Advanced Technology Manufacturing in Mexico
DJ Hill, Chairman and CEO, Silicon Border
Development
Economic events of the past year have led many high-technology companies to examine their
assumptions about growth in their own industries. Total market size, growth rates as well as product
and pricing strategies are all under revision as individuals and enterprises adapt to a new set
of economic realities. Global manufacturing strategies in support of an enterprise's larger
objectives should be examined and revised, if necessary, at the same time. The means and
mechanisms necessary to provide support to corporate objectives should be identified and
quantified wherever possible. Risk mitigation from possible adverse but foreseeable events
should be a key element of this analysis as well.
A well thought out strategy for a global high-technology company to mitigate risk
in its manufacturing environment includes geographical diversification of manufacturing
sites. This diversification needs to be more than multiple sites in a single area; the strategy
should look broadly enough at potential risk to expand the scope to locations that span multiple
continents. For many high-technology companies with a concentration of manufacturing capacity
in Asia, diversification must include examining other low-cost venues around the world.
In any review of low-cost manufacturing environments outside of Asia, Mexico should
be considered as a viable alternative. There are a variety of reasons that make Mexico an attractive
location for high-technology manufacturing: talent, educational infrastructure, preferred tax
structures, physical infrastructure, intellectual property, labor costs, free trade agreements (FTAs)
and exchange rate risk.
Talent
Mexico has an abundance of labor, engineering and managerial talent. Many semiconductor
companies recruit from the world-class universities in Mexico City, Monterrey and Mexicali such
as Monterrey Tech and University of Baja California (UABC). Individuals from Mexico
also study engineering at U.S. universities. There are numerous examples of Mexican engineers,
such as AMD's former Chairman, Dr. Hector Ruiz, and Dr. Lenny Martinez, vice president
at Sandia National Laboratories, who have gone on to successful careers in management roles in
the industry. That should not be surprising given that Mexico has almost twice as many students
(719,000 vs. 370,000) enrolled in undergraduate engineering programs than the United States. The
automobile and aerospace industries have also been driving a trend toward technical education
in the electromechanical sector. For more than 40 years, Mexico has educated technicians, engineers
and managers alike in not only math and science, but also in practical applications such as
International Organization for Standardization (ISO) certification, Lean Manufacturing and
Six Sigma. This talent base is well prepared for the challenges of advanced manufacturing
in foundries, solar panel operations as well as assembly and test operations.
Educational Infrastructure
To meet the needs of high-technology manufacturing in industries as diverse as aerospace,
automotive, medical device and semiconductor, Mexico has devoted significant financial resources
to the development of world-class universities and technical training programs, encouraged
and subsidized by state and federal government, to improve the human infrastructure in Mexico.
International companies worldwide now recruit engineers and technicians from Mexico. With a
very young population (65 percent under age 30), Mexico provides both the quantity and quality of
workforce essential for prosperity in the coming decades.
Preferred Tax Structures
Mexico has long provided foreign-owned enterprises with preferential tax structures. The
Maquiladora tax program has been responsible for reducing the tax profile of foreign-owned
companies operating in Mexico, making it very competitive with Asian countries
offering "Pioneer Status." The net result is that capital-intensive operations can be profitable
here. More profitability repatriated to the parent organization can provide capital for
the development of new products, programs and processes to improve the enterprise's
competitive position.
Physical Infrastructure
Until recently, Mexico had little to recommend it in the way of effective, world-class physical
infrastructure. Today, Mexico has privately financed and constructed science parks
with world-class physical infrastructure. State-of-the-art roads, power, water and
telecommunication utilities are available at prices competitive with any worldwide to
support high-technology facilities. Abundant, clean power and water are also provided
at competitive rates for companies using a semiconductor-based process.
Intellectual Property
Intellectual property theft has long been an issue with high-technology companies. One
of the conditions of the North American Free Trade Agreement (NAFTA) required Mexico
to both strengthen and enforce their laws regarding intellectual property rights. Mexico
now provides a secure intellectual property environment that rivals the U.S., Canada and
Western Europe.
Labor Costs
Since 2005, Mexico has become one of the most cost-effective countries in the world for
U.S. companies to conduct manufacturing operations. Devaluation of the Mexican Peso
by 20 percent relative to the U.S. Dollar in the past year has more than offset any wage
growth that occurred over the past 3–4 years. Simply, labor costs in Mexico are at historic
lows when denominated in dollars. And the productivity of the high-technology labor
force in Mexico is equal to that of any in the world. A company can receive all these benefits
with no requirement for a labor union.
And it isn't only direct labor costs that have
fallen to historical lows. Indirect labor costs for process improvement engineering and
research and development are significantly lower than they ever have been before. With
Mexico's manufacturing and engineering talent located in the U.S. Central, Mountain
and Pacific time zones, an additional advantage becomes apparent: Communication between
the U.S. headquarters and/or market and the "near-sourced" manufacturing facility can be
conducted in real time. No longer do designers, engineers and managers have to deal with 12-
to 16-hour time differentials. When an issue arises that must be dealt with promptly by the
factory, one can rest assured their management team is on the same schedule. And travel
between the U.S. and Mexico can be done in hours rather than days.
Over the past two or three years, labor rates in many parts of Asia have begun to increase
at 8–10 percent annually. Asian governments that once downplayed the role of the labor
union are becoming more union-friendly. As a result, labor costs, fringe benefits and the
resulting regulation of the labor market have driven labor rates up in Asian markets at close
to double-digit rates for the past few years. With Asian governments focusing on growing
a larger middle class, policy in Asian countries will continue to support wage growth and
more restrictive work rules in the foreseeable future.
Free Trade Agreements
Most individuals are aware of NAFTA, the FTA eliminating duties between Mexico,
Canada and the United States. What most people don't realize is that Mexico has FTAs
with 43 nations worldwide. In addition to North America, Mexico has FTAs with the
nations of the European Union, most of Latin and South America as well as Japan. An FTA
is also in process with Korea.
As a result of Mexico's leadership in negotiating FTAs, it is uniquely positioned
to be a location for low-cost manufacturing and duty-free distribution for the world's
products to the U.S. and for U.S. products to the remainder of the world. In addition, to
bolster their position as a key venue for high technology, Mexico has begun to emphasize
the enforcement of intellectual property rights whether domestic or foreign-owned. Their
position on intellectual property protection is in stark contrast to much of Asia.
Exchange Rate Risk
The economies of the U.S. and Mexico are strongly linked. Mexico is the United States'
third-largest trading partner only behind Canada and China. The United States
is Mexico's largest international trading partner. The Mexican economy is highly
dependent upon the health of U.S. businesses. Historically, the peso and the dollar have
moved together within a relatively small range. This makes labor and services denominated
and paid in pesos very stable in terms of dollar cost.
Contrast this experience to exchange rates in Asia. Many Asian currencies have
appreciated relative to the dollar at 15–20 percent over the past three years. Leading
economic predictions call for continued devaluation of the dollar relative to Asian
currencies. Partly due to anticipated domestic strength in these economies as they recover
from the world-wide recession and in part due to U.S. domestic monetary policy that
has added significant cash to the system with the anticipation of U.S. inflation and resulting
devaluation of the dollar, these trends seem unlikely to reverse themselves in the short
term. In fact, the greater likelihood is that devaluation of the dollar against major world
currencies will occur at an increasing rate as U.S. monetary policy continues to provide
stimulus to the domestic economy.
Conclusion
Combine all the attributes previously listed with governmental agencies at both the
state and federal level that understand and appreciate the importance of business in driving
economic well-being for their constituents and you have what could be considered an ideal
environment for high-technology companies. State and federal governments are willing to
back their commitment to recruiting new opportunities to Mexico by providing a variety
of cash grants and other incentives. All in all, the combination of quality, cost and location
is hard to beat.
About the Author
DJ Hill is the co-founder of Silicon Border and serves as the company’s chief executive officer and co-chairman of the board. His past industry experience includes serving as a division vice president and general manager for National Semiconductor, and as a C-level executive with Cerprobe, InterConnect and MCT. He spent 12 years transferring semiconductor technology to Asia, and eight of those years living in Asia. Hill has served internationally on several industry boards, is a public speaker and published author on semiconductor industry issues. Hill earned his bachelor’s of science degree in industrial engineering from New Mexico State University.
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