After Eric Steinmeyer, director of global operations for the largest producer of artificial Christmas trees in the world, visited Mexico last year, he and his fellow executives made a decision that wouldn’t be news, but for the fact that their company is from China.
They decided to set up a factory just south of the U.S.-Mexico border in Juárez, and a distribution center in El Paso.
“Costs in China continue to increase, so many companies are looking at production outside of the main manufacturing centers in China,” Steinmeyer said.
The company, Polygroup, has leased space in Juárez where it will manufacture a festive forest of faux Christmas trees for distribution to the United States and other markets in the Americas. Production will start in December.
After investigating the difference between the total cost of manufacturing in Asia and North America, the company found it would actually be cheaper in the long term to establish the company’s first manufacturing base outside of Asia in the El Paso/Juárez region.
“Due to the proximity to the United States, we can produce goods in Mexico and have them in U.S. retailers in a matter of days – not weeks,” said Steinmeyer, who was in Hong Kong last week and answered El Paso Inc. questions by email.
North of the border in El Paso, the company has announced plans to establish a warehouse and distribution center sometime next year.
It will serve as a center for raw materials heading south to Polygroup’s factory in Juárez, and for finished goods heading north to its customer base in the U.S.
South of the border in Juárez, Polygroup has leased a 130,000 square foot facility, according to global real estate firm CBRE, which represented Polygroup in the transaction.
The Juárez factory would initially employ 300 workers when the company begins production there in December, manufacturing plastic swimming pools, above ground pool accessories and Christmas decor products.
Polygroup plans to employ 500 workers at the factory by the end of next year. And if the move to North America proves successful, Steinmeyer said they will further grow their operations in Juárez, employing a total of 1,000 workers.
Polygroup has more than 14,000 employees worldwide. Its products are sold in more than 40 countries and at nearly every major retailer globally.
“We hope to expand our operations in Mexico in the coming years to be able to provide quality products to our customers in North and South America at a competitive price compared to those made in Asia,” Steinmeyer said.
Polygroup is not affiliated with another similarly named company, China Poly Group Corp., which is a large and controversial state-owned enterprise in China.
It’s not clear if Polygroup’s plans mark the start of a flood of business that will have a big impact on the region’s economy, or if the trend is one that will blow through El Paso and Juárez like a March dust storm.
A number of Asian companies have recently chosen to open new factories in Juárez, said Roberto Coronado, lead officer and senior economist of the Federal Reserve branch in El Paso.
However, he added, it is hard to say exactly what the impact is – how much Chinese companies have invested and how many jobs they have created – since the evidence is mostly anecdotal so far.
When China joined the World Trade Organization 12 years ago, there was a significant move of manufacturing from Mexico and elsewhere around the world to China, Coronado said. Labor there was dirt cheap and companies saw an opportunity to produce their products at much lower costs.
But some fundamental economic shifts recently have made Mexico and specifically Juárez – the largest industrial real estate market along the U.S./Mexico border – more competitive with China.
“We’ve seen over the last number of years some of those manufacturing facilities, that at one point went to Asia, come back,” Coronado said.
Chinese wages have risen significantly since 2005 and the wage gap between China and Mexico, although one remains, is shrinking rapidly, according to Coronado.
“When you incorporate everything in – the wages, the output, all the costs – Mexico’s labor force is more productive than China’s in certain products. That has sparked interest from many companies to come back to Mexico or the U.S.,” Coronado said.
Transportation costs also remain high, making the long trip from China to markets in the United States more expensive. Those costs are one reason why Polygroup decided to locate its new factory in Juárez, rather than Asia.
“By producing in Mexico we can save ocean freight from Asia. Actual non-freight production costs are higher in Mexico than China, but this is offset by the freight savings,” Steinmeyer said.
There are really two trends, Coronado said: Some companies are moving their operations back home to North America after outsourcing to China, while others, like Polygroup, are Chinese companies expanding into the region to better service the North American market.
Investment flowing directly from Chinese entities to the northern Mexican state of Chihuahua, which borders Texas, remained relatively small last year but is growing.
The foreign direct investment, or FDI, into Chihuahua from China was $3 million last year, the highest it has been in eight years, according to data compiled by the secretary of economy in Mexico.
By comparison, the FDI from Mexico’s largest trading partner, the United States, totaled $59.3 million during the same period.
FDI only measures outside investment in things like businesses, factories, mines and land from Chinese entities.
As for the companies returning their operations to North America, a trend known as “reshoring,” Borderplex Alliance executive director Rolando Pablos, said he is hearing, “a pretty strong desire from some of these companies to come back to the Americas.”
The Borderplex Alliance was established earlier this year to become the primary business and industrial recruiter for the region.
Pablos added, “We have discussions about this trend every day with companies that have gone to Asia but who are now considering coming back or have already come back.”
Email El Paso Inc. reporter Robert Gray at firstname.lastname@example.org or call (915) 534-4422 ext. 105.