Mexico: The new China

IN November I quit my job as the editor of Wired to run 3D Robotics, the San Diego-based drone company I started w...
IN November I quit my job as the editor of Wired to run 3D Robotics, the San Diego-based drone company I started with a partner as a side project three years ago. We make autopilot technology and small aircraft _ both planes and multirotor copters _ that can fly by themselves. The drones, which sell for a few hundred bucks, are for civilians: they don_t shoot anything but photographs and videos. And they_re incredibly fun to build (which we do with the ample help of robots). It wasn_t a hard decision to give up publishing for this.

But my company, like many manufacturers, is faced with a familiar challenge: its main competitors are Chinese companies that have the dual advantages of cheap labor and top-notch engineering. So, naturally, when we were raising a round of investment financing last year, venture capitalists demanded a plausible explanation for how our little start-up could beat its Chinese rivals. The answer was as much a surprise to the investors as it had been to me a few years earlier: Mexico. In particular, Tijuana.

Like many Americans, until recently, when I heard _Tijuana_ I thought only of drug cartels and cheap tequila. _TJ,_ though, is a city of more than two million people (larger than neighboring San Diego), and it has become North America_s electronics assembly hot spot: most of the flat-screen TVs sold in the United States, from companies like Samsung and Sony, are made there, along with everything from medical devices to aerospace parts. Jordi Mu__oz, the smart young guy who had taught me about drones and then started 3D Robotics with me, is from TJ _ and he persuaded me to build a second factory there to supplement the work we were doing in San Diego.

Shuttling between the two factories _ in San Diego, where we engineer our drones, and in TJ, where we assemble them _ I_m reminded of a similar experience I had a decade earlier. In the late 1990s and early 2000s, I lived in Hong Kong (working for The Economist) and saw how that city was paired with the _special economic zone_ of Shenzhen across the border on the Chinese mainland in Guangdong Province. Together, the two created a world-beating manufacturing hub: business, design and finance in Hong Kong, manufacturing in Shenzhen. The clear division of labor between the two became a model for modern China.

Today, what Shenzhen is to Hong Kong, Tijuana is becoming to San Diego. You can drive from our San Diego engineering center to our Tijuana factory in 20 minutes, no passport required. (A passport is needed to come back, but there are fast-track lanes for business people.) Some of our employees commute across the border each day; good doctors are cheaper and easier to find in TJ, as are private schools, although it_s generally nicer to live in San Diego. In some ways, the border feels more like the notional borders of the European Union than a divide between the developed and developing worlds.

And it_s not just TJ. To the east, in Ju__rez, Dell computers are built by Foxconn, the company that manufactures more than 40 percent of the world_s electronics (including Apple_s iPhone and iPad). To the south, in Quer__taro, a factory builds the transmissions that General Motors installs in its Corvettes. The design of General Electric_s GEnx turbine jet engine and the production of interior elements of Boeing_s 787 Dreamliner also happen in Mexico. Manufactured goods are the country_s chief export, with private investment in this sector among the highest in the world.

The notion that Mexico offers only cheap labor is just plain off the mark. Mexico graduates some 115,000 engineering students per year _ roughly three times as many as the U.S. on a per-capita basis. One result is that some machine specialists are typically easier to find in TJ than in many big American cities. So, for that matter, are accountants experienced in production economics and other highly skilled workers.

What all these pieces add up to is a model _ one that might hold the long-sought answer for how American manufacturers can compete with those in China, India and the next generation of economic powerhouses. That_s because the TJ template isn_t so much about outsourcing as it is quicksourcing. And that_s also the way to create thousands of good jobs in the United States.

As any entrepreneur can tell you, the shorter and more nimble a supply chain is, the better.

First, a shorter supply chain means that a company can make things when it wants to, instead of solely when it has to. Strange as it may seem, many small manufacturers don_t have that option. When we started 3D, we produced everything in China and needed to order in units of thousands to get good pricing. That meant that we had to write big checks to make big batches of goods _ money we wouldn_t see again until all those products sold, sometimes a year or more later. Now that we carry out our production locally, we_re able to make only what we need that week.

Second, there_s less risk. If we make an error in a design, we_ve wasted at most a few days_ worth of production. If there_s something wrong in the production process itself, we can spot it fast. We control the component inventory, so we can see what_s going into our goods and know that we_re not being ripped off with used or pirated parts. And if we want to protect our intellectual property, we can do so without having to trust that other companies will uphold our interests above all others. And that_s saying nothing about political risk, environmental risk or P.R. risk, all of which companies like Apple and Walmart have learned about in China the hard way.

Third, it_s simply faster. We still order some parts from China, and even though we use FedEx, it always seems to take weeks, and sometimes months, longer than we_d planned. That_s not a criticism of China; it_s merely intrinsic to any arm_s-length relationship between small buyers and big makers. If we were Apple, we_d get overnight service. But we_re not, so we wait.

Finally, a short supply chain is an incentive to innovate. If you_re outsourcing the manufacturing of huge parcels of a product, you can_t change that product until you_ve sold all the ones you_ve already made (at least not if you want to stay in business). So that often means sitting on your hands, waiting for Version 1 to sell out before starting to make Version 2. But when you_re doing just-in-time manufacturing, you can change the product every day if you want _ whether to take advantage of some better or cheaper component or to improve the design.

In the land of the long supply chain, meanwhile, things are changing, too. Inflation-adjusted labor costs in China have more than tripled in the past decade. Wages in China_s southern cities are approaching $6 an hour, roughly what they are in Mexico.

Whether factors like these are enough to turn American businesses from outsourcers to quicksourcers remains an open question. But I_m betting my money that they will. The sense of possibility I felt when I first crossed from Hong Kong to Shenzhen in 1997 is what I now feel when I cross from San Diego to Tijuana. The trade routes of the 21st century don_t have to follow Marco Polo from West to East. Indeed, in the new manufacturing landscape, the routes don_t have to take you far at all.


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