What do you do when a big company gives you a one-million-piece order and you don’t have the capacity to manufacture it in time? You either turn it down, outsource it to another manufacturer, set up a captive, create a joint venture, or simply subcontract it.
Command Medical Products chose to set up a captive. “We had no alternative,” says David Slick Sr., president of the Ormond Beach, Florida manufacturer of disposable plastic medical products used in chemotherapy and dialysis devices. The company also manufactures disposable oxygen masks. “You have to offer a discount with an order that size. Buyers tend to beat you up on price,” he explains.
Slick says the company’s Florida facility can handle hand assembly of medical products up to a certain volume, but it needed to do high-volume hand assembly in a low-cost labor environment. So it began looking for an offshore location where it could build a plant as a captive operation that would have the economics to compete on mega orders.
Selecting a destination
Command Medical had three main requirements: the country had to have workers with some skills in medical manufacturing. And it had to be just a short plane ride from Florida. “We wanted to be able to get there the same day because we don’t have the internal resources to manage a captive really far away,” he explains. Finally, it had to have solid infrastructure. “We didn’t want to go somewhere that just had electricity Monday, Wednesday, and Friday,” Slick adds.
It eliminated China at the outset because it was worried about protecting the company’s intellectual property. “We didn’t want the Chinese to subcontract our work to their brother-in-law,” he continues.
The company’s executives first looked at Mexico. But it discovered the Mexican medical manufacturing plants had employee turnover rates that were too high. Then they searched the Caribbean and Central America, settling on Nicaragua. They liked the country’s relationship with the World Bank. He says it was easy to work with the Nicaraguan government. And the country had a well-developed manufacturing employee base, although they were only servicing the apparel industry.
Being able to accept large orders for the first time
Command Medical set up a captive in Nicaragua’s Free Trade Zone in 2005. Over 115 companies mainly from the United States, Canada, Korea, and Taiwan operate under the Free Trade Zone regime, according to Margarita Talavera, director of investment promotion for ProNicaragua, the National Investment Promotion agency that operates as the economic development arm of the president’s office.
It took just eight weeks to form a Nicaraguan corporation and complete the application to operate under the Free Trade Zone Regime. Command Medical welcomed help from ProNicaragua during the process; ProNicaragua found the company a building in an industrial park, which until then had been completely leased.
It took six months to build the requisite cleanroom the company needs to manufacture its products. Nine months after it signed the incorporation papers, Command Medical was producing medical products. Now the ISO-certified facility “operates like it was next door,” says Slick. He’s been impressed with the plant’s production. “Every time they told us a shipment would be ready, it was,” he reports.
The caliber of the employees is high. The company hired a Nicaraguan manager with an MBA from Harvard. Slick says 11 of the company’s 12 original employees are still there three years later. “If we need an extra 20 people, we walk outside the gate of the industrial park and find plenty of people to interview. We find Nicaragua has a productive and stable workforce.”
The Florida plant handles the less labor-intensive orders. The captive handles all the high-labor content jobs. “The math doesn’t work for 50,000 unit orders, but it works well for a five-million-unit order,” says Slick.
At first, Command Medical just sent its own products to the Nicaraguan captive. “Our manufacturing customers were reticent to be our pioneers,” Slick says. After he showed customers the quality of the production, “our customers came to us and asked us to move their products to Nicaragua, too.”
He was impressed when a Command Medical customer contracted for seven new products whose differences are minimal. “We were concerned the Nicaraguans would get the products confused, since it was easy to do,” says Slick. The Florida quality assurance experts examined the first container load. “They shined. We had zero defects,” Slick reports. Five container loads later, Command’s customer, which also performed quality tests, “is elated,” adds Slick.
The captive’s work has been so successful that Command Medical is in the process of adding an additional 30,000 square feet to its original 10,000.
Slick says the Nicaragua captive didn’t impact the work or the workers in Florida. “We weren’t getting the big orders because we couldn’t produce them at a competitive price,” he explains. “Our Nicaraguan captive has added a tremendous dimension we didn’t have before. It has brought people to the table who wouldn’t have talked to us before. The word has gotten out that we can produce high-labor content jobs with top quality.”
A real estate captive
Construction was the first industry to set up captives in a big way in Nicaragua. ECI Development is a Belize-based development company specializing in building retirement and resort communities in Central America. The company puts in the infrastructure and the amenities at the outset, then builds condos and hotels “to create the critical mass of activities” that define a resort, according to Michael Cobb, CEO and chairman.
When Cobb and his colleagues formed their company, they decided “to outsource everything we could.” While it has local teams in Costa Rica and Belize, ECI Development outsources its engineering and architectural work to its captive in Nicaragua. Architects at the captive draw up the basic schematic documents. Most countries require local licensed architects to draw up the final construction plans.
The captive, called Gran Pacifica Resort also handles operations and the administration of the construction projects from Nicaragua. This includes accounting, marketing, public relations, and human relations.
ECI Development discovered Nicaragua by accident. The company built its first Central American resort in Nicaragua. “We were surprised by the talent we discovered; there’s a huge population of totally bilingual people,” recalls Cobb.
“Nicaragua is a hidden gem in Central America,” says Cobb. He says “most Americans think of Nicaragua as a country of camouflage and soldiers. But that was back in the 1980s.”
He says Nicaragua is a great country for offshoring because of the country’s civil war. Over 500,000 locals left the country; many landed in the United States or Canada. These ex-pats sent their children to high school and college in America. “Many have lived in the United States over 20 years,” he reports.
The result: they understand American culture and speak American English. “As an American businessman, I appreciate their sensitivity to U.S. business culture,” says Cobb. “They have a gut-level understanding of what we really want.”
Another advantage: Nicaragua is a country of high unemployment. “It’s easy to hire people with great talent,” Cobb reports. He simply runs an ad in the local newspaper for architects and engineers “and I get 50 resumes.” He says it was much harder to compete in the United States for top talent.
Moreover, the telecommunications with the United States “is great,” according to Cobb. The costs are low and the bandwidth is high, compared to Belize, which has much higher telecom rates, the CEO continues. Low telecom costs are crucial for an engineering captive because of the large CAD files it transmits.
Talavera adds Nicaragua has various investment incentives for tourism and export-oriented operations. The country offers up to a 100 percent tax exemption on imported supplies, raw materials, and machinery under the Free Trade Zone Regime.
She adds the country is known for its personal safety. “This is a safe place to live,” she points out. Ex-pat kidnappings are rare. In addition, Nicaragua is on the Central Time Zone just like Chicago, making it a nearshore convenient location.
Lessons from the Outsourcing Journal:
- Captives with lower labor costs helped a medical manufacturer enter a new territory: big orders. Its Florida plant handles small orders while it sends one million plus orders to Nicaragua.
- Nicaragua has a workforce with good English skills and a good understanding of American business because many of today’s workers grew up in the United States when their parents left the country in the 1980s.
- Nicaragua is a convenient nearshore location for U.S. businesses because it’s in the Central Time Zone and has a 100 percent tax exemption for manufacturing suppliers and machinery under its Free Trade Zone Regime.
- Companies with captives say they never have trouble filling jobs in Nicaragua. And the employee turnover is low.