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 spanned 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...