Case #1- Martin’s Textiles The survival of Martin’s Textiles is very much in doubt with the enactment of the North American Free Trade Agreement (NAFTA), which would not only eliminate tariffs but also allow an increase in the quota for Canada and Mexico to ship textiles to the United States. Compounding the issue, Martin’s Textiles has been registering small losses the past several years and is in danger of losing major customers.
Therefore, John Martin, CEO of Martin’s Textiles, has to decide whether to move production of his company to Mexico in order to lower labor costs or keep production in the United States, where the company has good labor relations with its employees. In regards to the dilemma that Martin’s Textiles face, I would recommend that the company move its production base to Mexico in order to lower labor costs and stay competitive within the industry. Martin’s Textiles was founded in 1910 and has pned four generations of the Martin family.
However, with the implementation of NAFTA, all tariffs between the United States, Canada, and Mexico would be eliminated within the next 10 to 15 years with most tariffs cut in 5 years. Especially impactful for Martin’s Textiles was the plan’s provision that all tariffs on trade of textiles among the three countries would be removed within 10 years. Even more devastating for the textile industry was that the quota for Mexico and Canada to ship clothing and textiles to the United States each year would rise slightly over the first five years of the agreement.
Thus, many textile competitors moved operations to Mexico in response to increased cost competition since the textile industry involved low-skilled and labor-intensive business. In order to cut costs, John Martin needed to lower his labor costs and the only surefire way to do so would be to move production south to Mexico. However, Martin’s textiles has always had great labor relations with its workers and John Martin prided himself on knowing most of the names of employees and even knowing family circumstances of the longtime employees.
Therefore, John Martin needed to decide whether to move production down south to Mexico to save costs and keep up with the competition or keep production in the United States where the company has developed strong employee relations. In evaluating what decision John Martin should make, there are several factors that he must consider. The first issue is the economic costs of the business. In the manufacturing industry, work is defined as low-skilled but labor-intensive and thus costs are driven by wage rates and labor productivity.
Therefore, it is not so difficult to find workers that are able to work in the textile industry but the challenge in recruiting workers is that the work is very labor intensive. In evaluating the cost of labor, it is important to find workers willing to work for low wages and also ones that are self-motivated and have high workmanship. In addition, another factor to consider is the social costs. As mentioned above, Martin’s Textiles has strong employee relations and thus workers are loyal and have high workmanship.
Thus, would the company’s brand take a hit by moving production to Mexico and releasing 1,500 employees, many of whom have been with the company for many years. On the other side, how would Mexican workers respond to the working culture of Martin’s Textiles and would workers show the same loyalty and workmanship that the current employees show? Finally, one has to consider the competitors and rival products when evaluating this decision. What are your competitors doing and how are their products compared to yours in terms of pricing and quality.
In evaluating whether Martin’s Textiles should shift production to Mexico or stay in the United States, I believe that the best choice would be to move production plants to Mexico instead of keeping production in the United States. In looking at both alternatives through a SWOT analysis (for a diagram view look at Appendix A and B), it is evident that moving production to Mexico is the more desirable option. First we will look at the option to keep production in the United States, where there are several strengths in this decision.
Martin’s Textiles would be able to maintain its strong labor relationship with employees that is has built over the years and consequently not have to deal with labor disputes. Also, the company would not have to invest additional resources in building or purchasing a production plant in Mexico as well as having to move equipment down south. In the short run, they would be able to enjoy the benefits of tariffs in trade. But there are also weaknesses to this decision as well. For one, the company would have to deal with cheap imports coming from Asia and now
Mexico since those countries have the advantage of cheaper labor. Also, the company would not have the benefits of a trade barrier with the enactment of NAFTA. Whereas before, the company could justify having higher prices since cheaper imports were subjected to quotas and tariffs; now the higher costs that Martin’s Textiles employed would no longer be protected. Thus, Martin’s Textiles could lose a lot of its clientele since many could opt for cheaper alternatives with the same quality.
Additionally, the tariff barrier will be rescinded within 10 years creating further problems for Martin’s Textiles if it is still operating. An opportunity that could arise if Martin’s Textiles decided to remain in the United States would be to brand itself as an “All-American” company. Since the whole operation of the company is based in the United States, Martin’s Textiles can market itself as such and hope that the patriotism and nationalism card will resonate with its customers.
Threats or risks that may come up if Martin’s Textiles decides to stay in the United States could be that the company will not be able to survive the higher labor costs and that its competitors could undercut prices so much that Martin’s Textiles would no longer be viable. Customers have already threatened to leave if costs are not reduced so the company has to figure out a way to cut costs. If it decides that it won’t cut labor costs, then there has to be cuts in other parts of the company.
Whether it is the sales force, research and development, or the designers, another part of the company will have to suffer cuts. Next, we consider the alternative of moving production to Mexico and after evaluating this decision through a SWOT analysis, it is clear that moving production to Mexico is the favored decision. One of the strengths of this decision is that the economic costs are highly favorable. The labor cost for textile workers in Mexico are less than $2 per hour compared to the wage rate paid to workers in the unionized New York plant, $12. 50 per hour.
In addition by moving production to Mexico, Martin’s Textiles will be able to avoid cost disadvantages that they would have faced by keeping their production base in the United States. In the United States, there are tougher and stricter labor laws, regulations and standards than in other countries. Therefore, Martin’s Textiles will be at a disadvantage to companies in foreign countries with lax labor laws like China. In addition, Martin’s Textiles will be able to enjoy the benefits of the NAFTA agreement now that they have moved their production base to Mexico.
The trade agreement allows for an increase in the quota of Mexican and Canadian clothing and textiles to the shipped to the United States. Additionally, tariffs on trade of textiles would be removed within 10 years. Finally, moving production to Mexico would allow Martin’s Textiles to keep most of its major customers as they will be able to enjoy the benefits of lower prices in products since labor costs have been reduced dramatically. However, there are also weaknesses for Martin’s Textiles in moving production plants down to Mexico.
For one, Martin’s Textiles reputation will take a hit as the company has had a long history of good labor relations with its workers. Also, there is a great unknown in the Mexican workforce, as John Martin has heard stories of low productivity, poor workmanship, high turnover, and high absenteeism. For John, this may be an unsettling situation as he has relied on strong employee relations over the years. In addition, it would be hard for Martin’s Textiles to forge the same work culture, as John Martin would have a difficult time establishing relations with foreign workers who speak a different language.
An opportunity that could benefit Martin’s Textiles if moving to Mexico would be to expand its production to other garments and clothing if desired since it can now employ cheaper labor. If there is a new hot fad in the United States, Martin’s Textiles would have the opportunity to capitalize due to the immense savings from labor costs, which allow them to hire more workers and expand production. A threat or risk of moving production to Mexico could be that the Mexican government demands a bribe from the company for purchasing a textile plant or building a new one.
As seen in Appendix C, Mexico is shaded darker than the United States, which makes it more corrupt. Therefore, Martin’s Textiles could be subjected to paying bribes or buying needless licenses. I believe that the best decision for John Martin to make is to move the company’s production to Mexico instead of keeping production in the United States. Although the company has developed an outstanding record of employee relations and there is great uncertainty with the workforce in Mexico, the economic benefits of moving to Mexico are too great.
The company would be saving over $10 per hour on each worker and these savings would allow the company to keep customers. In addition, Martin’s Textiles would be able to keep up with its competitors in Asia and other textile companies that have moved their production to Mexico. Though the decision to move production to Mexico would not be a popular decision locally as many people would be losing their jobs, the vitality of the company is at stake. By not moving production to Mexico, Martin’s Textiles would be at risk of falling behind its competitors and ultimately going out of business.