Once Upon a Time in Mexico

Once Upon a Time in Mexico is one of my favorite movies.  It features Antonio Banderas as the hero, Salma Hayek as the self-confident love interest and Johnny Depp as a quirky CIA agent.  Together they team up to fight drug trafficking, corruption, and save the Mexican President from a coup and assignation.  The movie does not end without casualties and paints a Hollywood version of a very violent political environment where all economic and political activity is controlled by drug lords.  This is the image most of us have of the border with Mexico—police corruption, excessive violence and a really big fence.  What you probably did not realize is the current state of affairs along the border with Mexico is actually quite different from what was depicted in Once Upon a Time in Mexico.  After all, the movie takes place “once upon a time ago.”

Several years ago, boarder towns like Juarez, Tijuana and Mexicali were places to be feared—especially for American travelers.  Violence and instability for travelers often does not encourage business investment in such a region either.  Why then is there a sudden resurgence in high tech manufacturing along the border with Mexico?

Before I discuss anything else, I want to address the issue of organized crime.  Mexico still has far to go to quell violence, but there are a few micro trends that point in the right direction.  Starting after his election in 2006, President Felipe Calderon began a policy to deploy increasing force by way of the Mexican Army to the border Regions.  They disrupted corruption in the local police force which created some friction in the drug trafficking process. (http://www.cfr.org/mexico/mexicos-drug-war/p13689)    Some of his initiative may be paying off.  For example, USA Today reports, “Mexico's homicide rate dropped from 24 in 100,000 people in 2011 to 22 in 100,000 in 2012, suggesting greater security efforts made by the nation's government.” (http://www.usatoday.com/story/news/world/2013/07/31/mexico-murder-rate/2606229/)

From a national stand Point, Homicides showed erratic behavior without a real trend in one direction or another. 

Source Data: Secretaria De Globernation

The following 2013 data extracted from the Secretaria De Globernation in Mexico shows a few trends.  Mexican states along the border region all show homicide declines throughout the year with the exception of Sonora and Baja California which roughly flat-lined throughout 2013.  If you look at Mexico City however, homicides climbed throughout the year, skewing the national results from 2013.

I am trying to demonstrate with data what I know intuitively and what I hear continuously from my counterparts in Mexico: crime is still a problem, but the situation on the border is getting better with the support of the Mexican Army even though the national numbers do not show significant change.  Current President Enrique Pena Nieto (elected Dec ’12) has plans to implement a national paramilitary national police force ("Gendarmerie") to further the work the military began.  Since his election over a year ago, he has yet to implement this force.

Now that I addressed the elephant in the room—the crime problem, I want to talk about the other reasons why Mexico is great supply source and manufacturing location.
    1.) NAFTA
    2.) Skilled Labor/Manufacturing Infrastructure
    3.) Efficient Communication
    4.) Improved on time deliver/lead times
*Low labor costs were intentionally omitted as a benefit.  I will explain that more at the end of the blog.

NAFTA—The North American Free Trade Agreement (and the Central America Free Trade Agreement [CAFTA]) provide a huge cost advantage for parts sourced in North America.  Under provisions of NAFTA tariffs between the US and Mexico are nearly non-existent, especially for manufactured goods.  Import tariffs from countries outside North America average about 4% depending on the product, but can range upwards of 10% for certain goods and commodities.  (Source: United States International Trade Commission)

Skilled Labor Force—There is enough to be said about the highly skilled labor force to write a doctoral dissertation.  For now, I will leave it with an anecdotal statement and possibly come back later for a full blog post on this topic alone.  Mexico has a wealth of highly skilled laborers from engineers, to machine operators, to assembly experts and the list goes on and on.

Communication between sites in Mexico and the US is quite simple.  There is more cultural commonality with Mexican counterparts than those in Asia.  Furthermore, 36.7% of those living in the US speak Spanish in the home (Source: http://www.pewresearch.org/fact-tank/2013/08/13/spanish-is-the-most-spoken-non-english-language-in-u-s-homes-even-among-non-hispanics/)  In my experience nearly all management staff speak fluent English.  I often tell my clients during morning meetings that if we needed to get to Reynosa or Mexico City or even Guadalajara, we could be there by close of business today.  That is not the case with Ningbo, Suzhou, Shanghai, or anywhere else in Asia.  Finally we share time zones with Mexico.  There is general alignment between hours of operation in both countries.  The majority of my teleconferences were in the middle of the night.

Proximity is also critical to why Mexico is such great sourcing location.  Trucks can reach nearly everywhere in the contiguous 48 states within 3 days from leaving a plant in the border region.  It is often 45 days from dock door in Asia to dock door in the US.  The benefits are huge in the areas of lead time, inventory cost, and quality.

I promised I would address the labor rate issue.  Bloomberg Business week says manufacturing costs are 6% lower in Mexico now than China.  Labor rates play a part of this cost, but the bigger driving factor creating this value is technical prowess and fantastic productivity.  Perhaps minimum wage could be another blog post in and of itself.

I could continue on about the merits of sourcing in Mexico, but I will stop with this initial exposure blog.  As a supplement to what I wrote, I highly recommend this article from Bloomberg Businessweek: http://www.businessweek.com/articles/2013-09-09/the-new-mexico.  In fact, theirs such a compelling argument, if I read their story before I started writing this blog entry, I may have just posted their link and called it a day!