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Cross-border companies setting up shop in San Diego to boost near-sourcing advantage

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When Kenn Morris, the CEO of Crossborder Group Inc. started his consulting company back in 1996 to assist entities interested in doing business across the border, his clients were mostly U.S. companies that wanted to go south and take advantage of NAFTA.

Then in 2004, the University of California at San Diego hired him to conduct a study called Borderless Innovation, which examined opportunities in the border region to increase the competitiveness of science and technology industries. During the process, he kept running into entrepreneurs in Mexico who wanted to take their business north but did not know how to access the market, especially in the technology industry.

"It's an emerging trend and one reason it's happening is because there is an increasing push within Mexico to go global. Also, Mexican companies have a marketplace with a Spanish speaking population in Southern California," Morris said.

He also thinks the Mexican marketplace is getting more sophisticated, which means entrepreneurs there have more money in their pockets, higher levels of education and they are studying on both sides of the border, which gives them familiarity with the market here.

Jorge Arroyo, principal and co-founder of Arkus Solutions, based in Tijuana with offices in San Ysidro, illustrates that fact, having worked in San Jose where he learned to fine-tune his strategy, network effectively and attain a startup mindset.

He started Arkus five years ago in Tijuana, when most of its clients were based in Mexico. Within a year, half its revenues were coming from U.S.-based customers.

Then, in 2006, Arkus, which offers custom software solutions to insurers and insurance agencies, was selected as one of the top 25 TechBA Silicon Valley companies, a business accelerator operated by the George E. Brown U.S.-Mexico Foundation for Science.

"That opportunity helped us consolidate our U.S. presence and bring a sharper focus to our business development efforts. We started pitching ourselves as an American company, rather than a Mexican company doing business abroad, while still leveraging (the presence of) our offshore facility to strengthen our value proposition," Arroyo said.

Arkus' customers in the U.S. include Workmen's Auto Insurance Co., Quadrant Information Services, Alliance United Insurance Co., All Star General Insurance Agency and FiservFSC. Since it set up a presence here, revenues have tripled, according to Arroyo.

Arkus has 15 employees in Tijuana and it uses the San Ysidro office mainly for sales, business analysis, consulting and project management tasks. There is one full-time employee and several contract staff at the San Ysidro office.

Arroyo, like other cross-border entrepreneurs, spends nearly half his time on this side of the border, commuting daily. Initially Arkus set up shop in San Jose, but it made more sense to establish an office in San Diego, when the company gained no real value from being up north.

"We chose San Diego basically because of the proximity. Our teams on both sides of the border require frequent face to face interaction, so this makes it more convenient," Arroyo said.

Understanding the legal and fiscal compliance requirements was a challenge at first, but it was still simpler than he had originally expected, according to Arroyo.

"The biggest challenge we encountered was making a paradigm shift in terms of how we pitched ourselves to clients and prospective clients -- we're no less of a U.S. company than the guy next door," Arroyo said.

Increasingly, many companies offering near sourcing have begun to set up offices north of the border, primarily for sales, marketing and client meetings, but also in some cases, for other functions like project management. This move further strengthens the advantage of proximity that near sourcing or "near shoring" exemplifies.

U.S. presence

Mario A. Rodriguez Garcia and Elias Martinez founded BC Manufacturing in 2003 after the company they were working for in Tijuana decided to shift its operations elsewhere. BC Manufacturing is a shelter provider or "maquila albergue" that offers near-shore manufacturing, assembly, fulfillment and human resources services.

"What we lacked was a U.S. presence, someone to direct and manage the sales and marketing required to grow our business," said Rodriguez Garcia, who tapped John Riley, then-president of Vertek International Inc. to address this gap. When Vertek's owner learned that Riley intended to leave, he asked the trio to buy out Vertek.

They decided to capitalize on the opportunity to increase business and in September 2003 acquired the San Diego firm with a respected name in the industry.

Having a U.S. office provides the option of contracting with a local company and assures clients that contractual agreements comply with U.S. laws, according to Riley.

"We chose to be in Otay Mesa so that we could better serve the needs of our clients by being near our customs brokers and other service providers required to support our operations. We also set up the office here so that our potential clients can leave their car at our U.S. office and we then drive them to our Mexico operations," Riley said.

Industries that BC Manufacturing serves today include medical equipment, aerospace, semiconductors, defense, biotechnology and automotive. Projected sales for 2008 are around $5 million, a 20 percent increase over 2007 revenues.

Riley credits the Small Business Administration with helping the company, and recommends that new entrepreneurs seek the SBA's help with networking. Morris' Crossborder Group also assisted BC Manufacturing with marketing and brand identity when the entrepreneurs sought his help in 2006.

"Tijuana is the second largest city on the Pacific Coast, bigger than San Diego. With rising income levels and education, more and more companies will come up north," Morris said.

In addition to companies, many families in business have also begun to shift up north, prompting those who offer services to this high-income demographic to follow suit.

Carlos Guerrero owns Car Armoring Services, a 10-year-old family business based in Tijuana, with a sales showroom in Chula Vista that he set up in 2006. His company armors clients' vehicles against gunfire assaults, a service that has become increasingly necessary with the rise in violence in Mexico.

"The main reason I set up shop here is because my clients felt more comfortable meeting here; they did not want to go to Tijuana," said Guerrero, speaking in Spanish as his manager translated for him.

Most of his U.S. clients live in San Diego and have businesses in Mexico. He began getting clients from the United States in 2005, when many began moving north from Mexico. Guerrero spends 50 percent of his time at the showroom in Chula Vista, where he has three employees.

Aside from sales, this office is also used for logistics: tracking the whole process and monitoring the status of clients' vehicles at the factory.

"We're looking into new markets such as armored car rentals. We will set up offices where there is demand, in border cities in Arizona or Texas," said Guerrero, speaking about possible expansion plans.

While many Mexican small businesses are beginning to establish a presence locally, Morris said they are often like bootstrappers, navigating the waters alone and operating in a vacuum, since not much is being done to encourage cross-border investment.

"Tijuana and San Diego have a critical mass of nearly 5 million people and there is the potential to position ourselves as the Pacific Coast's equivalent to Miami and look for more cross-border opportunities. But on both sides, we don't have sufficient government advocacy efforts," Morris said.

Nagappan is a San Diego-based freelance business writer.

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