Great Business Ideas: Expand Production South of the Border

Great Ideas for your Small Business:

Expand Production South of the Border

Japanese giants sony, sanyo electric, and Hitachi made headlines by investing hundreds of millions of dollars in Mexican border factories, but hundreds of small U.S. businesses are also taking advantage of Mexico’s affordable skilled labor force. “It’s the big guys and the small guys—the growth is phenomenal,” said Mike Patten, editor of Twin Plant News, a trade magazine covering the maquila industry.

Shared production plants, known as “maquiladoras,” offer big and small businesses a cost-effective way to boost pro- duction. There are about 3,000 maquiladoras employing about one million workers in Mexico. Employment has doubled since the peso devaluation in 1994, according to industry experts. The majority of workers are making electronic equipment, automotive parts, textiles, and furniture. Tijuana has become the TV production capital of the world, manufacturing 14 million units a year, according to Business Week.

While it’s easy for mega corporations to deal with government permits, customs regulations, and cultural and language problems, working in a foreign country is daunting for most entrepreneurs. Jeff Paul had about one thousand Mexican workers when he was working for a major blue- jeans manufacturer ten years ago. But too many labor and financial problems made it an unpleasant experience.

A few years later, Paul, now the president and owner of Sierra Pacific Apparel, decided to return to Mexico. His Visalia, California–based company has 400 workers in California and about 100 in Mexicali, Mexico. Sierra Pacific’s Mexican workers sew jeans for Gap, Old Navy, and Sears, among other customers. Making jeans in Mexico saves Paul about seventy-five cents per garment, but he still faces some challenges. “Our employee turnover in Central California is 5 percent a year,” said Paul. “In Mexico, we lose 5 percent a week.” Still, he said, his Mexican workers produce high-quality jeans, and his customers are satisfied. To make it easy, Paul set up his Mexican operation in partnership with North American Production Sharing Inc. (NAPS), a small Solano Beach, California–based company that helps U.S. companies set up shop over the border.

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NAPS, founded by Bill Lew and Richard Jaime in 1991, works with about a dozen U.S. companies doing everything from refurbishing telephones to making computer cables. NAPS, which has an office in Tijuana, screens applicants and hires workers, manages the payroll, helps train workers, and even rents buses to collect workers for one client’s second shift. Best of all, they handle all the permits, payroll- related paperwork, taxes, and customs requirements.

But before they’ll help a company move across the border, they spend quite a bit of time evaluating the company’s needs and goals. “We start by helping them understand if it makes sense to be in Mexico,” said Lew, NAPS vice president and a former loan officer for Wells Fargo Bank. “We make sure the client is right for Mexico.” The low labor cost, usually under $3 an hour for assembly line workers, is what attracts most U.S. businesses to Mexico. But contrary to popular belief, Lew said his clients are not firing U.S. workers and fleeing to Mexico. They head to Mexico to expand production. “It’s not a zero sum game.

Our clients are not closing down U.S. factories,” he said. In fact, he cautions, “Mexico won’t save a company—Mexico will help a growing company.” Ray Noble, president of Storm Products Co. in Santa Clara, California, hired NAPS because he couldn’t find enough assembly workers in northern California. Storm Products makes a variety of cables. Its Mexican operation, which has grown from one to 130 employees, makes computer cables for Internet access.

“Domestically, it’s very hard to get people to work on assembly lines,” he said. “They [Mexican employees] do an excellent job. The quality is good—we are still working on productivity.” Noble said Storm, which has a total of 500 workers in seven domestic locations, saves about 50 percent on labor costs in Mexico. NAPS found and leased a 20,000-square- foot facility for Storm in the La Mesa area of Tijuana. Noble said he pays more for rent in Mexico than in Los Angeles, but the company makes it up on labor costs.

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Twin Plant News, an El Paso, Texas–based monthly publication, has been covering the maquila industry since 1985. Subscriptions cost $85 a year.

If you’re considering setting up a production facility in Mexico

  • Carefully calculate your current labor costs.
  • Determine whether unskilled or semi-skilled workers can be trained to make your product.
  • Determine whether you can wait for finished products to be shipped back to the United States or abroad from Mexico.
  • Budget extra money for start-up costs.
  • Find a partner who knows how to work in Mexico.
  • Learn about the Mexican culture and how business deals are done there.
  • Be patient.