Episode 3: Site Selection Tips for Manufacturing in Mexico
After focusing in the last episode on the different modes of entry for expanding into Mexico, Ricardo Rascon and David McQueen shift their attention today to where to manufacture in Mexico and how companies can work through the initial site selection process.
First, David identifies the most important criteria companies should take into account when choosing a manufacturing site in Mexico. These factors include accessibility, manpower services, customers, cost, and security. Then, he divides the industrialized areas of Mexico into six options and provides pros and cons for each one. The first region is the one directly south of the U.S. border. Otherwise known as the border region, the proximity to the U.S. and high skill levels are its major benefits. Downsides include high expenses and security concerns. The northeastern area of Mexico has been industrialized for over a century. This region is the best option for companies who want to avoid the expenses and security risks of the border zone, but still want to be close to U.S. markets. Companies may consider the northwest region for its coastal logistics and low turnover rates, though there are fewer workers and customers within close proximity. Bajío is a region north of Mexico City which is rapidly growing and attracting more attention for its excellent access to Mexican markets and both ports. The southeast region has long-term established infrastructure and skills. Guadalajara is the second-largest metropolitan area in Mexico and is known as the Silicon Valley of Mexico, focusing on electronics, software and computing.
Now that we’ve identified the six major areas in Mexico, David explains an effective process companies should follow in order to choose the right location for them. They should consider individually the factors of logistics, manpower, competition, local wage and benefit costs, security, and accessibility. Finally, he shares the best people to ask for advice before making a final decision.
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Speaker 1: Welcome to Tetakawi's Manufacturing in Mexico podcast, where we talk to internal and external experts to provide you with news, insights, and best practices about doing business in Mexico. Whether you're thinking about expanding into Mexico or already there, this podcast will provide you with the information and advice you need to launch, operate, and thrive.
Ricardo Rascon: Hello, and welcome to another episode of Tetakawi's Manufacturing in Mexico podcast. My name is Ricardo Rascon and today I'm joined by my good friend and colleague David McQueen. Dave, how are you doing today?
David McQueen: I'm good, thanks, Ricardo. And it's good to be here again.
Ricardo Rascon: On our last episode, we talked about modes of entry for expanding into Mexico. We talked about the options that companies have in terms of contract manufacturing, joint ventures, forming a subsidiary, or choosing the shelter path. Today, we're going to talk about where to manufacture in Mexico and how companies should work through that initial site selection due diligence process. So, Dave, for companies that are convinced on establishing a manufacturing presence in Mexico, what are the important criteria that they need to take into account when they're considering where to locate in Mexico?
David McQueen: Well, I think it's unique for each company and there are a lot of things that can be considered, but I think the main things are, first of all, logistics and accessibility. Can you get to the place and what's it going to cost you to transport goods in and out? The second big one to me would be manpower and services. Can you get manpower? Do they have the skills? What services are available or not available? Then I'd be thinking about customers. So, new customers and existing customers. Cost, obviously big factor. And finally in Mexico, I'd be thinking about security. That's a concern to a lot of people and most people know that it's a very localized problem that there's security risks, but you want to make sure you're not located in one of those localized problems.
Ricardo Rascon: Makes sense. How should a company approach a location search in Mexico? It's a big country and there's a lot of industrialized options.
David McQueen: There are a lot of options. You're right. And there's a lot of variations within each area and so on, but I think you could divide the industrialized reaches of the country into six areas and that can help your search narrow down considerably.
Ricardo Rascon: And what are the regions you would consider for comparison?
David McQueen: Well, first of all, the industrialized areas of Mexico are mostly north of Mexico City. There's a few that are immediately south and east of Mexico City, but the areas to the south in Mexico are, for the most part, not heavily industrialized and except for some specialized situations, most manufacturers probably wouldn't choose that.
If we think of the industrialized north, I would divide it into these six regions. First of all, the border zone. That's the area right along the border, obviously. The Northeast, which is mainly the states of Coahuila, Nuevo Leon, and Chihuahua, but there are a few other options as well. The Northwest, which is mainly the state of Sonora. Then I think about the Bajio, that's the central area immediately north of Mexico City, includes several states, Aguascalientes, Guanajuato, San Luis Potosi, and Queretaro. There's lots of cities there, but they share some similarities.
Then you might think about the Southeast and that's the area below Mexico City. It's the state of Puebla and then Estado de Mexico. And finally I put Guadalajara in its own region. That's the city of Guadalajara, it's in the state of Jalisco. But the electronics, computering, and distribution hubs that exist in Guadalajara make it unique to me.
Ricardo Rascon: Let's go through these different six areas that you mentioned and start with the border zone. How do you define it? And what are some of the cities that we would recognize?
David McQueen: Well, I think it's a hundred kilometers or less from the US border cities that people would recognize include Tijuana, Mexicali, Nogales, Juarez, maybe Nuevo Laredo, Renosa. There's some other ones, as well.
Ricardo Rascon: You mentioned Nogales being here in Tucson, Arizona. I'm about an hour away from Nogales. So, obviously that's one benefit of the border region, but what are some benefits? Why would a company choose to locate in the border region, Dave?
David McQueen: Well, as you say, Ricardo, the key benefit is proximity to the US. And in many cases you're integrated with the US city on the other side of the border. That can be a benefit. Many of the cities have high levels of services and skills. A lot of them have been industrialized for a long time. They have very, very high levels of skills and services. Of course, US based staff can commute back and forth and that could be an important benefit. The other thing is US services are close, so there might be services you can't get in Mexico, but you can't get on the other side of the border in the US.
Ricardo Rascon: And are there any downsides to establishing manufacturing in the border region?
David McQueen: Definitely. First of all, high turnover, much higher than most other cities. There's a lot of competition for labor and the labor force tends to have a lot of transient, which means 10 years people leave, but also that it's more difficult to recruit in that particular environment. There's higher operating costs, both wages and benefits are higher. Real estate's more expensive. Services can be more costly. It's more expensive to operate there.
And then security is a big risk because of the things that go on along the border. The border cities tend to have some of the worst security situations, some of the highest levels of crime of any of the Mexican cities, so you have to deal with that. And finally, you're pretty far from Mexican markets. If you're shipping in the US, obviously you're very close, but if you're shipping to Mexico, either to other customers in Mexico or to the Mexican market itself, you're pretty far away, particularly places like Tijuana, which is very far away from the rest of Mexico.
Ricardo Rascon: Right. So, the border region sounds good if you need to be close to the US and there's great technology and services, but in terms of overall operating cost, turnover, and security, there seems to be some kind of pitfalls there. Let's look to the Northeastern part of Mexico. What are some of the states and regions that are located there?
David McQueen: Well, as I mentioned, Chihuahua, Coahuila, and Nuevo Laredo or the primary industrialized states in the Northeast. The area of Monterrey Saltillo is the prime industrial areas. It's been industrialized for more than a century. It's a large area with almost five million people. It's the main location, but also Chihuahua, Torreon, and Monclova are options in that area. It's near the border. It's not too far away. Monterrey's three hours by truck from the border, for example. And then as I said, Monterrey Saltillo, particularly, has such a long history of industrialization that there's good concentration of manufacturing there.
Ricardo Rascon: Especially recently, we're getting a lot of inquiries for companies that are looking at the Northeastern part of Mexico. What would you say are some of the benefits of this region? Why are so many companies looking there?
David McQueen: Well, there's excellent manpower and services availability, but then you can combine that with a lower cost than the border zone has and lower turnover, significantly lower turnover than the border zone. It's easier to get people, but they have similar levels of skills and services available to you.
It's close to the US. If the US is a significant market, you haven't moved too far away. There are clusters of customers that can be attractive because of that huge industrialization. And particularly in the Monterrey Saltillo area, there is a lot of customer potential there. There's some excellent expat services. If expat management is going to be part of your strategy, the services available in most of these cities are very comparable to what's available in the United States. And finally better security than the border zone. It's a safer area with lower levels of violent crime and greater personal safety.
Ricardo Rascon: And why would a company not consider the Northeast then?
David McQueen: Well, you're still not too close to the Mexican market. You've moved closer, but it's the bulk of the Mexican market is closer to Mexico City. That still isn't close. Your access to the west coast, obviously you move to the east, so access to the west coast. If you've got goods coming in on the Western side, isn't quite as ideal. And it's higher cost than some other areas you could choose. It's not as high as the border zone, but it's higher than some other areas. So, that could be a deterrent as well.
Ricardo Rascon: Right. So, if I want to avoid the downsides of the border, but I still want to be close to US markets, the Northeast sounds like it might be my best option. But what about the Northwest? What areas does the Northwestern part of Mexico include?
David McQueen: Well, it's primarily the state of Sonora and cities that people would know that would be Hermosillo, Empalme, and [inaudible 00:08:50] are examples of locations there. It has the advantage of not being too far from the border with Arizona, so relatively close to the United States, and good access to the west coast of the United States. That's an attribute, but you also have Gulf of California coastal access. Shipping options are better than they are in some other locations.
Ricardo Rascon: And why do companies consider the Northwest then?
David McQueen: Good western logistics is often the case, but there's also lower turnover than the border zone, at least. It's about similar to what you would see in Monterrey Saltillo or some of the other areas we were discussing, but it's lower than the border. It has significantly lower costs and that's a big benefit. The area has not been industrialized as long, so costs don't tend to be as high for manufacturing, and that could be a big benefit. It's definitely lower than most other regions. Finally, you've got Pacific ocean port access. That could be attractive depending on what your business model is.
Ricardo Rascon: Great. If I want to be close to the western part of the US, the west coast specifically, establishing here in Sonora is a way to avoid some of the drawbacks of the border yet still have that proximity. And you said it's lower cost than either the Northeast or the border. Why would a company choose to not locate here?
David McQueen: Well, as I mentioned, because it has lower level of industrialization and, in fact, a lower level of population, there are fewer skills and services, and that could be an issue. There are also fewer local customers. If that was one of the motivations for going to Mexico, there aren't as many opportunities. Finally, you are still pretty far from the Mexican markets. If the Mexican market, either the direct Mexican market, or the other customers located elsewhere in Mexico are part of your strategy, it's not close.
Ricardo Rascon: Let's move a little further into the heart of Mexico. And talk about the Bajio. What is the Bajio?
David McQueen: The Bajio is a region north of Mexico City. It's in the central part of Mexico. It includes several states. Aguascalientes, Guanajuato, San Luis Potosi, and Queretaro. There are a wide range of cities there, both big and small. So there's lots of choices within that region. Queretaro, Aguascalientes, Leon, San Luis Potosi, Puerto, Silao, Guanajuato. There's others, but those are one's people may have heard of. It's a more recently industrialized area, but it's rapidly growing, and there's a lot of interest in that area.
Ricardo Rascon: And why is there so much interest in the Bajio there?
David McQueen: Well, first of all, excellent Mexican distribution, both in terms of the geographic center of population in Mexico, but also in terms of manufacturers located in Mexico and your ability to reach them. It's ideal. The costs are similar to the Northeast, so there's no penalty, there's no benefit, but there's no penalty. You have good and improving skills and services. So, pretty good market for both skilled labor and for services to support your operation.
But then there's some other benefits. Customers include some sizable clusters in a number of industries: automotive, aerospace, electronics appliances, and some traditional ones like footwear, leather goods, and food processing. There's lots of clusters of companies operating in that region.
You have good port access on both coasts. It's not too far to either coast and to major ports. And there's some low turnover in some of the cities so that option's available in some cases, but others have higher turnover. When you're choosing within the region, there are some differences there.
Ricardo Rascon: Kind of building off of that turnover there, you talk about how it varies between cities, that it might be a challenge in some parts of the Bajio. What are some other drawbacks of manufacturing the Bajio?
David McQueen: Well, the obvious one is you're pretty far from the US border. If the bulk of your production is shipping north into the United States or further into Canada, then you've moved pretty far away. Queretaro, for example, is about 11 or 12 hours by truck to the border, as opposed to, as we said earlier, Monterrey being three hours. So, it's a significant difference.
Secondly, the infrastructure is struggling a little bit to keep up with growth, not so much the manufacturing support infrastructure, but things like roads, and highways, and rail lines, and so on, power lines. And that can cause some congestion in some cases.
Labor competition, as I mentioned, can be intense in some of the cities, but then there are other choices where it's not. That's kind of a mixed bag and the same thing with benefits and costs, there are differences. And so that also is a mixed bag.
Ricardo Rascon: So the Bajio provides excellent access to Mexican markets, as well as providing good port access and other benefits seem to depend more on location within the Bajio, but lower turnover and moderate costs are possible. What about the Southeast? What do you consider to be the Southeastern part of Mexico?
David McQueen: Really it's just two states, the state of Puebla and the State of Mexico, and these are both located kind of around the bottom of Mexico City around the Southern end of Mexico City, so you're almost as close as you can get to Mexico City, but not in Mexico City.
Ricardo Rascon: Right. And what are the benefits of operating there?
David McQueen: Customers can be a big one. Volkswagen has most of their manufacturing in the state of Puebla. And so Volkswagen is a target or a customer. It's a good location for that. Chrysler is big into Luca. And so if Chrysler's a customer then that could be a target.
There is a pretty long history of industrialization in this area, so good established infrastructure, and skills, and skilled manpower. Costs are generally competitive, no advantage or no disadvantage, generally. There's excellent access to Mexico City without actually being in Mexico City, which is which not too desirable. Finally, you've got pretty good access to the Mexican market. Not maybe as ideal as up in the Bajio, but it's pretty good.
Ricardo Rascon: And are there any downsides to operate in there?
David McQueen: Well, once again, you're very far from the United States. Even further, in fact. You're also further from most Mexican industrial customers in the sense that you're at the opposite end of the industrial base. You're at sort of one boundary of it. Everybody is north of there. That's not as ideal.
Security can be poor in some cities, others are not so bad just depending on where you locate. That could be an issue. Again, like the Bajio, turnover and cost can be high in some areas while in others. It's not. So again, like the Bajio, you need to be a little careful about the specifics of where you locate.
Ricardo Rascon: Okay. And let's talk next about Guadalajara and Jalisco.
David McQueen: Guadalajara is a special case. It's the second largest metropolitan area in Mexico, and it's known as the Silicon Valley of Mexico. It's also happens to be the main hub for Mexican distribution. If you go to a map and see where it's located, you can understand why that is. Unskilled wages tend to be competitive, which is an attraction. Skilled wages are a little bit more expensive, which is perhaps a drawback, and that's because of the software and computer activity that occurs there.
You've got excellent west coast port access, reasonably good access to the east coast, and you've got excellent expat services. In fact, the environment around Guadalajara's ideal for expats. There's a huge expat community at Lake Chapala that has a bunch of that go there and so on. It's a very attractive city from that point of view, the big concentration is electronics software and computing.
Ricardo Rascon: You forgot to mention the proximity to tequila, as well, Dave that's [crosstalk 00:16:14].
David McQueen: There's that, as well. That's high on my list.
Ricardo Rascon: Yeah. Why would a company choose to not locate in Guadalajara? When does Guadalajara not make sense?
David McQueen: Well, as I mentioned, professional wages are higher and the demand for professionals is high. If your organization has a heavy concentration of engineering or software engineers, things like that, it could be expensive and difficult to attract enough people.
Another downside is that real estate can be scarce and expensive. Particularly if you want to purchase land. It's not quite as easy as some other cities. You've got the distance to customers in the Northeast or Northwest. So, like the Bajio, you're further down in Mexico and the distance to the north and to the US is further away.
And then security is not as good as some other cities. Now, there are regions within Guadalajara that are very safe, but it is a very large city and a very spread out city. There are areas that can be unsafe. Security's not like the border area or the border zone, but it's not quite as good as some of the other areas we've discussed.
Ricardo Rascon: Now that we've talked about these six different areas in Mexico, Dave, can you provide us with a framework or a process that companies should follow in order to choose the right location for their manufacturing?
David McQueen: My checklist goes something like this. I'd start with logistics. I'd be thinking about where my current customers are located and where my current raw material sources located. But I'd also be thinking about where future customers might be and where I might like to find new material suppliers or new vendors to source from.
The second thing I'd think about is manpower, and we come back to that. Do I have the critical skills available? Are the services available for the things that I'm not going to do in house? Then I'd think about how big a pool of manpower is available and how competitive it is. So, you can have a large city with a lot of people available, but if there's a lot of competition for those people, you're still going to find it difficult to hire. Tijuana is an example of that very scenario.
Finally, I'd think about the local wage and benefit costs, and I'd spend more time on benefits than I would on wages, because that can be less obvious. Yet it can be a more significant difference. So, what kind of benefit package you have to offer in a particular city or a particular part of a city to be competitive and to retain people can have a big impact on your cost structure. So that's the next thing I'd look at.
After that, security and accessibility would probably be the next things on my mind. I'd want to know if the security level was okay for my staff, but also for the people that were going to work on my plant. Are people going to be afraid to come to work? Are my assets at risk? In most cases, the answer will be no, but there are spots where that would be an issue.
And then I think about how accessible it is. Can I get there? If I need to go back and forth, and I will, can I and my staff get there easily, or is it complicated, and time consuming, and onerous for us to get back and forth? If expats management is part of your strategy, then you want to think about the lifestyle and what services need to be available and what services are available. And that can vary if you pick a small city. They're not necessarily going to have English language schools for instance, but a large metropolitan center like Queretaro or Monterrey are going to have excellent English language schools that could compete with anywhere in the world.
And lastly, I'd think about where you want to go. Most executives involved in the Mexican project are going to spend a lot of time in the first few years, going back and forth to their Mexican operation and their staff is as well. So, where's the place that you want to be, where you want to travel to, where you're going to enjoy yourself and relax, and be productive. And that will be on my mind.
Ricardo Rascon: And once I've generated a short list of potential cities that make sense, how do I make sure that I'm making a data driven decision and making the right choice for my company?
David McQueen: Well, I think once you've got a short list, it's time to talk to some advisors. There's a lot of people that can help. I don't recommend friends or relatives, or relatives or friends of employees. That's probably not the best choice. Lawyers and accounting firms are probably not the best choice at this stage. These are probably all excellent people. They can probably help with your operation, but in terms of having the understanding of a particular market and location, there's other people that can serve you better.
People you can talk to, shelter providers, obviously, are going to have an excellent understanding of the areas they're operating in. Customers that have operations in Mexico are probably helpful. Same with suppliers. If they are operating in a certain area, then they probably can tell you a lot about it. Developers and real estate agents are helpful, of course, and government agencies can be helpful. There are limitations on government agencies, but I wouldn't not talk to them. There's a lot that they can help with understanding an area. Obviously, they have an agenda, but they can help as well.
Ricardo Rascon: Well, thanks again, Dave, for introducing us to these six regions, for giving us this checklist and a framework to drive strategies forward. I appreciate your time and thank you to everyone who listened, and we hope that you could join us for our next podcast, as well. Thank you.
Speaker 1: We appreciate you joining us for this session of the Manufacturing in Mexico podcast. For more information and resources about how to succeed in Mexico, be sure to visit our website, tetakawi.com.