Shelters have long been a niche service in Mexico, one staged between companies setting up their own maquiladora plants and those hiring contract manufacturing.
The niche has proved to be so successful that at least one Mexican state has decided to make shelters part of its economic development plan and incentive package.
The shelter concept is simple. Shelter operators allow foreign companies to manufacture without a legal presence in Mexico. The operators hire, train and pay employees, obtain the permits and licenses, arrange and pay utilities and, usually, provide transportation within Mexico.
The industrial client pays the shelter operator the passed-through costs plus a shelter fee for services provided.
Wrinkles and variations on this concept occur, but the basic concept stays fairly simple. Unlike contract manufacturing, shelter clients bring in their own manufacturing equipment and materials. Otherwise, they do not deal with issues of operating offshore. They can concentrate on their core manufacturing operation.
Shelters have long marketed their services as an easy way for small and medium-sized manufacturers to operate in Mexico, taking advantage of lower wages without tackling the maize of fees, permits, foreign laws and other red tape.
After decades of shelter operations, mainly in Mexico’s northern states, the mountainous state of Guanajuato in the central highlands of Mexico recognized that shelters can play a vital role in strengthening the state’s competitiveness for foreign investment.
The recognition comes in the form of a new incubator program beginning this month. Guanajuato will join shelter operators with the state paying for employee training, licenses, permits and plant space rents, costs that will not passed on to industrial clients.
“This will be the easiest it can get to start an operation in Mexico,” said Manuel Fernandez, director of the Guanajuato Investment Office in Chicago.
Why is Guanajuato doing this?
The state already has some giant industrial operations, led by a General Motors assembly plant at Silao, which produces Cadillac, Suburban and Yukon models. It also is home to a General Electric appliance factory, as well as manufacturers American Axle and Lear Corp. Guanajuato has developed its auto industry in the past decade. Currently, about 20,000 workers in Guanajuato are employed in the automobile sector.
Guanajuato naturally wants these companies to expand and for other large manufacturers to move operations to its state, but it finds it lacks the necessary second- and third-tier suppliers to lure the investments.
Shelters can address that gap because they are an attractive method for smaller suppliers to make the jump into a foreign country, Fernandez said.
“We have plenty of industry, but lots of foreign companies in Central Mexico are in need of parts and components not available now regionally,” Fernandez said. “We want to develop the supply chain in Central Mexico, so we are going one step beyond shelters by being supportive of companies coming here and offering incentives.
“We are convinced this is the best way to go, because every cent we spend to develop industry results in a fantastic payback for us,” he added. “We are going to take an aggressive approach to shelters for the automotive, electronics and appliances industries."
As shelter customers arrive, the state also will assist in finding additional industrial plants for the companies to supply, even in the surrounding states of San Luis Potosi, Queretaro and Aguascalientes.
“We will try to help small companies with potential growth to get their feet wet and grow into bigger businesses,” Fernandez said.
Although shelters are concentrated in northern Mexico, Fernandez said Guanajuato is convinced shelters can locate successfully in Central Mexico because of five daily flights between the U.S. Midwest and Guanajuato’s airport at Leon.
Shelter Operations Look to Expand
Established shelters elsewhere in Mexico believe demand for their services will rise in 2005.
St. Louis-based MO-MEX Corp. has operated a shelter service for 16 years and has three main clients operating in 150,000 square feet of space in Navojoa, Sonora, employing 700 workers.
The three U.S.-based clients are C.F. Martin & Co., making guitars and guitar strings, GE Security Inc., manufacturing wireless alarm systems, and Accellent, makers of medical devices.
“We look for any industry with labor intensive operations,” said James Cummings, president of MO-MEX. “We provide the labor and buildings. We maintain the buildings and mechanical systems and handle shipments into and out of Mexico. We also handle the qualifications of our clients to receive the benefits of the North American Free Trade Agreement.
“Clients that come to us bring their own equipment and raw materials and do the manufacturing,” he added. “We take care of everything else.”
MO-MEX has 80,000 square feet of space available for shelter clients and recently canvassed 4,000 manufacturers.
“The responses are encouraging,” Cummings said.
Greenville, S.C.,-based Initiative Group employs 330 workers in Matamoros, Tamaulipas, at the Texas border, in 28,000 square feet of facilities. It started shelter services in 2000.
“It’s full. We’re looking to expand by the same size next year,” mainly in Matamoros with some operations possible in Monterrey, Nuevo Leon, said Stanley Garrett, operations executive vice president for the Initiative Group.
“We see lots of movement to Mexico because of the U.S. economic turnaround,” Garrett said.
Electronics and automotive are the main industries moving to Mexico, he added. His company specializes in assembly, disassembly, inspection, circuit board testing and sorting services.
“We’re pretty broad,” Garrett said. “We don’t shut the doors to anyone except textiles. China is taking that away from Mexico.
“Everything is handled on a U.S. company basis," he pointed out. “We basically are using our shelter as a contractor on a U.S. company-to-U.S. company basis. We are outsourcing to our own entity in Mexico.”
The Initiative Group’s clients can pay the pass-through charges on either an hourly basis or by piece.
“We have clients who do both,” Garrett said.
Among the newest shelter operators is San Antonio, Texas-based Entrada Group, which has three clients employing 220 workers in facilities in Fresnillo, Zacatecas. Those clients will increase production and employment to 400 workers in 2005, and the company believes it will add two to three clients this year to add 150 to 300 more employees.
The Entrada Group, which began in 2003, charges clients a facility fee, a shelter fee for administrative services and pass-through fees, with no markup, for local purchases and utilities.
Doug Donahue, vice president of Entrada Group business development and a principal in the firm, said when shelter clients are grouped together, costs are reduced because of economies of scales. Shelter clients can share the costs, for example, of employee daycare centers and union contracts.
Some shelter operators help clients graduate to their own stand-alone plant after one or two years, but others tailor their services to keep their clients in the shelter plan.
“Most clients sign on for the long term,” Donahue said. “They don’t want to graduate to their own plant because it is to their benefit to stay in the shelter.
“We take everything Mexican out of running the operation," he noted. “It’s like adding another production line in the United States because clients are not dealing with a setup in a foreign country.”
.
Means the article is accessible only to our magazine subscribers.
