Doing Business In and With Mexico Jay Daniel, DanHil Containers Jeff Hughes, ALHU International Humberto Trevino, Super Cajas Y Empaques Industriales

Doing Business Doing Business In and With MexicoIn and With Mexico

Jay Daniel, DanHil ContainersJay Daniel, DanHil Containers

Jeff Hughes, ALHU InternationalJeff Hughes, ALHU International

Humberto Trevino, Super Cajas Y Humberto Trevino, Super Cajas Y Empaques IndustrialesEmpaques Industriales

Mexico, Mexico, The The Maquiladora Maquiladora Industry Industry and NAFTAand NAFTA

ALHU INTERNATIONAL, INC. .… So lutions a nd Service

Jeffrey Hughes, PresidentJeffrey Hughes, PresidentALHU International Inc.ALHU International Inc.

Safety: Homicide RatesSafety: Homicide Rates

CityCity Homicides per Homicides per 100,000100,000

Washington DCWashington DC 8282

BaltimoreBaltimore 4444

DetroitDetroit 4040

MonterreyMonterrey 2424

GuadalajaraGuadalajara 1212

Mexico CityMexico City 1212ALHU INTERNATIONAL, INC.

.… So lutions a nd Service


Mexican Exports: 1998Mexican Exports: 1998

To the U.S.: $95 billionTo the U.S.: $95 billion

- a 137% increase since 1993- a 137% increase since 1993

To Canada: $5.2 billionTo Canada: $5.2 billion

- a 79% increase since 1993- a 79% increase since 1993



• World’s 8th largest exporterWorld’s 8th largest exporter

• Exports worth $167.6 billionExports worth $167.6 billion

• Commerce between Mexico Commerce between Mexico and U.S. totaled $226 billionand U.S. totaled $226 billion

• Mexico boasts 29 trade Mexico boasts 29 trade agreementsagreements



Mexican Exports totaled Mexican Exports totaled $167.6 Billion (U.S. Dollars)$167.6 Billion (U.S. Dollars)

• U.S. (82%)U.S. (82%)

• Canada (1.3%)Canada (1.3%)

Source: Twin Plant News



Mexican exports to the U.S. rose from $42.85 billion in 1993 to $140.3 billion in 2001

Source: El Paso Times


U.S. Exports to Mexico: U.S. Exports to Mexico: 2000 2000

Totaled $102.8 billion, a gain of 147% Totaled $102.8 billion, a gain of 147% from 1993’s $41.6 billionfrom 1993’s $41.6 billion

Mexico overtook Japan as the #2 Mexico overtook Japan as the #2 destination for U.S. exports (Canada destination for U.S. exports (Canada #1)#1)

Leading sectors for U.S. exporters Leading sectors for U.S. exporters are: Auto Parts, Building Products, are: Auto Parts, Building Products, Franchising, Telecommunications Eq. Franchising, Telecommunications Eq. and Computersand Computers


U.S. Exports to Mexico: U.S. Exports to Mexico: 20012001

U.S. exports to Mexico grew from U.S. exports to Mexico grew from $45.29 billion in 1993 to $113.77 $45.29 billion in 1993 to $113.77 billion in 2001billion in 2001

Source: El Paso TimesSource: El Paso Times


Mexico’s Investments Mexico’s Investments Surpass the U.S. Surpass the U.S.

New investment of New investment of Mexican groups to Mexican groups to the U.S. were the U.S. were more thanmore than the U.S. the U.S. investments to investments to Mexico in 2001Mexico in 2001


Maquiladora GrowthMaquiladora Growth

Dec. ’90 Plants/ Employees

Sept. ’99 Plants/ Employees

Border Cities

1412/ 331,900

2,033/ 738,300

Juarez 195/ 123,000

284/ 220,900

Tijuana 469/ 56,600

737/ 172,100

Reynosa 75/ 23,700

128/ 68,600


Maquiladora Growth Maquiladora Growth (Cont.)(Cont.)

Dec. ’90 Plants/ Employees

Sept. ’99Plants/Employees

Chihuahua 60/27,700

87/48,600

Monterrey 81/15,700

133/58,900

Guadalajara44/7,000

101/34,300


Free-trade proponents Free-trade proponents estimate 13 million jobs estimate 13 million jobs have been created by free have been created by free trade since 1994trade since 1994

Source: El Paso TimesSource: El Paso Times

Maquiladora Growth Maquiladora Growth (Cont.)(Cont.)


Maquiladoras Maquiladoras Employment Employment DeclineDecline

From January to November From January to November 2002, employment in Mexico 2002, employment in Mexico (Maquiladoras) dropped 10.8% (Maquiladoras) dropped 10.8%

Source: INEGI


Employment Decline by Employment Decline by StateStateBaja California Sur

Estado de Mexico

Sonora

Puebla

Zacatecas

Distrito Federal

Yucatan

Nuevo Leon

Guanajuato

Chihuahua

-35.2%

-23.9%

-18.5%

-14.9%

-14.0%

-12.0%

-8.5%

-3.6%

-1.6%

-0.3%

Source: INEGI


Maquiladora Employees Maquiladora Employees in Mexico in Mexico

1,098,831 1,098,831 employeesemployees

November 2002

Source: INEGI


• January 1980: 36,943 in 102 plants• January 1990: 118,504 in 222 plants• January 1994: 129,991 in 233 plants• January 1999: 217,014 in 254 plants• January 2001: 257,075 in 314 plants• June 2001: 227,371 in 318 plants• October 2001: 212,226 in 307 plants

Source: Mexico Instituto Nacional de Estadistica, Geografia e Informática

Maquiladora Employment: Maquiladora Employment: Juarez, Mexico Juarez, Mexico


Key Challenges to Sustain Key Challenges to Sustain Maquiladora GrowthMaquiladora Growth Outcome of Mexican Outcome of Mexican taxtax issues issues Mexico’s Mexico’s educational systemeducational system Social, economic & border Social, economic & border infrastructureinfrastructure Keeping up with the pace of Keeping up with the pace of technologytechnology Sufficient qualified Mexican Sufficient qualified Mexican personnel personnel Corporate HQ Corporate HQ decision-makingdecision-making Mexican Mexican government government (2001-2006)(2001-2006) Added value because Added value because cannot competecannot compete against against

China in low level manufacturingChina in low level manufacturing


Doing Business in MexicoDoing Business in Mexico

• StabilityStability

• Communication/Communication/TransportationTransportation

• EducationEducation

• Confined Agriculture (Ejido)Confined Agriculture (Ejido)

• State Owned IndustriesState Owned Industries

• CreditCredit


Doing Business in MexicoDoing Business in MexicoCorrugating IndustryCorrugating Industry

ProfitProfit

MarginsMargins 1970’s - 30%1970’s - 30%

1980’s - 20%1980’s - 20%

1990’s - 15%1990’s - 15%

38

17

35

59



Amount of Corrugated Amount of Corrugated PlantsPlants

There are approximately 67 There are approximately 67 plants with corrugating plants with corrugating

single facers and 82 sheet single facers and 82 sheet plants in the country of plants in the country of

MexicoMexico

DanHil DanHil ContainersContainersDanHil de DanHil de MexicoMexico

dh

Jay Daniel, PresidentJay Daniel, PresidentDanHil ContainersDanHil Containers

Followed our customers!Followed our customers!

DanHil ContainersDanHil ContainersDanHil de MexicoDanHil de Mexicodh

Strategic decision based on supporting Strategic decision based on supporting our existing customer baseour existing customer base

Several major customers moving to Several major customers moving to MexicoMexico– Building additional facilitiesBuilding additional facilities– Relocating existing facilitiesRelocating existing facilities

Must be positioned to supply corrugated Must be positioned to supply corrugated materials on a local basis in close materials on a local basis in close proximity to customer locationsproximity to customer locations



How Did We Get There?How Did We Get There?

Three Basic Options Available to Three Basic Options Available to DanHil:DanHil:

1.1. ““Job out” transitional business Job out” transitional business through existing, local manufacturersthrough existing, local manufacturers

2.2. Maintain finished goods warehouse, Maintain finished goods warehouse, feeding product into Mexico from feeding product into Mexico from United StatesUnited States

3.3. Operate own locally based Operate own locally based manufacturing facilitymanufacturing facility


Pros and ConsPros and Cons

Disqualified “jobbing out” to local third Disqualified “jobbing out” to local third party:party:

– 1991: very few viable partnering 1991: very few viable partnering opportunities available thru AICC in Mexico opportunities available thru AICC in Mexico

– Domestic linerboard unacceptableDomestic linerboard unacceptable– Lessened level of service with local sourceLessened level of service with local source– Loss of control of business relationshipLoss of control of business relationship



We Only Wanted We Only Wanted A Warehouse!A Warehouse!

Managed Warehouse FacilityManaged Warehouse Facility Benefit: Benefit: Less expensive than manufacturing facility, Less expensive than manufacturing facility,

while still enabling us to maintain controlwhile still enabling us to maintain control

ChallengesChallenges– All freight costs absorbed by DanHil ContainersAll freight costs absorbed by DanHil Containers– Transfer and brokerage fees also absorbed by Transfer and brokerage fees also absorbed by

DanHil ContainersDanHil Containers– Basically, customers expected to pay same price for Basically, customers expected to pay same price for

finished product regardless of additional costsfinished product regardless of additional costs

Obviously not a good solution for long-term Obviously not a good solution for long-term success, forced into local manufacturingsuccess, forced into local manufacturing


Made in Mexico, Cheaper?Made in Mexico, Cheaper?

BETTER HAVE DEEP POCKETS: Initial start-upBETTER HAVE DEEP POCKETS: Initial start-up

expenses three times estimated costexpenses three times estimated cost


Higher Operating Costs:Higher Operating Costs:

– While labor is less expensive, all other While labor is less expensive, all other costs are highercosts are higher

– Operating cost per square foot much Operating cost per square foot much higher in Mexican facility compared to U.S. higher in Mexican facility compared to U.S. facilitiesfacilities

IN MEXICO, Industry is Mired in BureaucracyIN MEXICO, Industry is Mired in Bureaucracy

Union Domination In Workforce:Union Domination In Workforce:- Contractual obligation to increase pay and benefits - Contractual obligation to increase pay and benefits annually (customary to raise by official inflation rate annually (customary to raise by official inflation rate as a minimum)as a minimum)- Hired for Life: Limited ability to terminate employees - Hired for Life: Limited ability to terminate employees

without significant severance packagewithout significant severance package- Requirements for meals, clothing, transportation, - Requirements for meals, clothing, transportation, and educationand education- Over period of time, labor savings become non-- Over period of time, labor savings become non-existent. Unlike linerboard, the local marketplace existent. Unlike linerboard, the local marketplace doesn’t recognize these escalating costsdoesn’t recognize these escalating costs


Government Requirements ALWAYS Changing!Government Requirements ALWAYS Changing!

Lack of stability can be intrusive, invasive, and a Lack of stability can be intrusive, invasive, and a major profit deterrentmajor profit deterrent

Inordinate demand placed on industryInordinate demand placed on industry

Multitude of additional processesMultitude of additional processes

Compared to a U.S. facility, there is a significant Compared to a U.S. facility, there is a significant increase in number of employees required to increase in number of employees required to administer additional government mandated administer additional government mandated processesprocesses


Limited Customer BaseLimited Customer Base

Forced to disqualify most domestic Forced to disqualify most domestic companiescompanies

- Payment history- Payment history

- No viable recourse for collecting unpaid debt- No viable recourse for collecting unpaid debt

- Extremely burdensome and expensive - Extremely burdensome and expensive

to write off bad debt or obsolete inventoryto write off bad debt or obsolete inventory


CULTURE CLASH!CULTURE CLASH!

American companies (our customer base) begin to conduct American companies (our customer base) begin to conduct business as domestic companiesbusiness as domestic companies

- More difficult to receive payment in timely mannerMore difficult to receive payment in timely manner

- Lack of inventory controlLack of inventory control

- Poor communication (forecast information, etc.)Poor communication (forecast information, etc.)

Result: increased cost to provide same level of serviceResult: increased cost to provide same level of service

- - Support processes (accounting, sales support) require additional Support processes (accounting, sales support) require additional personnel to accommodate the same volumepersonnel to accommodate the same volume

- Increased inventory levels required on hand- Increased inventory levels required on hand

SO, WHY GO? SO, WHY GO?


Local demand for qualified suppliers far Local demand for qualified suppliers far exceeds the supplyexceeds the supply

DanHil Containers managed the following:DanHil Containers managed the following:– Maintain existing customer baseMaintain existing customer base– Expand with new customersExpand with new customers– Provides continued growth during period of Provides continued growth during period of

economic decline (double digit growth in economic decline (double digit growth in last two years)last two years)

Additional challenges forced us to really Additional challenges forced us to really understand intricate details of our business understand intricate details of our business in Mexico and U.S.in Mexico and U.S.


Doing Business Doing Business In and With In and With MexicoMexico

Humberto Trevino, Humberto Trevino, CEOCEOSuper Cajas Y Super Cajas Y Empaques Empaques IndustrialesIndustriales

How is the 2003 Mexico?How is the 2003 Mexico?

Cinema movies = False Cinema movies = False perceptionperception

New goverment = Private New goverment = Private business orientedbusiness oriented

Economy: stronger than everEconomy: stronger than ever NAFTA & NAFTA-like agreementsNAFTA & NAFTA-like agreements

FirstFirstPakPak MeMexixicoco


21st Century Challenges21st Century Challenges

E-MexicoE-Mexico E-Goverment,E-Goverment, E-Education, Nation-WideE-Education, Nation-Wide E-Commerce, (SBA)E-Commerce, (SBA)


TechnologyTechnology

State of the ArtState of the Art– ComputersComputers– Wireless CommunicationsWireless Communications– MedicalMedical– Everything FEDEX May CarryEverything FEDEX May Carry


Explosive Industrial Explosive Industrial GrowthGrowth Mexico is a Young CountryMexico is a Young Country 100,000,000 People100,000,000 People 50% Younger than 3050% Younger than 30


The Globalization of The Globalization of MexicoMexico Many companies moving Many companies moving

plants to Mexicoplants to Mexico A lot more to ChinaA lot more to China


The world is changingThe world is changing......

your company should your company should too!too!

If the world has new rules ... If the world has new rules ... play with themplay with them


If Your Customer Moves If Your Customer Moves to Mexico, What Will to Mexico, What Will Happen?Happen?

A)A) Lose salesLose sales

B)B) Step forward and keep your Step forward and keep your businessbusiness


Are You Ready Are You Ready to Deal in Mexico?to Deal in Mexico?

CultureCulture Legal SystemLegal System Labor and Worker Compensation Labor and Worker Compensation

RulesRules CreditCredit


Is it Possible to Make Is it Possible to Make Money in the Mexican Money in the Mexican Market?Market?

Of Course!Of Course!


Keep it SimpleKeep it Simple

Keep the business as close to Keep the business as close to your office as possibleyour office as possible

Deal in your countryDeal in your country Sell in MexicoSell in Mexico


Exporting to MexicoExporting to Mexico

Can you play with the Can you play with the customs rules?customs rules?

Do you need to deliver JIT?Do you need to deliver JIT? Will the long haul freight be Will the long haul freight be

acceptable ?acceptable ?


FirstFirstPakPakThe AICC SolutionThe AICC Solution

If your goal is to make money, If your goal is to make money, then then FirstFirstPak Pak will helpwill help


RememberRemember

Act now! Next week could be Act now! Next week could be too latetoo late

FirstFirstPak now, Pak now, tomorrow tomorrow maybe by yourselfmaybe by yourself

Documents

Doing Business In and With Mexico Jay Daniel, DanHil Containers Jeff Hughes, ALHU International Humberto Trevino, Super Cajas Y Empaques Industriales