Trends in Nearshore and Offshore Manufacturing

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This Entrada Group (www.entradagroup.com) presentation explains why and how Mexico is becoming a key manufacturing destination for the world’s aerospace industry.

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  • I’ll outline the business impetus to create shelter services, explain the evolution of those services in Mexico, describe the types of shelters available today and offer advice on how to choose the best shelter for your requirements.
  • Location of Production by Market Region Primary Market Regions: North America, Europe and Asia
  • Regionalism: Predictability—Currency Speed---transit times Costs---freight Trade Agreements---content requirements Nafta &Cafta Proximity to your client
  • Example: Automotive Industry in the North American Region -- European OEMs---BMW, Mercedes and Volkswagon now re- quiring European suppliers to locate plants in North America
  • D&M opens in Zacatecas, Mexico
  • Reform of the Supply Chain Siemens goals 60% increase in pooling of spending—particularly indirects 25% increase in sourcing in emerging markets 20% reduction of the supply base
  • Demand More communities looking for manufacturers to relocate production than there are manufacturing companies relocating
  • State Competition Tier 1 automotive supplier in Mexico
  • Country Competition Bulgaria v. Poland and Czech Republic Nicaragua v. Honduras
  • Competing against the State China, Brazil, Russia Book by Ian Bremmer, “The End of the Free Market” Concept: The State is dominant economic player in select markets and their primary motivation is political, not economic. This makes it very difficult for the private sector to compete
  • State owned companies, Privately held companies supported by the state Sovereign wealth funds financially subsidized, don’t necessarily need to make a profit, not transparent or accountable and have global reach State bailing out companies in strategic industries: France, US
  • Manufacturers must have production operations in place in order to play Bowles/Nissan D&M/Volkswagen
  • Greenfield Joint Ventures
  • Subcontract Hybrids: Shelter in Mexico: help manage from a distance and across national borders
  • Objective: Estimate, compare, and contrast a Mexico manufacturing site vs. an identical one located in Honduras, Nicaragua and Costa Rica in terms of Operating Costs & Business Risk
  • Private Sources of Location Information and Analytics Trade Data: Global-Production .com Harmonized Tariff Codes- can determine patterns of cross-border trade. The patterns can help identify competitive locations Foreign Direct Investment: IBM Plant Location International Database Tracks public announcements worldwide of new FDI projects
  • Operating Conditions—assess each country’s strength and weakness Legal and regulatory framework Economic factors: Financial incentives and tax structure, duties, inflation, interest rates, currency exchange Government and Political factors: stability and attitude towards business Social and Cultural factors Quality of life
  • Infrastructure quality—transportation, telecommunications, utilities Labor characteristics: quality and availability of operators Availablility of skilled and industry specific personnel Characteristics of the location Proximity to parent company and/or competitors Proximity to suppliers
  • Thank you for your attention. Any questions?
  • Trends in Nearshore and Offshore Manufacturing

    1. 1. <ul><li>Paul Karon </li></ul><ul><li>Managing Partner, Entrada Partners Ltd </li></ul>
    2. 3. <ul><li>Regionalism </li></ul><ul><li>Low Cost Production in Emerging & New Markets </li></ul><ul><li>Reform of Supply Chain </li></ul><ul><li>Supply vs Demand </li></ul><ul><li>Competing Against the State </li></ul><ul><li>Production in Place in Order to Play </li></ul>
    3. 4. <ul><li>Location of production by market region </li></ul><ul><li>Primary market regions </li></ul><ul><ul><li>North America </li></ul></ul><ul><ul><li>Europe </li></ul></ul><ul><ul><li>Asia </li></ul></ul> Part I: Trends
    4. 5.  Part I: Trends
    5. 6. <ul><ul><ul><li>BMW, Mercedes & Volkswagon requiring European suppliers to locate plants in N. America </li></ul></ul></ul> Part I: Trends
    6. 7. <ul><ul><ul><li>D&M Premium Sound Solutions opens production in Zacatecas, Mexico </li></ul></ul></ul> Part I: Trends
    7. 8.  Part I: Trends
    8. 9. <ul><li>Siemens goals </li></ul><ul><ul><li>60% increase in pooling of spending – particularly indirects </li></ul></ul><ul><ul><li>25% increase in sourcing in emerging markets </li></ul></ul><ul><ul><li>20% reduction of the supply base </li></ul></ul> Part I: Trends
    9. 10. <ul><li>Intense competition for large manufacturers </li></ul>
    10. 11. <ul><li>Competition amongst states in Mexico </li></ul> Part I: Trends
    11. 12. <ul><li>Competition amongst countries </li></ul> Part I: Trends
    12. 13. <ul><li>State Capitalism: China, Brazil, Russia </li></ul>“ The State is a dominant economic player in select markets and their primary motivation is political, not economic. This makes it very difficult for the private sector to compete.”  Part I: Trends
    13. 14. <ul><li>State-owned enterprises </li></ul><ul><li>Privately-held companies supported by the State </li></ul><ul><li>Sovereign wealth funds </li></ul><ul><ul><li>financially subsidized </li></ul></ul><ul><ul><li>don’t necessarily need to make a profit </li></ul></ul><ul><ul><li>neither transparent nor accountable </li></ul></ul><ul><ul><li>have global reach </li></ul></ul><ul><li>State bailouts in strategic industries: France, US </li></ul> Part I: Trends
    14. 15. Bowles/ Nissan D&M/Volkswagon  Part I: Trends
    15. 16. <ul><li>GREENFIELD </li></ul><ul><li>SUBCONTRACT </li></ul> Part I: Trends
    16. 17. <ul><li>JOINT VENTURES </li></ul><ul><li>HYBRIDS </li></ul><ul><li>(Mexican Shelters) </li></ul> Part I: Trends
    17. 19.  Part II: Case Study Estimate, compare, and contrast a Zacatecas, Mexico manufacturing site vs. an identical one located in Honduras, Nicaragua and Costa Rica in terms of Operating Costs & Business Risk
    18. 20. <ul><li>Trade Data: Global-Production.com </li></ul><ul><ul><li>Harmonized Tariff Codes </li></ul></ul><ul><ul><ul><li>Can determine patterns of cross-border trade. The patterns can help identify competitive locations </li></ul></ul></ul><ul><li>Foreign Direct Investment </li></ul><ul><ul><li>IBM Plant Location International Database: Tracks public announcements worldwide of new FDI projects </li></ul></ul> Part II: Case Study
    19. 21. WWW.IBM.COM/GBS/PLI By projects 2003 - 2007 By jobs 2003 - 2007 Source: IBM-PLI Global Investment Locations Database (GILD)  Part II: Case Study
    20. 22. WWW.IBM.COM/GBS/PLI By projects 2003 - 2008 By jobs 2003 - 2008 Source: IBM-PLI Global Investment Locations Database (GILD)
    21. 23. WWW.IBM.COM/GBS/PLI By projects 2003 - 2008 By jobs 2003 - 2008 Source: IBM-PLI Global Investment Locations Database (GILD)
    22. 24.  Part II: Case Study
    23. 25.  Part II: Case Study
    24. 26.  Part II: Case Study Selected Comparative Country Statistics Year 2009 Statistics US Mexico Honduras Nicaragua Costa Rica Population 307m 111m 7.8 m 5.8 m 4.3 m Labor Force 154m 46 m 3.3 m 2.2 m 2.1m GDP 14 t 1.5 t 32b 16b 48b GDP per capita 46,000USD 13,200USD 4100USD 2800USD 10,900USD Inflation 0% 3.60% 5.90% 3.70% 7.80% Exports 1 t 230b 5.1b 2.3b 9.0b Exports to USA 80% 60% 61% 32% Internet Users 130m 23m .65m .185m 1.5m Main Exports apparel apparel semi conductor wire harness wire harness electronic, medical Companies Gildan, KC VF, Cupid Intel, Panduit Lear, FCI Yazaki, Draexlmaier Baxter Medical, Boston Scientific t=Trillion b=billion m=million USD=US Dollars
    25. 27.  Part II: Case Study
    26. 28.  Part II: Case Study     Location>> Mexico           <<<<<<<<Less Risk More Risk>>>>>>>>> Weighted # Risk Factor Weight>> 1 2 3 4 5 Totals     1 Labor Supply 17%     3     0.51 2 Unionization 10%     3     0.30 3 Infrastructure 15%   2       0.30 4 Climate 5%   2       0.10 5 Governmental 20%     3     0.60 6 Currency 20%       4   0.80 7 Inflationary 10%     3     0.30 8 Technology 3%   2       0.06                     Totals = 100%           2.97                       Location>> Honduras           <<<<<<<<Less Risk More Risk>>>>>>>>> Weighted # Risk Factor Weight>> 1 2 3 4 5 Totals     1 Labor Supply 17%   2       0.34 2 Unionization 10%     3     0.30 3 Infrastructure 15%     3     0.45 4 Climate 5%       4   0.20 5 Governmental 20%         5 1.00 6 Currency 20%   2       0.40 7 Inflationary 10%     3     0.30 8 Technology 3%       4   0.12                     Totals = 100%           3.11                  
    27. 29.  Part II: Case Study     Location>> Nicaragua           <<<<<<<<Less Risk More Risk>>>>>>>>> Weighted # Risk Factor Weight>> 1 2 3 4 5 Totals     1 Labor Supply 17%     3     0.51 2 Unionization 10%     3     0.30 3 Infrastructure 15%       4   0.60 4 Climate 5%       4   0.20 5 Governmental 20%         1.00 6 Currency 20%   2      0.40 7 Inflationary 10%     3     0.30 8 Technology 3%       4   0.12                     Totals = 100%           3.43                       Location>> Costa Rica           <<<<<<<<Less Risk More Risk>>>>>>>>> Weighted # Risk Factor Weight>> 1 2 3 4 5 Totals     1 Labor Supply 17%   2       0.34 2 Unionization 10%     3     0.30 3 Infrastructure 15%     2     0.30 4 Climate 5%   2      0.10 5 Governmental 20%     2     0.40 6 Currency 20%       4   0.80 7 Inflationary 10%     3     0.30 8 Technology 3%     2     0.06                     Totals = 100%           2.60                  
    28. 30. <ul><li>Total operating costs deemed to be at parity </li></ul><ul><li>Fully burdened direct labor rates are within ~3% of each other </li></ul><ul><li>Overhead cost differences not material </li></ul><ul><li>Honduras freight costs are higher based on delivery to US </li></ul><ul><li>Working capital impacts (e.g. inventory) favor Mexico if target market is US – this impact would need to be quantified </li></ul> Part II: Case Study
    29. 31. <ul><li>Honduras cost volatility deemed to be greater due to potential changes in minimum wages and continued additions of labor expense add-ons like 15 th month, etc. End of 2009/2010 </li></ul><ul><ul><li>Total Honduras payroll estimate with +60% on minimum wage and 15 th month = $4.3MM/Year vs. Estimate of $3.2MM/Year </li></ul></ul><ul><ul><ul><li>Potential +34.3% per year total payroll increase </li></ul></ul></ul><ul><li>Effective productive hours favor Mexico </li></ul><ul><li>Incentive pay systems within Honduras could mitigate weekly production hour disparity </li></ul><ul><li>Political stability deemed to be a “watch-out” in Honduras due to June 2009 events </li></ul><ul><li>Weather related events are more of a risk in Honduras vs. Mexico (Working Capital Impacts) </li></ul> Part II: Case Study
    30. 32. <ul><li>Administrative work, and related costs, for customs and importations favor Honduras </li></ul><ul><li>Production efficiency assumed to be equal </li></ul><ul><li>Technical expertise favors Mexico due to current levels of experience and diversity of industry </li></ul><ul><li>Honduras- maximum cost advantage requires locating within a free-zone (Zona Industrial Privada: Z.I.P) </li></ul><ul><li>Honduras practice of paying indemnification needs to be considered </li></ul> Part II: Case Study
    31. 33. <ul><li>No Corporate taxes in Honduras if located in a Free Trade Zone (ZIP) – value needs to be tied to size of overall enterprise </li></ul><ul><li>In Mexico need professional tax advice to determine best scenario of Transfer pricing versus Safe Harbor </li></ul><ul><li>Park owner in a ZIP includes customs services as part of rent (@$0.42/sq. ft. per Month) </li></ul><ul><li>Site location(s) needs to be tied to company strategy of single site versus multiple sites </li></ul> Part II: Case Study
    32. 34. <ul><li>Lowest fully burdened Direct & Indirect labor rates as compared to other current target sites </li></ul><ul><li>Highest freight costs incurred relative to target Southeast U.S. RM origin and FG Receipt </li></ul><ul><li>Higher working capital incurred due to greater supply chain length and dwell times (Curfew) </li></ul><ul><li>Poorest supporting infrastructure of all current target sites (Roads, Rail, Air, Ports). </li></ul><ul><li>Minimum wage increase volatility with potential 6 month adjustments by governing body </li></ul> Part II: Case Study
    33. 35. <ul><li>Subjective risk matrix currently indicates Nicaragua as the highest risk target site </li></ul><ul><li>Technical expertise favors Mexico & Costa Rica due to current levels of experience and diversity of industry </li></ul><ul><li>Nicaragua practice of paying indemnification needs to be considered </li></ul> Part II: Case Study
    34. 36. <ul><li>Highest fully burdened Direct labor rates as compared to other current target sites </li></ul><ul><ul><li>High Base </li></ul></ul><ul><ul><li>High Social Security (+25%) </li></ul></ul><ul><ul><li>Could be minimized with “Jornada Mixta” (Mixed Shift) </li></ul></ul><ul><li>Higher freight costs incurred relative to target Southeast U.S. RM origin and FG Receipt </li></ul><ul><ul><li>Could be reduced with Global Volumes </li></ul></ul><ul><li>Higher working capital incurred due to greater supply chain length </li></ul><ul><li>Minimum wage increase volatility with potential 6 month adjustments by governing body </li></ul> Part II: Case Study
    35. 37. <ul><li>Subjective risk matrix currently indicates Costa Rica as the lowest risk target site </li></ul><ul><li>Technical expertise & Relative stability favors Costa Rica due to current levels of experience and diversity of industry </li></ul><ul><ul><li>Higher Tech products & Quality goals could warrant higher DL cost incursion or location acceptance via manufacturing supported with greater levels of automation </li></ul></ul> Part II: Case Study

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