them to the home country for training.

If this is the company's first offshore experience, select a site in one of the traditional manufacturing cities. There will be cheaper sites, but you will struggle with logistics infrastructure, connectivity, and quality of the workforce if you make that choice.