THE HERSHEY CO.

Low costs in Mexico appeal to U.S. firms

Sunday, February 25, 2007
BY TOM DOCHAT
Of The Patriot-News

From John H. Boyd's perspective, The Hershey Co. is a little late with its plan to move more of its production to Mexico.

Hershey is "catching up" with other confectionery businesses that are benefiting from the lower wages and sugar costs south of the border, said Boyd, president of The Boyd Company Inc. in Princeton, N.J.

"It's a much anticipated move," Boyd said.

Hershey probably is late to the game because of its instinctive conservative nature.

"It's part and parcel of the makeup of Hershey," Boyd said. "It has other interests in central Pennsylvania."

Those interests involve the Milton Hershey School for disadvantaged youth and the cross-promotional ties at Hersheypark and other entertainment venues. The Hershey Trust Co., whose purpose is to fund and support the school, has a controlling stake in The Hershey Co. and owns all of Hershey Entertainment & Resorts Co., which operates Hersheypark, Hershey Lodge and The Hotel Hershey.

On Feb. 15, the candymaker said it hopes to open a plant it is building in Monterrey, Mexico, later this year. Tied in with that move, Hershey will eliminate more than a third of its production lines in the U.S. and Canada.

Hershey has not disclosed the size of the Monterrey plant nor how many employees will work there. It also wouldn't say what products it intends to make there.

By 2010, the Mexican plant is projected to handle about 10 percent of Hershey's production volume.

"Actual production, staffing levels and product mix will depend upon a number of factors, including consumer demand, plant competitiveness within the Hershey manufacturing network, product innovation and our success internationally," spokesman Kirk Saville has said.

Richard H. Lenny, Hershey's chairman, president and CEO, said last week that labor costs in Mexico are about 10 percent what they are in the U.S., a determination based on internal research and benchmarking.

He said labor costs in Asia are about 5 percent of U.S. costs.

Hershey last month announced an alliance with Lotte Confectionery Co. Ltd. to operate a plant in China to produce Hershey products for that country and possibly other growing markets in Southeast Asia.

Looking at the numbers:

Boyd's company recently completed an analysis of estimated manufacturing costs for a 150,000- square-foot confectionery plant with 300 hourly employees in the U.S., Canada and Mexico. Costs for a fictional plant in Mexico would be much lower than for any other location analyzed.

Annual operating costs for the maquiladora, or factory, would be $17.5 million, according to the Boyd study. For the Hershey/Lebanon area, the annual costs would be about $29.9 million.

Boyd, whose clients do not include Hershey, said costs in Monterrey would be comparable to a maquiladora that is typically located along the Mexican/U.S. border. He added that Monterrey, the country's third-largest city, has a "more mature manufacturing base than other places in Mexico."

Boyd said other companies have been in Mexico for a while. So has Hershey, which has a plant in Guadalajara and has had a presence in Mexico for about 40 years.

But the Monterrey plant promises to be a much bigger operation. Only 6 percent of Hershey's production volume is handled outside the U.S. and Canada now, so the Monterrey plant would nearly double that output if it reaches the 10 percent target.

When confectionery companies first came to Mexico, they focused on hard candy to take advantage of lower sugar prices, Boyd said. The plants also benefited from the "relative ease of manufacturing [hard candy] and the skill sets that are involved."

But companies in Mexico are now involved with all groups in the confectionery industry, including snack foods, he said.

Sugar costs rise:

David Taylor, executive director of the Pennsylvania Manufacturers Association, said companies such as Hershey are victimized by an "extremely stupid anti-consumer law that jacks up the price of sugar" in the U.S.

As a result, Taylor said, U.S. confectionery companies and others that use sugar are rendered "less competitive worldwide."

Boyd said sugar costs in the U.S. are artificially high because of import quotas and fixed prices, instead of marketplace demand. He said the sugar industry has a "very effective" lobbying organization in Washington.

His study shows that sugar costs for the plant in Mexico would be about $2.5 million annually, compared with $4 million in the U.S. Sugar costs for some Canadian operations would be even less than in Mexico, at $2.4 million.

But wages are the main factor that attracts manufacturers to Mexico.

Boyd's study shows that the average hourly wage would be $2.77 for the maquiladora, compared with $18.74 in the Hershey/Lebanon area.

Fringe benefits in Mexico actually cost more than wages because of government-mandated company contributions for a wide-ranging worker safety net. Boyd's study estimates Mexican fringe benefits at 115 percent of base payroll costs, compared with fringe benefits amounting to 38 percent of payroll costs in the Hershey/Lebanon area.

Restructuring plan:

Hershey has 20 plants in the U.S., Canada, Mexico and Brazil. The company has not disclosed the number of plants that will be affected by its three-year restructuring program, but workers at the Smiths Falls, Ontario, plant were told Thursday that the facility would close in 2008.

As part of the restructuring, Hershey said it plans a net reduction of 1,500 employees by 2010. Because additional workers will be hired for the Monterrey plant, the number of jobs to be eliminated at existing plants will be more than 1,500. The Smiths Falls plant employs 500 people.

Hershey employs 6,500 people in Pennsylvania, 5,400 of them in the Derry Twp. area where it has three production plants, its headquarters and other facilities. The other Pennsylvania plants are in Lancaster, Reading and Hazleton.

Dennis Yablonsky, secretary of the state Department of Community and Economic Development, said Wednesday that the state has "reached out to try and ascertain what the facts are. ... We're obviously going to do everything we can to minimize the impact here locally.

"Any time a major company like Hershey announces a consolidation that affects jobs, we're very concerned about those people. But I will say this, Hershey's been a good corporate citizen over the years. I think they'll do everything they can to do the right thing for their home location."

LeRoy S. Zimmerman, chairman of the Hershey Trust Co., said the trust board has "confidence" in The Hershey Co. management and its board of directors.

"These are very difficult and competitive times," Zimmerman said. "It's extremely important to the trust and the school that the company remains competitive and profitable for the long term. It's a marathon, not a sprint."

Zimmerman pointed out that the trust does not get involved in management of the company, but "we follow all of this very carefully."

"You're looking at a damn tough market," he said. "They're in a tough business."

TOM DOCHAT: 255-8216 or tdochat@patriot-news.com


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