Detroit — Global automakers are investing a lot of money in new capacity in Mexico, creating new opportunities for plastics processors and other suppliers.
But smaller U.S. and Canadian companies that are interested in pursuing growth in Mexico face a variety of challenges, according to Daron Gifford, partner-in-charge of the strategy consulting practice at Plante Moran LLC.
“It can be an adventure,” Gifford said in a presentation at the Plastics in Automotive conference, held Jan. 12 in Detroit.
On the plus side, Mexico is a low-cost manufacturing economy with very competitive labor rates. Energy costs — once a major problem in Mexico — are getting better, he said. And the Mexican peso has been pretty stable. Since 2014, the peso has depreciated by about 25 percent against the U.S. dollar.
In addition, Mexico is easily accessible to U.S. and Canadian suppliers, and the time zone differences are easier to manage than with suppliers in China, he said.
Plus, there's that growth.
Twelve different automakers have invested or announced plans to invest in Mexico between 2013 and 2020, with the current total above $20 billion, he said.
Long-term, the future of the auto sector in Mexico is bright, Gifford said. Mexico already is the seventh largest producer of automobiles in the world, and future growth will be driven both by demand from North America and favorable free-trade agreements with 42 countries.
Government incentives also play a big role in the rise of Mexico's auto sector, at least with OEMs and Tier 1 suppliers. Mexico offers “significant incentives … to promote new investments. There's continued funding in new infrastructure. And there are workforce development programs to develop skills relevant to automotive suppliers,” Gifford said.
Plenty of challenges
Still, there are many challenges for smaller Tier 2 and 3 suppliers, like injection molders, toolmakers and compounders, Gifford said. No. 1 and No. 2 on the list are staffing related: Finding and retaining local managers, and high attrition rates within the hourly workforce.
The unemployment rate in Mexico is about 3.9 percent, he said.
“Maintaining a competitive wage [compared] with similar companies will help mitigate attrition,” he said. “Additional fringe benefits, as well as efforts to enhance the company culture” also help.
For example, successful employers often provide bus transportation to work, and daily lunches. Gifford added that some companies have worked hard to create a “culture of family,” with special activities to make workers feel like they are an essential part of the team.
“Create a culture there of a Mexican family. Building that labor force will be a key success driver for you,” he said.
Another problem: While OEMs and Tier 1s have plenty of government assistance to set up manufacturing in Mexico, smaller companies find a tougher time getting capital to expand there.
Tax policies can also be confusing to companies doing business in Mexico — the country has recently made changes to its value-added and income taxes. And safety considerations remain a concern for business travelers to Mexico, Gifford said.
“This was a bigger topic a few years ago. Just like in any big city, be cautious, conservative about how you travel,” he said, adding, “They captured [drug kingpin] ‘El Chapo' last weekend. Hopefully they can keep him this time.”
‘Missing links' in the supply chain
Still, Gifford highlighted what he feels is a big opportunity for plastics companies in Mexico — the main “missing links in the supply chain.”
In 2014, automotive Tier 1 suppliers in Mexico had to import $38 billion in components, raw materials, tooling and other resources to support sales of $79 billion.
Where are the missing links? Think small- to mid-sized plastics processors. Gifford used the Plastics News list of top North American injection molders as an example. Among the companies in PN's top 50, there are 53 injection molding plants in Mexico. But looking at the companies ranked from No. 51-100, there are only 14 plants in Mexico.
The result is that an estimated $6.4 billion of Tier 2 and 3 injection molded parts are imported by Mexico annually, primarily from the United States, according to Plante & Moran.
Mold makers also have been slow to set up operations in Mexico, so OEMs and Tier 1 suppliers have been importing heavily from the United States, Canada and Asia.
“We view that as a missing link,” Gifford said.
Gifford said OEMs and Tier 1 suppliers would like to have more of their suppliers locally in Mexico, although “there may not be explicit pressure all the time” to do so.
“But what we're seeing from OEMs and Tier 1s is they always want people to provide production locally.” That helps when they're trying to resolve problems fast, and there are also logistical advantages to having supplier capabilities near production.
Costs of manufacturing are still about a third to half as much as in the United States, so there's the opportunity for cost savings, too.
Finally, he had a few words of advice about bridging the culture gap.
“I think it's a major challenge if you go down there like an American with a mindset that you want them to operate just like you,” Gifford said. “You need to have patience. It's going to move at a little slower pace than we're used to up here.”
He cited an example at one company he visited where, every hour, a buzzer sounds that signals for managers to do “break-type things,” like checking email. After 10 minutes, the buzzer sounds again, signaling that it's time to get back to work.
“And that's with the managers!” Gifford said.