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Continued: Polaris exec defends plan to shift some manufacturing to Mexico

  • Article by: SUSAN FEYDER , Star Tribune
  • Last update: November 6, 2010 - 11:28 PM

After Polaris Industries announced it was closing a plant in Osceola, Wis., and building a new one in Mexico, Bill Meis says his customers didn't hold back.

"There were people who told me they'd never buy a Polaris again," said Meis, sales manager of Frontier Powersports in Fergus Falls, Minn.

Most calmed down, Meis said, when he asked them to consider that Polaris isn't the only recreational vehicle company that manufactures outside the United States.

"It's just the way things are," Meis said.

That air of inevitability surfaces when executives of Polaris talk about the plan to close the Osceola plant, whose 500 workers make it a major employer in the town of 2,600. A combination of geography, changing manufacturing methods and the lure of Mexico's low-cost labor market dictated the decision, executives have said in recent months.

It's a choice that comes with some risks, beyond just potential consumer backlash for exporting jobs when nearly one in 10 Americans are unemployed. Medina-based Polaris recently disclosed that it will spend about $2 million more than initially planned this year to make the move to Monterrey, Mexico. The higher upfront costs, part of $25 million to be spent on the transition, are for security to protect the new plant and its workforce from a flare-up in violence in Monterrey by drug traffickers.

But Polaris expects the extra costs -- plus another $35 million in capital expenditures -- to be quickly recouped by the $30 million it will save annually after the Mexico plant is done next year.

In an interview, CEO Scott Wine said Polaris will pay its Mexican workforce one-third of what it now pays workers at its plants -- all nonunion -- in Osceola, Roseau, Minn., and Spirit Lake, Iowa.

Those dramatically lower labor costs were the reason Polaris rejected the idea of building a plant in the southern United States, even though that would have accomplished the goal of getting the company closer to faster-growing all-terrain-vehicle markets in states like Texas, Arizona and California. The snowmobiles that gave the company its start more than 50 years ago have been a dwindling part of its business for several years. ATVs now make up 65 percent of the company's sales.

"We had some outside consultants come in, and their initial thought was maybe Tennessee or Texas. Then, when we ran the numbers to compare costs, it wasn't even close," Wine said of the decision that was two years in the making.

Osceola, which will close by 2012, was picked because unlike Polaris' other plants, it doesn't assemble vehicles. It produces components, more of which will be outsourced, in some cases with suppliers closer to the Roseau, Spirit Lake and Monterrey facilities. The change will allow for faster and cheaper delivery of parts and allow Polaris to be more flexible and adjust production more quickly to changes in market demand.

"The concept of lead time is very important," Wine said. "It affects the amount of cash you have to have tied up in inventory."

The two U.S. facilities will be remodeled so they each can assemble, paint and weld every type of Polaris off-road vehicle, not just certain models as they do now. The company will invest about $6 million at the Roseau plant to make the changes.

Polaris will join a host of other U.S. manufacturers that have established facilities in Mexico. Manufacturing accounts for the largest portion of U.S. direct investment in Mexico, rising 9 percent to more than $24 billion last year, according to the U.S. Commerce Department. U.S. automakers have had plants in Mexico for several years. In addition to Polaris, other manufacturers that have announced plans to move facilities to Mexico in the last year include Whirlpool Corp. and Dell Inc.

The fear of violence hasn't caused any major businesses to pull up stakes, although it has put some on edge. More than 25 percent of companies responding to a survey earlier this year by the American Chamber of Commerce of Mexico said they were reconsidering investments in the country because of safety concerns.

Although manufacturing in Mexico will be new for Polaris, it won't be for Wine. Before joining the company in 2008 he worked at United Technologies, where he ran plants in Monterrey, Matamoros and Victoria. Before that he worked for Danaher Corp., where one of his jobs was running a plant in Mexico City.

Polaris' Mexican plant also is part of a broader strategy by the company to expand its footprint beyond North America. This year Polaris enhanced its distribution network in Europe and entered the Chinese and Brazilian markets. Overseas sales made up about 16 percent of Polaris' total revenue last year, but the company hopes to increase that to about 25 percent in the next few years.

Side-by-side ATVs, which allow a passenger to sit next to the driver, are a key part of Polaris' growth plans in North America and overseas. Core ATV sales have fallen in the past few years for Polaris and the industry as a whole, but sales of side-by-side vehicles have continued to increase. The company estimates that the overall side-by-side market has a five-year compound annual growth rate of about 11 percent. At Polaris, side-by-sides have offset soft sales of core ATVs, recently fueling most of the 49 percent increase in sales for the off-road vehicle segment in the third quarter.

Honda leads the overall ATV market, but Polaris is No. 1 in side-by-sides, with North American market share approaching 40 percent, according to James Hardiman, an analyst with Longbow Research in Independence, Ohio. But the competitive landscape is changing. Earlier this year Bombardier Recreational Products Inc. (BRP) began producing its first side-by-side ATV at a plant in Juarez, Mexico, where it has produced single-rider ATVs and personal watercraft for about four years.

"They're putting themselves in a position to have a cost advantage on us," Wine said.

BRP already leads Polaris in snowmobile sales, and its Sea-Doo brand is No. 1 in personal watercraft, a business that Polaris exited in 2004 after several years of losses. BRP spokesman Chaz Rice said the Canadian company has been pleased with the initial response to the new side-by-side ATV, the Can-Am Commander. "Some people had deposits on it for more than a year," he said.

The most powerful Commander model has a 1,000cc engine designed to appeal to sand dune riders in the South and Southwest, the same fast-growing markets Polaris wants to target. That market is what led Thief River Falls-based Arctic Cat Inc. to start making its own engines at a St. Cloud plant because previous supplier Suzuki Motor Corp. in Japan didn't want to make them.

Polaris' most powerful side-by-sides have 800cc engines, and the company declined to say whether it's working on a 1000cc machine. But it does believe that realigning its manufacturing, including the move to Mexico, will keep the company on the right path.

"We're making this decision from a position of strength, and because we want to make sure we're still strong five, 10 years from now," Wine said.

Susan Feyder • 612-673-1723

  • related content

  • Polaris

  • POLARIS INDUSTRIES

    Business: Snowmobiles, all-terrain vehicles, motorcycles, personal watercraft.

    Headquarters: Medina

    CEO: Scott Wine

    Revenue (2009): $1.6 billion

    Net income (2009): $101.0 million

    1-year stock return: +71 percent

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