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Dollars & Sense

By Lesley Kriewald

Research-driven consortium aims to attract manufacturing to border region, ease trade between Mexico and the U.S.

It started with a hunch: Companies who had moved their manufacturing operations from Mexico to China simply hadn't done their calculations properly.

"We felt that many of these companies hadn't captured all the supply chain costs associated with that move," says Barry Lawrence, director of the Industrial Distribution Program at Texas A&M and the Leonard and Valerie Bruce Chair. "And as a result, many of them had made a mistake in relocating to China."

Lawrence says that such a mistake is of course unfortunate for the manufacturers because it cost them money, but it's even more unfortunate for the people in the communities who have lost those jobs. So he, Jorge Leon and colleagues in the Texas-Mexico Trade Corridor Consortium (TMEX) set out to study the problem.

TMEX brings together manufacturers, distributors, infrastructure and logistics providers, and governments to work together to understand how to optimize opportunities as the region expands. The consortium was originally established to make the movement of materials in the Texas-Mexico border region more efficient. Because of the North American Free Trade Agreement (NAFTA), Northern Mexico has seen major growth as a regional manufacturing center. Mexican, American and European firms operate manufacturing plants, called maquiladoras, in the border region, particularly in the Mexican cities of Reynosa, Matamoros and Juarez.

"We felt that if we could develop a model that could give industry a more accurate depiction of the costs of serving the North American market, fewer companies would decide to move when they shouldn't," Lawrence says. "And maybe many companies that had already moved to Asia would consider coming back to the region."

The research partners worked to develop cost and return on investment, ROI, models to help companies decide where to locate. Then the researchers tested those models for Mexico and the United States as opposed to China.

Using the cost model, the team found that in many cases, if not most, Mexico was a better location for manufacturing operations serving North America than China was. The reasons: holding costs of inventory, high variability of transportation costs, constraints of the transportation system, and quality problems in the goods themselves.

The second approach, the ROI model, confirmed Mexico as a better location for manufacturing than China.

Lawrence says that other studies have confirmed the findings of the original TMEX study, and Mexico has surpassed China as a less expensive place to do manufacturing.

But the researchers made a surprise discovery.

"In every single cost category that we identified, except for labor, the U.S. was stronger than Mexico," Lawrence says, "which meant that if you could bring about improvement in the labor costs in the U.S., the U.S. was the least expensive place to do manufacturing. And we found that in many cases, the higher labor costs were justified and that manufacturing still should come back to the U.S."

Other studies have confirmed the findings of the original TMEX study, and Mexico has surpassed China as a less expensive place to do manufacturing.

"So the TMEX study discovered that North America — and especially Mexico and the southwestern U.S. — is a very competitive location for manufacturing and actually comes out ahead of Asia in a great many cases, if not the majority of them."

And during their studies, TMEX and Texas A&M's supply chain experts have created tools and methodologies to help manufacturers and other companies determine where they should be located. The researchers are working with economic development groups in Texas and in Mexico, helping to attract employers to the region.

The NAFTA "problem"

The team also set out to address criticism of the North American Free Trade Agreement (NAFTA) enacted by President George H.W. Bush. Many people blamed NAFTA for a loss of American jobs. Lawrence says that this challenge to NAFTA is a major problem for Texas because Texas has been the biggest beneficiary of NAFTA with huge international trade taking place through the state. Criticism of NAFTA is also unfair because the agreement has led to a good deal of reciprocal trade between the U.S. and Mexico.

"What we wanted to address here was making sure that NAFTA was properly respected and supported," Lawrence says, "and that we paid attention to the right issues — such as the fact that manufacturing should come to this area. And that when it does come to this area, it's beneficial for the U.S. and for Mexico, no matter which side of the border it lands on."

TMEX members involved government and economic developers, as well as major corporations to bring new knowledge and new information that would in turn help government entities to make changes in order to make the border region more successful.

Continual improvement

"We can make the argument that the Texas-Mexico area is a good area for manufacturers to be in, but that doesn't mean that we don't need to continually improve," Lawrence says.

To that end, Lawrence then looked for ways to involve more corporations with the consortium. Those companies could share problems with the researchers to solve. Solving those problems could teach the researchers about additional challenges companies were facing that the governments or other development agencies could help with to improve the region and make it even more competitive. Such issues include constraints on crossing the border and getting cities to work together to attract manufacturing rather than competing with one another.

"All those issues became important components here, and if we could demonstrate the difficulty corporations truly faced, that would give the government ideas on how they could go about attracting even more companies," Lawrence says.

"In every single cost category that we identified, except for labor, the U.S. was stronger than Mexico, which meant that if you could bring about improvement in the labor costs in the U.S., the U.S. was the least expensive place to do manufacturing. And we found that in many cases, the higher labor costs were justified and that manufacturing still should come back to the U.S."

About 40 corporations joined the project at different stages and continue to work with TMEX, studying everything from transportation to manufacturing issues to finding suppliers to dealing with border-crossing challenges. Funding has come from the Economic Development Administration within the U.S. Department of Commerce; the Texas governor's office; ProMexico; and the economic development agencies from Mexican states, including Nuevo León, Jalisco and Estado de Mexico.

Sharing knowledge

To date, TMEX has held six meetings in Texas and Mexico, but plans are in place for global information sharing.

"We have been asked to form a consortium of this nature for Central America," Lawrence says. "We are also starting to form global conferences where we can take what we learn from TMEX — as well as a message about the economic development and the reasons why people should invest in the TMEX region — to these global conferences."

The first conference will probably be in Panama, possibly Brazil after that, and Lawrence says he is already planning for Barcelona in 2013.

"In the meantime, TMEX continues its research and progress, building ROI and a strong positive message about our relationship with Mexico. It's demonstrating new ways for companies to examine their location decisions, and using all of that information to give a worldwide message about the value of investing in this region," Lawrence says.

Dr. Barry Lawrence
Dr. Barry Lawrence
Leonard & Valerie Bruce Leadership Chair
Director, Industrial Distribution Program
Director, Global Supply Chain Laboratory
Director, Thomas & Joan Read Center for Distribution Research & Education
Engineering Technology & Industrial Distribution
979.845.1463
Dr. Jorge Leon
Dr. Jorge Leon
Allen-Bradley Professor
Director, Manufacturing & Mechanical Engineering Technology Program
Engineering Technology & Industrial Distribution
979.845.4993