Importers Find Success in Mexico Sourcing

| Apr 15, 2014 4:45PM EDT
Making Christmas ornaments in a maquiladora.Making Christmas ornaments in a maquiladora.

JUAREZ, Mexico — Each Christmas ornament or mannequin that is shipped from here to major U.S. retailers is a sign of Mexico’s growing competitive edge with China.

When it shifted production out of its Brookfield, Colo., headquarters seven years ago, Fusion Specialties considered sourcing in China, but instead chose this plant miles from El Paso, Texas. Competitive Mexican labor played a part in the company’s decision, but the ability to get its products into the hand of U.S. customers, which include Macy’s, Nike and J.C. Penney, within a week was the main factor, said plant manager Hector Romero. If the mannequins were built in China, they could sit at a port before a two-week ocean trip, only to stay at the Port of Los Angeles for three more weeks before being shipped inland. Rejected shipments would also face a long trip back to a Chinese factory. 

“What if the second batch (from China) has the same issue and is already on the boat?” Romero said.

Having the ability to make changes to different mannequin models is key, as Fusion Specialties produces a gamut of different types for each customer, ranging from child-size models to mannequins modeled after pregnant women. Other mannequins are modeled after professional athletes, such as basketball legend Michael Jordan. The major design work is done at the Colorado headquarters, but the Juarez plant, which employs 500, can also make alterations to products.

Fusion Specialties’ decision to source in Mexico instead of China appears to be paying off. The company in the last five years has quadrupled annual production to more than 100,000 custom-built mannequins. Sourcing in Mexico “has allowed us to grab market share and become more competitive by reacting to customers’ needs faster,” Romero said.

The rise of maquiladoras, or Mexican companies devoted to producing products for export, can be seen in the growth of U.S.-Mexico cross-border traffic. U.S.-Mexico truck trade in January rose 5 percent year-over-year to a record of $28 billion, while rail trade expanded 5.9 percent to $4.9 billion in the same period, according to the U.S. Bureau of Transportation Statistics. A decline in Mexican homicides is also helping some manufacturers get over fears about sourcing south of the border. The murder rate last year fell roughly 15 percent in Mexico, with Juarez seeing a 47 percent drop to 453 homicides in the same period, according to a report released this month by Justice in Mexico, based at the University of San Diego.

U.S.-Mexico cross-border tradeU.S.-Mexico cross-border trade, Jan. 2013 to Jan. 2014

Even though more shippers are shifting production to Mexico, the trend hasn’t yet registered in ocean container traffic. But that hardly means the trend isn’t changing supply chains and won’t reshape them even more dramatically. Roughly 22 percent of about 100 shippers surveyed late last year by Wolfe Research, an investment research firm focused on transportation, said they plan to shift production to Mexico. The trend is more than just about a change in sourcing; it points to a new way for North American Free Trade Agreement partners to be competitive in some manufacturing. U.S. and Mexico go beyond trading goods and materials to jointly manufacture products, whether automobiles or airplanes.

The increased interest in sourcing in Mexico is more than just that Mexican labor prices are becoming more competitive with Chinese labor costs. Christmas by Krebs chose to produce plastic ornaments in Juarez instead of China largely because the company wanted better control of its supply chain for the more than 5 million ornaments it produces annually, said plant manager Jorge Moriel. Producing in China would be cheaper, but the manufacturer likes the certainty of being able to hit its North American customers, including Wal-Mart, Hobby Lobby and Lowe’s stores in U.S., Canada and Mexico, in weeks.

Sourcing in Mexico isn’t easy, though. There’s a myriad of challenges, ranging from government regulation to cross-border logistics, to navigate. Since 1986, The Tecma Group has been helping manufacturers focus on their core business by taking care of the legal end, customs, human resources, real estate and other backend process. As a holding company, Tecma manages 24 maquiladora operations, including those for Fusion Specialties and Christmas by Krebs. The manufacturers produce a wide range of products, including dog toys, computer parts and pallets.

The operations of Tecma, a $70 million company, are staggering. The 11 Juarez plants, along with three others in Mexico, employ about 4,800 and require a small army of support. For example, Tecma factory cafeterias — a must for any Mexican maquiladora — have served up to 16,000 meals in one day.

The services extend to arranging transport of factories’ goods across the border and handoffs to U.S. drivers, as required by federal law. Tecma has an 18-driver-strong dedicated truck fleet that hauls goods to its two and soon-to-be three El Paso cross-docks, where goods are then shipped out to customers, said John Rippee, vice president of border solutions. The fleet handles about 13,000 cross-border shipments annually.

The rising fortunes of the maquiladoras are spilling over the border into El Paso. The value of trade handled by Foreign Trade Zone No. 68’s 20 users grew 35 percent year-over-year last year to $10.6 billion. Part of the growth in 2013 was due to the 10 third-party logistics companies, which each serve at least 20 maquiladoras.

But in a broader sense, the zone is experiencing growth by serving as a “launching pad” for Mexican exports to Europe and the Middle East, said Jose Quinonez Jr., manager of FTZ No. 68.

Maquiladoras can consolidate shipments in the FTZ before tapping the U.S. freight transportation network, which offers better access to European and Middle Eastern markets than the indirect route to southern Mexican ports, he said. Sometimes components from Mexico are assembled with U.S or foreign parts to create a final product either for domestic consumption or for export. Companies that manufacture in FTZs have a choice of paying the duty on the final product or on its foreign components. Because shippers don’t have to pay U.S. duties on final products that are re-exported, they can use the zones as hubs for domestic and foreign distribution.

The FTZ also allows shippers to better handle emergency air cargo shipments, as about 1,000 acres of the zone are adjacent to El Paso International Airport. The more than 3,400-acre FTZ in El Paso is used by Bosch; Honeywell; Sumitomo Electric Industries, a producer of wire harnesses for vehicles; and VF Corp., a major apparel maker. Third-party logistics companies with the FTZ designation handle the cellphone, printer and computer business of electronics giant Foxconn, which has a Mexican plant adjacent to the Santa Teresa-San Jeronimo border. FedEx trucks carrying Foxconn-built Dell computers move in caravans out of the growing port of entry.

Less than 10 miles away, intermodal trains stop at Union Pacific Railroad’s new intermodal terminal, another sign of the existing cross-border growth and expectations of even more. The $400 million facility, which includes a fueling station, opened earlier this this month, giving the railroad more than 70 percent more lift capacity, or the ability to handle 250,000 more units, than it had at its El Paso terminal, said Scott Moore, UP vice president of public affairs. Electrolux already ships Juarez-built refrigerators out of the UP terminal, and other shippers are expected to join the white-goods giant in tapping the region’s newest transportation asset.

Contact Mark Szakonyi at mszakonyi@joc.com and follow him on Twitter: @szakonyi_joc.