Partnering for business retention A plan for regional economic development. Presented by: DEITAC
WHY SHOULD WE TALKABOUT PARTNERING? • CONCERN regarding our shared future, California’s and Tijuana’s, with regards to manufacturing. •A SOLUTION to improve our competitiveness globally, at least for some industries and cities. THE REGION’S MANUFACTURING SUCCESS DEPENDS ON OUR COLLABORATION.
California’s industry at a glance High-tech manufacturing industries employment 27% employment Preliminary figures for 2009 reduction over the past 8 years Pharmaceutical & Medical equipment & 700000 medicine 620,279 supplies 10% Commercial & service 11% industry machinery 2% 600000 Aerospace products & parts Computer & peripheral equipment 500000 452,524 16% 13% 400000 Communications Magnetic & optical equipment media 300000 6% 1% Audio & video 200000 equipment Navigational, measuring, 1% 100000 medical, & control Semiconductor & other instruments electronic component 0 20% 20% 2001 2009Source: US Bureau of Labor Statistics
Summary of the last century Birth of Forefront of First Biomedical aircraft aerospace microprocessor industry industry industry produced 1900’s 1940’s 1970’s 1990’s•Entrepreneurship & opportunity •Struggle to remain competitive •Industrial base & labor growth •Tax burden & regulatory compliance •Industrial GDP increase costs (and more to come) •Hi-tech sectors diversification •Labor issues: unionism & workers comp. •Internal market growth • Increasing government budget deficit •Innovation leadership •Engineering talent shortfall •Intra & international competition
Aerospace in California •Birthplace of the aircraft industry 17% employment reduction over the past 8 •70,779 employees in 2009 years •Value of shipments $ 23.7 billion USD (2008) 85,051 90000 80000 70,779 70000 14% 60000 50000 2009 40000 30000 86% California 20000 Rest of US 10000 0 2001 2009Source: US Census Data, considering NAICS 3364
Considering new options “Locating manufacturing operations abroad is sometimes seen as the only way to compete with these challenges. …Using low labor costs, relocation incentives and the availability of an extremely qualified technical workforce as inducements, many foreign countries present an attractive alternative to California aerospace companies struggling with the cost of living and doing business in the Golden State.” Energizing California Aerospace, Report to the California Commission on Economic Development, Aerospace Advisory Committee - November 2008
Industry relocation Northrop Grumman McDonnell TRW (Washington, DC) (Fairfax, VA) Douglas C-17 Rockwell (Salt Lake C., UT) International Lockhead Hughes (Tulsa, OK) Martin helicopter (Marietta, GA) (Mesa, AZ) Rockwell McDonnell International Douglas Hughes Aircraft (Perry, GA) (Dallas, TX) (6 southern US states)Perhaps one of the most recent and significant cases is Northrop Grumman, moving it’s headquartersfrom L.A. to Washington, D.C., area, the company was the last major aerospace firm based inSouthern California.The decision is seen as a blow to the much-battered regional economy: …"This is very bad news, a crummy way to get 2010 started," said economist Jack Kyser of the Los Angeles County Economic Development Corp. … Los Angeles Times - January 05, 2010.
Automotive in California • Currently no final assembly plants operating in California 36% employment reduction over the past 8 • Over 32,000 direct employees, showing a decline trend years • Employment related to parts manufacturing, Corporate 43,248 Headquarters, R&D facilities, Scientific & Technical Consulting 45000 40000 • Estimated 127,000 people worked in automotive support industries (2005). 35000 30000 27,569 4% 25000 20000 15000 2009 10000 California 5000 96% 0 Rest of US 2001 2009Source: US Census Data, considering NAICS 3361,3362 & 3363
A century of automotive industry One of the most dynamic and relevant components of the manufacturing industry in North America and globally has had a significant presence in California: Tesla – Toyota / (Electric vehicles) GM – Toyota Fremont (NUMMI)/ (Chevrolet, Toyota, Geo, cars and trucks ) NEW ERA = NEW OPPORTUNITIES GM Fremont / (Chevrolet cars and trucks ) Ford Pico Rivera / (Ford cars) Ford San Jose / (Ford and Mercury cars)Nash Motors El Segundo/(American Motors cars) GM Van Nuys / (Chevrolet – Pontiac cars)GM Southgate/(Buick, Olds, Ponitac) Studebaker Vernon/ (Cars) Chrysler LA / (Plymouth & Dodge cars) Ford Richmond / (Cars and armored vehicles) Ford Long Beach / (Plymouth & Dodge cars) Chrysler San Leandro / (Plymouth & Dodge cars) Willys – Overland Maywood / (Cars) Chrysler Stockton / (Dodge trucks) GM Oakland / (Chevrolet cars and trucks) 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 +
The case of Nissan North America Nissan Trading Corp. NNA - Corporate HQ Farmington Hills, MI - Est 1984 NNA – Decherd (Parts) Gardena, CA - Est 1960 Decherd, TN - Est 1997 NNA - Smyrna plant Smyrna, TN - Est 1983 CALIFORNIA TENNESSEE NNA - Corporate HQ Franklin, TN - Reloc 2008 Nissan Design America NNA - Canton plant San Diego, CA - Est 2005 Canton, MS - Est 2003It is evident that proximity has strategic advantages; the question remains as for how longwill design operations be sustainable by themselves for Nissan in California and what othercompanies will follow the example.
Biomedical industry in CA 9% employment reduction Total Biomedical Employment by Cluster (2008) over the past 8 years Sacramento 1.1% (medical device sub-sector) Bay Area 19.5% 69,656 70000 Ventura/Santa Barbara 3.7% 63,638 Los Angeles 16.1% 60000 Orange County 11.1% 50000 San Diego 8.6% Riverside/San 2.9% 40000 Bernardino 30000 20000 10000 0•Second largest hi-tech sector on employment in CA 2001 2009•36% of companies reduced their employment in 2008-2009 US Census Data, considering NAICSSource: California Biomedical Industry – 2010 report; California Healthcare 334510, 334516, 334517, 339112,Institute – PriceWaterhouse Coopers 339113, 339114, 339115.
Why the downsizing? If your company’s R&D, manufacturing, general and administrative or overall workforces inside California have been reduced in the past year, select the choices (all that apply) that describe why. Overall business climate/ cost of Overall business climate/ cost of doing business doing business Lack of tax incentives / unfavorable 13% Lack of tax incentives / unfavorable 13% tax environment tax environment 4% 4% Infrastructure established elsewhere Infrastructure established elsewhere 4% 4% 45% 45% incentives from other regions 4% 4% Cash Cash incentives from other regions 4% 4% Qualified Qualified workforce elsewhere workforce elsewhere 13% 13% Willingness to tailor packages to Willingness to tailor packages to 13% individualindividual company needs elsewhere company needs elsewhere 13% Cost of living elsewhere Cost of living elsewhere Other OtherSource: California Biomedical Industry – 2010 report; California Healthcare Institute – PriceWaterhouse Coopers
The end result Transportation equipment General manufacturing employment manufacturing employment in in California California 2,500,000300000 2,000,000250000200000 1,500,000150000 1,000,000100000 50000 - 59% 500,000 - 35% 0 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 1991 1992 1993 1996 1997 1998 2000 2001 2002 2004 2005 2006 2008 2009 1990 1994 1995 1999 2003 2007 A clear trend over 20 years of manufacturing employment loss.AXIS, with data from California Employment Development Department
What do CEO’s think?Best and Worst State Ranks 2010(For doing Business)Chief Executive Magazine Bill Dormandy, CEO of San Francisco medical device maker ITC, summed it up: “California has a good living environment but is unfavorable to business and the state taxes are not survivable. Nevada and Virginia are encouraging business to move to their states with lower tax rates and less regulatory demands.”
Competitive disadvantages• Workers compensation premium rates Rank = 37• Travel time to work Rank = 44• Median monthly housing costs Rank = 49• % of Population aged 25 and over that graduated from high school Rank = 48• S&E degrees awarded per 100,000 hab. Rank = 31• % of labor force represented by unions Rank = 45• Minimum wage Rank = 44
More to comeIn addition to the increasingly large number and complexity ofregulations that has typically doubled the approval time of projectsto 51 weeks versus 26 in other states -- increasing the cost ofoperations in the long run-- theres more on it’s way: – 2010 continued economic decline – Implementation of AB 32 – ‘Card-Check’ Forced unionism bill – Clean and alternative energy regulations – Healthcare related regulation
WHAT ARE THE OPTIONS?a) Closing down operations • Direct and indirect loss of labor • Tax base erosion • Loss of economic baseb) Relocating to Asia • Total loss of labor and partial loss of professional positions • Partial tax base loss • Partial loss of economic base • Slower response to market • Risk intellectual propertyc) Relocating elsewhere in the US • Total loss of manufacturing jobs and eventual loss of professional positions • Gradual tax base loss • Gradual loss of economic baseOr partner with Tijuana and stay in CA.
$ Value added Research and development New product design Key component manufacturing Commodities manufacturingAXIS | Strategic Intelligence Center, based in the Stan Shih model Assembly and packaging LCC Tijuana California Extended value chain Logistics and distribution Flexible partnering curve Customization solution Customer service Market and brnad development How we can be part of the
An integrated industrial model= A more COMPETITIVE region CA •Finished / semi-finished goods Headquarters •Support services Strategic Processes $ R&D Centers Sales & Customer Service Current efforts in the right direction: = A Stronger Regional Economy (CA exported $ 17.4 B USD to Mexico in 2009) $•Production outsourcing contracts•Materials and parts $ TJ•Support services Manufacturing•R&D and tech support Outsourcing
Our proposal Partner with Tijuana : the most convenient near shore option. PROS CONS• Keeping in CA high value added operations. •Loose some of the manufacturing employment .•Keep strategic manufacturing processes andjobs.•Keep a significant proportion of your taxand economic base.•Keep a large portion of supportingoperations (labor multiplier of 5 to 15).•Be time and cost competitive•Strengthen a consumer and export market
Maintaining a good share of the value added in many ways"There are over 5,000 individuals on U.S. payroll commuting daily from San Diego to Tijuana, and that number goes up constantly.Nearly every manufacturing plant that locates in Tijuana creates jobs for U.S. payroll individuals; in many cases companies have over 20 professional level employees. A significant number commute on hired shuttle services." Fernando Ortiz-Barbachano President, Barbachano International, Inc.
What others have done• There are plenty of success stories that confirm our model: – Qualcomm (San Diego – Tijuana) – CareFusion (San Diego – Tijuana) – Solar Turbine (San Diego – Tijuana) – Kyocera (San Diego – Tijuana) – Sony/Foxconn (San Diego – Tijuana) – Sanyo-Matsushita (San Diego – Tijuana) – Yakima (San Diego – Tijuana) – Avery Dennison (Pasadena – Tijuana) – Mattel (El Segundo – Tijuana) – Clayton (City of Industry – Tijuana) – Teledyne (Thousand Oaks – Tijuana) – Leach International (Buena Park – Tijuana) – Meade Instruments (Irvine- Tijuana) – Plantronics (Santa Cruz – Tijuana) – Sunbank Corp. (Paso Robles – Tijuana) Among others
Achieving specific benefits Using the production sharing model = reduction in manufacturing cost.Labor costs are 40-80% lowerin Tijuana than in the U.S., andthe fully-burdened cost formost manufacturing orassembly operations rangesfrom as little as $7 and up to$15 per shop hour (includingdirect labor and support staff,plus all facility and operatingcosts).
Whats in it for you?While already very cost- Description US Cost Tijuana Mex. Costcompetitive, the recent decline in Employeesvalue of the Mexican peso in 2009- Number of Employees 140 140 Direct 101 1012010 has made the cost of doing Indirect 25 25business in Tijuana even lower… Administrative 14 14 Hours/Work Week 40 48 Hours per year 2080 2496…typically more than 50% lower Labor Cost perthan in the U.S. …not to mention Hour Direct Labor Cost/Hr $ 12.97 $ 2.95Mexico’s Indirect Labor Cost/Hr $ 21.71 $ 12.35 Admin Labor Cost/Hr $ 24.47 $ 22.6548-hour work week… Factory Cost Labor $ 12.97 $ 2.95*COMPARATIVE COST ANALYSIS AND Overhead $ 7.90 $ 4.64POTENTIAL SAVINGS, OF A TYPICAL 140 General & Administrative $ 3.87 $ 3.70EMPLOYEE MEDICAL DEVICE Factory Cost/Hour $ 24.74 $ 11.29MANUFACTURING OPERATION LOCATED Total Operating Cost $ 5,196,584 $ 2,846,436IN THE US AFTER RELOCATING TOTIJUANA, MEXICO Potential Annualized Savings $ 2,350,148 Notes: 1.Exchange rate at $13 Mexican Pesos per $1 US Dollars; 2. Does not include Interest, Amortization & Depreciation; 3. Does not include relocation costs.
How to get started 3 phases to establishing operations in Tijuana: DETERMINE THE SCOPE SET UP YOURGET TO KNOW OF OPERATIONS BUSINESS IN TIJUANA:TIJUANA : SUITABLE FOR NEARSHORING: • Incorporate Mexican• Receive information Companyin print or electronic • Estimate total cost • Register with fiscalformat savings and labor authorities •Evaluate operation (state and federal)• Visit existing model (Shelter, • Obtain Facility (lease-operations in Tijuana outsourcing, stand buy) alone ops.) • Open bank accounts• Meet with key • Decide on ownership •Start your set-upinstitutions structure process. Etc… Tijuana’s EDC and its members are here to assist you in EVERY STEP TO RECOVERY.
Regional Team-Marketing• Seminars in Northern California• Joint Presentation: – Implementing your Near-Shore Strategy in the San Diego-Tijuana Region