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Choosing a manufacturing partner in Mexico: A conversation with Jason Wolfe – Podcast

by | Jan 26, 2023

LATAMFDI: Hello. Welcome to the first of a series of podcast episodes that we’ll be recording for the LATAM FDI website. What we’re going to try to do in these conversations is to make the listeners aware of individuals with whom they can invest in Latin America. We’ll be doing episodes that pertain to foreign direct investment opportunities in the entire region.

Guest Speaker:
Jason Wolfe

Today. We have Jason Wolf with us. He’s the president of a company called Novalink in Mexico. We will be discussing the issue of choosing a manufacturing partner in Mexico.  Hello Jason, please introduce yourself and give us a synopsis of what your company does.?

Jason Wolfe: Yeah, sure. Absolutely.

Thank you, Steven. My name is Jason Wolf. I’m the president and CEO of Novalink. Novalink is a company that was founded in early 1989 as a manufacturing partner in Mexico for our clients. The idea behind Novalink was, or still is today, that many companies need to get to Mexico that would like to be in the country to reap the benefits of manufacturing there. We’ll talk a little bit about many of those benefits in a minute. But Novalink’s idea is that companies are looking to place a product line or move their facility completely into Mexico but need more resources or the desire to come to Mexico and start something on their own.

Novalink is a manufacturing partner in Mexico that is probably categorized as a shelter manufacturing company. Again, I’ll explain how we differ from a typical standard shelter manufacturing operator in Mexico. Currently, we have two locations. Our headquarters and principal location is in Matamoros, Mexico. We have 400,000 manufacturing space and depending on the seasonality, just around 2,000 employees.

Additionally, We have a secondary location in Saltillo, Mexico, where we have 78,000 square feet of industrial space and roughly 200 employees at this point. And then on the US side, we have a 70,000 square foot distribution center where we do warehouse and distribution services for many of our clientele.

LATAM FDI: You mentioned that you would tell us a little about the different shelter company models operational within Mexico’s maquiladora industry. Could you expand on that?

Jason Wolfe: Sure. So, when somebody’s looking to find a manufacturing partner in Mexico, there are basically three concepts. One is you can come to Mexico and look for a contract manufacturer in the maquiladora industry. And my definition of a contract manufacturer is, say, take wire harnesses. You have a Mexico company operating as a maquiladora under the IMMEX program, but their focus is on wire harnesses. You can go to them and give them your drawings and explain your production needs. They know how to go out and acquire the inventory. They have the engineering and design on staff to be able to build your harness for you, and you can look at them as a contractor whom you place your order with.

The second option is a standalone operation. Most people are familiar with this option.  It includes large operations such as General Motors, Aptiva, Delphi, and companies like Boeing and so forth. They come to Mexico, put in their own operation, and staff the program with ex-pats from the US to get it up and running. Then maybe they oversee it over the long term and staff it with their own personnel and a Mexican workforce.  When this option is chosen, the companies do not require a manufacturing partner in Mexico. That model is one where the company, whether it’s a US-based company, Chinese or other nationality, is going to need to incorporate in Mexico and therefore be in the Mexican system of paying taxes, doing all their own legal work, having their own IMMEX program, their own importing and exporting and so forth.

The third option, or third main option if you will, is what many refer to as the shelter program. Under the shelter program, a US company, for instance, partners with a shelter company. Most of the time, shelter companies already have the infrastructure in Mexico to set that company up. Now, most standard shelter manufacturers will incorporate that US company in Mexico, put them in a facility, help them do all the importing and exporting, set up the maquila program for that company, help them staff it, and so on forth. In the ongoing process, the shelter company would handle what many would refer to as administrative functions. So, the HR, the importing and exporting oversight, the customs oversight, the accounting, the legal matters, and so forth. But the US company is still responsible for coming down and manufacturing and overseeing and managing the production aspect of the operation.

So again, that’s a pretty black and white explanation of the three models. Now we’ll look at Novalink to give you a little bit more information on how there are some other options to choose from within the shelter manufacturing industry.

Novalink decided that there were companies that did not have the resources or the desire to come down and oversee the production management of the operation. These are companies that are looking for a manufacturing partner in Mexico. Under this scenario, we have clients that may have 20-25 operators here with us. They may take up 2,500 to 3,000 square feet of industrial space. We produce a product for them on an ongoing and consistent basis. The unique aspect of Novalink is that our clients are not incorporated in Mexico. They don’t have a Mexican entity, therefore, they don’t have any legal ties to Mexico for things like accounting. There’s no permanent establishment risk and so forth. Novalink acquires all of the permits under our maquiladora license. We hire all the employees under our corporations in Mexico. Our clients typically provide us with all the equipment and raw materials and the know-how of building their products. They’ll come down to Mexico and they’ll teach us how to do their production.  This includes everything related to manufacturing the specified item, as well as maintaining the quality aspects of their production. They also show us how to run the communication aspect of the relationship, whether they want us to run Epicor, Oracle, SAP, or however they want us to communicate with them.

All of that is the initial training of it. But then they go home, take their resources, and focus on their business, and we oversee operations as their manufacturing partner in Mexico.

LATAM FDI: You mentioned a term that is important to illuminate. You spoke of IMMEX in Mexico a couple of times. Could you give the listeners a brief explanation of what that term means?

Jason Wolf: Sure.

The IMMEX program in Mexico is all balled up within what many people understand to be the maquiladora industry. It started in the 80s with an agreement between the United States and Mexico of a US company being able to come to Mexico, set up, and qualify for a different taxation structure. There are a lot of rules and regulations related to this arrangement that we don’t need to get into in this discussion necessarily. But from a general standpoint, I operate within Mexico. I have a US company. I also have a Mexican maquiladora and am permitted to operate within Mexico and not pay import duties or taxes on the raw materials and equipment I bring into the country.  This is with the understanding that it is all here on a temporary basis.

There are many rules placed on me that when I import, let’s say, a million feet of wire to build wire harnesses, and I have a checks and balance system that I report to the Mexican government that shows that I’m importing those million feet of wire. And through the consumption of the bill of materials of the finished product and the exportation of those finished products, I demonstrate to them that I am exporting it all back out of Mexico.  The Mexican government permits me to do that without paying any import taxes on that wire. So that’s a general explanation of it. And again, many programs come along with the maquiladora and the IMMEX program. As you know, it was modified from NAFTA to the USMCA as the primary trading agreement between the United States, Mexico, and Canada.

In conclusion, there are many benefits and a lot of rules and regulations that go along with it. But that’s, in general, what the IMMEX program is.

LATAM FDI: Thanks for that explanation. Given what you mentioned regarding the models in the maquiladora industry, based on that explanation that you provided to listeners, what type of manufacturing partner in Mexico would you recommend that they consider working with?

Jason Wolfe: Well, so much thought needs to go into making this decision, right? So again, not to pick on them or single them out in any way. But suppose you look at somebody like General Motors. In that case, or Fruit of the Loom, or companies like these that are large fortune 500 companies, lots of times Fortune 100 companies that have the wherewithal not only in labor resources, managerial resources, but cash right to come down and set up their own operations. They do not need to find a manufacturing partner in Mexico. Many times, these are some of your larger maquiladoras in Mexico. Volkswagen has got a big operation. Ford has got a big operation in Mexico, actually building finished vehicles. So, when you look at something like that, the scale and scope of the program oftentimes would, by definition, dictate that they’re going to come down and put in their own operation.

Now for everybody else, that may require a smaller operation. Or, again, they don’t want to commit the resources to Mexico to come down and manage it, or they do not want to have their own legal entity in Mexico. In this case, a contract manufacturer or somebody like Novalink will benefit them in the process of finding a manufacturing partner in Mexico.

Another variable comes into play when you look at something like getting started in Mexico. Right? So, Novalink has a few customers. And keep in mind that we’ve been doing this for 30-plus years. We’ve been a part of the natural evolution of manufacturing in Mexico. Fruit of the Loom was one of my clients in the early 90s. And to use them as an example, they wanted to get into Mexico. All their cut and sew was being done in the United States, and they wanted to get into Mexico, but they needed to learn about the country. Because of this, they started with Nova Link. We started off with about 25 operators and were sewing their products for them. That taught them about Mexico and how things function in the maquiladora industry. Through our services, they were able to test the waters. We grew that operation to about 450 operators. At that point, and I want to say, Steven, we had been manufacturing for them for probably four or five years; they decided that it was time for them to start to explore Mexico on their own and start to set up some of their own manufacturing operations.

So, the neat thing about a company like Nova Link is, again, is that we are not committing you to a 50,000-square-foot building. We are not committing you to your own legal entity in Mexico. We will get the program going if you want to start with Novalink with 25-30 operators. That operation may grow to 300 to 500 operators, consuming 30,000 -40,000 square feet. At that point, you may run a cost model and decide to establish your own operation. Now, suppose you decide to move out of your relationship as a manufacturing partner in Mexico with Novalink. In that case, I will cease using them as my steppingstone to operate in Mexico. Those are all the possibilities and benefits that come along with choosing a company like Novalink to be your partner. It opens up many more variations and opportunities for you as you grow in Mexico without that full-on upfront commitment of going out, getting your own building, incorporating, and so forth.

LATAM FDI: What I’m hearing here is that your company has to offer a model that enables a manufacturer that perhaps has had no international experience; they don’t have to go through the learning curve of doing business, all the intricacies of doing business in Mexico. They can use your organization and your knowledge to immediately benefit from being in Mexico without having to experience that learning curve. Novalink can be their manufacturing partner in Mexico.

Jason Wolfe: That’s exactly right. For example, we brought over a company that we met three months ago today. It’s actually a Canadian outfit. And they’ve been doing cut and sew up in Canada. They are starting to need help with the cost of that labor and mathematically how that affects the product they have, as well as the availability of labor and finding people willing to take up the trade of cut and sew. And so, we are starting them off today, and they will start with 15 operators that will quickly grow to 25. And as their business grows, we’ll be able to grow with them.

It’s a very easy way to start and get your feet wet in Mexico. And if the size of your operation is only going to be 25 operators, then a company like Novalink is an excellent partner because that’s what we’ve built our business off of. Again, the neat thing about us is that we are not pigeonholed into being a wire harness provider or a textile manufacturer. We’ve been in quite a few industries, including automotive, aviation, the medical space, and consumer goods.  Additionally, as a manufacturing partner in Mexico, we’ve built airport shuttle vans, football helmets, and even bagged potpourri.

LATAM FDI: That is quite a diversity of activities you’ve been involved in as a manufacturing partner in Mexico. Given that and what you’ve said, what resources should someone consider that should be dedicated to Mexico?

Jason Wolfe: So anytime you do an international operation, bringing this back to exaggerate the point, let’s talk about a US company that has not done any manufacturing abroad. Again, suppose they partner in Mexico with somebody like Novalink. In that case, the resources they will need to commit to the program will be something they will be able to communicate with us and provide us with. They will tell us what the manufacturing schedule is going to be. They will need to provide us with certificates of origin for all the raw materials and someone who will continue to do all the material ordering and acquisition. And then, after that, it’s basically communicating with the Mexican operation. We’ll dedicate somebody as a project lead for that particular customer. And those individuals will communicate on a daily basis to talk about quality production efficiencies, ramping up production capabilities, and so forth. Suppose one of your listeners wants to do a contract manufacturing relationship again. In that case, they’ll need to designate somebody as the lead on that project who can communicate directly with the contract manufacturer. And if they decide to do something on their own, then the resource commitment will be much deeper than if they use a company like Novalink to be their manufacturing partner in Mexico.

In this case, somebody will need to spend more time in Mexico, possibly relocate there to be able to be in the factory dealing with the day-to-day on-site issues that arise with the operation.

LATAM FDI: What’s the manufacturing background that companies who are seeking to get involved in this type of relationship should look out for?

Jason Wolfe: One of the things we’re seeing today is that many companies migrated overseas. And when I say overseas, I’m talking principally about countries like China and India. Places that were a lot farther away from home. Right? When that happened, Steven, many of these companies basically gave up their manufacturing capabilities. They’re buying products from someone in China. And so, what we’re seeing today is companies returning that have to recreate that manufacturing capability. Novalink, being that we’ve been in manufacturing for decades, can help them. My father, who started the business, Bill Wolf,  came from a long history of being in the manufacturing industry with General Motors initially and Trico Technologies after that. The rest of us that are currently running the operation are my brother, Brad Wolf, who is the Senior VP of Administrative Operations, and Louise Muskies, who is the Senior VP of Manufacturing Operations. We have 30-plus years of manufacturing experience with Novalink, so we can help these companies recreate that capability. Your question leads to another: How do you choose a manufacturing partner in Mexico? If you’re going it alone and doing a standalone, you will need help with legal, accounting, import-export, etc. You’re likely to hire a Mexican national to be your general manager, and so forth.

If you’re going with a contract manufacturer to be your manufacturing partner in Mexico, you obviously want to ensure that that company has the right background. If they’re a contract manufacturer, you would assume they have a background in whatever product or category you need them to manufacture. Or if you’re picking to take the route of a shelter company in Mexico, what you really want to focus on is what’s their manufacturing background. Because you’re selecting a partner here, right? It’s like you’re selecting a financial partner or a private equity company to get into business with you. What are you looking for? Are you looking for somebody that can help you? Because they have experience in the industry. Are you looking for a private equity partner to give you cash and let you go and do it on your own? And the same thing applies to the shelter manufacturer. Are you looking for a company that is really good at administrative roles? Then there are shelters out there that are really good at that. What are you looking for? A manufacturing partner in Mexico that is a manufacturing-minded experiential group that can understand what manufacturing is all about.

Will you be able to teach them how to do your processes and then walk away from it? Will you go back home and let them oversee the manufacturing? We’re really good at it if you’re looking for somebody to be your legal representative in Mexico. But this is not Novalink’s competency. I’m not going to do all your legal work for you. We will be your manufacturing partner in Mexico that oversees the manufacturing side of the business.

LATAM FDI: You’ve brought up something very interesting. There’s been much talk over the last couple of years about nearshoring and people bringing back manufacturing from, particularly, China. And we find that most of those companies have done what it is that you say. They basically source the product from the Chinese. They don’t get involved in manufacturing. So companies looking for that kind of relationship with somebody nearshore would look towards working with a manufacturing partner in Mexico like Novalink. Is that correct?

Jason Wolfe: To some degree, yes. Now, if you take somebody, for example, to use a silly example, mugs. If somebody wants to order and buy mugs or order and buy ball caps, Novalink is not your partner. We’re not in the ball cap manufacturing business. Now, if you make ball caps or you’ve been in a relationship with somebody, again, to use the example of China, where you’re ordering ball caps from them on a very consistent basis, and you want to leverage all of the value propositions of having an operation in Mexico. Nova Link would say, okay, we’re going to set up a ball cap manufacturing line or project program for you. With you. Right. So that would mean between the two companies Novalink and Company X. We will need to acquire all the inputs to be able to do that, which is going to be the sewing equipment, the embroidery equipment, the cutting equipment, and so forth. And then we’re going to set that up. And that project will be dedicated to you, my client, company X, and we’re going to make, I don’t know, 1000 ball caps a day, 1000 ball caps a week.

We’re going to set it up to meet the production needs that you have. So that’s where a company like Novalink comes in, where these companies will come back and say, okay, I want to find the same model I have in China. I want to order ball caps. From somebody that’s going to be more of an, I need to find a ball cap contract manufacturer in Mexico that is currently making ball caps. And the ability to do that in Mexico right now is much more limited than it is in China. China has spent the past arguably 30 years developing that supply chain in China. And to give them credit, and all your listeners already know this, they got very good at they have put in a supply chain model in China where if you want to make a ball cap out of wire mesh, they probably got somebody over there that will figure out how to do it and get it done. So, Mexico is developing that supply chain and has been doing so over probably the past ten to 15 years as companies are really looking to, I don’t want to say deglobalize because I don’t know that deglobalization is much of a reality, but deglobalize as much as possible and nearshore as much as possible. In this case, they will seek a manufacturing partner in Mexico.

So, coming back, finding injection molding, finding PC boards, finding painting and metal fab and so forth here in Mexico, Mexico is doing yeoman’s job of things like textile production, being able to provide fabrics out of Mexico. And frankly, I hope that the US will realize and see the opportunity in a lot of those much more capital-intensive operations like injection molding, fabrics, plastics, metals, and so forth that would make much sense to do in the US. And then do all the assembly and kind of secondary production, if you will, leveraging our manufacturing partner here in Mexico.

LATAM FDI: Jason, in a short period of time, we’ve covered a pretty good amount of ground. We find that listeners of our podcast inevitably have more questions and want to go deeper into the subject matter in some cases. That being said, how would somebody contact you to be able to email you or whatever communications mode you prefer? How could they get in contact with you to be able to have you expand on this topic further for them?

Jason Wolfe: Sure, and thank you for that opportunity, Steven. One, they certainly can reach out to you and contact me via you (stevecolantuoni@latamfdi.com). The other is my direct line here in Mexico is 956-986-6727. I also have a personal email which is jwolfe@novalinkmx.com. And then we also have a website which is novalinkmx.com. On the site, we have a contact form to fill out, which would put your listeners in direct communication with one of Novalink’s business development VPs.

LATAMFDI: Thanks for that. The listener can also keep in mind that the written transcript on this website that recorded this conversation will have that information. And if it’s okay with you, Jason, if you have a LinkedIn page, we’d like to put a link to your LinkedIn page so that people could contact you that way.

Jason Wolfe: Okay, that will be fine.

LATAM FDI: Well, I want to thank you for joining us today. It’s been very instructive. We wish you good luck in 2023 and beyond. We hope that more companies will do business with Novalink as their manufacturing partner in Mexico.

Jason Wolfe: Well, I do appreciate the opportunity, Steven, and best of luck to you as well. And I look forward to talking to you again and continuing our relationship.

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