) is staying in North America. The Santa Cruz (Calif.) company -- a leader in the headset and call-center equipment business -- has a big production plant down in Tijuana, Mexico, right across the border from San Diego. Like the U.S., Mexico has been hit hard by factory migrations to China in search of cheaper labor costs. While Mexican factory workers make a fraction of their U.S. counterparts, they make many times more than Chinese do.
For Plantronics CEO Ken Kannappan, the math behind a move to China simply doesn't add up. Many employees at the Mexico plant, which is one of the highest-paying factories in the Tijuana region, have been working with Plantronics for decades. Kannapan says they carry key institutional knowledge. And a highly skilled, loyal work force has given Plantronics the ability to reduce costs in ways that likely would not be possible at a Chinese contract manufacturer.
BusinessWeek Online Technology Editor Alex Salkever recently discussed these issues with Kannappan. Here are edited excerpts of their conversation:
Q: Why continue to do most of your production in North America? It's unusual these days, isn't it?
A: That's right. We do the overwhelming majority of our revenue and unit-volume production in the Plamex facility in Tijuana. We do make a little bit of our consumer products in China.
For high-volume, single-model stuff, there are a lot of people who can do it at a much lower cost in China. But for the quality levels we want, which are truly extraordinary in terms of low defect levels, we feel we need to do that closer to home. And for the type of widely varied product mix we're trying to make in a single plant, there really isn't anything comparable.
Q: Isn't that a minority viewpoint these days?
A: I think that's true. The labor costs are definitely lower in China. But bear in mind our labor costs represent about 1.5% of the revenues, so it's not a huge amount. Most of our product costs come in materials, and we do source most of the materials in China, where it's cheaper. But in actual finished production and labor involved, it's a very small part of our expenses.
Q: Still, if you could get even cheaper labor in China and shave labor costs even a little bit, wouldn't it be worth it?
A: There are a lot of counterarguments to using more labor in China. You're talking 1.5% of our costs in Mexico. Move it to China, and you could cut it to 0.5%. So you have a 1% margin at stake. But there are countervailing factors.
You've got airfreight, which can be very pricey. Our plant is less than an hour away from major domestic shipping facilities in the San Diego area, and we can get everything out on a truck. The proximity also helps us keep cycle times low, so we can make sure we get our products on store shelves. The big stores want less and less of a window between when they give an order and when it appears on their shelves.
Then you've got product-defect rates. Even though we use a lot of the same production procedures where we produce in China, in Mexico we have a higher level of quality. We have employees who have worked for us for 35 years, since we opened the plant. We have very low turnover. We have a very knowledgeable group that can produce exceptional quality. That's hard to replicate elsewhere.
Q: So a stable workforce close by allows you to maintain quality and cut costs more easily?
A: Yes. For example, we put a product-design team into our Mexico facility because when I have those people in the plant, cost reduction becomes very cool. One of the things they found was a way to use a plastic screw in one of our products instead of a metal screw -- which actually turns out to be a better component because it is lighter weight. We actually saved some money on it.
Those are the kinds of things we want in place. If we were outsourcing to China, those things wouldn't have come back to us to the same degree. We wouldn't have the same level of innovation. In Mexico, we have a lot of people who really understand our products, in part because they have been working with on them for some time.