With business margins tight, shipping costs skyrocketing, and a worldwide recession threatening every company’s bottom line, some industries have found advantages in moving manufacturing operations to low-cost Honduras.

This was the case for Empire Electronics, a mid-tier auto parts supplier from Troy, Michigan. In 1996, the company found it was losing substantial sales and a major customer to less expensive suppliers in Mexico.

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“We considered moving our operations to India, but realised that logistically it would be a nightmare,” says board chairman Steve Doman. The company then decided on Mexico. “But at the 11th hour, an associate asked if we had thought about Honduras,” says Mr Doman. “I was already uncomfortable with Mexico. I felt backed into a corner, and too many companies were already operating there.”

Although sceptical, Mr Doman flew to Honduras and, within 72 hours, decided that if Empire was going to risk everything and set up shop in a low-cost country, he would do it there. That was 12 years ago. He has never looked back. “We have a highly skilled and very diligent workforce in Honduras with operation costs that make us very competitive globally,” says Mr Doman.

Empire transports parts just-in-time from Honduras to North American clients within two days or so. The company also trebled its capabilities between 2003 and 2006 by adding injection moulding and tooling to its manufacturing processes. “When Tier 1 customers ask for help in design or engineering, we can offer larger cost savings,” says Mr Doman. “We also produce a better product that fits the technology and quality benchmarks mandated by our own customers.”

With annual shipments of 3.5 million parts and 2007 sales topping $65m, Empire is now one of the auto industry’s fastest-growing Tier 2 suppliers of wiring harnesses, moulded components and PCB assemblies. “We could easily do $100m in sales by 2010,” says Mr Doman.

Recently, the company began doing business directly with General Motors, Ford and Chrysler. “Maybe one day we’ll become a Tier 1 supplier,” he adds.

Gradual expansion

Overall, the auto parts business in Honduras is expanding, albeit slowly. Despite Honduras being the third largest exporter of wire harnesses to the US, only a handful of such companies are manufacturing there. Among them are Lear and FCI, both major world players.

Mr Dorman thinks that the industry could do better. He is considering developing an industrial park in Honduras to encourage overseas manufacturers, including automotive suppliers, to locate there. “If everything goes well, we will develop the park before 2010,” he says.

Honduran law allows companies to develop industrial parks as free trade zones anywhere within the country. This way, companies realise no duties on imports coming into the zones that are needed for production, processing, and/or manufacturing of products for export. All products being exported outside Honduras are also duty free. Free trade zone companies are exempt from sales and corporate taxes. Plus, a Honduran customs official inspects and seals all containers prior to their departure from a free trade zone, shortening the time needed to reach the customer.

Industrial set-up

Some 24 industrial parks exist in Honduras that offer space in such zones. Among them is Green Valley Industrial Park (GVIP), a 518-acre project developed by a consortium that includes Grupo Karim’s, a textile company based in Pakistan.

Billed as the largest and most high-tech industrial park in the Americas, GVIP is spearheading industrial and manufacturing development in the Naco Valley corridor outside San Pedro Sula by attracting textile, automotive wire harness and light manufacturing assembly industries. Grupo Karim’s predicts GVIP and its tenants’ economic output will boost Honduran GDP by nearly 6% in the next five years.

Since developing GVIP, Grupo Karim’s has expanded its investments to include other industrial and real estate development, tourism and hospitality projects. It is developing the Altia Business Park, which, when completed, will be the first sustainable ‘class A’ park in central America. The first phase, scheduled for completion early next year, will include a 12-storey tower, a secure infrastructure, and telecommunications facilities. Three such buildings are planned, each offering 34,000 square metres.

“Among the industries we are targeting are business process outsourcing, call centres, and IT industries,” says Rubén Darío Sorto Alvarado, marketing and new project development corporate director.

Fortunately for such a project, Honduras has a bilingual workforce. Grupo Karim’s executives believe their park will create a cluster that will make Honduras a hot-spot for such industries.

Grupo Karim’s, itself, established its yarn operations at GVIP in 1991 when the textile industry was barely beginning to discover the potential of the region. Grupo Karim’s operates as the largest yarn manufacturer and distributor for central America and the Caribbean.

“We are also one of the largest manufacturers in Pakistan, where more than 380,000 spindles produce various types of yarn,” says Mr Alvarado. “We carry the largest inventory of 100% cotton, cotton-polyester and heather yarns from our mills in Pakistan and from different spinning mills from the US and central America.”

Other companies that have located in GVIP include Alabama-based Premier Narrow Fabric, which started operations in March 2008. The company already employs 480 people and knits and weaves 4.66 million metres a week. Founded in 2006, the company is the result of a merger between Georgia Narrow Fabrics and Elastic Corporation of America. “We had to go abroad to survive,” says Leonel Preza, general manager of the Honduras operations.

Besides free trade zone benefits, manufacturers in Honduras benefit from trade agreements such as the Dominican Republic-Central American-US Free Trade Agreement and the Caribbean Basin Initiative.

Top for textiles

Honduras ranks number one in the Caribbean and central America and number four worldwide for textiles and apparel manufacturing. It remains an important supplier of automotive parts, particularly wire harnesses, and is home to a thriving agricultural sector.

Its workforce is ample. With an unemployment rate of 37%, Hondurans are anxious for jobs. Consequently, worker turnover is a low 6.7%. Salaries are also low, resulting in the GDP being $1115 per capita.

Most in demand, executives say, are managerial-level workers and technicians. Instituto Politecnico Centroamericano (IPC) was formed as a non-profit technical institute in San Pedro Sula to offer high-quality technical education to apprentices. Students at IPC learn all aspects of production needed for textile and other manufacturing jobs.

IPC is supported by various manufactures, individuals and government entities, such as USAID and the German Agency for Technical Cooperation. IPC’s partnerships with companies such as Gildan, Cerveceria Hondurena, Grupo Karim’s, Elcatex and Grupo Jaremar make it possible for employees to keep up with new equipment and provide a place where new companies can easily recruit highly skilled workers.

IN FOCUS

Private ownership shows the way

Other free trade zone parks in Honduras include the Buena Vista Export Processing Zone (ZIP Buena Vista), home to a host of textiles and clothing manufacturers. Created by a group that owns and operates ZIP Choloma, the first private sector-owned and operated industrial park in Honduras, its tenants include Bestform Foundation, Monty, Kellwood, Jerzees, Cross Creek, Finotex, Sara Lee Intimates and Trueform.

The park is located 64 kilometres from Puerto Cortes, the principle port of entry to Honduras, 26km from the Villeda Morales International Airport, and 14.5km from San Pedro Sula, Honduras’ industrial centre.

“We started the park in 1991 with Sara Lee Lingerie,” recalls Miguel Soto, ZIP general manager. While the project saw its fastest growth in the 1990s, businesses there have continued to evolve and grow.

“They are diversifying and solidifying as well as growing vertically from manufacturing to producing cutting, sewing, packaging and distribution,” says Mr Soto. “This is good. It gives stability to the park.”

Encompassing about 202,000 square metres, ZIP has a further 101,000 sq m on which it can expand.

COUNTRY PROFILE

HONDURAS

Population: 7.6 millionPop. growth rate: 2.02%Area: 111,890 sq km

Real GDP growth: 6.3%GDP per capita: $4300Current account: -$1.225 bn

Largest sector Services (% of GDP): 58.6%Labour force: 2.78 millionUnemployment rate: 27.8%

Source: CIA World Factbook, 2007