- 0:00 Welcome
- 01:50 Panelist introductions
- 06:30 Nearshoring definition
- 08:00 Nearshoring for an electronics manufacturer
- 09:30 Historical trend with nearshoring in Mexico
- 12:50 Manufacturing and design trends in building factories in Mexico over time
- 15:00 How SEACOMP decided to open a Mexico manufacturing facility
- 17:51 Trade compliance and considerations with nearshoring operations
- 21:16 Nearshoring software development considerations
- 24:30 How ArkusNexus grew and expanded into multiple cities and countries
- 26:28 Tecma West's perspective on the talent pool and availability in Mexico
- 28:36 Cultural considerations when nearshoring in Mexico
- 32:30 Due diligence considerations from an investor standpoint for companies with multinational talent
- 36:48 Technologies that are helping the nearshoring movement
- 40:55 Questions from the audience
Neal
Hi everyone. Thanks for coming. Good to see you. Happy May, early May. And welcome to our talk on the impact of nearshoring movement on tech. We are really excited to have this conversation with you. I've got an esteemed panel that I can't wait to introduce to you. But first, a little introduction on myself. I'm Neal Bloom.
I am an investor with Interlock Capital. We're an investment community that together as a group of operators and excited founders, put our brains together and invest in the hard things, both software and hardware. and so we've got investors all over the world as part of us. But we're rooted here in San Diego, and we've been investing over the course of about 4 or 5 years, which over the last few years, I think we've seen some changes globally as is, that have affected us locally.
And that's kind of what we're going to set the precipice for, for tonight. There's a lot going on, a lot going on in the world that affects our every day, whether it's supply chain. upheaval, whether it's global conflict, whether it's a change of materials because of sustainability or lack of access to or our talent that just wants to work in other places at different times than what we're used to.
That sets the stage for a lot, a lot of different ways of doing business. Fortunately enough, it's actually brought San Diego at an amazing, point to work on both sides of the border. And so for years, we've been talking about a mega region here. down in San Diego and Tijuana. And today we're going to show how well it's really working.
Things are really happening from an entire region that just happens to have, you know, two different countries on either side where we're going to talk about that in a global way as well, too. How are things, how companies working globally in different time zones, but also hyper local as well too. So without further ado, I'd love to turn it over to our panel so we can start this discussion.
First we'll go with our Ernesto Bravo from Tecma West. Please.
Ernesto
Yeah, everyone. my name is I'm Ernesto Bravo. I'm president of Tecma West. That's a division in Baja California, basically. And what we do is we are, we help companies set up factories, in Mexico. And we've been doing that for almost 40 years.
I personally, I was born in San Diego, grew up in Tijuana. finished grammar school there, transferred to high school in San Diego. So I'm very much, cross-cultural. I don't know if Spanish or English is my first language, but, actually it's Spanish, but sometimes I've been told me. Can't tell. in any case, so I really grew up, in the in a bi cultural world.
And I've been now in the business of manufacturing for almost 13 years. and, as a company, we have, well over 10,000 employees across Mexico, with about 80 different factories. about half of those are here in Tijuana. and that's, my area. So I'm looking forward to this discussion. And thank you.
Thank you. SEACOMP. And, Mike, for hosting us. Thank you very much.
Neal
Next we have Gabby, director of BPE global.
Gabby
Hi, everyone. I'm Gabrielle Griffith, Gabby Griffith from BPE global. BPE global is a 20 year old global trade compliance consulting firm. So we work with companies across all sectors. lots of high tech. And that's what I'm here to talk about tonight.
There's a lot of considerations to think about. And the expansion of, global cross border industry and, the tangible elements and intangible elements. And I myself, works come from industry in the high tech sector, as well as a variety of other government sectors. So I've kind of been on both sides of the house, and I'm thrilled to be here and contribute my perspective to this conversation.
So thank you for having me. Thank you. SEACOMP, thanks, Terry, for inviting me next.
Neal
Angel Sanchez, co-founder of ArkusNexus.
Angel
Thank you Neal. Well, my name is Angel Sanchez. I'm one of the co-founders of ArkusNexus. nearshore software development company, basically building great software technology for companies in the US, but built by mostly Mexicans, because now we have expanded into South America, and we're proud to say that we have Colombians, Chileans.
And we are still waiting for a while in Brazil to join forces and to bring and prove that we can deliver with this great, industry, ecosystem and country, request from us. And I'm happy to see a lot of familiar faces. we have been building community here in San Diego all the way to L.A for like, 12 years.
When we figured out that this is our backyard, where we need to to prove that we can deliver, we start bringing this type of community. So happy to see, a lot of familiar faces and also to say Hola and, gustan verte, because most of you speak Spanish, at least here, understanding what we're trying to say to build strong bonding.
So that's what we have been doing for, for 21 years now.
Neal
Amazing. Last but not least, Terry, our chief commercial officer of SEACOMP.
Terry
Yep. Thank you. Terry Arbaugh with SEACOMP. We are an electronics manufacturing services provider or headquartered in Carlsbad. We have a factory in Dongguan China. And our grand opening of our Tijuana, Mexico facility is tomorrow.
When I was inviting the panel to be here today, you know, said, hey, this new trend, this nearshoring thing, we want to talk about, Angels like, where have you been in here for 20 years? So, we design and manufacture industrial, medical and consumer electronics, right? So, really happy to be here. We talk about nearshoring now, having a factory in China and opening up a factory in Mexico in this last couple of years going through this process.
We talk about nearshoring a lot. So there's a lot to discuss. And we wanted to make sure we had a breadth of of perspectives here to do so. So thank you all for being here and beyond. Panelist. Thank you guys so much.
Neal
Thank you. I'm we're going to talk for about 30 - 40 minutes and then open up for questions. you know very conversational here. But let's hold our questions till the end. But let's also let's set the stage. I know you came to an event called near about nearshoring, but can you just take us through, give us some basic guidance on what nearshoring is and kind of a across sector time, meaning?
Gabby
Sure. Yeah. So the obviously the panel topic is nearshoring, but I'm sure everyone in this room has sort of there's nearshoring, there's reshoring, there's friend shoring, there's all onshore and there's a lot of various versions and iterations of shoring. they're all just buzzwords for basically a strategic supply chain. And I would say specifically, if we're really in the weeds on nearshoring, at least as it pertains versus reshoring, which would be the most familiar buzzwords.
Reshoring is when you bring what is a manufacturing operation overseas back on shore. So it's bringing manufacturing production home onto our domestic shores. You're shoring is where you bring overseas operations to neighboring countries. for whether it's strategic strategy on your supply chain, more control and visibility over, the folks that are developing and producing your goods. French shoring is more of a geopolitical strategy to transition manufacturing operations from what would be considered a riskier hot button country and to lesser hot button country.
So an example would be moving in software manufacturing from China into India. So not exactly a nearshore, but a friendlier shore. But specifically for today, we're talking about nearshoring. So the value and the considerations of bringing overseas operations into our neighboring countries, our neighboring shores, specifically Mexico. So hopefully that sets the stage. If there's one thing we can take away from that is to use friendshoring more often, because that's exactly what it is.
Neal
and I think you'll get that from this audience in this panel right here as well, to Terry, specifically from the hardware and electronics world. What is nearshoring, friendshoring, mean, in your world?
Terry
For us, it's actually amazing. So, like I mentioned, we've had a factory in Dongguan China for more than ten years.
Mike, the CEO of our company, actually lived in Hong Kong for ten years. And so whenever we had to go to the factory to work with our team, whenever one of our customers or prospects wanted to see manufacturing or meet the team, it's a big commitment, right? Time, money to get all the way over there.
We're 45 minutes away from our factory right now and right, so there's a massive difference. We've been able to, as we've gone through this process, I can drop off my daughter at school in the morning, get down to the factory, have a great, productive day, and get back in time to pick her up, which is really cool for anybody who's been overseas or done manufacturing or travel.
So, you know, not only the convenience, not only being able to work more closely with the team. and I'm sure we'll get into this a little bit more. There are some, tariff, you know, financial, business timing, logistics, cash flow impacts on all of those things that are all net positives for our U.S. customers by moving closer to home.
Neal
I think it is closer for me to go to your factory now then to home from in North County, San Diego, for real? Yeah. Then not even regardless of traffic. Right. which has changed over time. Angel, you've been doing this for nearly 20 years. Like where? What was it like from then? Now, what trends have you seen that are helping the friendshoring movement?
Angel
Well, back then there were not even any buzzwords that no one was talking about bringing this type of level of, engineering to Mexico. Back then, it was just pure manufacturing. So you just acquire a bunch of equipment and set of processes, and it was basically and mostly like cost efficient, providing. And then when we started, we, we tried to promote here and, in the area and we were, asked like, you really have to have a computer degrees or anything like that.
At some point we were even asked a giant laptops or a computer or like, yeah, it's closer to this nation. And back then you can cross the border without actually proving that you were a U.S. citizen or you have a visa. It was so easy. But still, people didn't believe in and in talent. So it was hard for us to prove that.
Yeah, the Mexican and Latin American talent can can deliver in, especially in this area. And that started being a, a way a trend in the very few individuals that believe in doing so and like they, they found a goldmine. Hey, I don't want to talk to anyone about this because these people are so good that they want to hire all of them.
And back then, we were the only ones that, hey, you need to hire people. You need to train people because it's not just what they learn in the university. We need to invest at some point, up to 24 months in order to get people ready. So imagine the turnaround that we needed to have. And if people were leaving the company two and a half years, three and a half years down, all of these investment.
So we started doing it. So we were starting and getting people like 5 or 6 years into it, and we didn't have anyone outside Tijuana. And then within Mexico, most of the people that know Mexico, there's always this bad, media about Tijuana specifically, like, you're going to get kidnapped or whatever. We all heard what happened last week, and we were inviting Mexicans to come to Tijuana, and they were afraid to come to Tijuana.
I was I know it was tough on both sides. We were stubborn, resilient, whatever you want to call it, to keep doing it until, like. And now Mexico passes Canada and the trade with the US is because of a lot of the new sharing that is going on manufacturing still, etc. but yeah, it was hard. And now everyone is looking at the potential I every single time to have the opportunity to, to promote at a higher least 20 or 30% of your workforce and you will see not just the incremental productivity, but how can that the shift of mentality can exponentially grow your business?
Because it's a different way of thought. And of course, keep leading the way you do your business, but keep adding these other nationalities that we want to prove that we can deliver in, in any area. So that's where it is.
Neal
We'll come back a bit to kind of this labor arbitrage aspect, which is what I think a lot of people think of when they think of outsourcing technology, whether it's development, it's like that.
Enresto, Tecma has been building technology for a long time. And I think a lot of people think of automotive and TVs. But what trends have you seen over time from a manufacturing design, building design factories, from manufacturing over time?
Ernesto
The one trend, I think over the past almost 40 years that's been constant and, constantly upwards is, is, the, the degree of hiring and talent that we're hiring that is not just a direct operator, somebody working directly on the production line, which is what it was 40 years ago, to some degree, but nowadays roughly 30 to 40%, depending on the, the specific nature of the factory, of the staff can actually be engineers, supervision technicians, so much, much higher level, talent than what it used to be. nowadays is in Tijuana alone, there's almost a quarter million employees in manufacturing in EMX.
So maquiladora manufacturing, it's a historically high number. And a very significant portion of those are engineers. Fortunately, Tijuana invested a long time ago in education systems to target or to design, programs and, and design and develop talent that can work in the factories at an engineering level, product development level.
SEACOMP is actually a great example of this because of, of the latest, the forefront of, technology and what's that's being, manufactured in Tijuana, where you're not just building components, you're not just building this one part that will be sent to Asia or to the US to be finished. You're building finished product or engineering part of that finished product.
And so it's really exciting to see. It's exciting to see how much of an economic and, and just the personal impact it's had, for people, and for the people in Tijuana especially.
Neal
So why don't we build off of that so that you're opening tomorrow? But this, for SEACOMP, this is this didn't happen overnight.
You take us back through when a company like yours decides to open a second facility. How? What were some of the ingredients that went into. And where did you go through to first start looking, deciding that where the talent is and what are the needs? The recipe to go into that?
Terry
There's one very clear trigger, the tariffs from 2018.
You know, most of the electronic products that we make suddenly had a 25% additional import duty on them coming into the US. And most of our business in the, in at SEACOMP is US based customers and even some customers that we have in Europe. Their markets are in the US, even if they're not directly a US based client, they're shipping products into the US.
So the 2018 tariffs were really the kickoff to the conversation. So Mike and Francois, a couple of the guys in the audience here, they started looking around because a lot of our customers were asking for a China plus one option. So it wasn't necessarily we have to get out of China, but we need to start looking at, options that we might have to avoid these tariffs probably the tariffs are going to go away soon.
But just in case, that has not happened, the tariffs are still here. So that really accelerated. So we started looking all over Southeast Asia. We had a presence in Hong Kong. Mike the owner of the company was there. You know we had operations sourcing procurement. You know we had a real healthy team there. So if we can find somewhere in the neighborhood then that makes a lot of sense.
We could make that work pretty easily and still get around the tariffs. Well then Covid hit. So Covid prevented travel. So when we were originally thinking we'll start in China will transfer. We'll send a few a Swat team over to we ended up selecting the Philippines. We looked at Thailand, Malaysia, Vietnam, Taiwan. Right.
We looked at a lot of different countries. We were going to go with, the Philippines, and we figured we'd send a Swat team over to do some training, right. Jump back and forth. And that got blown up. So that ended up leading to Mike the the owner moving back from Hong Kong, back to San Diego, which set in the motion finance team and operations, and everybody coming to our Carlsbad global headquarters and then Tijuana being the very obvious choice for that China plus one.
So 2018 till now, until tomorrow. I guess is the is the process.
Neal
Gabby, take us through. Maybe, you know, some of the due diligence that companies come to for help and just navigating this, you know, multi-year path, to establishing a physical presence.
Gabby
Yeah. So, it's interesting as a pertains from due diligence to SEACOMP’s path, I always I have to back out a little bit about and set the stage more of trade compliance, because I don't know how many of you I'm like by show of hand.
How many of you have even heard of trade compliance? Probably like less than half. Yeah. So it was it was all our people. Yeah. I know, just solidly obviously complex. so with trade compliance, there's to there's tangibles you have to consider and intangibles. So I want to kind of back up an answer your question. and a little bit of around my way.
So from a tangible perspective, that's the obvious stuff for SEACOMP. That is your classification. You mentioned tariffs. I think you said tariffs are going to either here to stay, 25%. I hope that was a joke. [it was] we live and breathe this stuff and it's it's it's they're here to stay. So your tariff classification, your actual tangible item, what you can touch and see has a tariff number that drives your duty rate, that drives whether you're subject to the China tariffs or they're subject to a whole host of other government agency considerations.
There's anti-dumping duties. It's your landed cost. That's ultimately what's driving your landed costs are from SEACOMP to back out and answer your question from a 2018 moving forward, it's not only what's the classification. And the roll out of specifically the China tariffs was like in seven and a half. No. 25, no. Seven and a half. But it's only seven out for X amount.
So that I want to kind of put in a box and not discuss. Because the larger concept is that the tangible tariff classification drives the duty rate, drives all the other decisions. But the intangible is what I've really been drilling in the Terry and the SEACOMP team. And that's your recipe, because that's the message that I have for all anybody involved in any cross-border manufacturing of any sort.
Is your product that you're manufacturing the recipe or secret, your secret sauce that you're handing over to be manufactured can sometimes have some ramifications and some licensable information that is protected for national security, reasons for nuclear proliferation, reasons for chemical and weapon. And so that's where in terms of the roadmap of SEACOMP, every client that SEACOMP has introduced me to, we do the tariff classification to figure out the tangible risk, but we do the intangible work as well.
You know, great. You want to manufacture in Mexico. What if all your Mexican nationals working on this in Mexico now need licenses from the U.S. government to to do that? So those are things that are imperative to identify as upstream as possible. So we've luckily been together on this journey over a few years and see comp as they got it dialed in.
So it's been great. But that's my message.
Terry
And then means we introduce customers to Gabby. Yeah, a lot because we can only provide so much guidance. And if we're wrong, telling a customer and they take our word for it and we, you know, it's still they're on the hook. Yeah. Or the penalties. Right. So we go,
Gabby
Our president is here tonight to introduce you. She and I were on one of my earliest sales calls, a bit of the company seven years. And one of our earliest calls was with a robotics manufacturer. And the president on the phone. He's like, you're telling me that everybody does this, like, tariff classification? Like, no, no, this is this is BS for us. This is not something that everybody does.
It's like speeding on the highway. Everybody does it. But it just like, really sucks for the one guy that gets caught. I'm like, well, I mean, I'm compliant. So you want to be the one to get caught, go for it. But we did not land that client. It was that I don't know, his company shut down.
Terry
I said it may still come back. Yeah.
Angel
You can always suggest to go into software and you can avoid all.
Gabby
Don't get me started on recipes.
Neal
And I'm like, yeah, why don't Angel, you can take us through a little bit of consideration of working with companies. What kind of questions come up and what are they? They not ask that you tend to have to bring up, from working on a software side.
Angel
Okay. For software, first, you wanted to leave all your liabilities in the US. So make sure that you're making business with, you as legal entity. And to some extent, I have come to realization that it's pretty easy to any, any foreign citizen to to set up a business and then is not properly backed up.
So make sure that the structure and everything is legally farm in the US and it's backed up correctly for us. So for example, we always provide a an insurance policy for liabilities. The it depends on the size of the business that we're going to work, etc., but that's something that you want to take into consideration. And the data it covers everything and everyone work related to this, this business.
Right. Because there's some times where people hire people from Ukraine or wherever they are in the world, and those are not covered by the what they offer here in the States. So it's a different country, a different. So as long as you're cover here, you're good. And that in, security and every other thing, it's like everything, it's on the cloud.
So there's no need, for example, for any, any of our developers to download your code. It's just a piece of code that they're working on and that's specific. So it's fairly simple to set up all the infrastructure cloud base, AWS, Google, Microsoft, whatever it is. Or even if there's some customers still have their own, it's easy just to give access and to set up all your security on your side so you can monitor who is downloading what, uploading what.
It said that every, every single time everything is automated. Now testing. Even so, it's fairly simple to to protect your IP. And and again if the company that you're doing business with it's giving you the legal framework to cover all of that. That's pretty much it. I, I'm more worry about how can you make sure that the talent is going to perform right.
Because sometimes it's yeah, they're, they're, they're, training their experience. But sometimes the way you work. So it's not easy to adapt to all type of projects. Complexity different setup is different. We have work group company. They have people in 5 or 6 different countries at the end of six months normally, who are the ones managing all of them because we know how to make this process work.
So again, it's not just hiring talent and and having the right people, but making sure they have the managers to actually deliver it. Now, normally I'm more worried in the initial 3 to 6 months on that end, then the legal and the security, compliance, which is important. But since we know how to to deal with it is more like let's be productive to show that this is something that will work for the long run.
Our tenure with customers is around five six years, and normally we deliver 2 or 3 different successful products, growth, etc. that most of them become acquired and are taken like after acquisition. We want to take in business with now with the acquiring company and that has been the case. luckily for us.
Neal
Can you just speak to a little bit more about the broadness of your talent? I mean, your software, I think you started in a specific area, maybe apps, but it has grown significantly, which has forced you to find talent in different regions as well. Speak a little bit to that part, too.
Angel
Yeah. at first we were working with only small businesses, companies that hired 3 to 5 people mostly. And then as they were growing and we were growing, we started working people, companies needed 15 to 20, so wasn't enough.
And by 2018, we started, a second office like in Monterrey, actually, but purchase here, it was the one setting up the second facilities, and we thought that we were hire like 30 people or so in a year and we grow like 200. And then the pandemic came and, we opened out of and fourth facilities, with clients and Colima two border town series two, which is the third largest city within Mexico, 2021 to 2022.
We needed to expand into South America. We're about to open our fifth office in Medellin, Colombia, which is pretty cool. but they have a lot of fun there, and they, that that's Latin America. but the good thing and what the, the makers decide to to remedy in we, we were able to spot like five individuals babies.
My first interview assigned some work and they were high level people. So this is it. This is it. You can have the best of South America just landed in Medellin. So now we have, access to a larger pool of talent. So we were, challenged to hire 150 people within six months, and we deliberately within five, because we had access to all of those different markets.
And we're still developing people and bringing people more tuned to work in the US.
Neal
Yeah. That's great. Yes. Ernesto, I'm gonna turn to you just to also talk about, you mentioned kind of, a little bit of the change of talent over time of being able to do more complex, kind of nature or anything else, considerations wise, that's unique, maybe to the border versus other parts.
That's driving where tech is expanding to as well to or certain clients coming to you.
Ernesto
You know, the, the, the one common question that I think a lot of companies are going to, to, to Mexico for is not necessarily the cost, not necessarily the, the level of education or the inherent talent in the person, but it's just availability.
So one of the questions that just about everyone asks is, you know, I need I'm going to need to hire 30, 40, 50 people in a month. Can we do that? And we are and they're going to be engineers are going to be operators, supervisors, everything across the board to to literally start from scratch, right? You build you build a factory, you build on all the time improvements, you bring your equipment and then you got to hire people.
And so I think the by far the most common question from all of our clients, especially when they're just starting out to look at the operation, to consider the operation in Mexico is can I get the people? And it doesn't matter whether they're coming from Asia, from California, from Europe, from Michigan, across the board. The first thing they tell us is we just we can't find people, or they don't want to stay or they don't want to work in manufacturing.
And so, Tijuana especially, and really across the border, Juarez, Tijuana, Monterrey, we have the advantage that people in, in Mexico, across all of the country know that there are jobs in these cities. So that attracts a lot of migration. Tijuana. It's estimated that we get about 50 to 100,000 people coming from southern Mexico every year.
And so that provides a huge pool of talent. And it also it's not just the jobs, but also the, the aspect of it where you can actually, get an education and develop a career. in these factories, that attracts people. And that's really one of the really great aspects of what we do.
Neal
Amazing. Kind of open to everyone but a little bit of the cultural considerations. What are what do American companies run into that they didn't expect and vice versa? you know, anything that you've seen and in companies work on both sides.
Ernesto
I can start. Nowadays, we're actually getting companies from all over the world. We always have. but it's more prominent now where we're getting we've just three years ago, we signed our first Chinese client.
So we actually have a company from China who needs to manufacture locally, for the North American market. And so we have seen, a lot of that in the cultural aspects of it. Number one is, that you need to keep in mind is, is just about it, just like anywhere else. Respect. Respect for people.
For the workers, no matter no matter who it is or what level of worker it is, you have to show respect. And that's especially important when you have a foreign management, which about half of our client factories have foreign management, the other half have local management. which is also a change in the shift over the years.
But but definitely, respect for the individuals is critical. and different cultures have different definitions of respect. and so, so so you do have to acclimate and maybe apply the local, customs to, how you respect people. But, but that's, that's critical. And the other one is, don't leave your common sense of the border.
Right. So you're, you're running a factory, you've run factories all over the world, and some of our clients, cases and, you know, the same things that apply in, in China or in Europe or in the US, apply here to, for, for manufacturing. You know, there are nuances, obviously. and there's legal aspects to it.
And that's what we're there to, to help our clients with. But, but overall, you know, don't think of it as something that's, that's, very different. It's, it's manufacturing and the fundamentals are the same.
Neal
So it's great. Appreciate it. Yeah. There.
Terry
I think it's a great answer for us. You know, we're of course we're here in Carlsbad. We have a factory in China. We have a team in Hong Kong. A couple of our guys are here from London and Sweden, and now we're opening Mexico. So we always kind of joke somebody is always on holiday, right? So that's part of the challenge. you know. So yes.
Respect, I would say we start with and then communication for what we do is kind of the number one thing, whether even if we're just working with, you know, in English in California, with American customers, the communication for really complex projects is really, really critical. And you add in the additional language, you know, challenges. And in the time zones, you know, you kind of add on all the different layers and that communication is really, really challenging.
And it is still the very most important thing to be able to execute a product, right, a project. And so, you know, I think figuring out how to be, how to speak and write in a way that's understandable, and also how to set up projects and handoff points between teams that are also very clear. Right? So not just having, you know, hey, I hope this is good enough, right?
Having, you know, kind of defined checkpoints. Everybody knows what good is or what done is before you're before you're handing it off is really key.
Neal
let me turn a question over a little bit with using my investor hat. As investors, we get pitches often on companies who everyone's got to have an edge compared to catch up to the enterprise company right of some sort, whether it's we have an outsource dev team in some place in the world.
So therefore, you know, our costs or our monthly burn is less or we can build technology differently. We were kind of talking to this ahead of time, like little investors come to you with, with questions of how to understand, a startup or a later stage company with how to how do you due diligence on a company with, a multinational talent force like this?
Gabby
Yeah. No, it's a great question. So the, the funds that we work with or I should say, kind of give input to come to us because they've been burned or trained properly to understand the upstream importance, which I mentioned earlier, which is okay, this company wants to make an interactive yoga meditation ball that I'm going to hold, and it's going to vibrate when, you know, but it's out of wood.
And this component comes from China and is a realistic that this is going to be manufactured over here. And landed costs needs to be X, Y and Z. So they might bounce off ideas from us to say, okay, this is what this is looking like. And this is, you know what this product is, what? And this is what the cost of the product is going to be.
Let's back out again, back to the landed cost component and understanding back to my tangibles and intangibles. The tangible is the tariff classifications. The duty rates related costs is going to hit the section tariffs. Is it going to hit any anti-dumping. Your intangibles is for manufacturing of this. If I am investing in this company that's now going to require all these software engineers to work on it from Mexico or from Vietnam or from the Philippines, am I going to need licenses from the United States to pass the recipe, the information for the development, production on that item too.
So, like, what am I in for kind of from a supply chain standpoint. So this is all information again that whether you're a VC or you're running your own company or whomever, just move the build the process. When we're talking about diligence or systems like what do you need to do? There's no off the shelf system. It's just built embedding it into your process.
Build it into your new product introduction, build it into your customer vetting, your customer onboarding. Just think about your own respective business and what's the like the point of origin. Because I tell you, like, I've been in my industry for 20 years and nobody knew what I did, even in companies when I worked for Intel, those tariffs went in effect like, oh, I got it.
That's important. Like here's some headcount like, you know, so it's just that it, upstream. And from an investor standpoint, it's just really understand what you're investing in and what the ramifications are going to be from the more compliance the, the boring stuff.
Neal
Yeah. Yeah. And that's so my question to you, Angel, because you get pitched a lot a lot of software ideas seem so easy. What considerations do you have to go through to decide to invest your invest in your talent pool, right. You’re to go and take this project on?
Angel
Yeah. Well, whenever there's a new sharing component on the on the formula of the company is very appealing to us. we started seeing a lot of, customers become successfully selling, their, their companies.
So that's how we're trying to invest ourselves into some of the companies that, that give us opportunity to invest in their own companies that work for us. So far we have done like eight different deals besides, the, the ones that we had done through Interlocks or bust up because, they're busy and other investment firms. So but we have seen is that we when you have that component, you deliver faster.
You basically take products to market faster, which improves your ROI a lot. You can improve by by working directly with customers. We have been assigned to specific customers like, hey, this is going to be your better version. So they keep improving the product for maybe six months into it after delivering. So that helps a lot to really create a good product market fit.
We have also being part of not only, sometimes we start just, boring stuff, maintaining static stuff, but that helps us to learn the business side of it. So it's critical to understand how these guys are making business. So whenever we jump into the corner, the cool stuff, we have that, chip, also aligned. And that's most of the things that we look at and the formula.
And of course, if they have, successful business development area, if they, they're attending a massive market, if it's a B2B, if the companies are going after our and then great spot depending on the, economy, etc.. And if that's the case, it's a no brainer.
Neal
This wouldn't be a panel on 2024 without talking about AI.
So we got to bring up, what technologies are like helping move forward this friendshoring movement, anything coming online, I'll let any of you all, jump in on this.
Angel
To start in software before moving into hardware. It's, all the limbs are improving. I was talking to to Lena, a little bit ago, and, developers are telling that right now they're improving 20 to 30% performance.
And I'm pretty sure that they're the ones holding it to 20 or 30% improvement. I'm pretty sure whenever they keep doing it as a regular thing using that technology, the productivity will increase 200%, 300% thats what I have seen that it's doable. Some people have said like today I'm improving ten times what I'm doing.
Like a year ago. Still, it depends on the project type and team composition and everything but 200%, I think it's doable with the technologies that are coming. And still we don't have the latest version that it's about to come. So it's a lot of transformation in the industry in the near future. But forget the good.
It's going to mean better, bigger, larger business for everyone.
Neal
Anything to your respective industries.
Gabby
Yeah I would say from a regulatory perspective, as we see in the news, the government's still trying to figure out how to actually codify and regulate the AI space as a whole. specifically in the trade compliance world, it has been regulated and codified very specifically, in more of geospatial imagery.
So it's hyper niche. However, the white House does have a list of the emerging technologies, which is everything that you robotics, biotech. Like anything that we would kind of categorize as AI and where there's a lot of movement in Congress and nothing kind of coming on the pike, so to speak, in terms of any AI that we would see on the ground.
We have a lot of clients who are in the AI space, and it's like, right now it's not not too regulated, but, from a trade compliance. And that's more in the kind of intangible world of what's coming on Pike. But tangibly, it's what we do is so hyper nuanced from the tangible world of assigning the tariff classifications, doing all the work to figure out the duty rates that there's a few companies out there that are trying to develop AI solutions to do this.
And we're very much actively involved in and helping them support this. And it's interesting to watch, but, nothing really to point to right now, just kind of watching the government figure it out and watching whatever administration will shake out. But on both sides, at some, certainly a few years down the line and say, okay.
Neal
Ernesto, anything you’d like to add?
Ernesto
Well, we've our experience with AI has been interesting because what we've seen is the Mexican government, government agencies in Mexico actually been using AI to perform, audits. and so, so the audit activity has increased substantially over the past, year or two years. And, and they're we know they're implementing AI into their, into their audits.
And so, that makes our job, you know, all the more important in terms of making sure that, we help our clients to stay within, the compliance parameters, and, and that includes in everything and customs or taxes, which are the two areas where they're mostly focused. So really, and we're also in the early stages of, of implementing the technology to, to help us as well, in the, in the compliance aspect.
Gabby
So there's an ask, what are they ordered inside customs. Those like tariffs?
Ernesto
Inventories, inventory, inventories and exports and that, you know and nondestructive shipments are active. no. Retroactive. Yeah. Yeah. And tax is also one of taxes. Yeah.
Neal
We're about to turn it over to the audience for questions. So if we have a microphone, let's get the handheld mike up and I'm happy to walk it out.
Or as Sarah wants to. Awesome. Thank you. Let's give our panel a round of applause real quick.
Questions from the audience, please.
Audience Member
I have one, well, thanks. Amazing panelists. Thanks, Neal, for bringing this together. I think it was really important. So, like, I don't know the questions I've tried to limit it to two, if that's okay. I had so many. but first is kind of like with the whole, NAFTA deal, I feel like. And you guys, some of you have been like in this industry like for so long, like, have you really seen a big improvement?
I feel like you see it in the news. But is this like what is really like the magical numbers behind there? And then second question, I guess is kind of like the add on. And that's mainly because I recently relocated to South America. there's talks about adding Uruguay to NAFTA. what is your like feeling a have you heard about it?
And B what is your feeling like how that even accelerates this magical by national nation. We have you
Gabby
I can definitely take that one. so first of all it's not after anymore, so you know, enough about it. It's, I call it new NAFTA because we've been around and I'm sure, you know, NAFTA, it's only been around since the 90s.
I feel like, so it's the USMCA, the US, Mexico, Canada agreement. And I don't know if there's by just quick context, it's a free trade agreement between the US, Canada and Mexico. and it is a very specific agreement. So I would say one thing that I did not touch on that plays directly into NAFTA and USMCA is qualification of goods to, to leverage this duty free treatment.
So again, going back to the tangible, you classify your goods. That classification drives, whether your product is actually going to be eligible for that program. And the numbers coming out of that program are huge in terms of the duty savings that companies use. I know when I worked in-house in my past company, we were saving the company 2 to $5 million a year on free trade agreements in general, NAFTA being one of them back then.
USMCA in the aftermath of the section 301 from China has been a little trickier. And I don't know if you guys have been seen this specifically in Mexico because, one thing that previously goods there's kind of three ways to qualify goods for the Usmca program when it's occurring in Mexico. One of those is obviously goods wholly of origin.
There's goods made within the territories, but the third is the most common, which is kind of what we're here to talk about today. It's when you're importing goods from various locations in the world into Mexico, manufacturing to finish. Good. Does. Is it a country of origin? Mexico is the million dollar question quite literally in most of my clients cases.
And unfortunately in the section 301 aftermath, a good can qualify for Usmca but not get out of the section tariffs. So it's been this while world in the past few years where the companies or clients who are saving millions and NAFTA, USMCA before in the aftermath of USMCA and CBP customs and border protections really subjective treatment of kind of how goods are qualified under section 301.
They're losing those tariff treatments. So, in short, the Usmca trade agreement is great. It's a really well written agreement. It from the consumer hardware device standpoint is very, encompassing. So it's not really stringent in the space, in the retail space, it's really tight and hard to leverage in the food space. It's hard. But to this audience, like it's a very, friendly agreement for the consumer hardware space, but it's just that section 301 factor.
So it's really about analyzing what you're manufacturing into a finished product to determine whether it would qualify. So you can leverage, all of those benefits. Yeah. Thank you.
Ernesto
From our perspective, very quickly, just a comment. But because we were around before NAFTA, so we started in the mid 80s and we've seen, how the geopolitical aspects of, of, of trade agreements, really do have an impact, considerable impact on, on employment and investment, into Mexico.
And as an example, in 2001, when China entered the WTO, we saw a significant impact on investment and jobs in Mexico, not just in the US, but in Mexico. Both countries were were pretty impacted in terms of a reduction in investment and jobs. and then since 2008 and that recession and Lehman and all that, since then, it's all been kind of an uptrend and, an acceleration with Covid and acceleration.
But it's been on an uptick for, for many years now. The USMCA, by providing that level of certainty, especially during the Trump administration, did resolve I think a lot and, and and added to, to that level of certainty for companies to be able to invest. And so we're seeing that that trend continue. Yeah. Thanks.
Audience Member
So I, I think that I think that's really interesting fact, kind of like, you know, like once you have the, the standard between the nations, like more established, like investment flows, like easier to like navigate, I guess. Yeah.
Neal
As you know, the question in the back.
Audience Member
It's me. Okay. Hi everyone. My name is Myles. I'm coming from a manufacturing, perspective here in San Diego. And I wanted to hear a bit more about this, like labor arbitrage. I like the way you put that, Neal. And the benefits, differentiators that factories in Mexico would have. A lot of the times I work with clients and we're getting to a larger scale and it's like, you know, we go to China for some reasons, and I'd love to tell them a story about why to go to Mexico, how to pursue Mexico.
And is it just a labor arbitrage, or are there new technologies, robotics, automation that like you're seeing that you're proud of, speak to that.
Terry
Yeah. I'll take it. yeah. Why? Maybe why Mexico instead of China? If you're trying to scale manufacturing, you know, getting around the tariff just to wrap that conversation up, right. So if you've got a product that is coming in from China, at a 25%, you know, land in tariff, the comparison to make the finished goods in Mexico just product a product, forget the tariff, forget freight for everything else, the product.
What we've seen in all of our averages, about 15 to 18% higher cost to make a finished product in Mexico. Electronics the types of things we do. Right. So about 15, 18% higher cost. But then you're, you know, two days trucking away from your warehouse, your distribution center, from your customer. you don't have the tariff. You've got this lovely USMCA free trade agreement.
So there is no import duty as long as you've qualified for the substantial transformation that it takes to achieve the country of origin designation for Mexico. Right? And typically in the electronics world, everything that we make, you pretty much have to do the circuit board assembly. So the surface mounted the components onto the circuit board is really where most of the component dollar value is added, which is not the only not the only thing I've learned from you, but you know, where the product gets most of its, character, right, is in the PCB when you put some plastics around it, maybe some accessories in a box and all that.
Still, the core value of that transformation comes from the electronics piece. So as long as you're doing that, you qualify for the substantial transformation, 15, 18% higher cost. But you're close to market. You know, cash flows faster. You're not sitting on the water, in China or from China for 4 to 6 weeks if you have to air freight, which I know there's people in this room that pay a good amount for airfreight.
You know, that can be really, really expensive in terms of your total Cogs. so, yeah, there's very good reasons from a financial standpoint, for a total landed cost of a product to go to Mexico. for a lot of the engineers and product developers that are in this room, like you, if you run into a problem again, You can be there, you can work with the team, you can get hands on, you can troubleshoot.
So the time to solve problems is much faster. right. So the convenience of working in the same time zone, the free trade agreements, you know, like we've mentioned, the general, cooperation between governments, maybe at a really high level is much higher here than obviously, I think any of us would assume between U.S. and China.
IP considerations and security and travel and, you know, like, you can go down the list of all the things that we get asked about all the time. So does that cover it?
Audience Member
you know, like from a, you know, A to B service that I understand there's so much more to the equation. and maybe, maybe slipping in it's unclassified.
So is there a situation in which China is just, Sorry, I'm taking the mic again. Is there a situation in which China is a slam dunk? You know, it's nice to know what the other side of the argument is.
Terry
Oh yeah. Absolutely. And just so everybody's clear we SEACOMP are agnostic in terms of where our customers would like us to build their product.
Whether it's China or Mexico. We're not pushing either. We offer both. Right. So China in terms of, high volume, in terms of if you don't have a stable forecast, if you suddenly, you know, need to ramp and be really high for a couple of months and then go back down, China's flexibility, and responsiveness to be able to do that sort of thing is, is absolutely incredible.
Right? So a lot of people think China is, you know, it's just cheap and it's low quality in the electronics world that Shenzhen don't want to show. That region is the electronics manufacturing capital of the world. There is more talent and skill and experience there. You know, within ten miles an hour China factory, every component available, the level of expertise, and passion from the people to make things in a great way, fast, efficient, low cost is unmatched anywhere in the world.
So there's there's some very good reasons. If you have a product that does not have a tariff or if you have a product that has a smaller tariff, you know, and you have really high volumes or you have you need some flexibility. China may be a better option for that.
Neal
Yeah. So I think you had a question behind you.
Audience Member
Hi, Myles. this is kind of to go along with Myles said. one I'd lived through it through one tariffs. It was a total nightmare. so are there tariffs on components coming in as the components are still going to come in from China. So I was curious on that also two,
Does Mexico have certain environmental where there certain materials and things that you cannot work with in Mexico that you can work with in China? And three, is SEACOMP going to do most of the like, If you're going to use an ODM type service, are you going to still do that in China and then bring it over to Mexico until the engineering development work is going to still reside in China with the talent pool, or is that also going to be part of the SEACOMP, local factory?
Terry
I guess I'll take that one. I think so, so specific was the first part materials, components, tariffs on components. Thank you. Sorry. So generally we are going to a lot of the components are coming out of China. We're going to buy them get them and send them into LA Long Beach Port most often they are going to be trucked in bond down to Mexico.
So they technically don't land in the US and trigger the tariff. Right. So they are, bonded. They will come down to Mexico. We will import. We have a facility there under Tecma. so we'll import into Mexico. We will perform the substantial transformation and then the good, the finished goods that's being imported from Mexico back into the US now has a tariff classification that is not on the country of origin, China 301 list. So that's where the benefit is for the whole trade agreement.
The second part, I don't exactly know on, the chemicals or what things there might be on the
Audience Member
import injection storage, things that cannot be done in Mexico just from through taxes, I would imagine there are.
Terry
And maybe some other people have said, I'll take number three and then I'll, I'll pass it.
And if nobody up for your answers, there's people in the room that we can probably introduce you to. the third part for, engineering and product development, anything that we SEACOMP are developing or engineering for a customer on behalf of the customer is done out of our Carlsbad location. So any product creation, IP creation, is done locally and then sent out to be manufactured in an either location.
We've done some work where we have existing customers that have been manufacturing, in China, that will we will be transferring for tariff reasons or other reasons, into Mexico. There are other programs that we have, during this transition period that has been it's taken quite a while. Right. So the demand for facilities in Mexico, Ernesto could talk much more about, but it took us quite a while to find a space.
We looked at a lot of spaces. We ended up going much larger than they originally thought, which is fortunate we did because we're filling it. but the demand for space was, you know, was really high there. so we were doing NPI in China with our team, with our existing policies, procedures, experts and all that over there while we were preparing Mexico for transfer.
But generally, I think the goal going forward in the next phase after Mexico is fully running, then we will just start. If it's going to be a Mexico made product, we will start NPI and everything else here. Locally, it's going to be a China made product. They will handle it from scratch.
Neal
So they will get a question. Grab that from there. Yeah. Let's grab a mic quick. Yes.
Audience Member
What is preventing you from fully transferring production to Tijuana? And you've been expanding on how are the differences between China and Mexico have differences? What is preventing you guys from fully transferring to Mexico?
Terry
We've had a very successful run, in China. We've got a great team in China. We are still again, like I mentioned, it's the electronics manufacturing capital of the world where there are, a lot of customers that either don't have tariffs, or have global distribution.
So some companies that, you know, maybe their, half their business might be in the US, half might be elsewhere. So manufacturing in China, you know, and doing the total, the total cost of ownership everywhere you're shipping, the math still might make sense to manufacture in China. And like I said, we've got a great team of great people there that we're really, really proud of.
Right? So we're not running away from China. We're adding Mexico as an option to fulfill customer demand.
Audience Member
Creating your operations from scratch. In the next three years, you reconsider just as a complete
Terry
If we were new, it wouldn't your two factories at once. That's that's for sure. yeah. hard to answer. Hard to answer. Hypothetical. Yeah. Sure.
Audience Member
So as I'm going through the process of I'm going through the process, you know, we've been in China for 20 years. Okay. And as I'm going through this process, as we're moving most of our manufacturing to Mexico, the opportunity for co-location in a blended solution provides a lot of flexibility in the supply chain. Okay. So I'm looking at maybe we still do some orders in China, but the ability and speed at which we can move our products in to the US for Mexico solves a lot of logistic issues.
And I look internationally at, you know, coming into Long Beach is a bottleneck. The Panama Canal is a disaster. the ships that are gonna fit aren't going to fit in the near future. And as we look at even, you know, the, the, efficiency, vehicles and, emission restrictions and some of those things, having that flexibility and co-location is key to the solution as we go forward.
And I have one more question kind of back to the people piece. I did, I did a project in Mexico in 92, and we really fought with, you know, housing, medical, you know, daycare, the logistics. You know. So how is the infrastructure now as we're moving? You know, I hear 250,000 people coming to Mexico.
I know back then that was a huge challenge. And we were having to help, you know, as a company, we had doctors in house, daycare in house, all those things. So I'd just like to hear how that's improved and what the plan going forward. Because, you know, as it surges, obviously housing and health care is going to be a big issue.
Ernesto
There's a lot of factors in your question, but, I'll touch on daycare, specifically daycare. The infrastructure is pretty good because there's a private sector that's of all that, that the government subsidizes. And so daycare is actually, pretty available, especially in the manufacturing, world. And there are industrial parks and sections of the city in Tijuana specifically, where, there's actually daycare centers attached to the industrial park.
And then some of the larger manufacturers have a daycare, might have a daycare center in their within their facility. with regard to medical care, that's a challenge. It's a challenge because of the growth. But it's also a challenge because of the way the federal government's managed something. Things and how they manage things and the budgets and budget cuts that we've seen. and, and, in the last, four five years.
And so that's, that's had a significant impact on, on health care delivery, too, because everyone works in a maquilladora, in a factory, if they're former employees, which I think probably the auto industry in Mexico is one of the most, one of the most compliant, industries, in Mexico, where 100% of the employees are on formal payroll with, pay taxes and everything and have medical care, in Mexico in general, it's only about 40 to 50%, of people that work are informal jobs.
So, so that the medical system, the especially the public one is definitely strained. It has been always and back then it was but it continues to be it's it's, it's getting better. And there are private sector, aspects that also come into play now and that some companies are able to subsidize. And so that's a help, for, for employees.
Pharmacies now have doctors, a lot of them attached to the, to the, pharmacy. So, the private sector in many ways is trying to overcome a lot of these challenges. you know, we have infrastructure challenges, in Tijuana and across Mexico, especially with electrical, and, you know, private sector is is addressing that challenge.
The some of the new industrial parks are more expensive, but they are building their own substations for distribution, for pulling power into into the, into the factory. So, so fortunately, the private sector is able to address a lot of those, concerns. It's not perfect. but there's definitely been an improvement over the last 20 or 30 years.
Audience Member
And last one. Derek Jackson here from SEACOMP. Frst off, thanks for your time and the experience and wisdom shared with us this evening. Really appreciate it. My question is for Ernesto, so you've had the privilege of setting up, manufacturing facilities across a broad number of industries in Mexico, and you talked to a little bit about the culture and the respect piece of, the importance of that when setting up a manufacturing operation.
But if you look at all these manufacturing operations that you've set up, what have they done to make their business as successful as possible? Manufacturing in Mexico, if you had to pick a few variables, because we have a lot of folks here who are going to be traveling down to see the SEACOMP Mexico facility tomorrow. And it's something that we're trying to get as right as possible because we take that very seriously at SEACOMP.
I'd be curious with your expertise and experience what you've seen and what we could do best, to have a successful operation there.
Ernesto
Good question, Derek. And actually, the answer is, I'm sure I've mentioned it to Terry and Mike, early on. but it's, it's culture. it's not treating your factory in Mexico because it happens to be under Tecma.
You know, we were make your employees feel like they are SEACOMP employees. and we help you with that, obviously, but that's critical, bringing your culture, that you have here in Carlsbad and in China, and anywhere else that you have a second office, I think, Terry is mentioning you have people here from Switzerland or London and.
Yeah. And, so that culture bring into your factory, make your people feel like they're part of your family. And, I think that's going to go a long way to making it successful for sure.
Neal
Angel, you can speak to that a little bit. I've walked through your facility and seeing the startup shirts, like the team is the team here.
Angel
You speak a little bit, they, become an extension of our customers and they live like, we, we started doing a, an annual gathering, six years ago. We go, different location. Tj is going to be Puerto Vallarta, but one of our customers got that, for their own it. And they invite all of our people and everyone.
It's all together, like there. And you don't have to treat them like they're part of your company. Your company. So that creates this purpose. Higher, level of, commitment to, to your own, objectives, goals, etc.. And they work like that and it works very well. So yeah, that's a must for us.
Neal
That's great. I think our panelists will stay for a little bit. And so feel free to come up and talk to them if you guys will stay for a little bit. Appreciate that. If you've enjoyed this conversation and want to engage with this community more on both sides of the border, I will say we're there's a lot of events happening. Like, just last weekend, our businesses hosted a two day SD hackathon, right?
And, tomorrow night, while some of us will be at the ribbon cutting, another group, we going down to get to know Techstars San Diego hosting an event also in Tijuana too. And then later in the month, Tech con. So SoCal will be putting on a conference one day. Conference on May 24th. Where really you'll have from the entire continent, from New York, Mexico and everything in between coming down and having a conversation about what is the future of technology, what software and hardware.
I know, Terry is hosting a hardware the future of hardware conversation. And so please engage with us and let's keep the conversation going and let's collaborate more, as much as we can and enjoy tonight.
We'll see you all tomorrow. So thank you all very much.
