Originally published in Automotive News

By Daron Gifford

Major automakers from around the globe are establishing or expanding operations in Mexico, and that means new challenges — and opportunities — for automotive suppliers.

In the past month, both Ford and Toyota announced significant new investments in the country. Chrysler has been growing its Mexican production operations. BMW and Kia are building new plants there; Volkswagen is doubling the size of its own. All told, some $23 billion in new automotive investments are slated for Mexico, Bloomberg reported Tuesday.

Everybody in the auto industry, it seems, is driving to Mexico.

What’s attracting them is low-cost labor that offers the possibility of real cost savings at a time when every company, big and small, is under pressure to improve its bottom line.

Once seen as substandard, the Mexican labor force now offers the kind of quality employee base that is causing a seismic shift in how (and where) automakers will do business in the future.

As they gear up for new operations in Mexico, however, those manufacturers are re-evaluating what they want their supply chains to look like — and re-thinking which suppliers work best.

Smaller and even mid-size suppliers will have to decide if they have the capability, financial and otherwise, to follow their key customers into the country. And the clock is ticking, as new plants need to be on line within two-to-three years to meet vehicle launch targets.

Relocating near any of the new assembly plants requires capital — not just for the bricks and mortar of their own factories, but to pay for equipment, tooling and labor.

As in many industries, suppliers also are often stuck in a “quote a price” mindset.

Setting up shop

And when it comes to setting up shop in a new country, smaller companies may not have a sound grasp of how much that expense will affect profitability. As automakers expand in Mexico, for example, wages will rise. By the time a supplier has its own operation up and running, labor costs may be markedly higher than they were when the project began.

Suppliers will need to evaluate themselves every bit as much as the manufacturers will be evaluating them. In the process of evaluating their entry into Mexico, suppliers need to have a disciplined approach.

When entering Mexico, and perhaps any foreign country for the first time, it’s important to find a business partner who understands the government entities and structures, how approval processes work, and how incentives may be negotiated.

Some basic international commerce knowledge must be mastered quickly as well. For instance, cross-border trading issues and currency hedging are particularly important. The peso has a history of volatility against the dollar, and this will help or hurt profits each quarter.

Already on the ground

Suppliers already in Mexico, meanwhile, probably face expansion decisions. Does it make sense to build at existing locations or start new operations elsewhere? Keep in mind that businesses are increasingly locating farther from the border, in part because of the crime and higher costs in northern Mexico. However, transportation routes are much improved, so moving product across the land is more manageable than in the past.

For suppliers interested in building or expanding plants near manufacturers, it is crucial to get a firm commitment from the manufacturer, preferably an agreement beyond the standard two-to-three years.

Lastly, the relocation of manufacturing to a new country inevitably puts renewed pressure on suppliers to clearly define their value to the customer.

One way to do that is through deeper communication.

Even suppliers who have been working with the same automaker for a long time often have only the vaguest understanding of how they are perceived by such an important customer, and how that customer actually goes about its business. Sit down with key people — not just in purchasing, but in engineering and manufacturing as well — to get a better understanding.

Mexico is in the immediate future, but a few years down the road somewhere else may be the next destination.

In business, as in life, the only thing permanent is change.

Daron Gifford is the partner leading automotive industry strategy consulting at accounting firm and consultancy Plante Moran.