Partnering for business retentionA plan for regional economic development.

Presented by: DEITAC

WHY SHOULD WE TALK ABOUT PARTNERING?

• CONCERN regarding our shared future, California’s and Tijuana’s, with regards to manufacturing.

•A SOLUTION to improve our competitiveness globally, at least for some industries and cities.

THE REGION’S MANUFACTURING SUCCESS DEPENDS ON OUR COLLABORATION.

California’s industry at a glance

High-tech manufacturing industries employment

Source: US Bureau of Labor Statistics

Preliminary figures for 2009

Pharmaceutical & medicine

10% Commercial & service industry machinery

2%

Computer & peripheral equipment

13%

Communications equipment

6%

Audio & video equipment

1%

Semiconductor & other electronic component

20%

Navigational, measuring,medical, & control

instruments 20%

Magnetic & optical media

1%

Aerospace products & parts 16%

Medical equipment & supplies

11%

0

100000

200000

300000

400000

500000

600000

700000

2001 2009

620,279

452,524

27% employment reduction over the past 8

years

Summary of the last century

1900’s 1940’s 1970’s 1990’s

Birth of aircraft

industry

Forefront of aerospace industry

First microprocessor

produced

Biomedical industry

• Entrepreneurship & opportunity• Industrial base & labor growth• Industrial GDP increase• Hi-tech sectors diversification• Internal market growth• Innovation leadership

• Struggle to remain competitive• Tax burden & regulatory compliance costs

(and more to come) • Labor issues: unionism & workers comp.• Increasing government budget deficit• Engineering talent shortfall• Intra & international competition

Aerospace in California

• Birthplace of the aircraft industry

• 70,779 employees in 2009

• Value of shipments $ 23.7 billion USD (2008)

17% employment reduction over the past 8

years

Source: US Census Data, considering NAICS 3364

14%

86%

2009

CaliforniaRest of US

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

20012009

85,051

70,779

Considering new options

“Locating manufacturing operations abroad is sometimes seen as the only way to compete with these challenges. …

Using low labor costs, relocation incentives and the availability of an extremely qualified technical workforce as inducements,

many foreign countries present an attractive alternative to California aerospace companies struggling with the cost of living

and doing business in the Golden State.”

Energizing California Aerospace, Report to the California Commission on Economic Development,

Aerospace Advisory Committee - November 2008

Industry relocation

Hughes helicopter

(Mesa, AZ)

Rockwell International

(Tulsa, OK)Lockhead

Martin(Marietta, GA)McDonnell

Douglas(Perry, GA)

Northrop Grumman

(Washington, DC)

Hughes Aircraft(6 southern US states)

Perhaps one of the most recent and significant cases is Northrop Grumman, moving it’s headquarters from L.A. to Washington, D.C., area, the company was the last major aerospace firm based in Southern California.

The decision is seen as a blow to the much-battered regional economy:…"This is very bad news, a crummy way to get 2010 started,"

said economist Jack Kyser of the Los Angeles County Economic Development Corp. …

Los Angeles Times - January 05, 2010.

McDonnell Douglas C-17(Salt Lake C., UT)

TRW(Fairfax, VA)

Rockwell International

(Dallas, TX)

• Currently no final assembly plants operating in California

• Over 32,000 direct employees, showing a decline trend

• Employment related to parts manufacturing, Corporate Headquarters, R&D facilities, Scientific & Technical Consulting

• Estimated 127,000 people worked in automotive support industries (2005).

Automotive in California

36% employment reduction over the past 8

years

Source: US Census Data, considering NAICS 3361,3362 & 3363

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

20012009

43,248

27,569

4%

96%

2009

CaliforniaRest of US

A century of automotive industry

One of the most dynamic and relevant components of the manufacturing industry in North America and globally has had a significant presence in California:

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 +

GM Oakland / (Chevrolet cars and trucks)Chrysler Stockton / (Dodge trucks)

Chrysler San Leandro / (Plymouth & Dodge cars)Ford Long Beach / (Plymouth & Dodge cars)

Chrysler LA / (Plymouth & Dodge cars)

Ford Richmond / (Cars and armored vehicles)

GM Southgate/(Buick, Olds, Ponitac)GM Van Nuys / (Chevrolet – Pontiac cars)

Nash Motors El Segundo/(American Motors cars)

Ford San Jose / (Ford and Mercury cars)Ford Pico Rivera / (Ford cars)

GM Fremont / (Chevrolet cars and trucks )GM – Toyota Fremont (NUMMI)/ (Chevrolet, Toyota, Geo, cars and trucks )

Tesla – Toyota / (Electric vehicles)

Willys – Overland Maywood / (Cars)

Studebaker Vernon/ (Cars)

NEW

ERA

=

NEW

OPP

ORT

UN

ITIE

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The case of Nissan North America

CALIFORNIA

TENNESSEE

NNA - Corporate HQGardena, CA - Est 1960

NNA - Smyrna plantSmyrna, TN - Est 1983

NNA - Canton plantCanton, MS - Est 2003

NNA – Decherd (Parts)Decherd, TN - Est 1997

Nissan Trading Corp.Farmington Hills, MI - Est 1984

Nissan Design AmericaSan Diego, CA - Est 2005

NNA - Corporate HQFranklin, TN - Reloc 2008

It is evident that proximity has strategic advantages; the question remains as for how long will design operations be sustainable by themselves for Nissan in California and what other companies will follow the example.

Biomedical industry in CA

Total Biomedical Employment by Cluster (2008)

Source: California Biomedical Industry – 2010 report; California Healthcare Institute – PriceWaterhouse Coopers

Sacramento 1.1%

Bay Area 19.5%

Ventura/Santa Barbara 3.7%

Los Angeles 16.1%

Orange County 11.1%

San Diego 8.6%

Riverside/San Bernardino

2.9%

• Second largest hi-tech sector on employment in CA

• 36% of companies reduced their employment in 2008-2009

0

10000

20000

30000

40000

50000

60000

70000

20012009

69,656

63,638

9% employment reduction over the past 8 years

(medical device sub-sector)

US Census Data, considering NAICS 334510, 334516, 334517, 339112,

339113, 339114, 339115.

Why the downsizing?

45%

13%

13%

4%4%

4%4%

13%

Overall business climate/ cost of doing businessLack of tax incentives / unfavorable tax environmentInfrastructure established elsewhere

Cash incentives from other regions

Qualified workforce elsewhere

Willingness to tailor packages to individual company needs elsewhereCost of living elsewhere

Other

If your company’s R&D, manufacturing, general and administrative or overall workforces inside California have been reduced in the past year, select the choices (all that apply) that describe why.

Source: California Biomedical Industry – 2010 report; California Healthcare Institute – PriceWaterhouse Coopers

45%

13%

13%

4%4%

4%4%

13%

Overall business climate/ cost of doing businessLack of tax incentives / unfavorable tax environmentInfrastructure established elsewhere

Cash incentives from other regions

Qualified workforce elsewhere

Willingness to tailor packages to individual company needs elsewhereCost of living elsewhere

Other

The end result

0

50000

100000

150000

200000

250000

300000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Transportation equipment manufacturing employment in

California

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

General manufacturing employment in California

A clear trend over 20 years of manufacturing employment loss.

- 59% - 35%

AXIS, with data from California Employment Development Department

Best and Worst State Ranks 2010 (For doing Business) Chief Executive Magazine

Bill Dormandy, CEO of San Francisco medical device maker ITC, summed it up: “California has a good living environment but is unfavorable to business and the state taxes are not survivable. Nevada and Virginia are encouraging business to move to their states with lower tax rates and less regulatory demands.”

What do CEO’s think?

A broader benchmark

2009 State Index

Competitive disadvantages

• Workers compensation premium rates Rank = 37

• Travel time to work Rank = 44

• Median monthly housing costs Rank = 49

• % of Population aged 25 and over that graduated from high school Rank = 48

• S&E degrees awarded per 100,000 hab. Rank = 31

• % of labor force represented by unions Rank = 45

• Minimum wage Rank = 44

More to come

In addition to the increasingly large number and complexity of regulations that has typically doubled the approval time of projects to 51 weeks versus 26 in other states -- increasing the cost of operations in the long run-- there's more on it’s way:

– 2010 continued economic decline

– Implementation of AB 32

– ‘Card-Check’ Forced unionism bill

– Clean and alternative energy regulations

– Healthcare related regulation

WHAT ARE THE OPTIONS?

a) Closing down operations• Direct and indirect loss of labor• Tax base erosion• Loss of economic base

b) Relocating to Asia • Total loss of labor and partial loss of professional positions• Partial tax base loss• Partial loss of economic base• Slower response to market• Risk intellectual property

c) Relocating elsewhere in the US• Total loss of manufacturing jobs and eventual loss of

professional positions• Gradual tax base loss• Gradual loss of economic base

Or partner with Tijuana and stay in CA.

Extended value chain

How we can be part of the solution

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Tijuana

AXIS | Strategic Intelligence Center, based in the Stan Shih model

$

Flexible partnering curve

LCC

• Production outsourcing contracts

• Materials and parts

• Support services

• R&D and tech support

• Finished / semi-finished goods

• Support services

An integrated industrial model= A more COMPETITIVE region

Current efforts in the right direction:

CAHeadquarters

Strategic ProcessesR&D Centers

Sales & Customer Service

TJManufacturing

Outsourcing

= A Stronger Regional Economy

(CA exported $ 17.4 B USD to Mexico in 2009)

$

$

$

Our proposal

Partner with Tijuana : the most convenient near shore option.

PROS

• Keeping in CA high value added operations.

• Keep strategic manufacturing processes and jobs.

• Keep a significant proportion of your tax and economic base.

• Keep a large portion of supporting operations (labor multiplier of 5 to 15).

• Be time and cost competitive

• Strengthen a consumer and export market

CONS

• Loose some of the manufacturing employment .

Maintaining a good share of the value added in many ways

"There are over 5,000 individuals on U.S. payroll commuting daily from San Diego to Tijuana, and that number goes up constantly.

Nearly every manufacturing plant that locates in Tijuana creates jobs for U.S. payroll individuals; in many cases companies have

over 20 professional level employees.

A significant number commute on hired shuttle services."

Fernando Ortiz-BarbachanoPresident, Barbachano International, Inc.

What others have done

• There are plenty of success stories that confirm our model:– Qualcomm (San Diego – Tijuana)– CareFusion (San Diego – Tijuana)– Solar Turbine (San Diego – Tijuana)– Kyocera (San Diego – Tijuana)– Sony/Foxconn (San Diego – Tijuana)– Sanyo-Matsushita (San Diego – Tijuana)– Yakima (San Diego – Tijuana)– Avery Dennison (Pasadena – Tijuana)– Mattel (El Segundo – Tijuana)– Clayton (City of Industry – Tijuana)– Teledyne (Thousand Oaks – Tijuana)– Leach International (Buena Park – Tijuana)– Meade Instruments (Irvine- Tijuana)– Plantronics (Santa Cruz – Tijuana)– Sunbank Corp. (Paso Robles – Tijuana)Among others

Achieving specific benefits

Using the production sharing model = reduction in manufacturing cost.

Labor costs are 40-80% lower in Tijuana than in the U.S., and the fully-burdened cost for most manufacturing or assembly operations ranges from as little as $7 and up to $15 per shop hour (including direct labor and support staff, plus all facility and operating costs).

What's in it for you?

DescriptionUS Cost Tijuana Mex. Cost

EmployeesNumber of EmployeesDirectIndirectAdministrativeHours/Work WeekHours per year

140101251440

2080

140101251448

2496

Labor Cost per HourDirect Labor Cost/HrIndirect Labor Cost/HrAdmin Labor Cost/Hr

$ 12.97$ 21.71$ 24.47

$ 2.95$ 12.35$ 22.65

Factory CostLaborOverheadGeneral & Administrative

$ 12.97$ 7.90$ 3.87

$ 2.95$ 4.64$ 3.70

Factory Cost/Hour

Total Operating Cost

Potential Annualized Savings

$ 24.74

$ 5,196,584

$ 11.29

$ 2,846,436

$ 2,350,148

Notes: 1.Exchange rate at $13 Mexican Pesos per $1 US Dollars; 2. Does not include Interest, Amortization & Depreciation; 3. Does not include relocation costs.

*COMPARATIVE COST ANALYSIS AND POTENTIAL SAVINGS, OF A TYPICAL 140 EMPLOYEE MEDICAL DEVICE MANUFACTURING OPERATION LOCATED IN THE US AFTER RELOCATING TO TIJUANA, MEXICO

While already very cost-competitive, the recent decline in value of the Mexican peso in 2009-2010 has made the cost of doing business in Tijuana even lower…

…typically more than 50% lower than in the U.S. …not to mention Mexico’s48-hour work week…

How to get started

3 phases to establishing operations in Tijuana:

GET TO KNOW TIJUANA :

• Receive information in print or electronic format

• Visit existing operations in Tijuana

• Meet with key institutions

DETERMINE THE SCOPE OF OPERATIONS SUITABLE FOR NEARSHORING:

• Estimate total cost savings

• Evaluate operation model (Shelter, outsourcing, stand alone ops.)

• Decide on ownership structure

SET UP YOUR BUSINESS IN TIJUANA:

• Incorporate Mexican Company

• Register with fiscal and labor authorities (state and federal)

• Obtain Facility (lease-buy)

• Open bank accounts• Start your set-up

process. Etc…

Tijuana’s EDC and its members are here to assist you in EVERY STEP TO RECOVERY.

Regional Team-Marketing

• Seminars in Northern California

• Joint Presentation:– Implementing

your Near-Shore Strategy in the San Diego-Tijuana Region

www.tijuana-edc.com

Questions, comments?

Thank you!