When choosing a manufacturer, in the past many American-based companies have turned to manufacturers in China because of the availability of lower-cost labor. However now with China experiencing rapid economic growth, with more of the population entering the middle class and demanding higher wages, more and more brands are turning away from China in search of lower cost alternatives from emerging markets.
One market that’s been on the rise since the 1980’s is Central and South America. Everything from medical supplies, to pharmaceuticals, to apparel, aircraft and computer machinery is now manufactured in Latin America, which has undergone important political and economic policy adjustments over the last 30 years, since the 1983 inception of the Caribbean Basin Initiative (CBI).
A Little History
Up until the inception of CBI, most of the Central America region suffered endemic poverty under military dictatorship. The Caribbean Basin Initiative, a United States foreign policy program, was designed to promote economic development and political stability by opening free trade between the U.S. and Latin American countries. The CBI is not limited to the Commonwealth Caribbean nations but extends to the entire Caribbean Basin, including selected countries of Central America, northern South America, and the non-English-speaking Caribbean. The CBI consists of trade, economic assistance, and investment incentive measures to generate economic growth in the region through increased private sector activity. Highlights of CBI include:
– Duty-free entrance into the United States of 94 product categories manufactured in the Caribbean and Central America
– The establishment in this area of development banks, chambers of commerce, and free trade zones
– The funding of job training and self-help programs
– And very importantly, the provision of easy-term financial assistance to U.S. companies doing business in the region
Further strengthening of the CBI came with the introduction of a program that promoted investment in the textile industry. Under this program, access to the United States market for certain textile and apparel imports became guaranteed. In addition, higher levels of access were provided for textiles manufactured from material originating in the U. S. Most specifically, under CBI, fabric could be made in the U.S. then sent to a country in Central America for assembly, then sent back to the U.S. tax-free, as long as the origin of the fabric came from the U.S. This created a boom in the apparel industry for the most stable countries at the time, which were Costa Rica and the Dominican Republic. El Salvador, Guatemala, Honduras and Nicaragua were still struggling politically.
In 2000, the CBI was substantially expanded on with the addition of the Caribbean Basin Trade Partnership Act (CBTPA), which took away the requirement that at least some of a product’s manufacturing be done in the United States. No longer was the fabric required to be made in the U.S.; the only requirement was that the finished product be made from raw, U.S.-based materials.
Still, trade between countries within the region remained limited, so to further promote trade within Latin America, in 2004, the United States signed the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) with five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua) and the Dominican Republic. The CAFTA-DR is the first free trade agreement between the United States and a group of smaller developing economies. Eliminating tariffs and opening new markets, CAFTA-DR is facilitating trade among the seven participating countries while furthering regional integration by making it easier to share resources. For example, in the apparel industry, any country in the CAFTA bloc can import yarn from any other participating nation duty-free, with no restrictions, and manufacture garments within their own manufacturing facilities.
Today, CAFTA is still in place. For businesses, this means there are many opportunities for manufacturing in Latin America. With free trade, businesses have access to resources that either don’t exist or are much costlier in their originating countries. But in addition to benefits of free trade, there are many other reasons businesses are now manufacturing in Latin America.
Benefits of Manufacturing in Latin America
Proximity
One of the biggest benefits of manufacturing in Latin America is its proximity to the United States.
“A lot of times when you do business with suppliers overseas, in China or other Asian nations, it’s very inconvenient and often impossible to spend less than a week travelling,” says Carmine Denisco, of Inventors Launchpad Partners, an advisory firm with expertise in supply chain resourcing that helps businesses every day find the right manufacturer for their products. “To ensure quality requirements, to ensure compliance with human rights, many business owners want to see first-hand where their products are being manufactured. Travel time to Asia is much longer than Latin America, and often just not feasible.”
Not only is it timelier to get to Latin America than other manufacturing-heavy regions, but it is often much less expensive to travel to Central America than Asia and there isn’t a huge time difference, only an hour or two in most cases.
Another issue that close proximity helps solve is disconnect from the manufacturing process.
“What makes Inventors Launchpad different than other sourcing agents is the involvement of our clients,” explains Denisco. “Typically a company will hire an agent in Hong Kong, which is the capital of sourcing agents, to handle manufacturing. They’ll hand the product over to the agent and the agent becomes the middle man dealing directly with the manufacturer. The client is hands-off from this point on until final shipment is received. What Inventors Launchpad is able to do is share more details with our client. We provide more visibility as a general practice and Latin America allows us to do that.”
Turn Around Time
Due its close proximity to the U.S., shipping from Latin America is much faster than that from overseas. In fact, often businesses manufacturing in China re-stock only once a quarter because often it takes a month for an order to ship overseas. Not being as flexible with ordering can lead to over- or under-stocking of products. Shipping from Latin America is typically four to five days which gives businesses a lot more flexibility when it comes to placing orders.
Climate and Culture
With a tropical climate, Latin America becomes an ideal place for doing business. Not only are the natives welcoming of Americans, but tourism is on the rise. People from around the world vacation in Latin America because of its relaxed atmosphere, ideal weather, and natural beauty. If you ever do need to travel for business, you will be in a comfortable place with lots to see and do.
In addition, English is widely used in business, and American investment is warmly welcomed everywhere.
Labor Pool
The biggest resource Latin America can offer the United States right now is its labor pool because there is a very large unemployed population. With China’s economy on the upswing, it’s getting increasingly difficult to compete with labor costs of Latin America.
Local Demand
In changing economies, Like China, where more and more people are entering the middle class, the apparel industry is booming—for the local population. This means the manufacturers are utilizing their own resources to meet the local demands. In some places, it is required for them to do so. This could lead to longer turnaround times and higher cost of labor.
What Country is Best
Not one country is necessarily better than another, it just all depends on what your manufacturing needs are. What is your product? What kind of volume do you need? These are examples of questions that need to be answered when determining the best manufacturer of your product.
Costa Rica has the most developed economy in Central America and offers a well-educated workforce and stable country in which to do business. As such Costa Rica attracts high tech industries such as electronics and computer chips, as well as manufacturers of higher value products such as automotive parts and pharmaceuticals.
Honduras specializes in basic products, with very high volume: electronic components, wood products, shoes and bags. Additionally, two of the largest fabric mills in the Americas are found in Honduras and Honduras is the largest exporter of textiles in Central America.
Guatemala is the most populated and largest economy in Central America and is known for dealing in high fashion and sophisticated apparel. Guatemala is also a lead exporter of automotive parts, telecommunication equipment, electronic and computer equipment.
El Salvador and Nicaragua have both stayed with high labor products, particularly apparel. Because there is such a huge work force, labor is inexpensive here. El Salvador is also a competitive source for partially finished products and raw materials.
