Not long ago Puerto Rico was the place to establish a manufacturing facility outside the U.S. to take advantage of low-cost labor and lower taxes. Then it was Ireland, then China. But things change fast in the 21st century. Costs are rising in Puerto Rico and Ireland, and fuel has topped the $4/gallon mark and won't stop there. The pressure is on to cut manufacturing costs. But are there other reasons to set up shop outside the U.S.?

“To gain market share,” says Ray Calhoun, president of sterilization firm BeamOne LLC, San Diego, Calif. (www.beam-one.com). “And the easiest way to do that is by just going where the OEMs are going. It's no secret that labor is less expensive outside the U.S. And transportation costs can exceed the cost of sterilization. Consider that and it makes sense to put a facility that supports OEM operations right in line with its manufacturing and distribution work,” he says.

What's more, locating a new facility outside the U.S. could let a contract manufacturer transfer a long-established production line that is no longer as profitable as it once was. Moving it to a low-labor site makes room for newer, more profitable production. OK, but where?

Go south, young man

Picking a site for a new facility outside the U.S. is no mean feat. In this day and age, you have almost the rest of the world to choose from. China has been the lowest cost labor site but recent quality issues with drugs and consumer products make it a questionable choice. Plus, it's a long way away.

For guidance to locating a new facility, look to those who have completed the chore. Start the due diligence with a few Internet searches. “Traditional locations such as Ireland and Puerto Rico frequently came up in our searches but we believe their wage rates are on the rise, so their advantages may soon be gone,” says Scott Fetzer, senior VP of business growth at Atek Medical Manufacturing Inc, Grand Rapids, Mich., (atek.com). “As a result, we targeted other areas, primarily Caribbean, and specifically the Dominican Republic, Mexico, Costa Rica, along with Singapore and Central Europe,” he says.

The proximity has advantages. “Because we are a small company, we needed a location close enough to get to in a day and back if necessary,” says David Slick, president of Command Medical Products, Ormond Beach, Fla. (commandmedical.com). Hence, Slick's team scanned a similar list of countries.

Then analyze the financials. “Do the homework on all potential costs,” suggests Slick. This includes freight costs, timing costs, labor costs, and regulatory issues. “For instance, we can ship a container one way in about eight days to the Nicaraguan port. We still kit in Florida because all raw material comes into the state, stuff we don't acquire in Nicaragua,” he says.

“After a couple trips we had a handle on the costs to operate from Costa Rica,” says Beam-One's Calhoun. “Then the question to answer was: How do we work to break even in a year? If we open this facility, we calculated how much customer commitment would be needed.” Calhoun reassuringly found that customers considered sterile products coming out of Costa Rica would be as good as if coming out of a U.S. plant. There were no sterilization services during his site search in Costa Rica, so many devices manufactured there were using BeamOne facilities in the U.S. “With customer commitments in place, we knew we could afford the financing to make the investments,” he says.

The free trade zones are another plus. A lot of the product that comes out of Central America ends up in Europe and Japan. Now, companies in Central America can put their product in containers and ship them directly to Europe or Japan. “Shipping from a free trade zone into Europe takes a layer of tax off that would have been paid had the product entered the U.S. for sterilization, and then distributed,” says Calhoun.

Visit the candidate sites. “We sent teams to each location to speak with government representatives and gather specifics on business parks and free-trade zones that cater to the medical community,” says Atek's Fetzer. “From those we assembled facts, comments, data, and generated cross comparisons. This let us narrow the search by sending additional teams back to dig even deeper.”

When visiting the business parks, suggests Fetzer, look at the infrastructure that supports them. See if the location has access to workers. Many parks, for example, have running and scheduled bus lines that bring workers to the park. “Government officials can provide demographics for an area, how many people live there, whether or not it can support what you are looking for, and how far they must travel to work,” he adds.

Fetzer's short checklist evaluated several items, such as the country's infrastructure, availability of manpower, the education system, power grid, ease of travel to the location, stability of the government, and intangible factors such as a perception of safety.

Command's Slick also recommends a visit. “Parts of three months in Nicaragua were spent interviewing trade-zone managers,” he says. And ask about the downsides of the location as well. “In Nicaragua, if you fire someone, you must pay them one month's salary for each year of employment.” But most agree that's fair.

Examine the demographics to understand where workers would come from. “Take Heredia, Costa Rica, for example. It's far on the north side of the capital San Jose. So it is not likely to pull workers from the big city. They would have to come from the outer suburbs,” says Fetzer.

One useful government official to ask for assistance and information is the Minister of Foreign Trade. “He answered questions and even introduced us to Costa Rican President Arias,” says BeamOne's Calhoun. “Once the president understood the nature and services of our technology, he was helpful by arranging other introductions. Those helped speed our permits through government processes. If government officials are unfamiliar with your technology, expect to explain it to them. They will want to know.”

Look for free-trade zones and business parks. “We looked for tax incentives from a free trade zone,” says Fetzer. Government representatives know where the parks are and what they cater to. In Costa Rica Fetzer worked with a group called Cinde, a Costa Rica investment promotion agency, (cinde.org). Their charter is to bring in foreign investment and businesses. ProNicaragua (pronicaragua.org) performs a similar function for that country.

“We worked with the Corporacion de Zonas Francas de Nicaragua and the Parque Industrial Las Mercedes free trade zone to establish a corporate entity and get clearance from their version of OSHA and EPA,” says Slick. They reviewed our building plans for safety issues. They want to know a lot about your company because they are concerned about pollution and bad business practices, such as sweat shops,” he adds.

Once you contact the agencies, they should put you in touch with the right people. There are several parks in Costa Rica, for example.

Countries use different criteria used to establish a trade zone. “You can establish your own trade zone with a minimum dollar investment and minimum number of people. But an advantage of a trade zone with an established medical community is a supply chain familiar with the area,” adds Fetzer.

Are companies buying or leasing their buildings? Leasing would indicate some uncertainty in the region, but companies building their own facilities are more confident they will be successful. “Companies also lease because they are unsure of what they are getting into,” says Calhoun. “The message to me is: once they are certain they made the right choice, they want to expand with further investments in facility and cleanrooms. Seeing them do that is a positive indication that they are confident with the results coming out of their facility,” he adds.

Further evaluations

Examine data on literacy rates. Then compare it to other countries. “We toured universities and spoke with students and teachers for a firsthand feel whether or not they had the characteristics of people we'd want to hire,” says Fetzer. “At some locations we found U.S. born and trained professors so talking to them provided opinions on several matters.”

Talking to other companies confirmed that the educational level was sufficient. “For instance, most speak some level of English, they can do the technical work in English, and there is a high moral standard,” says Calhoun.

The good news is that all interviewed here reported high professional conduct with the local agencies. “As you might expect, there was a concern about some groups taking long times for simple tasks,” says Slick. “We came through this thing without a penny's worth of graft, and all the dealings were professional from start to finish. If an official said he would have documents to us on Tuesday morning, they were ready,” says Slick. “We also felt there were never inappropriate requests,” says Calhoun.

Adult literacy table, %

Romania	97.3
Argentina	97.2
Chile	95.7
Costa Rica	94.9
Panama	91.9
Mexico	91.0
China	90.9
Brazil	88.6
Dominican Republic	87.0
El Salvador	80.0
India	61.0
SOURCE: CINDE

Why Central America and not Puerto Rico?

A number of different incentives from world trade organizations, along with rulings and memorandums, affect what trade parks can offer. “We see the overall wage rates continuing to rise in established places such as Puerto Rico and Ireland,” says Atek's Scott Fetzer. Their wage rates will be competitive when compared to the U.S., but not other places. And in Mexico, some say the 30% turnover rate per month turned them off to the region.

Puerto Rico's minimum wage and former tax exemption, described in Internal Revenue code Section 936, has elapsed. The same could happen to Central America, but over a longer term.

“The plan was to take something simple to Nicaragua, something already manufactured in Florida because we did not know the learning capacity of the workforce,” says Command's David Slick. “We found that the greatest asset is the quality of the workforce. It's so stable we don't measure turnover.”

“What's more, many manufacturers recall their experience with Hurricane Hugo when it damaged a lot of Puerto Rico. I don't think they want to put all their eggs in one basket,” says BeamOne's Ray Calhoun. Hence, OEMs are putting sister plants in other places such as, Nicaragua and Costa Rica, which are below the traditional hurricane belt.

“Also on the plus side for Costa Rica is a total of about 12 free-trade zones and industrial parks, all privately owned and managed,” says Cinde representative Andrea Centeno. “Most are located in the Central Valley and close to the Juan Santamaria International Airport. In addition, we have established free zone parks, such as the Forum and Global Parks, exclusively for service companies. Other free zone parks host a diversity of manufacturing companies and industries. For example, the Global and Coyol Parks are comprised mostly of medical companies while many electronic firms have settled in the Metro Free zone,” she says.

A few economic indicators

Country	GDP per capita $/person 2006	Poverty Index	Quality of life	Motor vehicles/1000 people	Annual economic growth, %
Costa Rica	5,173	4.4	6.624	193	6
Dominican Republic	3,667	10.5	5.6	111	8
El Salvador	2,661	15.1	6.164	64	4.2
Guatemala	2,327	22.5	5.321	108	4.8
Honduras	1,462	16.5	5.25	14	5.4
Mexico	8,060	6.8	6.766	191	2.9
Nicaragua	896	17.9	5.663	38	4.2

For your checklist

The people at the Costa Rica investment promotion agency Cinde suggest adding these few items to a checklist:

• General country information

• Availability of human resources, wages and salaries, education and training levels, attrition rate, industry knowledge, availability (ease or difficulty of finding employees for different tasks), training available, social benefits, and payroll taxes, among others.

• Incentives offered by the government

• Availability of local suppliers of, for example, raw materials and components

• Information on other foreign companies in the country by sector of interest. For instance, data on companies could include what they manufacture, their location, facility size, and number of employees.

• Real estate availability, costs and services offered by free zone parks

• Utilities such as telecoms, electricity, water, along with availability, quality, and cost

• The logistics to import and export to markets of interest. Ask about costs, frequency, transit time, type of service, and suppliers.