Why did you decide to come to Mexico and set up a factory in this country, and more precisely in Guadalajara?
About three and a half, four years ago we had a lot of interest from our customers to have an option in Mexico. At the time I don't believe anybody thought it was going to be as viable as it is, but everybody wanted some interest in Mexico. I think a big part was due to Ernesto Zedillo's political style that devaluated the peso, and suddenly the peso was floating in the world exchange and we have very large investments in Mexico and we prefer that the peso floats in a country that has an inflation of 20 % as last year's. You need 20 % devaluation of the peso because those two things are directly related. For many years Mexico remained isolated from the rest of the world because they kept a cap on the peso.
So, that was one of the reasons that drove us here. The customers were the primary reason why we came here. We arrived here the same time five of our biggest competitors arrived. So we all have the same customers and apparently all the customers are talking about all of us. Mexico has geographical proximity to the largest consuming nation on the planet, so no matter what you do in Eastern Europe or what you do in Asia for cost you can't get closer to the U.S. market place. It is the number one driver of most of our customers in this point and so they want speed, they want flexibility. To get that you have to compress the supply chain and a major part of the supply chain is the logistics of the raw materials. That's where Mexico still has a bit of a disadvantage as we don't have all of our supply structure here. But over time that supply structure will be moving to Guadalajara and then it will be extremely competitive with Asia. Today though, the very largest pieces of business, four or five hundred thousands printers a month kind business, is still cheaper in Asia. And there might be a percent or a percent and a half. And the primary reason is because of the infrastructure in Asia, they've got cable harness, circuit boards, capacitors, LCDs, anything you want to put in an electrical product at some level it's produced in Asia. They have a very competitive position concerning the infrastructure. Though infrastructure follows the contract manufacturers, so as we move into a region we usually move within competitors and then our common vendors move in to support us. So over time we can change the infrastructure of a nation. And that is happening very quickly in Mexico. It just happens to be focused around us here in Guadalajara. The customers, who wanted us in Mexico, went in Mexico and we really had four ideas. One is the border region, which has 90% of maquiladoras in the country; the second would be Monterrey, Mexico City or Guadalajara.
Monterrey is an old industry. They have a lot of steel production, oil production, very hard line manufacturing. Though the city has good social policies, it is a very safe city to live in, lots of culture, and their own opera. It's the oldest of the old money in Mexico that lives in Monterrey. Mexico City is a nightmare from an ecological perspective, it is the largest city in the world, it's got a base elevation of 7,200 feet, it's surrounded by mountains and the sky turns black an hour before you fly in there. So we really didn't want to be in that environment, we didn't think it's a healthy environment. As for the border, our number one reason to stay off the border is it's migratory workforce. And then if you look at the typical turnover of the employees on the border you will see 15 to 20 % per month and you'll see 50 % in December. The reason: nobody wants to live on the border. There is no culture, no weather to talk about. Cd. Juarez is the fourth largest city in Mexico; they have a professional soccer team. Guadalajara's got three or maybe four. So the reason Cd. Juarez is what it is, is because it is an industry town and the people go there to work. In Guadalajara we have between seven or eight generations working in our factory.
According to National Geographic, Guadalajara has the second best microclimate in the world with an average temperature of 72º F with a standard deviation of 10º. We have 320 days of sunshine a year. We are at the same latitude as Hawaii but we have a base elevation of 5,000 feet. So if you go from here three hours by car, you are in Puerto Vallarta and there are mangroves and mangos growing in trees. So you take the weather of Hawaii and you take it up to 5,000 feet and you end up with this perpetual springtime weather. That's rare for Mexico. So the people who live here love Guadalajara. It's almost like a San Diego. Everyone wants to live in San Diego. The problem is that the cost of living in San Diego is extremely high so that keeps a lot of people from moving there. Guadalajara doesn't really have the punishment of the cost of living standard as it cost as about as much here as it does living anywhere else. People from Mexico City or from the border will tell you that if they get fired they would move to Guadalajara. For us that's interesting. So we feel that Guadalajara is the second largest city in Mexico, it's got beautiful climate and weather, there are eleven or twelve metropolitan universities in town, we've got electrical engineers driving cabs because they can't get jobs, there's an unemployment rate which seems to move a lot, if you look to the government statistics they'll tell you 6%, if you analyze the statistics you'll see that if you are a single female living at home, which explains every single female in Mexico you are considered as a domestic servant but you are not really bringing money into the family. So to me, employment is bringing outside resources to your family and if you are a domestic servant you are an unemployed stout. So I think when you scrutinize the numbers on unemployment it's hard to say because it's a lot of unemployment and as a capitalist you want unemployment. I think the U.S. is in trouble right now because unemployment is too low so you end up hiring the people in society who don't want to work and all the sudden your service sector begins to get punished. So, a certain level of unemployment is healthy and Mexico certainly has that level of unemployment. Amnesty International says that 50% of Mexico's population is malnourished; most people can't afford to feed themselves well. So I think malnourishment is a better indicator of at least underemployment. So, we have an education system, we have a perfect climate with a very stable economy, a very pro business economy, we are not on the border so we don't have the migratory workforces, we will leader vertically integrate our way out of problems or we will bring the supply chain to support us. So there's not really any negatives in being in Guadalajara other than the fact that we are 24 hours by truck from Dallas where Monterrey is eight.
Do your human resources match the requirements that your company demands? Or do you have to train your employees?
We have fabulous training programs. We have a lady on the campus named Claudia Ruiz; she's a PhD of the Pan-American University that runs what we call a learning factory. A learning factory is our education systems on sight. We have graduated 150 college students out of our program and we probably have 60 college students on staff. We are certified as a junior high school and a high school in Mexico. So you don't have to be a high school graduate to work here but you have to be willing to go back to high school. We have foreign language training, we probably have 300 people taking English as a second language, we are teaching from fifth to twelve classes on campus, we tour about four or five hundred fifth graders per month because the highest dropout rate in Mexico is at sixth grade. If you are from a poor family in Mexico you know that you are not going to college so you can't go to high school where you learn algebra. And algebra is essential to be a technician. So we try to do school retention and we focus whole batch on training.
Some weeks around here we hire a hundred people a week and we might do that six or eight weeks in a row. Mixing were a pretty aggressive environment trying to bring those people in, socialize them, culturize them, our training classes are both hard and soft courses so we teach them about responsibility and electrostatic discharge of components, but we also teach you that littering is not good, smoking is not good. We have a medical staff, every worker gets its small pox vaccinations, polio vaccinations, we check for contagious diseases, we give our employees tetanus shots, we allow our doctors to be available on week-ends for the people to bring their families in and do a family health day.
No place in the world is training students that
walk into the working environment and are productive
because there is just the classic on education.
They are not applying the highest technology available
today. And no school has resources to that. Maybe
Georgia Tech. or Harvard. But they can't teach what
I use. We have heavy training programs to bring
people in but more important than the hard services
to me is the cultural aspect of it. We try to run
a very casual campus. Mexico is a very formal place
in that way. We probably have the most fabulous
culture in Mexico. People want to work here. People
are very open, the only thing they don't talk about
is personal compensation, and every other subject
is open. So we can have any discussion we want,
we encourage this discussions. We want our employees
to be provocative, to be aggressive. |
We encourage business conflict while we avoid personal conflict. But what we are trying to do is set a culture, keep in mind that in Mexico 90 to 95 % of the businesses are family run businesses where maybe the father in law owns the family business and his favorite saying: "He who makes the gold, makes the rules." Well, that is not very motivational. So most of this kids come out of college and they expect to work in their dad's company or a company like their dad's. Where the most important person in that company is the financial controller who goes back to the family 50 years and no one dares question his responsibilities. We don't believe that's a scale of a model. How many kids can you have? You can have as many as you want but you still can't have 5,000 people working for you. Also by doing the family business you end up in a lot of problems with what are the odds you have the best architect in the family or the best engineer which in need to do is go through society and pick the best of the best and that might not be from your gene pool. Though most of the big successful businesses in Mexico fancy their gene pool. And if you look who runs the business it's always the family number. And so all I have to do is take you in here and explain you what a glass sealing is and if you don't have the right family name you are not going to run the business.
In this business, in Mexico we have four foreign passports. Everyone else is Mexican national.
Do the Mexican workforce easily adapts to this culture?
The Mexican nationals either think it's the greatest thing they have ever seen or they lock up. There's nothing in the middle. They've always been told what to do and they've never given up a project. This is the most dynamic manufacturing model in the world. Contract manufacturing is successful for a reason: it's the nastiest work on earth that the big OEMs don't want to do anymore and if this was easy then HP would still be doing it not selling entire factories. I mean, Motorola is out-sourcing and it's one of the finest manufacturing firms of the world. So when they out-source to us, they are a hard customer. They exactly know what they want. They exactly know what the performance criteria should be and they know how much they are going to pay for it. So what happens these are not the customers of the past. In the past when we built the first pump pilots for a company there were seven people working on it. And they were going to invent the next hand computer generation and they did it. They won 97% of the market but they did it without embracing manufacture skills. They worked on engineering, product development and manufacturing. That's what they specialize in. And in the end this is the model that Motorola, Phillips or Ericsson do. As an example you see contract manufacturers buying entire factories of our customers. So the customer owns a factory. It's got a hundred million dollars book value, it's got a thousand people working in it. We come in and buy it for a hundred million dollars and those thousand people start working for us the next day. And we sell them their products at exactly the same cost they were before.
So they have no labor, they are not laying anybody off, the unions are fighting, they want to go to another region. If you want to go to a different region, you need another general manager, you need another factory, another marketing team, another sales team.
We have fifty factories, 25 countries, we are working in forty currencies so I can go right now and build pump pilots in Malaysia, Freemont, CA, or Guadalajara, Mexico. And if I have to move to Hungary I can do it in a week without hiring anybody else, without building the buildings, the customer doesn't have any commitments for resources. So if you have a factory for sale, we buy it. Then we take over the costs of the factory and start selling you the product at the same cost. But then we go and bring maybe your competitor into that factory average up the over having and give you a price reduction. So within a very short period of time you come up with a hundred million dollars. Now, you put that into your competencies of marketing and development, I have taken the hustles of the factory, the equipment, the capital intensity, the labor intensity of it. I bring somebody else in I surely overhead reduce your cost and now I give you a price discount on a product you've always built for yourself at a set price.
Can you name some major brands, that in your opinion, are going to give up on manufacturing and continue working with your procedure?
Siemens. Siemens is an in-house manufacturer. We just bought two Siemens factories. Now what happens is that we owe two Siemens factories. And those factories are building Siemens products. But the people building those products are the Siemens people. These are the people that have worked for Siemens their whole life. So who'd be better to represent us within Siemens than their own people. The same thing happens for Ericsson. We've bought a lot of Ericsson factories, probably a dozen. The same people that ran those factories for Ericsson are now Flextronics people and they are still best friends with the people of Ericsson. So if Phillips was in a join venture with Neutronics, we bought Neutronics and all the sudden the top 4 employees in Flextronics Austria have 85 years experience at Phillips. These people are the best manufacturers Phillips has and now they work for Flextronics. So not only are they representatives to that customer but they are the representatives that run those regions and this is why Flextronics is very decentralized in that way. We run very powerful autonomous regions. We have a couple of sayings: one, it is not the big that eats the small, it is the fast that eats the slow, we are fast, and two, we believe that you centralize for economy scale and you decentralize for speed and flexibility, we sell speed and flexibility. Does it matter if you buy this 3 cents cheaper, or is it more important you could double your order in three weeks or cancel your order in an hour? And all you have to do is take one product end of life and then five million dollars with the money shelf that you have to give away for two million dollars and you can value speed and more and more the world manufacturers value speed. And when you have to go to a region and set up your own factory into that regions that's not fast. I just make a phone call and if they tell me that they have a 747 coming my way with materials and they ask me if we can build it, my answer is absolutely yes. And then their engineers come and join the plane and when the plane comes in, their engineers come in, they set up the same line and those engineers go away and my people run it. Or my people go to their facilities and set up theirs. So we truly have global reach, more on four continents. As an example, very few customers want to go to Brazil, but the situation in Brazil is not the best right now. But everybody want a factory in Brazil, because maybe someday we are going to go to that local market. But right now Brazil's customs have been on strike for a month. Right now. That is very painful for somebody who tries to buy or sell products or supply a chain. It's very unstable and that is scary enough for our customers to ask us to build a factory down there. But you go down there and try to build your own factory and hire your own men in a city, for example Sao Paolo, where somebody can shoot you in traffic just to take your wallet. We fly our customers on helicopters because we don't want them on the ground. So it's all run by Brazilian nationals. These people know the market. But it's still a very dangerous place to run a business.
So this international presence has become more and more important and really only three or four of the top five enterprises can give you global reach. Selectron's going hard, they are coming up the curve, so as SCI. We are truly the biggest of the international players. Natsteel is huge in Asia but very few in rows into the Americas. Their little facility over here is all they've got in the Americas. And it's only three thousand people. Natsteel is one of the sleeping giants. In Asia there is a company called Lucky Goldstar building a lot of products. But they are not really thought as a contract manufacturer but, when do they enter this market place? Companies like Foxcon in Taiwan, one of the biggest in closure manufacturers in the world, building plastics and steel are now working on circuit boards. So doesn't that make them contract manufacturers? So it's hard to say who's going to have control next week, there's the top five of us, we've been in this order for a lot now, Flextronics is the fastest of the top five contract manufacturers but there's unknown enemies out there. |
Flextronics International 