Honeywell's Edict

Date: Monday, June 03, 2002 9:07 AM

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This is the first time I have heard of an American company to require
their
subcontractors to move to Mexico. Perhaps we shouldn't consider
Honeywell to
be American.

http://www.arizonarepublic.com/business/articles/0602honeywell020.html

Honeywell advice: Head south
Urges its suppliers to relocate to Mexico

By Hal Mattern
The Arizona Republic
June 02, 2002

Honeywell International is urging its jet-engine parts suppliers to set
up
operations in Mexico to cut costs, raising concerns about possible job
losses and business failures in the Phoenix-area aerospace industry.

Several small companies that sell components to Honeywell's
Phoenix-based
Engines, Systems & Services division said they are being asked to reduce
their prices by 30 percent by moving at least part of their operations
across the border, where labor costs are cheaper.

A Honeywell executive confirmed the request.

The suppliers say they are concerned that if they refuse, they could
lose
their Honeywell contracts, which account for the bulk of their business.
But
if they invest the millions necessary to move and are unable to recoup
the
money, they risk failure.

"If you don't go, you could lose business, and if you do go, you could
go
out of business," said one Phoenix supplier who asked not to be
identified.
"That's some trade-off."

Some of the suppliers also said they were concerned that they would have
to
significantly reduce their workforces in Arizona and shift the jobs to
lower-paid Mexican workers. As many as 10,000 Arizona jobs are tied
directly
to supplying parts to Honeywell, which paid $255 million last year to
170
suppliers in the state.

None of the suppliers contacted by The Arizona Republic would speak for
attribution, saying they feared it would harm their relationship with
Honeywell. "Everybody is nervous," one of them said.

So far none have committed to move, although several are investigating
the
possibility.

Peter Riley, vice president for integrated supply chain at Honeywell
Engines, Systems & Services, acknowledged that the company is asking its
suppliers to consider setting up shop in Mexico, but he said it is not
trying to shift its entire supply base south of the border. He added
that
the company has neither exerted pressure nor delivered ultimatums to the
suppliers, but is only suggesting Mexico as one way to reduce costs.

Earlier this year, Honeywell took about 40 of its suppliers to
Monterrey, a
manufacturing center south of Texas, to show them the city's factories
and
training facilities and to expose them to how business is conducted in
Mexico.

"That decision is theirs to make," Riley said. "We're trying to make it
clear to them that we need to respond to the marketplace. We need to
take
action to protect Honeywell and our employees."

Terror and competition

Honeywell is Arizona's largest private-sector employer with nearly
15,000
workers, including 7,600 in Engines, Systems & Services. The division
has
nearly 2,500 suppliers worldwide and has told all of them to cut their
prices. Riley wouldn't reveal the amount of the price reduction the
company
is seeking, and he said Honeywell has no specific number of suppliers
that
it wants to go to Mexico.

He said the company is reacting to competitive pressures in the
aerospace
industry, which has been rocked by the slumping economy and the Sept. 11
terrorist attacks. Calls for cost reductions start at the top with major
manufacturers and work their way down through the supply chain.

Companies such as Boeing, Airbus and other aircraft makers, for which
Honeywell makes products, have been demanding lower prices, higher
quality
products and faster deliveries. Honeywell has to do the same with its
suppliers.

"Our customers are continuously asking us to do more," Riley said. "We
need
to respond to that as quickly, aggressively and fairly as we can. It's a
reality of the industry."

A common trend

Phillip Carter, a professor of purchasing management at Arizona State
University and a supply-chain expert, said Honeywell's efforts to move
suppliers to Mexico are not unique. Several major companies, including
General Electric, have made similar pushes.

"Every company is under tremendous cost pressure, severe cost pressure,"
Carter said. "It's unrelenting. Moving operations to low labor-cost
countries is a way of removing costs from the supply chain."

He said fears by Honeywell's suppliers that they would be forced to cut
jobs
in Arizona if they moved operations to Mexico are well-founded.

Honeywell is suggesting that the suppliers move to Monterrey, the
capital of
Nuevo Leon and a major manufacturing center with a large workforce.
Located
about 120 miles south of Texas, it also has a major American corporate
presence, including auto and truckmakers and such companies as GE,
Whirlpool
and Johnson & Johnson.

After visiting Monterrey, some Honeywell suppliers said that they were
impressed with the area's modern factories and vocational schools but
that
the labor force is not yet skilled enough to handle some of the
precision
work required in the manufacture of aircraft engine components. That
means
they would have to buy the raw materials in the United States and ship
them
to Mexico for basic machining, then ship them back north for finishing.

Small shops may suffer

Some Phoenix suppliers said that even though wages in Mexico are about
one-fifth of what they pay their workers here, they still would struggle
to
cut 30 percent out of their costs unless they produced a large volume of
products.

Many of them are small machine tool shops with few employees. They also
said
that Honeywell expects even more price cuts in future years.

One supplier estimated that it would take $3 million to $5 million to
launch
even a small operation in Mexico.

"Honeywell is going to expect the cheaper pricing right away, so you
wouldn't be able to recoup that money," he said.

Gale Thompson, vice president of Offshore International, a Tucson
company
that helps American firms establish operations in Mexico, agreed that
small
companies with fewer than 25 employees would have a tough time
succeeding
there. He said he has advised some of Honeywell's suppliers not to go,
leaving them the option of selling their businesses, trying to diversify
their customer bases or joining with a company already operating in
Mexico.

"I don't think some of the suppliers can afford to do it," Thompson
said.
"They are too small. If they have 25 or more people in Mexico, their
chances
for success are pretty good. But it might take them a couple of years to
break even."

He said that under the North American Free Trade Agreement, companies
can
avoid paying duties on equipment and materials produced in the United
States
or Canada and taken to Mexico for use in the manufacturing process. If
they
have equipment that was made elsewhere, they face stiff duties.

"There are some costs that are unique to Mexico, but overall it is still
less expensive to operate there than in the United States," Thompson
said.
"It's a tough decision. I feel the sweat and agony the suppliers are
going
through."

Asia has cheapest labor

Honeywell's push comes at a time when Mexico's labor costs are inching
up.
Experts say the country's efforts to attract higher-wage jobs, coupled
with
the increased value of the Mexican peso, have prompted some foreign
corporations, and even some Mexican companies, to move their operations
to
China and other Asian countries to take advantage of their cheap labor.

"Labor costs are still cheaper in Mexico than in the United States, but
they
are more expensive than in China, Malaysia and Thailand," said David
Eaton,
an economic development consultant in Monterrey.

Some Arizona companies have successfully shifted some of their
operations to
Mexico, including a few that supply products to Honeywell and other
aerospace companies.

One of them, Chandler-based Goodrich Turbomachine Products, has been
operating in Guaymas, Sonora, for the past two years.

Dave Hughes, vice president for sales and marketing, said the company
made
the move for competitive reasons, not because of any pressure from the
manufacturers it supplies.

"We did it to protect business we absolutely would have lost to the Far
East," Hughes said. "Like everybody else, we were looking at the global
picture."

He said that at the time, GE was pushing its suppliers to move to
Monterrey,
where it has a major manufacturing operation, but that Turbomachine
Products
preferred Guaymas because it is closer to Arizona. It has managed to
maintain its Arizona operations while expanding in Mexico.

"We haven't laid off people (in Arizona)," Hughes said. "I know that's a
real concern. We're always looking for ways to be competitive without
hurting the local economy."

Reach the reporter at hal.mattern@arizonarepublic.com or (602) 444-8652.

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