Handicapping Mexico, China

April 4, 2005
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GRAND RAPIDS — China Mexico Solutions LLC President Doreen Huro Michelini has made a career out of setting up shops abroad.

Based in Chicago, she also serves as vice president of tool and mold maker GBMC Precision Co. and president of product importer AJ International LLC. Before that, she was vice president of global operations for Dial Tool Industries Inc., overseeing operations in Mexico, China, Malaysia and Brazil.

She has more than 12 years of experience in setting up, managing and sourcing across the border and in the Pacific.

And a growing contingent of the region's tool and die industry would probably like to see her burned at the stake. But Michelini was kind enough to share her global sourcing experience at the recent Midwest Supply Chain Management Conference at Steelcase University.

"A lot of people are looking at those low labor rates and jumping right into it without weighing the costs associated with doing business in other parts of the world," she said. "There are a great many things that you need to take in to account to make that decision. If you don't think it through and cover all your bases, there are going to be surprises and they will be costly."

With many companies now looking from Mexico to China, the decision to source globally now must weigh both the benefits of Mexico and China over the United States, as well as against each other.

In the past two years, Michelini has set up and overseen facilities in both Mexico and China, representing light manufacturing, tooling and molding competencies. None are strategic partnerships with foreign suppliers, instead owned and operated by her employers.

The numbers she presented for comparison between the two sourcing destinations were up to date as of January. No different from the United States, much of the cost will fluctuate by region or city.

In Mexico, she now operates factories in Juarez and Chiquila. There is no minimum wage in Mexico. Compensation is competitive within a given area and relative to the distance from the U.S. border — the closer to the border, the higher the wage.

It is also important to note that laws are often interpreted differently throughout the country, and Michelini has found this to be even more pronounced in China.

There, she recently relocated to the southern province of Guangdong. Largely farmland only a few years ago, Guangdong has been developed by the Chinese government as an industrial sector because of its proximity to Hong Kong.

In Guangdong, new hires bring additional concerns besides training. Unlike Shanghai and other large cities, the province has few populated areas to fill a labor force, so employees come from all over the country and live in a dormitory on site.

The largest concern within new hire orientation is acclimation. There is a large assortment of cultural differences by region. Dietary preferences, dialects and cultural biases all must be taken into consideration.

If an employee is unsatisfied, it might be a weeklong trip home.

Compare that to Mexico.

"I came by the factory one day and there were all these tents set up and they were handing out food and prizes. I thought I'd missed a holiday," Michelini said. "It was another factory trying to hire my employees."

In Mexico, Michelini has found that bonuses are required just to have employees show up on time. Workers will take another job for a nickel raise.

"And you have to feed them lunch; it's the law. But if you want to get good workers, you'd better serve them breakfast, too," she said. "I've had people quit just because they liked the food better somewhere else."

Also, medication is distributed through the employer, a practice she was uncomfortable with. She hired a company nurse to manage that program, an expense she found well worth the cost. With the country's inefficient hospitals, an employee may disappear for days before even being diagnosed.

The health-care system presents problems in China as well. While care is slightly more efficient there, insurance becomes an absolute necessity.

"We had an employee come down with what looked like appendicitis and we rushed him to the hospital," Michelini recalled. "They wanted cash just to look at him. They diagnosed it, and then wouldn't touch him until they got cash for the operation. We had to write a check for $2,000 right on the spot."

When Michelini relocated to Guangdong, the average hourly wage dropped to 82 cents from 98 cents. Wages are not negotiated individually or through collective bargaining, determined instead through negotiations with the local government. In a jurisdiction populated by farmland and only a few square miles in size, Michelini was greeted with discounted wages and a generous tax abatement on the real estate.

The distance of executive leadership can quickly erode the benefits of Chinese labor, Michelini noted.

"You have to be there," she said. "You can't think it will take care of itself. It's part of the cost of doing business. And I'm lucky: I'm in Chicago — I can fly anywhere. Others might not have that luxury."

While Mexico is real-time, or nearly so, with the United States, China is the opposite. If there is a problem, someone will be up all night.

"Someone needs to be available 24 hours a day," Michelini said. "Executive burnout is the biggest complaint we hear. It's a common problem when dealing with China."

She recalled a recent situation involving a large tooling project for Motorola. The shipment was to arrive on a Monday morning, but she received a call from China on Saturday at 2 a.m.

"They said call the freight broker," she explained. "I did and told him I needed it there Monday. He said, 'OK, Tuesday.' I said, 'No, I need it there Monday.' He said, 'OK, Monday.'

"It arrived Tuesday."

While Mexico is geographically closer, cultural differences exaggerate the language barrier.

Michelini offers free English lessons in both countries. These are ongoing and well received at the Chinese facility, she said, where workers see English as a key to advancement.

As the Chinese workers live onsite, it is only natural that the classes would be more popular there. But only one employee has taken the class in all the years she has offered it in Mexico.

"It's quite a cultural difference. They just want to punch out, go home and be with their families," she said.

Meanwhile, 90 percent of Chinese managers not only speak English but also have U.S. or foreign degrees. Michelini has had line workers with U.S. engineering degrees, usually working toward enough savings to start a business in their hometown.

While labor and distance are taken into consideration, Michelini has found that it is the issues unique to foreign trade that often create unwelcome surprises.

In China, utility concerns can cripple a company's ability to respond to hot orders. Frequent blackouts are a particular threat to molding presses. Inconsistent Internet connectivity complicates any online delivery of tooling specifications. Lengthy calls between the states and Mexico will put a dent in any margin.

In both countries, any company needing proprietary metals, engineered resins or many secondary services to operate may be better off stateside. Michelini recently turned down an order because a proprietary material was used in the design that would not be available outside of the states for a decade.

Another order missed its deadline by a week last summer when the Fourth of July holiday drove up the terror alert rating. During an Orange Alert, every case is opened and inspected as it enters the country.

Plus, if there are quality issues in the states, they will only be worse abroad.

"We had this job where we were just putting a sticker on a part," Michelini said. "It cost 16 cents here. We moved it to Mexico and it cost 10 cents. It was horrible quality and rejection was a constant problem.

"In China, we had no rejections. It's not that Chinese workers are better. We were able to put so many people on it that we had a person to just check and clean it and then another to check it again."    

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