Acquire or Build: How Best to Enter Mexico’s Injection Molding Industry

Introduction

The current and projected growth in Mexico’s manufacturing sector has created a burning need for additional injection molding capacity. For molders or other processors looking to enter the Mexico market, there are a lot of different options. The main ones include acquisition, greenfield site, shelter provider, strategic partnership and even opening a plant on the U.S. side of the border. Which option is best for your company depends on a lot of complicated factors. This article was written for injection molding companies that need to be in Mexico AND require 100% controlling interest in the new plant. This boils the options down to the following: 1) purchase/acquire an existing injection molding facility or company, or 2) set up a new plant from scratch (greenfield). So which is better for your company? Here are some thoughts that may help you decide.

Acquisitions in Mexico

MBS has advised on four successful M&A transactions in Mexico in recent years. We helped sell Plainfield Precision’s molding plant in San Luis Potosi in early 2015. Most recently, we advised Plasticos Promex on its merger with Quantum Plastics (March 2016) and the acquisition of Lou-Mac Manufacturing by Kugami Precision Plastics (March 2016). There have been many other highly publicized plastic injection molding acquisitions in the last 12 months and there is no doubt that Mexico is very hot from an M&A standpoint.

Acquisition Benefits

1. An acquisition in Mexico will significantly compress two important timelines: 1) the timeline between the strategic planning phase and full-scale production, and 2) the timeline in between full-scale production and acceptable levels of quality and profitability. In other words, you can hit the ground running much easier with an acquisition versus a greenfield plant.
2. Hopefully, the entity being acquired has its administrative “ducks” in a row. For most smaller U.S. companies, there is a huge learning curve when it comes to doing business in Mexico. If you can find a company and a key set of managers that is on top of the complex and ever-changing regulatory and tax environment, the M&A opportunity could be worth its weight in gold.
3. Similar to the U.S., good managers and mid-level technical people are difficult to find. If you can acquire an organization that has good injection molding people in place, this is exceedingly valuable, as it could take five years or more to build a good manufacturing team from scratch.
4. If you can find an M&A opportunity involving a Mexico operation that is owned by a U.S. entity, this is by far your best option. Effecting an M&A deal with a Mexican company can be problematic (although certainly not impossible), while consummating a deal with a U.S. entity (to buy the stock in its Mexican subsidiary, for example) is typically much easier and more cost effective.
5. The acquisition of an existing molding plant should come with a fairly solid book-of-business and customer list. Together with business and customers you bring to the table, this should reduce concentration and increase the overall stability of the plant.

Acquisition Challenges

1. There is a shortage of acquisition opportunities in Mexico right now and the ones out there are expensive. In 2009, there were dozens and dozens of potential sellers but no buyers. Valuations were low. The inverse is true in 2016; the demand for Mexico acquisitions is huge and the supply is small. So valuations are much higher today and in some cases higher than a comparable company in the U.S.
2. Bona-fide acquisition opportunities are not always in the ideal location for the buyer; nor are they likely to have the perfect customer base and matching capabilities/tonnages. So as a buyer, it is likely you will have to settle for something that not an exact fit.
3. It is hard to be sure that the company you are buying is free of unknown or contingent liabilities. This is true of any U.S. deal, but it is especially daunting in Mexico because rules are routinely bent or broken and laws/regulations are constantly changing.
4. Getting bank financing for any kind of acquisition in Mexico is much different than in the United States. For smaller buying entities, Mexico acquisition financing options will be extremely limited.

The Greenfield Option

There has been an explosion of new plant openings/inaugurations in Mexico over the last several years. According to a recent report by Plante & Moran, 70% of automotive OEM plants in Mexico are new or have received significant investment since 2013. This has trickled down to the Tier-1 and Tier-2 automotive injection molders and there have been recent new plant announcements by companies such as Geiger Automotive, Mecaplast and Roechling. New injection molding plants in Mexico are popping up in other industries as well, including appliance and packaging.

Greenfield Benefits

1. Similar to building a new home, the injection molder pursuing a greenfield option in Mexico gets to spec out exactly what it needs, from the location to the building specs to the machine tonnages and manufacturing capabilities.
2. A greenfield plant gives the molder a clean sheet of paper from a tax and regulatory standpoint. The parent company also gets to learn the tax/regulatory landscape from ground zero, which might be attractive to some companies from a risk management standpoint.
3. There are usually tax incentives and other government funds available to companies looking to open new manufacturing plants in Mexico.
4. There are more financing options for new factories (including equipment financing from machine manufacturers) that will improve investment modeling.

Greenfield Challenges

1. Any greenfield plant is going to struggle from day-one to find good long-term people. This will affect the plant launch from the planning phases through the first production run and well beyond. Unless you have several people willing to relocate from one of your other plants, management turnover is likely to be a long-term problem.
2. Building a new plant is expensive anywhere, but you will be shocked at the cost of new construction in Mexico.
3. A greenfield expansion typically takes 18-24 months from initial planning though startup.
4. Molders are often pushed by a single customer to open a factory in Mexico. So in early years before the operation is fully established, greenfield sites are more likely to have a customer concentration issue.
5. The path to profitability is usually a very long and difficult road. Most injection molders that have opened a greenfield plant in Mexico will tell you that whatever learning curve is used in the planning models, especially when it comes to profitability, you can double or triple the timeframe. So the molder that believes he can open a plant and have it be profitable in two years, he is probably looking at five years and maybe even longer before the plant turns a profit.

Conclusion

Each molder looking to enter Mexico will undoubtedly have a different set of criteria driving the decision making process. In general, though, if you have a long lead time, very specific capability requirements, lots of patience and a high degree of confidence that you can develop a good long-term workforce, then a greenfield plant might be your only option. Just be aware of the long learning curves and extended payback periods. On the other hand, if your timeframe is compressed and you lack the organizational girth to start a plant from scratch in a foreign country, then an acquisition might be just what the doctor ordered. In this market however, don’t spend too much time shopping around for a good deal OR for the perfect fit, or the opportunities will all pass you by.

To learn more about our experience in Mexico, including information on MBS services that might help your business, please contact Andrew Munson at 413-584-2095 or andrew@moldingbusiness.com.

by Andrew Munson