The Emerging Role of Mexico in the Electronics Supply Chain

The globalization of the electronics supply chain has been a widely discussed topic, and having Andrew Hupert, an esteemed supply chain consultant, in this episode is incredibly timely.

In this insightful discussion, Andrew sheds light on Mexico's distinctive edge in electronics production. Furthermore, he provides us with a comprehensive comparison of the logistical aspects between Mexico and China's production processes.

Listen to the Podcast:

Watch this Podcast:

Key Highlights:

• Introduction to Andrew Hupert, professor at Holt University and Supply Chain Consultant
• Andrew talks about his career in cross-cultural negotiation. From China to Thailand, Vietnam, and now to Mexico
• Compliance costs are becoming unmanageable, and logistics becoming more unpredictable, these are just a couple of the challenges in the electronics supply chain
• NAFTA (North America Free Trade Agreement ) aka USMCA, the US, Mexico, and Canada agreement puts Mexico on top of the list as far as production sites for large-scale factories
• US trade agreement with Columbia, is it possible?
• Guadalajara is in the process of becoming the software center in Mexico
• Andrew describes the challenges of sourcing electronics products from Mexico
• In China, one person knows people who can give you all the necessary connections to start and finish a project, meanwhile in Mexico, people will keep their mouths shut
• The level of workmanship in Mexico is high, however, project management is very poor
• The auto industry is the kind of business that is built for Mexico. American automakers have been producing automobiles in Mexico for over 70 years
• Mexico has EMEC which allows companies to bring in equipment, materials, raw materials, or components, all of it duty-free provided they ship it out or export it and not for sale in Mexico
• Andrew gives his insight on what the supply chain will look like
  • Only a certain percentage of the electronics production will move out of China to Mexico
  •  Sophisticated design based in the US such as Texas, Arizona, California, and Mexica can handle the assembly
• Apple is moving its production to India
• “India is a tough one”, Andrew explains the challenges in producing electronics in India
• GM (General Motors) moved all their electric vehicle manufacturing to Mexico
• It’s hard to get business intelligence on Mexico, Andrew encourages companies to plan their transition or hire a project manager to do the legwork

Links and Resources

• Connect with Andrew Hipert on LinkedIn
• Watch related podcast episodes:

  • Achieving Diversified Electronics Supply Chain

  • Supply Chain Intelligence from Octopart

 

Get Your First Month of Altium Designer® for FREE

 

Transcription:

Andrew:

When I first started looking at Mexico, one of the things I had heard was, it's very hard to find design. It's very hard to find reverse engineering. I heard that in Monterey, where they've got the auto industry. When I come to Guadalajara, it turns out they do have this, but the people that I'm speaking to from Caterpillar and the Monterey people and the Saltillo people don't do it. So they say it doesn't exist, but when I come down here, yeah, it exists.

Zach:

Hello everyone and welcome to the Altium OnTrack podcast. I'm your host, Zach Peterson. Today we're speaking with Andrew Hubert, professor at Holt University and a supply chain consultant. He's spent 20 years in Asia. He's recently moved over to Mexico and he thinks that you should do the same. Andrew, thank you so much for joining us today.

Andrew:

Great to be here, Zach. Thanks for having me.

Zach:

So we don't have a lot of supply chain people or maybe not enough supply chain people on the show, but given all the events of the past couple years, I think someone like yourself is very interesting to have on the show because you work beyond just electronics. So maybe if you could tell us all what you do and a little bit about your background, that would be very helpful.

Andrew:

Okay. My main job is cross-cultural negotiation. That's what I teach and that is how I do my job. Most of my time in Asia, when I wasn't teaching business school, I was training purchasing teams at places like Siemens, Phillips, some semiconductor companies. A lot of others you you've never heard of, but I was training Western sourcers, and Western procurement teams to interact with Chinese suppliers. So that's how from 2002 to 2012, I was living in Shanghai and I was teaching at NYU, the business school, and I was training purchasing teams. After 2012, I started to branch out a little bit. I spent some time in Thailand, spent some time in Vietnam doing much the same thing. It was everything was going along just swimmingly till COVID hit, and in one fell swoop, I lost both, between that and the trade war, I lost both my careers.

I lost my China specialty, became devalued, and teaching sort of went lowest common denominator, online. So I did what a lot of people did after COVID, we reshuffled the deck. I didn't really start anything radically new. I just started following my own advice. I did the business environment analysis that I teach people to do. I looked at the strengths and weaknesses of different supply chains and different business environments around the world, and I chose Mexico. I thought that Mexico's got some tremendous advantages, especially for small and medium sized enterprises right now, and that's really my specialty. So I'm over here sort of paving the road, clearing the road to bring over my old clients from China who in my opinion, are going to have a lot of trouble completing their business mission if they stay in China and try to market to try to sell to the United States, and we can talk about why, but I don't think that's going to come as a big shock to many of your listeners.

Zach:

Well sure. I think anybody that's listening and hears China is going to come up with two or three different reasons that makes sense for them. But I think probably the bigger question is why Mexico and why maybe Latin America more broadly. We've actually talked with someone else on the show, his name is Angalin, and they have a facility in Taiwan and then they have a facility in Columbia, and so Latin America more broadly might seem like a good opportunity if you're trying to geographically diversify your supply chain and your manufacturing base.

Andrew:

Right now, I am looking at the major challenge to any cross-border business as government regulation. I see compliance cost and compliance costs are becoming unmanageable. Logistics is becoming more unpredictable and more difficult, and regulations, there's a transaction risk that we didn't have before 2018 when the trade war with China started. Mexico is uniquely positioned because you can call it NAFTA2, the real name is USMCA, the US, Mexico, Canada Agreement. Here in Mexico, we call it TMEC, but that puts Mexico top of the list as far as production sites, as far as emerging market candidates for large scale factories and large scale production. So yeah, Latin America has a lot to offer. Columbia is actually the other thing I look at. The other entity I pay attention to for production.

Latin America is a lot to offer in terms of raw materials and resources, but Mexico, Columbia, I don't know who else, I guess really it have a production base that is suitable for the US. The only difference, the key difference for me is Mexico is part of that trade agreement. The USMCA, NAFTA2 and Mexico has the physical border, a 2000 mile physical border with the United States, 40 official ports of entry. Worse comes to worse, you can drive a pickup truck to your factory and get your stuff and that was the big frustration during the second half of COVID when you couldn't unload a boat.

Zach:

Right and I remember hearing about a lot of shipping container vessels that were stuck just parked outside of the LA port.

Andrew:

Parked outside of LA and then parked outside of Shanghai. It was a parking lot for boats, and I don't expect that to happen again because of COVID, but A, that's a possibility and B, as we'll discuss, there are other things that could disrupt shipping and once that happens... The first time it happened, I think it was 2021, when it first happened, everyone was like, "This is shocking. We'll all pull together. We'll figure this out." But 2023, 2024 suppliers and partners and customers aren't going to be quite as forgiving. This is in the market now.

We know that there are going to be logistics problems or potentially we know that US and China are in a state of some degree of hostility with one another, and that has the potential to disrupt, to disrupt shipping. So Mexico has a good trade agreement with the United States. In my opinion, it's going to be the last trade agreement the United States signs for quite some time. It's got the facilities, it's got the educated well-trained workforce. There are problems with Mexico and we'll talk about all of that, but because of the proximity, because of the favorable regulatory environment between United States and Mexico and the cost base of producing in Mexico, I think there's a lot to look at here.

Zach:

Yeah and there's a lot to unpack in what you just described, but you mentioned the trade agreement aspect, which I think is probably one of the last things people have thought about when they're looking at where to produce, especially in maybe moderate volume where the trade issue can create a real cost differential between two different locations.

Andrew:

The 20% tariff on a lot of goods coming out of China.

Zach:

Yes.

Andrew:

I don't think that's going to go away anytime soon. So that 20% right there, it equalizes a lot of the disadvantages of having to move production. That's a hefty number.

Zach:

So you mentioned that you think the trade agreement with Mexico is probably the last one the US will sign, but if companies are looking elsewhere in Latin America, do you think there would ever be any impetus to maybe develop a similar trade agreement maybe with Columbia?

Andrew:

There is for me, I'm a big fan of that and if anyone at the... Who does trade agreements, if there's anyone at commerce or there's anyone from the Biden administration listening, yeah, we should definitely be extending the USMCA. The issue though Zach, and remember, I'm a negotiator and this is what I do. I train negotiators. The issue here is that's not within my power to negotiate. That's not a variable for me. It's a given. It's part of the environment. So yes, I would love to see Nicaragua and Columbia and Paraguay and Peru, but I don't think it's going to happen. There's a possibility of Columbia. I've never been to Columbia. I've got to come clean here. I don't know Columbia that well, but on paper, when I do my business environment analysis, Columbia looks good to me.

Zach:

I see.

Andrew:

I would definitely like to see USMCA extended to include Columbia and possibly Panama, possibly Peru, but again, that's a great thing for business people to discuss. I don't think government people are discussing that.

Zach:

Sure, that's understandable. So in terms of the business environment in Mexico and probably elsewhere in Latin America, what are some of the challenges for any company that wants to move some of their supply chain to Mexico or maybe all of their supply chain to Mexico? Because when we talk electronics manufacturing, it's more than just the circuit boards and the assembly. I mean there's plastics, there's mechanical fasteners, there's sheet metal, I mean wiring cables and the list goes on and on.

Andrew:

And design and software too. I'm in Guadalajara at the moment, so I'm sort of plugging the work I'm doing right now. Yeah, I'm meeting with a lot of design people and I'm meeting with a lot of software people because Guadalajara is in the process of turning itself into a software and design center. As far as electronics in Mexico, there's good news and bad news. Let's start with the challenges and the first challenge is supply chain and sourcing. I just had a long conversation with a designer this past week. He said all of the pieces exist in Mexico. You can find the design, you can find parts, you can find processors, but the problem is they're not in the same place and not everyone knows where they are. In other words, if you want something designed, you'll come to Guadalajara.

They can do the reverse engineering, they can do the 3D prototypes, they can do look and feel. They can do the complete design. I said, "Where do you have it produced?" He said, "China." I said, "Wait a minute, that's not going to work. Where in Mexico can we have this done?" Well, you can go to Carretero for this sort of metal processing and you can go to Leon for this I think, and I contrast that with my conversations in Shenzhen, where if I went to... I'm holding up my little Bluetooth mouse. If I went to a factory, not a designer, not a consultant, if I just showed up at a factory and said, "I want to produce this, but I don't know how to do it."

By the time I got up and left the meeting from that factory manager in Shenzhen, he would've arranged my entire sourcing plan. I might not have the molds, I might not have intellectual property. I might be stuck with him forever. That's a different issue, but he would know by the end of business that day where to source everything. That is something that is a challenge here in Mexico. So things take a little bit longer to arrange for just that reason. Also, at the very high end, at the semiconductor level, you're not really going to find, you might not find the talent in Mexico that you would be able to access in Asia.

Zach:

This is really interesting because it sounds like in Shenzhen, if you were to talk to that same person, they have a list of people in their back pocket that they know, I can call this company for the design, this company for the plastic, the enclosure, so on and so forth, and they just have this list probably because they deal with it so much. Is that fair to say? It's because they have to deal with it so much that they've been like economically forced into having that list ready to go on a moment's notice?

Andrew:

It's also a matter of policy and a matter of culture. On a policy level, China put all the manufacturing in one place. This was a plan. The whole rise of China from when I first started going to China in 1996 because I'm old. So when I first went to China, there was a Guandong special economic zone and Shenzhen, I was a specialist and there was a special passport to get in. You couldn't leave the zone and they were already building and rehabilitating older factories. This was always the plan to put everything in one place. Now, in addition, Chinese culture, Chinese business culture puts a premium on Guanxi, on your connections.

You're supposed to have really good networks for a Chinese business person that is just a sign of competence. They like that and this predates WeChat and all the social networks. When I first went to China, it was pre-social media and it was still a big deal. I worked for an electronics company on the ground in 2002, and I was introduced to someone who said he used to be in the army. He has very good connections. That was his qualification for being one of the senior partners.

Zach:

He just knew people.

Andrew:

He knew people who knew people. Mexico is just the opposite. Mexico smart people keep their mouths shut. It's a family business culturally speaking. Business here was organized around family units. The father, the patron ran the business, all decisions went through him, and if you're a smart business person, you present the boss with the information he needs and that's it. He makes the decisions. So the idea of building a really broad network is more of a family thing or a relationship. It's a pure relationship thing here in Mexico. Whereas in China, it's more of a business thing. So in Mexico, once you break into that network, everyone knows everyone but if you're an outsider, you're an outsider.

Zach:

That's really interesting because I think if you think about what was happening with electronics production 40 years ago, everybody had a captive production or supply chain. So because of that, I think at some point everyone was reinventing the wheel as far as what they had to build and the specialty, and so at some point it made sense to have EMS companies that just were good at production and to build out that kind of network like that, and it doesn't sound like that same culture of specialization and building these kind of highly specialized services really exists in Mexico. Is that a fair way to look at it?

Andrew:

Mexico's got multiple economies at the SME level, at the small and medium size enterprises, you've got two types of Mexican business. One is the craft oriented simple material non-electronics business. They make furniture, they make tables and chairs. That's the example I'm always given. They're very, very good at what they do. They put a premium on craftsmanship. They do not put a premium on production and efficiency. So when you come to Mexico, the level of workmanship is very high. The level of project management is very low, and this is one of the things I'm here for. Someone is going to develop this, I'm putting it together. There are other people who are putting together. These networks that are in Asia and in China, these networks were just sort of part of the environment they were given.

Here, there is a great deal. It's siloed. That's the expression, the term I used. So someone in Guadalajara will know everything about Guadalajara, but he won't know anything about what's happening in Leon, a few hundred miles to the West where they're doing all the electronics production for medical devices or in Carretero where they're doing all the sophisticated electronics for the aerospace industry or along the border, were they making cars and autos? Well you know better than I. I mean nowadays, a car is just the same as an electronic device with wheels. So the know-how is here, but it is siloed within companies and within cities or within regions. So every region is developing its own specialty, but what hasn't happened yet is there isn't the Alibaba of Mexico. This is the holy grail for people I talk to. Everyone wants the Alibaba of alibaba.com of Mexico and it doesn't exist and I don't know if it ever will.

Zach:

That was one thing I was just wondering is the challenge because these pervasive marketplaces where anybody can join and offer products and services don't exist, and you brought up Alibaba of Mexico. I think if you had that or the digit key of Mexico, if you want to focus specifically on electronics and you can go into other industries as well, I think that would make a lot of sense, but I wonder if that kind of service is the type of thing where if you build it, they will come and if there's a cultural barrier to that kind of networking among different players in a particular industry, maybe if you build it, they won't come.

Andrew:

The customers will come. Will the factories come?

Zach:

That's what I mean, yeah.

Andrew:

That brings us to another issue. Right now there is not that much contract manufacturing in Mexico and the contract manufacturing that exists is Flextronics. They're coming from overseas, they're coming from the US and more and more, they're coming from China, which is going to be the wild card here because that might fix things in a way we don't want them to be fixed, but it's a possibility. There isn't a native Mexican version of Foxconn or Flextronics. It's all coming from overseas. They don't particularly like that business. I mentioned before there were multiple economies. Let's switch the focus to the big advanced production. Well let's use the auto industry cause that's really what built this kind of business in Mexico. The American automakers have been producing in Mexico for 70 or 80 years. It goes way back. An auto factory in Mexico looks just like an auto factory in the United States that happens to be in Mexico.

It looks the same. They have ISO 9,000, 9,001, whatever ISO you want. They all talked about being six sigma black belts and following the Toyota way or the Caterpillar way or the GM way, and they're really into it. Mexican factory manager is on the same organization chart as HQ, which is a huge operational difference from trying to build in China where you've got a 12 hour time difference and a big culture gap. Here, I'm talking to you from Mexico, we're in the same time zone pretty much. In the old days, one of us would be losing sleep right now if I were in China because there's a 12 hour or 11 hour time difference. So these American or these international multinational company, let me do that again. These multinational factories that are being built now are cutting edge.

They are really good at what they do, but their supply chain is not dependent on Mexico. Their supply chain is global. So they're bringing in containers of everything they need and it is not having a huge impact on the contract manufacturing business in Mexico. When the Chinese come in, that may change, it may not change. That remains to be seen, but so far the contract manufacturing that does exist here is large scale for servicing that multinational, that sophisticated large scale multinational production effort. So it's not working its way down. You can't go shopping for electronic parts like you could in China.

Zach:

I wonder if it would take a Foxconn or a TTM to come in and set up shop with electronics production and probably a lot of other ancillary components that go into electronics assemblies as well to really drive the native group of companies to get out of that silo-ing that they do. I think on some level I understand it because it's kind of this mentality of we worked hard to build our relationships and our capacity and our capabilities and we don't want to interface with anybody else because someone else might take that from us. So I kind of get that mentality, but at some point, if you really want to scale, you have to team up with other companies and you have to develop those supplier relationships.

Andrew:

I agree with you. I feel the same way. Unfortunately, a lot of Mexican factory owners do not yet, but I'm pretty sure that that tide is turning. It's turning here a little bit because we have on the design side. When I first started looking at Mexico, one of the things I had heard was, it's very hard to find design. It's very hard to find reverse engineering. I heard that in Monterey where they've got the auto industry. When I come to Guadalajara, it turns out they do have this, but the people that I'm speaking to from Caterpillar and the Monterey people and the Saltillo people don't do it, so they say it doesn't exist, but when I come down here, yeah, it exists. That's who I had lunch with the other day. I had lunch with a guy who does reverse engineering and 3D prototypes. So someone's going to put the pieces together. It might end up being me or someone like me, or it could be Foxconn and Flextronics, and Plantronics? Or it could be the next gen of Mexican entrepreneurs.

Zach:

Yeah, that's another kind of wild card here is if the next generation of entrepreneurs maybe see what happens in other countries and other cultures and then they say, "Hey, getting out of your silo is actually very valuable, especially if you're running a manufacturing operation and you want to scale it." And then they start to undergo that networking and marketing initiative to try and link all these different companies together and eventually maybe become that broker that knows where all those different services are and can work with an OEM, let's say, or maybe a company that wants to produce a moderate volume in Mexico and provide all those solutions.

Andrew:

Well that brings up an interesting point. The whole concept of OEM and contract manufacturing is a little bit different here. When Mexicans talk about OEM, it looks to me a lot like a wholly owned subsidiary. There's a little bit of a difference in the phrasing. Recently, up until now, they haven't really liked contract manufacturing because it is contrary to the way the two ways they do business. From the craftsman workshop type setup, they don't like it because it's too variable and they say, "No, I don't want to ramp up." And they'll look right in the eye and say, "No, I don't want any more business." Which coming from Asia is very strange to hear, but here they have more of a 

Zach:

Coming from America, it's very strange to hear.

Andrew:

From America too, but they have that craftsman approach and the family business approach and the other extreme, I'm talking to these factory managers who could definitely do it, but these guys were trained by General Motors or they were trained by Caterpillar. If they don't have an entire end-to-end production plan, including a bill of materials and a budget and sourcing, they'll walk away and they say, "No, you don't have a product. You're a marketer. You're not a producer." And again, coming from the North, coming where I was recently, coming from Monterey, that's the insult. You don't have not a manufacturer, you're a marketer. In Asia, that's okay. It's actually good. They like that because it enables them to use their network to do all the design work. In Mexico, they don't like that because they're basically Detroit or Irving, Texas or they're trained to be factory managers. They're not trained to be marketers.

Zach:

So I guess that puts the burden on the customer if let's say it's a small medium business, they want to produce moderate volume assemblies in Mexico. They have to go through and find all of those different people. Figure out the logistics. How you going to get, let's say it's boards. How are you going to get boards from one factory over to the assembler? How are you going to get the chips over there? Where are you going to get the plastics of fasteners, the cables, all of that stuff.

Andrew:

Okay, true but with one added twist, you are expected to do the assembly or production work yourself. Mexico is set up to build factories.

Zach:

Okay.

Andrew:

So that's a big difference. When you go talk about entering the Mexican market for production, they are going to ask you how big your factory, how much space you need, how many square feet you need for your factory, and that's what it's set up for. Like I said, Flextronics is here in this town and there's a lot of design work in this town. The people who've traditionally done design for products, including electronics, have done the design here and then sent the work over to Taiwan or China for production. That is changing, but the assumption is still that you'll set up your own factory at least for assembly, and Mexico is set up for that. I told you about the USMCA, the new NAFTA. Well, Mexico has something on the other side called EMEC, and if you want to bring in equipment, you want to bring in materials, you want to bring in raw materials or components, you can bring all of it in duty free provided you ship it out.

Zach:

Whatever you make, you got to ship it out.

Andrew:

Sorry?

Zach:

Whatever you make, you have to ship it out?

Andrew:

All for export. They don't want you selling into the Mexican market. It's sometimes called a shelter system because they have a set of laws that makes everything you do tariff-free, low or no duty or rebate, the value added tax that you have to pay. It's set up for the production that gets exported.

Zach:

That's very strange because I mean let's say you're producing the next, I'll use iPhone. We always use that as an example. Let's say you're producing the next iPhone. You want to sell that internationally. Wouldn't you want to sell some of those to Mexican citizens even if you produce it here?

Andrew:

You can, but you'll be paying a tariff or you'll be paying duties, I shouldn't say tariff. You'll be paying duties on all the materials just like a regular product. This is an incentive. They like export for Mexico and this could be a good lead in to Mexican government policy. Mexican government likes high employment, they like new technology, and they like protecting their domestic market.

Zach:

That's what I was thinking. Yeah, it's all about protecting the domestic manufacturer who is going to be allowed to sell locally. So you, your American company that's producing all these electronic devices, you got to ship them out because there might be a Mexican producer that's producing the same thing and we want to make sure Mexican money gets spent on something produced in Mexico and keeps the money in the economy.

Andrew:

That's the logic that governs Mexico. Mexico is much more willing to adjust the market. They nationalized stuff. They have a lot of policies that are not very pro-business at the national level. On the state, the municipal level, they're much more pro industry and much more pro business, and that's where the interesting things are happening, but that leads to more of this silo-ing because the infrastructure in Monterey is very different than the infrastructure and the legal structure in places like Leon where it's a little bit rougher.

Zach:

I see.

Andrew:

There's a lot of variance from different business centers in Mexico.

Zach:

Well, I suppose if you're planning to geographically diversify your electronics manufacturing base and supply chain, initially Mexico looks really cool because it's got water on both sides of the country, so shipping is easier and then of course you've got one big huge end market just to the North of you, United States and then of course Canada, but a lot of these challenges really have to play into the business strategy if that's really going to be your plan. It sounds like this is only going to be something where maybe it's an American company selling in the American market that is trying to diversify themselves away from whatever centralized situation they're in Asia and maybe that's the strategy that makes the most sense from the business stand point.

Andrew:

Well, you've got three things to consider. Simple answer, yes. Number one, you're not required to move 100% of your production out of China or out of Asia into Mexico, because of the cost bases here, it still makes sense as a trans-shipment point. It still makes sense as for assembly and packaging and processing and shipping.

Zach:

So maybe you do the boards in China and you ship the semiconductors from the US to your assembly plant in Mexico, you assemble it in Mexico, then you export it back to the US and Europe and Australia, wherever else?

Andrew:

That's one possibility. The second possibility that I'm just starting to see, and I'm very interested in this one, don't forget, you've got a very sophisticated production and electronics, a design base in the United States. So places like Texas where TSMC is setting up in Arizona, but places like Texas and Arizona and California are also right across the border and there is a lot of hopscotch. You go back and forth. Mexico is really good at design, really good at assembly. They've got the right cost structure. There are a lot of problems with the infrastructure in Mexico, but roads, airports, rail, and regular ports are not the problem. It's very easy to ship, it's very easy to move stuff around, and all the production centers you see here in Mexico are all on major highways.

And if you're making in Monterey, we're talking about two hours to Laredo, I think it's only two hours, which of Brownsville. It's two hours to the border and if you Tijuana and Juarez, they're even closer and they've got laws so that the trucks get preferential treatment. They can just drive across. There's a zone within 25 miles of the border on either side and the trucks don't really have to stop. So it's set up for this. Mexico is set up for this kind of production, but the two caveats are one, you need your own factory and two, you have to know where stuff is.

Zach:

Yeah, makes sense.

Andrew:

So the scenarios I'm discussing with people are one, transitioning gradually into a Mexico production base. So you're not just pulling up stakes, you're not burning your factory in China or in Vietnam to the ground. You're still going to import components, but the lower tech stuff can be done probably better here in Mexico so you can transition. The other thing that we can use Mexico for is the shift from just in time inventory management to just in case inventory management and you can warehouse and store and accumulate and keep your stock here in Mexico so that if those boats stop moving between Ningguo and Los Angeles, you can still do business. You won't have empty shelves at your customer store. We saw that during the, I think it was 21 during the shipping.

Zach:

Yeah, makes sense.

Andrew:

And then eventually ramp up your Mexican production.

Zach:

Yeah, I think maybe the other instance here is you're right, I think companies aren't totally burning their factories to the ground as you said in Asia, but if they're planning something new and they're going to keep that other factory online, maybe this is a location that makes a lot of sense for some of the reasons you side it.

Andrew:

That's a good way to look at it. Don't forget we're so close to the customer that you can make changes almost real time, whereas if you're trying to make changes to your design in China or in Vietnam, you got a two-month lag because of the shipping.

Zach:

Yes, that's a good point. Now think anyone that follows the news and maybe follows like a de-globalization hashtag even on social networks, they have probably heard of Apple moving some of their production to India and have probably thought, "Well, if Apple's doing it, then maybe I should do it too. The folks at Apple are smart people and I don't think they would move to India if they thought there was going to be problems producing electronics." So that brings up the question, does India also make sense if your goal as a company is to geographically diversify your production and your supply chain?

Andrew:

India is good. India seems to be a really good option for a lot of people, but there are a couple of downsides on India that we have to talk about. I have my notes here. I'm always wary of using Apple and Samsung as our test case because these people are...

Zach:

I understand, but they're the big ones that are visible and so people look at them and I think it's easy to boil down their strategy to maybe something that might work since at a smaller level. I agree with you that it doesn't always make sense.

Andrew:

India can be difficult. Maybe it's gotten better since I had my encounters. India hasn't been, and remember, I do international negotiation as my job. India is a tough one. It's tough to manage. The government is difficult, the labor situation is better, but they have unions and they have vocal proponents of their own interests. It's tough to manage and it doesn't really cure all your geopolitical ills.

Zach:

But maybe if you wanted to produce closer to Europe, if you're selling into the European market, does India make sense? Is India like the Mexico equivalent for Europe?

Andrew:

No, I think Eastern Europe is-

Zach:

Okay, so maybe Serbia would be better.

Andrew:

Or Poland. I'm not 100% sure on that. India is an option, but again, right now I'm worried about political risk and geopolitical risk and India is not going. It's going to be a half step. I put India in the same category as Vietnam. If you've already done your negotiations, if you have a plant or you have a relationship already, fine, it will serve you well for a while, but we live in very unsettled geopolitical times and there's a that can go wrong. So yeah, India, I have nothing against India. I mean I'm not going to raise any red flags there. In China, I know things are going to be bad. I know the costs have been going up. India, I'm more of a wait and see kind of guy. I know that India wants the business. I don't know for sure that they can do the business and I'm not sure that in a year or two we won't be having similar problems with India that we're having with China.

Zach:

Well, you just mentioned that China would be bad from the cost perspectives. I think you said costs are going to go up and that's just been the broader trend regardless. I think India, when people look at India, they'd say, "Well, India makes sense for the technical skills." But I think as the technical skills have gone up, that also pushes the cost up. So at some point, you're not necessarily looking at India as the lower cost option. There's got to be something else there that causes you to put your new production or assembly facility in India, and maybe the contrast is can I actually sell into India if I'm going to put a factory in India? Is that going to be allowed? Whereas Mexico, you can't really do that without paying duties.

Andrew:

I'm not 100% sure what the situation is in India. The population's big, I don't know the size of the middle class there. In Mexico, the middle class is growing to the point where costs are going up. We're starting to have a little bit too much of a good thing here in Mexico. There is a middle class market that's developing. They are used to paying the duty here. Right now, it's either iPhones or OPPO or the Chinese brands. The Chinese brands pretty much own the market. The non-Apple, the non iPhone market here in Mobile. I don't know, as far as production goes, I think as far as I'm concerned, the jury is still out on India because I've heard good things, but I don't know if the verdict is in yet. On Mexico, I know that sophisticated multinational factories are producing at the same quality as they are in the United States.

Zach:

Okay, well that's comforting because that's another issue that comes up is quality control and that's another news item that came out with Apple moving production to India is that they were having some quality issues. So I think if you have that culture of quality like you have in Mexico, it makes it a lot easier to move production there, plan new production there and be able to sleep at night.

Andrew:

Yeah, that's a given, that's known. When GM sets up a plant here or when Caterpillar sets up a plant here, the expectation is that quality will be within the US tolerances.

Zach:

Sure, makes sense.

Andrew:
In some cases, I think it's GM has moved all their electric vehicle stuff down here. These are cutting edge factories that GM is building. I think it's GM. GM is doing the construction by their own standards with people they know. So it's not going to be as much of a question mark as India seems to be, but that being said, I've heard good things about India as far as the quality of the factories. I just haven't seen it. I don't think it's really a known quantity yet, and the distance bothers me.

Zach:

Sure. Well, we're running a little low on time but I think as maybe a final thought, I just wanted to ask you what would be some advice given all of the stuff that we've talked about, what would be some advice that you would give to companies that are maybe planning new production in one of these areas that we have mentioned or just planning to geographically diversify generally, whether it's electronics or whether it's part of all of the components that go into their assemblies?

Andrew:

Time is not on your side. It's already late. That's what I would say. In many parts of Mexico, they're at capacity already. Don't forget, the multinationals have been doing this for five years at least. The multinationals have been splitting their supply chain. There's now a US block supply chain and a China block supply chain, and the Western big multinationals have already taken up a lot of capacity and they're building from the ground up here in Mexico and they don't even have enough land to build on. I know from my time in Vietnam, they're not really looking to build small factories. Samsung was able to create, but they had to build their own port, but Samsung was able to set up a giant operation in Vietnam. I don't know that there's that much excess capacity for contract manufacturing in Vietnam going forward. India, I'm not sure of, Thailand I know it's not as flexible as it used to be.

People have been moving out of China and they've been doing that anyway because of costing, but since 2018 when our trade war, our trade kerfuffle started to develop, the multinationals had made the adjustments and a lot of larger companies have already made the adjustment. So if you're still like saying, "Well, maybe Vietnam or maybe Mexico." I would invest in a couple of plane tickets and I would investigate and the second thing I would say for the SMEs and for the small and medium sized businesses is develop a transitional strategy. Figure out a way to get your foot in the door. I would prefer it to be Mexico, but even Vietnam, you're going to run into the same issues where it's not going to be a quick adjustment. It's not going to be a matter of weeks to transition into Mexico in a meaningful way.

You're looking at six months to two years. I don't know the situation in India, but I would be surprised if everything was finalized without incident. I think for a lot of, especially American companies still running supply chains through China. They think everything is going to run on China time. They think everything is running on Shenzhen time and the rest of the world just doesn't work that way. So it's already late in the day. Figure out a transitional strategy and do a business environment analysis to figure out what is right for you. Don't stop at the first piece of news because again, China is one of the most over analyzed markets and one of the most over covered economies in the history of the world, but once you leave China, it's very hard to get usable business intelligence on these other places.

And this is one of the things I've been finding in Mexico. It's very hard to get business intelligence on Mexico. That's one of the things people have me doing and no one's ever going to be the factor of the world the way Shenzhen and Guandong were where you could just show up at the Canton Fair and spend a couple of days in this giant trade show and walk out with all your supply chain taken care of. That doesn't happen anywhere else, and it certainly doesn't happen in Mexico. So time is not on your side. You need a transition plan and you are going to have to put in some legwork or hire something to put in the legwork.

Zach:

Yeah. Well, I think that's all very excellent advice and hopefully as these trends continue and as the situation globally develops, we can have you back on to discuss more of these issues.

Andrew:

Good, hopefully we'll see you down here in Mexico sometime soon.

Zach:

Well thank you very much. To everyone that's out there listening, we've been talking with Andrew Hubert, professor at Holt University and supply chain consultant. If you're watching on YouTube, make sure to hit the subscribe button and you'll be able to keep up with all of our tutorials and episodes as they come out, and last but not least, don't stop learning, stay on track and we will see you next time.