Flying down to Mexico

In a Q&A session, Entrada Group's vice president of business development, Doug Donahue (right) explains how the company helps European manufacturers establish a low-cost manufacturing base in central Mexico. Q) Tell me how the Entrada Group instigates an offshore manufacturing operation and business model with its aerospace customers? A) “Entrada works on the philosophy that there are three fundamental costs to manufacturing: supply chain or raw material costs, labour costs, and overhead costs. Entrada has devised a location and a service package that attacks the labour and overhead costs to minimise the increasing cost of the supply chain when moving to a low-cost country. “Our location in Zacatecas contributes to cost savings. We have an administrative structure that allows us to build economies of scale for all of our clients. Entrada's service package can be divided into the start-up phase and the medium- to longer-term phase. Generally, aerospace manufacturers succeed by having the right talent, suppliers, and manufacturing set up. During the start-up phase, Entrada works with its clients in building the team that will run the operation and build the facility to ensure the operation will be successful. Entrada has the expertise to do it better than any single company entering Mexico for the first time because we've done it many times already. “Medium- to longer-term means leveraging the scale of our operations to bring other cost benefits to our clients. And because we perform these Mexican corporate services every day, we have much more expertise. Our clients' core competency is manufacturing – our core competencies are these corporate services in Mexico.” Q) Typically, what are the barriers to European aerospace companies setting up low cost manufacturing businesses in Mexico? A) “There are both tangible and subjective barriers. The tangible barriers are simple. To get an operation up and running companies need the talent to carry out their processes. Then they need to find a location that will help them succeed. Quality is probably the number one issue people worry about when they first start up, so they focus more on it. As they gain more confidence, they tend to concentrate more on efficiencies. “Another tangible barrier is the supply chain, i.e. the raw materials and processes. Mexico has a tremendous OEM sector comprising many capable first-tier suppliers, whereas the second- and third-tier suppliers – the process people – are just starting to come to Mexico. The obvious process problem we run into is locating a suitable heat treatment facility. The best solution is to set up a manufacturing site next to a heat treatment facility, but everybody has done this. These markets are now the most expensive markets you can visit and the obvious examples are Monterrey and Queretaro, which have established heat treatment processes. They are the two most expensive markets in Mexico - not only in cost of direct labour, but also in finding the right skills. The principle barrier is in companies being able to manage their supply chain and establish their processes in a location that is cost competitive, but which also allows them to effectively service their clients. “What is important for European companies is the cultural barrier. In the past, European companies have set up for the Mexican domestic market, locating in Puebla, Queretaro and Mexico City, which today contain some large European communities. However, these three communities are also the most expensive in which to manufacture, particularly for export. Plus, they're the most competitive markets for labour and technical engineering talent. “While European companies may be inclined to go to regions with a tradition of European manufacturing, they may need to think outside the box and look at other regions in Mexico to balance the issue of cost competitiveness. This means being more adaptive to Mexican culture and using many more local resources to manage those operations than European companies have traditionally done in the Queretaro, Monterrey and Mexico City areas.” Q) What are the key economic reasons for setting up an aerospace manufacturing business in Mexico? A) “In terms of cost, the first reason is that by setting up in Mexico, companies will gain a competitive advantage over other traditional North American aerospace manufacturing destinations like Montreal, Seattle, or Kansas City. “The second reason concerns the cultural issue. When a company becomes established in the US and Canada, the tradition of ‘how things are supposed to be done' is already in place. They're hiring aerospace workers who have been working for other companies and have learned another way of doing things, whereas in Mexico these businesses can implement their own manufacturing culture and mould it from scratch. “The final point is the concept of localisation. You produce in Asia for Asia. You produce in North America for North America. You produce in Europe for Europe. Although you used to be able to service all three markets from one manufacturing location, you now need a localised manufacturing operation. Just having a local sales team and engineering isn't enough – you need to be manufacturing locally to win orders. This way, you will not only have a cost advantage, you'll have an administrative advantage too.” Q) What are Zacatecas, Central Mexico's aerospace objectives? A) “During the last few years many aerospace clusters have developed in northwest and central Mexico, acquiring both momentum and talent in the process to serve established companies, such as Bombardier and Cessna in Chihuahua and Rolls-Royce in Sonora, whilst the Monterrey area has a number of helicopter manufacturers. “Several came on the first wave and established their operations in these markets, but today the benefits of these areas in terms of competitiveness, availability of labour and the ability to build one's own manufacturing culture have gone. “The current wave of manufacturers might wish to go to these areas because of the resources there, but companies looking to find a competitive long-term location will need to go outside of these communities and find their own niche. “Central Mexico has been excellent in this instance, ranging from St. Luis Potosí and the Zacatecas area to just north of Queretaro, including Guanajuato and León. Companies will discover pockets of these areas where they can go and work with the government on incentives and the co-development of training programmes, and work with shelter operators like Entrada to become a leading employer in these communities. “Triumph Aerospace and Meggitt Aerospace are based in Zacatecas. Both became dominant players in the market and gained the cooperation of the government, obtained certain benefits and established a school programme designed around their technical needs to train employees. In the more traditional markets, it's much harder to get these types of benefits. “Furthermore, as the leading employers in the community, everybody wants to work for these aerospace companies. Companies in a smaller or a less-developed market get more of the ‘pick of the crop' of the employees they want to hire. There are of course some drawbacks, which I alluded to earlier. For example, if they need heat treatment processes, they might have to subcontract parts to Monterrey or Queretaro. Most people who choose to go to less saturated areas are looking at how they're going to be competitive for the medium- to longer-term. They know these areas are going to be competitive markets for the next 20 years.” Q) What kinds of Western-based major aerospace companies are partnering with Entrada and why? A) “Meggitt Aerospace in Zacatecas has contracted Entrada Group to provide its Mexican corporate services, including HR, import/export, local financial issues, building maintenance, everything connected with operating in Mexico. For Triumph Aerospace we help recruit their talent.” Q) Is Entrada connected with the local governments and departments of commerce? A) “Zacatecas has made a major effort to attract aerospace industries and this is what first brought Triumph to Mexico. It's their first operation here and the government provided many incentives to help them. Entrada works directly with the government on training programmes. The reason that Entrada Group went to Zacatecas was because we wanted to be the major employer in town. It gave us more influence with local and state authorities to be able to bring benefits to our clients. “This is one of the main advantages of Entrada Group. Our clients are contracting us to provide their Mexican corporate services, but we're delivering these corporate services through a shared service model. The obvious example is freight. Any one company could purchase freight to the US or to Canada for a certain cost, but if we leverage the volume of all of our clients, we can reduce this cost by 20%. We do this across the board on all the services we provide and the technology we purchase. It offers the economies of scale to SMEs who otherwise wouldn't be able to get this.” Q) Finally, summarise the successes that the Entrada Group's customers have enjoyed. A) “The biggest statement of success is that all our clients' footprints have doubled since they first began in Mexico. Even during the recession their operations continued to grow – and they continue to invest in these operations. At first Mexico was just their low-cost manufacturing location. Now it has become their principal manufacturing location.” www.entradagroup.com