Mexico transitions to high-value manufacturing location

August 3rd, 2015

Mexico is no longer the low-wage sourcing location for low-value consumer products for the U.S. market that it was two decades ago when the North American Free Trade Agreement with the U.S. and Canada was implemented. True, average wages have risen higher in coastal China, where so much export production is based, than in Mexico. But with an increasingly skilled Mexican workforce and a rapidly growing middle class, many international companies are investing in facilities that manufacture higher-value products for the U.S. and Mexico’s domestic market, and still more are planning to invest in sourcing there.

The near-sourcing trend is fueled by the desire to reduce turnaround time from order to delivery, cut transportation costs, and, increasingly, to avoid any repetition of the West Coast port congestion and delays that plagued so many supply chains in late 2014 and early this year.

One U.S. importer, for example, responded to a JOC.com survey about shippers’ supply chain plans in the wake of the West Coast longshore labor agreement in May by saying he wanted to shift as much production as possible away from China to Mexico.

“The whole near-shoring trend is based on ‘How do I make sure I don’t have my supply chain cut off because of lack of capacity or longshoremen’ and all of the issues you have when you’re bringing in product by boat from around the world,” said Troy Ryley, managing director of Frisco, Texas-based third-party logistics provider Transplace Mexico. “In Mexico, you’ve got multiple points to enter the U.S. via truck, and trucks are a lot more consistent on the highway than vessels on the open ocean. It’s a matter of days by truck, rather than weeks at sea.”

Over the past several years, there has been a continuous move of production to Mexico for the North American market. Some of that has come at the expense of Asia, but more often the investment in Mexican production may be in addition to Asia. “Investment going forward may be in Mexico, which doesn’t mean it’s being relocated from Asia,” said Foster Finley, a managing director of logistics consulting firm AlixPartners who specializes in supply chain performance. “Plants that in years gone by may have gone to Asia are going to Mexico now.”

In a survey last year of the near-sourcing plans of 143 senior manufacturing and distribution executives, AlixPartners found that 86 percent plan to increase their foreign manufacturing capacity closer to the U.S. in the next two or three years. The chief reasons behind these plans were the desire to cut the landed cost of imports, lower freight costs, improved speed to market and improved customer service.

The survey, conducted before the severe congestion that began to clog West Coast ports last fall, also found that 30 percent of those surveyed said near-sourcing of production would result in fewer supply chain disruptions.

“After NAFTA was implemented in 2004, many companies located in Mexico to take advantage of low wages and duty-free access to the U.S., but when China joined the WTO, they moved there to get even lower wages,” said Christopher Wilson, deputy director of the Mexico Institute at the Woodrow Wilson Center in Washington. “Over time, companies have become more sophisticated about the way they make site-selection decisions and are looking at a much wider range of factors. What that has done is push Mexico into its proper niche into areas where it has important competitive advantages vis-à-vis other countries.”

AlixPartners uses local wage costs as one of seven factors in measuring the competitiveness of global supply locations. The other six factors include availability of raw materials and cost, regulatory overhead, inbound transportation costs, inventory cost tied up in product flow, exchange rates, and tariffs or duties.

“Although Chinese wages are on average lower than Mexico’s, wages have risen rapidly up and down the coast of China that has historically been the factory of China, and they continue to go up,” Finley said. “China has made a concerted effort to tap into lower wages in inland China, but the problems are the lack of infrastructure to get product to and from the coast. The number of qualified workers also is still well behind the coast.”

The Mexican government is moving to enhance its competitive position by investing heavily in road, rail and aviation infrastructure improvements and by streamlining its customs procedures. As a result, it has become a major source for U.S. imports of bulky products such as automobiles, aerospace products and components and appliances that don’t fit easily into a container, but can be shipped by road or rail to the U.S.

Mexico is also the second-largest source of high-value, high-tech products such as cell phones, gaming consoles and computers, after China.

In the past, the Mexican government spurred the growth of these industries by providing incentives for them to group in clusters around cities that have an abundance of skilled engineers graduating from universities and the infrastructure to support shipments to and from the plants. It has since ended those incentives for all but the aerospace industry.

“Mexico has a very well-educated workforce that has the expertise to produce more technical products, like the aerospace industry,” said Derrick Johnson, vice president of segment marketing for UPS. “It is graduating 230,000 engineers every year.”

UPS is working with the Mexican government to identify the areas that have the infrastructure to support the transportation needs of industry clusters. “We look for good roads and rail infrastructure, but also the people with the skills to support these clusters,” Johnson said.

The aerospace industry is clustered around Chihuahua, which boasts plants by Hawker Beechcraft, Honeywell, Pratt & Whitney and Zodiac Aerospace. Bombardier, Eurocopter and Messier-Bugatti-Dowti have plants around Queretaro.

Although the government has scaled back on incentives to other industries, the incentives it provided in the 1980s and 1990s resulted in a cluster of more than 600 high-tech plants in the state of Jalisco around Guadalajara, which is known as Mexico’s Silicon Valley. Foxconn, Jabil Circuit and Flextronics assemble products there with components imported from Asia for the local and the U.S. market. Other plants are clustered around Chihuahua, Monterey and Mexico City.

“One of the big concerns for these highly technical products is intellectual property,” Johnson said. “Mexico’s IP protection is as strong as or stronger than other areas of the world, such as China.”

The automotive industry is far more spread out. Ford Motor Co. has plants in Chihuahua and Sonora in the north and Toluca in the south. Audi and Volkswagen have plants in Puebla near Mexico City. Honda has a number of plants. Chrysler, General Motors and Mercedes Benz have plants in Saltillo. BMW plans to build a plant in San Luis Potosi by 2019.

Approximately 1,100 top-tier parts makers also have opened production facilities in Mexico to supply these plants. Mexican automotive plants export about 80 percent of their production and account for 11 percent of all new car sales in the U.S.

Some cars are transported by rail to the U.S., and others by ocean. “Over the last two years, we’ve been seeing an increase in the traffic of car carriers transporting cars from Lazaro Cardenas through the canal to the U.S. East Coast,” Panama Canal Administrator Jorge Quijano said. “That may change if Mexico improves the roads and rail transport to Veracruz so cars can be shipped directly from there to the East Coast.” He said car carriers have told him they are building post-Panamax vessels that can carry 8,000 to 8,500 cars, compared with the current maximum capacity of 5,000 to 5,500 cars. “So for the next three years, we see strong performances for cars moving from Mexico through the canal to the U.S. East Coast.”

U.S. companies that source products in Mexico find it much easier to manage the engineering and quality control processes than in Asia because it is more cost efficient and easier to visit plants south of the border than across the Pacific. “The ability to supervise your engineering at a plant in Mexico is a lot less expensive than in Asia, and companies are starting to realize this,” said Phillip Poland, director of international trade compliance for DHL. “If I was making strategic decisions for a U.S. company, I would seriously consider building a plant in Mexico.”

Mexico has eased its customs procedures on imports of components for assembly in plants by moving all customs transactions onto a single electronic platform of window for export. “Mexico is ahead of the U.S. in that a single window increases compliance, decreasing the arbitrariness of customs from port to port,” Poland said. “It really streamlines and helps the movement of imports through customs.”

Mexico is working closely with the U.S. and Canada to harmonize their customs procedures under NAFTA. It signed on to the Wassenauer Agreement on export controls last year and is implementing an export control system, which together with its single platform on imports creates greater trade compliance.

Security is less of an issue in Mexico today than in the past, when theft of truckloads in transit was not uncommon. “That’s less frequent now, as the government has been cracking down on cartels to improve transportation safety,” Poland said.

The flow of trucks moving across the U.S. border promises to become easier as a result of changes in U.S. regulations introduced this year. For years, Mexican trucking companies with Mexican drivers could haul cargo only into a narrow commercial zone across the U.S. border, despite the provisions of the NAFTA treaty. In response, Mexico imposed retaliatory tariffs on U.S. imports estimated to cost $2 billion annually.

After a three-year pilot program, the U.S. Department of Transportation started allowing Mexican motor carriers to apply for authority this year to conduct long-haul, cross-border trucking services. Under this program, Mexican trucks must be inspected and meet the same safety regulations as those for U.S. motor carriers.

“You’re starting to see Mexican equipment go farther and farther north,” Ryley said. “What’s defining how far north they go is not any restriction by the law, but is more how much deadheading time they can afford to take on or whether they have the complementary southbound loads that allows for a round trip.”

Capital Investment, Technology Upgrades to Bolster Mexico’s Diverse Manufacturing Sectors

August 3rd, 2015
Capital Investment, Technology Upgrades to Bolster Mexico’s Diverse Manufacturing Sectors
Whether they are manufacturing vehicles, airplanes, electrical cable, or something else, companies are finding the resources they need to compete in Mexico.
Dan Emerson (Q3 2015)

Just over a decade ago, when Quebec-based Bombardier Recreational Products Inc. (BRP) decided to try Mexico as a manufacturing market, the off-road vehicle manufacturer took a measured approach. In 2003, BRP tested the waters by leasing a facility in Ciudad Juarez, Chihuahua, to assemble outboard engines for export. Two years later, the Canadian firm decided to transfer all of its ATV assembly and engine manufacturing operations to Juarez.

Building on its first, successful ventures south of the border, over the last decade BRP has steadily increased its stake in Mexico to more than $190 million worth of manufacturing facilities in the states of Chihuahua and Querétaro, and an extensive distributor network.

Investments Continue to Rise
Business expansions like BRP’s have become “the story” in Mexico, as the country has developed into one of the world’s manufacturing powers.

“Mexico has really burst on the scene as a legitimate player in the global manufacturing sector,” says Bob Cook, president and CEO of the El Paso, Texas-based Cook Strategies Group, LLC. “Every trend I look at indicates that rise is going to continue.”

Mexico – Global Manufacturers

  1. Bombardier Recreational Products Inc. (BRP), Flextronics Manufacturing, Lexmark Internacional and Johnson & Johnson

    Juárez, Chihuahua

  2. Bombardier Recreational Products Inc. (BRP)

    Querétaro, Mexico

  3. Ford

    Chihuahua City, Chihuahua

  4. BMW

    Goodyear

    San Luis Potosi, Mexico

  5. Toyota

    Guanajuato, Mexico

  6. Mazda

    Guanajuato, Mexico

  7. Hundyai/Kia

    Monterrey, Nuevo León

  8. Nissan/Daimler

    Aguascalientes, Mexico

  9. Honda

    Celaya, Guanajuato

  10. Audi

    San Hosé, Chiapa

Agreeing with that prediction, the Boston Consulting Group estimated in a 2013 report that Mexican manufacturing exports will increase up to $60 billion annually by 2018.

According to Banco de Mexico data, Mexico has received over $135 billion in foreign direct investment (FDI) over the last five years — almost $86 billion of that within the past three years. The largest share of FDI in Mexico comes from the United States, representing over one third (34 percent) of total FDI over the past three years. Canada has been the source of another 10 percent of FDI in Mexico over the same period.

More than half (58.6 percent) of the FDI coming into Mexico was invested in manufacturing enterprises, with the top five sectors being food and beverages; transportation equipment; chemicals; electronics; and electric equipment. The automotive sector alone added more than 93,000 jobs in 2014, growing nearly 15 percent.

However, the growth trend has also been “pretty diverse,” Cook says. “We’ve seen a lot of growth the across the board,” a trend which bodes well for the country’s economic future. The most pronounced growth has taken place in “high value” categories such as aerospace, automotive, and electronics.

Mexican manufacturing exports are estimated to increase by up to $60 billion annually by 2018. An Automotive Powerhouse
This tsunami of foreign investment has transformed Mexico into the world’s seventh-largest automotive producer and the fourth-largest exporter after Germany, Japan, and South Korea. Mexico has usurped Japan to become the No. 2 supplier of vehicles to the U.S. market, behind Canada. By 2018, industry analysts predict Mexico’s current annual production of 3.2 million cars and light trucks to increase more than 50 percent to five million vehicles. Earlier this year, The Wall Street Journal reported that seven Asian and European automakers have opened new Mexican assembly plants, or announced plans, in just over a year. Other car companies have bankrolled major expansions in Mexico, including Nissan, General Motors, Ford, Volkswagen, and Fiat Chrysler Automobiles NV.

In total, automakers and parts suppliers have earmarked more than $20 billion of new investments, Mexican officials say. The automakers’ presence has also spawned major growth of smaller vendors who supply the auto plants, according to Cushman and Wakefield’s Gonzalo Gutierrez, who is the firm’s senior director of Industrial Brokerage Services for the Northeast Region of Mexico, based in Monterrey. These vendors come from all over the world, but most hail from the U.S., Japan, Germany and, more recently, Korea, Gutierrez says.

Meanwhile, recreational vehicle maker BRP has gradually upped the ante on its Mexican investment. In 2013, BRP opened a $100 million manufacturing facility in Querétaro, which employs 1,100 people. Last year, BRP decided to build a second plant in Juarez, to expand its Can-Am product offering and meet future demand for off-road vehicles. When completed in late 2017, the $55 million facility is expected to employ about 900 workers.

Aerospace, Electronics, and Medical Devices
The aerospace sector in Mexico has also been growing rapidly. Last year, Mexico exported an estimated $1.9 billion worth of aerospace products to the U.S., an amount that has quadrupled since 2009, Cook notes. In that sector, “Mexico is rapidly moving up the global rankings.”

Regarding regional distribution of FDI, just over half accrues to Mexico City and the surrounding state, according to Cook. About a third of the balance goes to the four states of Chihuahua, Jalisco, Puebla, and Nuevo Leon.

In addition to being an automotive center, the border city of Juarez has become a manufacturing center for electronics and medical devices. Its electronics manufacturers include Electrolux, Flextronics, Foxconn, and Lexmark. Its medical device companies include Cardinal Health, GE, and Johnson and Johnson. Other northern states have benefited from the growth of the electronics industry, including Chihuahua, Baja California, and Tamaulipas.

Mexico’s developing manufacturing clusters have also drawn smaller companies. One example is Greatbatch Inc., which plans to move 170 jobs from its Electrochem Solutions Inc. manufacturing facility in Beaverton, Ore., to a new plant in Tijuana (Baja California) by year’s end.

The southern Mexican region has also benefited from lower labor costs, which have helped attract clothing and textile manufacturers to cities including Campeche and Veracruz.

Boosting Mexico’s Natural Advantages
There have been a multitude of reasons for Mexico’s manufacturing boom, including both indigenous advantages, and efforts by the government in recent years to make the country a more desirable trade partner and place to do business. Over the past decade, Mexico “has been pretty aggressive in liberalizing trade with companies around the world,” and has the most free-trade agreements of any country in the world — 44, Cook points out.

The Mexican government has been proactive in modernizing the country’s business climate to 21st century standards. Mexico’s homegrown business advantages include lower transportation and warehousing costs, an improved ability to respond to customer demands, improved control of intellectual property, the availability of proximate time zones between management and production locales, and the cultural similarities between the U.S. and Mexican markets.

Augmenting Mexico’s expansive, free-trade policies, the government has also been proactive in modernizing the country’s business climate to 21st century standards. Investing in education has been a major thrust to ensure a well-prepared, bilingual workforce.

According to the United States Embassy in Mexico, more Mexicans — almost 100,000 more — earn engineering degrees annually than Canadians and Germans. And during the past decade, Mexico has doubled the number of its public two-year colleges and four-year universities. The government financed 140 new colleges and universities, with 120 of those emphasizing science and engineering.

BRP facility in Querétaro

BRP facility in Querétaro

Another priority has been improving Mexico’s roads, bridges, and utility infrastructure to help expedite the flow of materials and manufactured goods. Revisions in the country’s energy policy have encouraged private-sector investment in new natural gas pipelines and power lines. Additionally, earlier this year, AT&T announced plans to invest $3 billion to extend its high-speed mobile Internet service to Mexico and cover 100 million consumers and businesses by year-end 2018.

Mexico also continues to benefit from the near-shoring trend among some American companies — i.e., moving manufacturing operations to Mexico from China and other low-cost countries. Average manufacturing labor costs in Mexico are now almost 20 percent lower than in China — a sea change from 15 years ago, when Mexico’s labor costs were 58 percent more expensive than China’s, according to Forbes.com.

Are there other supply chain issues in Mexico companies need to be aware of? “There are no critical issues related to transportation inside Mexico,” Gutierrez says. “Since the last five years, the 3PL companies, such as the companies with distribution centers in multiple (Mexican) states, have handled their operations with no inconvenient events, while they have significantly increased their operations, every year.”

Some Challenges Ahead
Of course, crime and violence, much of it related to the illegal drug trade, remain a concern. However, media reports may exaggerate the hazards. Gutierrez notes that companies doing business south of the border have developed effective, operational planning strategies to minimize risk and avoid travel related hazards in problematical regions.

Yet, with such a rapid economic expansion, some growing pains are to be expected. There are several challenges facing the country, which the current Mexican administration is working to address, according to Cook, in order to help promote continued economic growth.

BRP facility in Juarez

BRP facility in Juarez

To capitalize on Mexico’s abundant energy resources, the country will need new capital investment and technology upgrades in the processing and distribution of energy. “That’s opening up as we speak,” Cook says. This year, Mexico opened its oil industry to foreign investment for the first time since the 1930s, offering for auction exploration rights to 14 shallow-water fields. And this summer, Mexico’s Federal Electricity Commission began taking bids on 24 projects that will enable the generation of an additional 1,442 megawatts of power, along with adding nearly 1,500 miles of natural gas pipeline and almost 2,000 miles of power lines.

Competition for skilled labor can be expected to heat up, along with the overall economy. “If you need specialized engineers and technology, you will not find them along the border; you need to go closer to Mexico City,” notes Sylvain Blanchette, BRP’s VP of Mexican operations. Generally, the average cost of labor increases moving south from the border to the country’s interior. That may be due to more competition for skilled labor, due to the increased number of auto, aerospace, and other manufacturers, says Blanchette.

To sustain its manufacturing expansion, Mexico is going to need “to have an even greater emphasis on skilled labor,” Cook says. However, in spite of the challenges ahead, Mexico’s ascendance as a global economic power should continue, Cook believes, citing its globally competitive cost structure, young workforce, and friendly trade policies.

Mexico’s richest resource — and the real driving force behind the growth boom — may be its people, says Blanchette, who praises the knowledge, enthusiasm, and initiative of the Mexican workforce. “When we have come to Mexico with projects, the people we work with have been extremely eager to learn and improve what they do,” Blanchette concludes.

Mexico’s maquila boom extends across the border

April 19th, 2014

Kevin Robinson-Avila And Lauren Villagran / Journal Staff Writers

Copyright © 2014 Albuquerque Journal

Seamstresses sew car upholstery at the Tecma Group, which operates 18 of the more than 350 maquilas in the Ciudad Juarez area. (Journal File)

SANTA TERESA — Mexico’s maquila industry has become a raging bull that’s busting up the competition in China and other Asian nations for the first time in decades.

Rapidly rising costs to produce and ship goods from Asia, especially heavy industrial items such as cars and home appliances, are encouraging the world’s major producers to ditch overseas manufacturing and instead set up operations in Mexico, where proximity to U.S. markets helps to lower costs and increase operating efficiencies.

That’s good news for New Mexico, and for all U.S. border states, because the rapid growth of Mexico’s maquilas, or assembly factories, is creating huge business opportunities up and down the 2,000-mile U.S.-Mexico border. And that, in turn, is creating new industrial hot spots in places such as southern New Mexico, where companies are flocking to set up new facilities to supply goods and services to the maquila industry.

A technician repairs computer monitors at Amcor Service Solutions, a part of the Tecma Group. These assembly-for-export plants that crank out everything from brake pads to plasma TVs for U.S. companies are opening new facilities, expanding existing ones and hiring more employees.

“We’re seeing a steady ‘re-shoring’ of industry investment from China to Mexico that’s creating huge opportunities here for everything from manufacturing and transportation to warehousing services and technology-related enterprises,” said New Mexico Economic Development Secretary Jon Barela. “We believe a wide array of businesses can flourish along the border as the maquila industry continues to grow.”

Huge ‘re-shoring’ underway

A technician repairs computer monitors at Amcor Service Solutions, a part of the Tecma Group. These assembly-for-export plants that crank out everything from brake pads to plasma TVs for U.S. companies are opening new facilities, expanding existing ones and hiring more employees. (Journal File)

“Transportation costs have been on the rise since 2003, and they’re still very elevated,” Coronado said. “That’s made it far more expensive to move goods from Asia to the U.S.”

Other pressures include the strengthening of Chinese and some other Asian currencies against the U.S dollar, which makes exports from those countries more expensive, and the length of time it takes to transport goods from those places to North America, Coronado said.

As a result, global producers of everything from cars and auto parts to aviation technology, medical devices and home appliances are establishing maquilas in Mexico to be closer to U.S. markets. It’s an emerging re-shoring strategy that not only reduces transportation expenses, but allows for “just-in-time” manufacturing and delivery of products to increase operating efficiencies, Coronado said.

All of that is providing huge competitive advantages to Mexico.

“It’s a revolution,” Russell said. “For the first time in 50 years, the lines have crossed from a cost standpoint to favor producing in Mexico rather than producing in China.”

Foreign investment is flooding into Mexico’s maquila industry from all over, including the U.S., Europe and Asian countries to better position themselves for sales in North America.

Foreign direct investment in maquilas reached nearly $13 billion last year, up from just $7 billion in 2012 and its highest level since before the recession in 2007, according to Mexico’s national statistics institute. The value of maquila exports has jumped nearly 50 percent from pre-recession levels.

Sophisticated, diverse

Santa Teresa's industrial Park is booming because of trade with Mexico, particularly serving the maquila industry. Here, a shipment of steel is prepared for shipping at the Southwest Steel-Coil facility in Santa Teresa earlier this year. (Journal File)

The maquilas themselves have grown much more sophisticated and diversified in recent years, with Mexico now ranking as the world’s No. 1 exporter of flat screen TVs and refrigerators with freezers, and the fifth-largest auto-parts producer globally.

“Today, Mexico is the second-largest exporter of autos to the U.S.,” Coronado said. “It displaced Japan two months ago, and it will soon displace Canada.”

That’s a sea change from the 1960s, when the maquilas first emerged in Mexico to provide final assembly of simple products destined for U.S. markets using inexpensive Mexican labor. In those early years, the maquilas were often called “draw-back industries.” They were generally located just across the border so that U.S. companies could send things such as shirts and sweaters there for low-wage workers to sew on buttons before shipping the finished product back to markets in the U.S.

The growth and diversification of Mexico’s maquila industry is a boon to the U.S. border economy, and to U.S. manufacturing in general, given its deep-rooted connections to U.S. production and investment. Only about 10 percent of the inputs used in the maquilas – including raw materials, parts and services – are actually produced in Mexico. Most come from U.S. businesses.

U.S. maquila support

The Foxconn maquiladora, which sits just over the New Mexico border across from Santa Teresa, is a major player in the electronics manufacturing industry and is planning a major expansion. (Journal File)

“On the U.S. side, we provide every type of service related to maquila manufacturing and trade,” Coronado said. “That includes transportation, warehousing, logistics, real estate, insurance and staffing.”

It also includes raw materials and semi-processed goods.

The lion’s share of trade with Mexico is based in Texas, especially in Laredo, which accounted for 40 percent of the $500 billion in exports and inputs that crossed the border by land last year. El Paso accounted for another 18 percent, making Texas the number 1 gateway for U.S. trade south of the border.

“More than 50,000 jobs in El Paso are attributed directly to the maquila industry in Juarez,” Russell said. “More than 70 buildings in El Paso are occupied, or exist, because of the maquilas.”

Now, a significant chunk of trade and maquila-related border business is building as well in southern New Mexico, where an industrial boom is underway.

The number of maquila-connected businesses located in Santa Teresa grew by 50 percent in the last two years. And, land trade passing through the Santa Teresa-San Jerónimo border crossing has increased dramatically.

“Santa Teresa accounted for about 5 percent of all U.S.-Mexico land trade last year,” Coronado said. “That’s up from less than one-half a percent seven or eight years ago.”

Good N.M. prospects

A Union Pacific train refuels at Union Pacific's new $400 million intermodal complex near Santa Teresa. The facility was built to support, in part, cross-border trade with Mexico and its booming maquila industry. (Journal File)

As Mexico’s maquilas expand, prospects are good for capturing a lot more business in southern New Mexico. That’s because the New Mexico and Chihuahua state governments are working together to build needed infrastructure to turn the Santa Teresa-San Jerónimo crossing into a major binational land port.

That could attract a lot more supply businesses to Santa Teresa to provide goods and services throughout Chihuahua, where 420 maquila plants currently operate.

It could also bring more maquilas directly to San Jerónimo, providing greater opportunities for Santa Teresa-based businesses. Taiwanese electronics giant Foxconn, for example, which already operates two factories in San Jerónimo, wants to eventually open 14 more plants there.

In fact, private investment in Santa Teresa and San Jerónimo is likely to grow faster than public infrastructure, given the rapid expansion of maquila activity in Mexico.

“Demand for industrial space on both sides of the border is up,” said Octavio Lugo, chief operating officer for Corporación Inmobiliaria, which owns 47,000 acres of land in San Jerónimo. “We can’t sit around and wait for the federal government to finish building border crossings, because real demand is growing by businesses to operate in the area.”

BizO_Maquilas

 

More U.S. companies opening high-tech factories in Mexico

December 5th, 2013

latimes.com

Faced with rising wages in China and high shipping costs, many businesses are finding manufacturing close to home more appealing. But despite its advantages, Mexico has problems.

By Shan Li

4:37 PM PST, November 29, 2013

Manufacturing in Mexico

Oceas Verona Orocio inspects the latest-model drone at the 3D Robotics manufacturing plant in Tijuana. The company’s drones were formerly made in China. (Don Bartletti, Los Angeles Times / November 30, 2013)

TIJUANA — In an industrial park five miles east of downtown Tijuana, Ariel Ceja toils in a white room bustling with assembly workers hunched over blue tables.

A master scheduler, Ceja is in charge of all steps of production at this factory nestled inside a cavernous warehouse. A cluster of anonymous buildings surround the facility. Nearby are pitted roads, and just a few minutes away by car is the Tijuana airport and a university.

San Diego-based 3D Robotics moved into this once-vacant spot in June, producing affordable drones and electronic parts destined for customers in the U.S. and around the world.

It is just one of many American companies streaming to Mexico to open high-tech factories in a reversal of the outsourcing trend in years past. Called nearshoring, businesses are moving production to Mexico, Canada and other nearby countries to take advantage of their proximity to the U.S.

“Recently I have been seeing more American companies bringing production here,” said Ceja, who started working for 3D Robotics a month ago. During the 1990s, “there were more Asian companies coming in, Japanese, Korean, but that has changed.”

It’s not just in Tijuana. Manufacturing plants are also opening in Mexican cities such as Guadalajara and Mexico City, bringing a wave of new jobs to a country recovering from the economic downturn and still fighting constant drug violence.

From 2009 to 2012, foreign investment in Mexico jumped more than 50% to $7.4 billion, and exports from foreign-owned factories also grew 50% to $196 billion, according to one industry group that tracks maquiladoras, or assembly plants in Mexico that are owned by foreign companies. After plunging during the economic recession, employment also has jumped 25% to more than 2 million. According to an economic study from South/East San Diego, themaquiladora industry is one of Tijuana’s biggest employers, behind businesses linked to its border crossing.

“Sometime in the last year, we reached a crossover point where it became cheaper to make a lot of goods in Mexico than in China,” said Hal Sirkin, a senior partner at Boston Consulting Group. “A lot of American companies are looking or moving.”

The global recession and its aftermath led companies to rethink their supply chain. Faced with rising wages in China and high oil prices, many are reconsidering the appeal of manufacturing close to home, especially small and medium-size businesses without the bargaining clout of Apple and Wal-Mart.

Those businesses are finding a skilled workforce for high-tech manufacturing in Mexico. The country has doubled the number of post-secondary public schools, many devoted to science and technology. Former President Felipe Calderon last year bragged that Mexico was graduating 130,000 technicians and engineers a year, more than Germany or Canada.

The educated labor pool has attracted the car industry. Mexico has gained at least 100,000 auto-related jobs since 2010, according to a Brookings Institution report. Nissan, Honda, General Motors and Ford have all announced plans to expand in coming years.

3D Robotics, which makes drones and parts priced up to $730 for civilians and tech enthusiasts, is among the start-ups drawn to Mexico’s low costs and proximity to the U.S. The company once manufactured its drones and kits in Southern California and China.

But Chief Executive Chris Anderson said making products overseas was a lengthy process that meant waiting for months for merchandise to come on ships. Chinese factories also required bulk orders that tied up a lot of the company’s capital and prevented engineers from innovating quickly, which is vital in a tech sector such as drones.

“We decided it didn’t make sense at our scale and pace of innovation to ramp up in China,” Anderson said.

Instead, the company looked south.

3D’s first Mexico factory in 2011 was in the three-bedroom Tijuana apartment of general manager Guillermo Romero, who spent the first months of the test run in Mexico soldering parts and assembling drones in his living room along with one employee.

“We started with some benches and soldering stations you can buy anywhere,” Romero said. “We were like, ‘Let’s see what happens.'”

Sales of drones assembled in Mexico quickly grew after Romero got the hang of putting them together, and 3D moved into its first manufacturing space last year.

The last of the manufacturing equipment was trucked to Tijuana this spring, when the company moved to its current 12,000-square-foot facility. American engineers in San Diego design drones that are crafted almost completely by about 60 assembly workers in Tijuana.

A walk through the cavernous warehouse that houses the factory shows 3D’s quick expansion. On the second floor, a newly completed call center opened about a month ago, bringing customer service in-house for the first time. Inside the assembly room, workers solder circuit boards, attach plastic arms and test the flying machines.

“Mexico is very flexible. You can start projects here and grow them,” Romero said. “It’s very good for start-ups.”

For California companies, Mexico can be an especially attractive bet, analysts say. The ability to order in small batches means that designs can be changed quickly and production can be revved up and slowed down in a matter of days instead of months.

That can be invaluable during the holidays, as San Bernardino-based Cannon Safe learned.

On Black Friday in 2008, the safe manufacturing company received a panicked call from a major retailer that had drastically slimmed down its inventory in response the financial crash, President Aaron Baker said. But shoppers were scooping up their safes, prompting the chain to issue thousands of rain checks that it had to quickly honor.

Cannon’s Mexico facility was able to increase production and deliver new merchandise within four days, compared with weeks or months if the safes had come from China, Baker said. “That was our ‘aha’ moment.”

Today, about 60% of the company’s safes are made in Mexico, nearly double the production levels five years ago. Meanwhile, its China production has dropped by half, Baker said.

Although wages are higher in Mexico than in China, the relative ease of doing business and proximity can bring costs on par or even lower. Companies find that they don’t lose valuable time waiting for shipments. Deliveries can also be routed to another port or simply brought by truck when problems crop up, such as the eight-day strike that paralyzed the ports of Los Angeles and Long Beach last winter.

Companies looking to bring production closer to home rank Mexico as their No. 1 choice, according to a survey from consulting firm AlixPartners.

The tipping point may have come last year when manufacturing costs in Mexico, when adjusted for productivity, dropped below those in China, according to a Boston Consulting Group report. Within two years, the average cost of production in Mexico will be 6% below China and as much as 30% lower than countries such as Japan and Germany.

“Companies are bringing back parts of manufacturing to Mexico. They are saying, ‘We want our manufacturing process close to our engineers, we want our inventory next to our customers so it’s easier to ship,'” said Joe Mazza, a partner at advisory and accounting firm McGladrey in Los Angeles. “There are also many companies in China that are not exiting China, but reducing their manufacturing and bringing some to Mexico.”

With all its advantages, Mexico still has its fair share of problems. Companies that don’t produce their own goods can have a hard time finding the right third-party manufacturer in a country that can’t compete yet with China’s dense supplier base and strong manufacturing infrastructure. Mexico also just passed fiscal reforms that include raising taxes on U.S.-owned companies and other businesses, increasing worries that foreign firms might leave the country.

Despite these challenges, more U.S. companies will consider locating factories in Mexico in the coming years, analysts said.

“This is the return of manufacturing in Mexico,” said Scott Stanley, senior vice president of NAPS, which aids companies setting up factories in Mexico. “Every month it seems like there are more and more companies moving. There is no sign of that trend slowing down.”

shan.li@latimes.com

Copyright © 2013, Los Angeles Times

In Middle of Mexico, a Middle Class Rises

November 20th, 2013
The New York Times
November 18, 2013
By

GUANAJUATO, Mexico — A decade ago, Ivan Zamora, 23, might have already left for the United States. Instead, he graduated in May from a gleaming new university here, then moved on to an engineering internship at one of the many multinational companies just beyond the campus gates.

His days now begin at dawn inside the new Volkswagen factory a short walk away, and when he leaves at night, he joins a rush of the upwardly mobile — from the cavernous new Pirelli plant next door, an array of Japanese car-parts suppliers and a new Nivea plant on a grassy hillside.

“There’s just a lot more opportunity to study and to succeed,” Mr. Zamora said at the factory, surrounded by robots, steel, glass and young technicians. “Both my parents are teachers. They lived in an entirely different era.”

Education. More sophisticated work. Higher pay. This is the development formula Mexico has been seeking for decades. But after the free-market wave of the 1990s failed to produce much more than low-skilled factory work, Mexico is finally attracting the higher-end industries that experts say could lead to lasting prosperity. Here, in a mostly poor state long known as one of the country’s main sources of illegal immigrants to the United States, a new Mexico has begun to emerge.

Dozens of foreign companies are investing, filling in new industrial parks along the highways. Middle-class housing is popping up in former watermelon fields, and new universities are waving in classes of students eager to study engineering, aeronautics and biotechnology, signaling a growing confidence in Mexico’s economic future and what many see as the imported meritocracy of international business. In a country where connections and corruption are still common tools of enrichment, many people here are beginning to believe they can get ahead through study and hard work.

Mr. Zamora’s new job, for example (he was hired by VW at summer’s end), started with his parents prioritizing education, not emigration, and scrimping to give him a computer and, more recently, German lessons. The state of Guanajuato added to their investment by building the affordable polytechnic — part of a public university system that offers technical degrees as well as undergraduate and graduate degrees — and a sprawling interior port to lure the international companies that hire its graduates. And now Mr. Zamora has a job that pays enough to help his sister pursue her dream of studying marine biology.

This is a Mexico far different from the popular American conception: it is neither the grinding, low-skilled assembly work at maquiladoras, the multinational factories near the border, nor the ugliness of drug cartels. But the question many experts and officials are asking is whether Mexico as a whole can keep up with the rising demand for educated labor — and overcome concerns about crime and corruption — to propel its 112 million people into the club of developed nations.

“We are at something of a turning point,” said Eric Verhoogen, a professor of economics and international affairs at Columbia University. “The maquila strategy has been revealed not to have been successful, so people are looking around for something new.”

The automotive industry has been Mexico’s brightest spot so far. In many ways, central Mexico has already surpassed Detroit. There are now more auto-industry jobs in Mexico than in the entire American Midwest. At least 100,000 jobs have been added in Mexico since 2010, according to a recent Brookings Institution report, and General Motors, Ford, Chrysler, Honda, Mazda, Nissan, Audi and Volkswagen have all announced expansion plans, with nearly $10 billion to be invested over the next several years, mainly in a 400-mile corridor from Puebla to Aguascalientes.

The work tends to be better paid than what could be found in the area before the companies arrived. It is still a fraction of the salaries of American workers — many employees on the factory floors in the interior port make around $3.65 an hour — but higher-paid professionals make up about 30 percent of the employees at many auto plants here, roughly twice as much as in the maquiladoras near the border.

And although robotics and other changes have kept overall employment in the industry somewhat limited, more of the industry has moved to Mexico as the car business has recovered. Around 40 percent of all auto-industry jobs in North America are in Mexico, up from 27 percent in 2000 (the Midwest has about 30 percent), and experts say the growth is accelerating, especially in Guanajuato, where state officials have been increasing incentives.

The 2,600-acre interior port, for example, has become a draw because, in addition to the polytechnic, the state built customs facilities, a railroad depot and a link to the local airport. Guanajuato also helps find candidates for companies to hire and, in some cases, gives them free classes to help them pass standardized tests required for employment. At Volkswagen, many of the young men and women flowing in and out of test-taking sessions said they benefited from the assistance.

Guanajuato even pays companies a small bonus for sending workers abroad for training. Mauricio Martínez, 29, an engineer at the Italian tiremaker Pirelli, which was one of the first companies to take up residence in the port, said he and his wife, Mariana, still saw their trip to Prague after his training in Romania as a fairy tale.

“I’m a small-town guy,” he said one day after work, in his kitchen with a beer. “But there I was; an Italian company from Milan hired a small-town guy from Mexico.”

He said he now makes $2,250 a month ($27,000 a year), far more than at his old job at a tow-truck company and roughly double the median household income nationwide. That’s more than enough for a middle-class life here. Both husband and wife drive to work, and this year they bought a three-bedroom townhouse in a new development for about $80,000. On a recent visit, “The Big Bang Theory” played on their flat-screen TV as a neighbor watered her patch of lawn no bigger than a beach towel.

While cooking dinner, Mrs. Martínez said that her husband’s job had given them the credit and stability they needed to start her own business — a gourmet salad shop in a colonial village nearby. And as is common in other countries with an expanding middle class, such as Brazil, their economic rise has led to demands for better government.

When someone recently stole Mrs. Martínez’s cellphone, she said she went straight to the police over the objections of her father, who warned her nothing would be done. “He was right,” she said. “But next time it happens, I want my complaint to be there. I’m trying to make a living here, and I want a legal life.”

“My generation, we’re more prepared,” she added. “My parents, they never even finished school; we know if something is going to change, it has to start with us.”

Many young, middle-class Mexicans are coming to similar realizations, propelled by 13 years of democracy and the Internet. But their ranks are small. As the auto industry rebounds and wage inflation in China makes Mexico more attractive for global manufacturers, many foreign employers say that skilled employees are harder to find and keep, while the mass of Mexican workers do not measure up to what many companies need.

Only 36 percent of Mexicans between 25 and 64 have earned the equivalent of a high school degree, according to the Organization for Economic Cooperation and Development. Despite a rapid rise in foreign investment, with 2013 shaping up to be Mexico’s best year on record, the country is still struggling.

The Mexican economy has slowed significantly this year, and even when it was doing better, the nation’s poverty rate fell only 0.6 percent to 53.3 million people — roughly 45 percent of the population — between 2010 and 2012. Crime and a notoriously weak justice system continue to undermine the economy, with Mexico’s minister of health recently estimating that it costs 8 to 15 percent of the country’s annual gross domestic product. “It’s all the stuff we hear about again and again: Mexico has an education system that is not on par with its peers; a banking system that’s not lending; it has rule-of-law issues and public-security issues and corruption being a huge issue,” said Christopher Wilson, an economics scholar at the Woodrow Wilson International Center for Scholars in Washington. “The list goes on and on.”

Many economists and business consultants are keeping a close watch on President Enrique Peña Nieto’s efforts to improve education, open the energy sector to private investment and overhaul taxes.

Kevin P. Gallagher, an economist at Boston University, said Mexico also needed to prioritize innovation. “South Korea and Taiwan spend over 2 percent of G.D.P. on research and development; China spends almost 2 percent,” he said. “Mexico spends 0.4 percent.”

But on a smaller scale in Guanajuato, individual success is creating a sense of possibility. Some of Mr. Zamora’s friends are studying German, too, hoping to land work at Volkswagen, and a similar sense of momentum pervades the polytechnic, where students in pristine industrial labs, like Javier Eduardo Luna Zapata, 24, have begun to dream of more than work at an auto plant.

He and a few classmates won a prestigious design award this year for a scanner that would check airport runways for debris. “We want to start a company,” he said, displaying a video of the project on his cellphone. “We’re going to look for investors when we graduate.”

His classmates, representing a new generation of Mexicans — mostly geeks in jeans carrying smartphones — all nodded with approval.

Made in Mexico: An Increasingly Viable Alternative to Chinese Outsourcing

November 9th, 2013
By Mark A. Bogar, CFA and Michelle Donley Holmes | Posted: 11-07-13 | 01:13 PM
Executive Summary
Amid evolutionary changes in economics, leadership and policy, Mexico has emerged as an appealing alternative to China for U.S. companies looking to expand or relocate their manufacturing facilities. Wages have been sharply and steadily rising in China over the past decade, just as Mexico’s manufacturing landscape has undergone a dramatic shift, marked by high-tech manufacturing hubs that are synchronous with American manufacturing needs.The erosion of China’s comparative advantage over Mexico has resulted in global investment implications, with multiple industries positioned to benefit — or suffer — from the shift. In this paper, we highlight the economic, political and manufacturing climate in both countries, address relevant energy-supply and safety concerns, and identify emerging winners and losers from an investment standpoint.

The Economic and Political Backdrop

Although China has been a key driver of global growth over the past several years, it has recently experienced a slowdown,particularly within the manufacturing sector. At an April meeting of the International Monetary Fund’s International Monetary and Financial Committee, Gov. Zhou Xiaochuan of the People’s Bank of China said that his country’s 7.7% year-on-year GDP growth for the first quarter represented “a reasonable growth track,” with expected 2013 growth of 7.5%.1 While that outshines the tepid economies of many developed nations, it pales in comparison with the 10%-plus growth rates that China has enjoyed over much of the past decade. Many investors are also monitoring the monthly Purchasing Managers’ Index,which has been hovering precariously near the 50 level of demarcation between expansion and contraction.Also during April, China was the target of pessimistic comments from two major ratings agencies. Moody’s lowered its outlook on China’s government bond rating to stable from positive, while Fitch Ratings downgraded China’s long-term local currency credit rating to A-plus from AA-minus, both noting risks associated with excessive local government borrowing.2

The Chinese government, under the new leadership of President Xi Jinping, is well aware of these risks and is attempting to mitigate them, in part by increased austerity. Most recently, it tightened its controls over bond sales by local government financing vehicles, requiring them to have a rating above AA-plus.3 But other issues in the country, including suspected cyber attacks on the U.S. and renewed emphasis on strengthening China’s military, have stirred some concerns in the West.

Across the ocean, Mexico’s economy has also been struggling. For the first quarter, its GDP edged up a mere 0.8%, well below the 3.2% growth experienced in the fourth quarter of 2012. However, the slowdown was largely attributable to a calendar effect from an early Easter holiday and a 10% drop in public spending in the wake of December’s leadership transition.4 The country also posted a 4.9% drop in industrial output in March,in tandem with an easing in U.S. manufacturing growth.5 This has prompted speculation that Banco de Mexico (Banxico), the country’s central bank, will lower interest rates again this year; it last reduced its key rate by a half-point to 4% in March, the first cut in more than three years.

Nevertheless, sentiment about Mexico remains largely optimistic, at least over the long term. While growth expectations have been widely tempered for 2013, many investors are looking beyond that for compelling potential. In early May, Fitch lifted its rating on Mexico’s sovereign foreign currency credit rating to BBB-plus, the country’s first ratings upgrade since 2007, buoyed in large part by optimism about the country’s reform agenda.6

It is that ambitious reform strategy, promoted by Mexico’s new president, Enrique Peña Nieto, that has helped to strengthen the peso and underlined the country’s favorable investment climate. He has tackled labor reform, reining in some powers of the teachers’ union, and he has proposed to open the energy and telecommunications industries to more competition and private investment, thereby breaking up monopolies. If all of these reforms indeed reach fruition, Banxico estimates that GDP could hit 6%.

Manufacturing Climate

Amid these evolutionary changes in economics, leadership and policy, Mexico has emerged as a viable, appealing alternative to China for U.S. companies looking to expand or relocate their manufacturing facilities. According to the World Bank’s 2013 Ease of Doing Business Index, which measures business regulation environments across 185 economies, Mexico ranked No. 48, up from No. 53 in the previous year, while China held steady at No. 91.7A crucial factor in determining companies’ outsourcing decisions is wages, which have been sharply and steadily rising in China over the past decade, as shown in Exhibit 1.

Most of China’s manufacturers are situated along the coastal provinces, which offer ready access to ocean transport as well as supply-chain logistics, but with a costly labor pool and expensive land. The government has been taking aggressive action to rein in soaring real-estate prices; for example, Beijing recently began imposing a 20% capital-gains tax on existing-home sales. Moving facilities inland will not solve the issue of rising costs, as wages are not significantly different there and transportation infrastructure is inadequate, as it can cost more to ship goods from China’s interior to its coast than from Shanghai to New York.8

By contrast, Mexico’s manufacturing landscape has undergone a dramatic shift in geography. As assembly-for-export plants, called maquiladoras, in the border states suffered from the effects of economic recession and rising drug-related violence,companies nimbly shifted their focus to Mexico’s interior,supported by an attractive cost of living as well as by decent infrastructure and transportation. In fact, in the past three years, manufacturing jobs in the central states of Guanajuato, Aguascalientes, Queretaro and San Luis Potosi have climbed 30%, largely on the back of growing auto and aerospace businesses, which have in turn committed to providing those local communities with relevant educational opportunities.9

In tandem with this change, the importance of Mexico’s once-dominant textile industry has diminished significantly,replaced by high-tech manufacturing hubs for the automotive and aerospace industries, clearly synchronous with American manufacturing needs. The U.S. is now using its neighbor to the south as “a just-in-time, conveniently located and inexpensive sourcing partner, rather than a competitor,” according to Morgan Stanley Research.10

Comparatively speaking, there are other notable differences between the two countries’ workforces. Mexico’s laborers generally work no more than 48 hours a week, as mandated by federal law, and then go home at night, in contrast to many Chinese workers, who live in on-site dormitories, work lengthy shifts and return home only for the New Year holiday.

Demographics are another contrast, as Mexico’s population skews young, while China’s one-child policy has effectively shrunk the upcoming labor pool.

Energy Supply
Another potential advantage for Mexico’s manufacturing sector is its proximity to cheap natural gas, as the country uses the fuel for 46% of its energy, according to Morgan Stanley Research. However, much of this is virtually untapped, as the production monopoly of Petroleos Mexicanos, also known as Pemex, has left as much as 1 trillion cubic feet of gas reserves sitting idle, as private-sector development is prohibited.11Meanwhile, Mexico’s demand for the fuel has continued to soar, forcing Pemex to effectively ration limited supplies to its largest customers because of capacity constraints.This could all change if Peña Nieto has his way, resulting in a constitutional change to allow for asset sales in shale gas and deepwater exploration and downstream petrochemical auctions. That could unleash substantial foreign direct investment in the country’s energy sector, as Mexico has one of the world’s largest shale gas resource bases, according to the Energy Information Administration.12

On the other hand, China is the world’s largest energy consumer,and its largest producer and consumer of coal, which powers much of its electricity generation. Natural gas accounts for only 4% of China’s energy consumption, according to the EIA. The country also pays more for natural gas: an average of $10.77 per million Btu on LNG imports in 2012, compared with the recent benchmark Henry Hub price in Louisiana of $3.80 per million Btu. However, China is pursuing cleaner energy sources to combat rampant pollution concerns.

Safety Concerns
Both Mexico and China have a bit of an image problem when it comes to safety. For Mexico, it’s been the alarming rise in violence since former President Felipe Calderon’s war on drug cartels began in 2006. According to a travel warning issued by the U.S. State Department in November 2012, citing Mexican government data, “47,515 people were killed in narcotics-related violence in Mexico between Dec. 1, 2006, and Sept. 30, 2011,with 12,903 narcotics-related homicides in the first nine months of 2011 alone.” The warning also cited gun battles occurring “in broad daylight on streets and other public venues” as well as the prevalence of carjackings and highway robbery in the border regions.13 However, February 2013 marked a three-year low in the country’s murder rate, which remains below that of Brazil.Yet Mexico’s violence problem can be a scary proposition for companies looking to locate facilities there. This isn’t lost on government officials, although Peña Nieto’s plan has amounted to little beyond naming a security adviser and targeting economic improvement to reduce crime. Something else must be done. In fact, in an article published last year by CNBC.com, Andrew Selee, director of the Mexico Institute, a Washington think tank, summarized the resulting chilling effect on business: “It’s like the Mexican economy is driving with the emergency brake on. You can only imagine if the violence weren’t going on,its growth could be extraordinary.”14

China has encountered challenges of a different sort when it comes to worker and consumer safety. Its labor problems have come to the forefront in recent years, after a number of incidents, including explosions and improper use of toxic chemicals, resulted in many injuries and even deaths at Chinese factories tasked with producing iPhones and iPads. One manufacturer made headlines in 2010 after a spate of employee suicides prompted the company to install worker hotlines and even safety nets on some of its buildings to catch people who jumped. A much-cited New York Times article detailed the working conditions at some of these plants, citing 12-hour workdays, six-day workweeks and dormitory accommodations of 20 people in a three-room apartment.15

Product safety has been another ongoing concern, peaking in 2007 with the Food and Drug Administration’s ban on imported Chinese toothpaste because it may contain harmful levels of diethylene glycol, which is used in antifreeze, and a massive recall of more than a million Chinese-made toys that may contain high levels of lead. As recently as this year, though,China has faced related issues, such as the discovery of cadmiumin its rice supply and more recalls of infant formula because of contamination problems. China’s leaders have been attempting to respond to concerns more transparently, especially those related to environmental issues.16

Less imminently dangerous, but also problematic for business in China are counterfeit production and a perceived lack of court enforcement for intellectual property rights. The advantage here goes to Mexico, according to Morgan Stanley, which noted that, “Mexico offers a more attractive environment for multinational corporations concerned about piracy, copyrights and protection from industrial espionage than some of its Asian competitors.”17

A Matter of Convenience
Beyond economic slowdowns, leadership transitions, labor costs, safety concerns and energy sources, some decisions comedown to what is easiest for a company and its executives. When choosing between Mexico and China as an outsourcing partner, American business leaders may decide that all else being equal, Mexico is simply more convenient. Travel times and expenses are markedly lower, work visas are easier to obtain, and the language and cultural barriers are not as high. Currency is also in Mexico’s favor, as the peso floats along with the U.S. dollar, while China’s currency manipulation has been a sore spot in international trade talks. Mexico also operates on similar time zones and holiday schedules as the U.S., meaning fewer overnight conference calls and better-aligned availability.

Investment Implications
As outlined above, China’s comparative advantage versus Mexico has eroded on multiple fronts. This change in competitive positioning is resulting in global investment implications, with potential winners and losers dynamically emerging.We believe multiple industries are positioned to benefit from this shift, including:ƒƒ

  • North American resource companies. As Mexican manufacturing expands, factories there will consume more natural resources. To meet this rising demand, North American shale oil and gas may represent a material portion of Mexico’s energy supply, which would boost both infrastructure suppliers and hydrocarbon producers.
  • North American retailers and manufacturers. They can capitalize on both the cost savings of manufacturing in Mexico and shorter lead times in the supply chain. In particular, shorter lead times can be crucially important in helping companies respond to their customers’ needs in this increasingly competitive world.ƒƒ
  • Industrial automation companies. China needs to find ways to reduce its labor costs, and one proven method of doing so is by automating factory processing. The penetration of automated factories in China is low compared with the developed world.

Meanwhile, other industries will feel a negative impact from the change, including:

  • The ocean-transportation industry. As China loses market share to Mexico, fewer goods will be shipped from the Asia-Pacific region to the U.S. and other countries in the Western Hemisphere. As this industry has high fixed costs, any loss of volume will pressure margins.ƒƒ
  • Chinese retail plays. For years, Chinese consumer wages have grown at double-digit rates, fueling the retail industry. As wage growth slows, the risk is that Chinese retailers will expand too fast, leading to an oversupply of retail space.

Conclusion
We believe that U.S. and multinational manufacturers will continue to evaluate Mexico’s potential as a manufacturing center and likely come away with favorable conclusions. The country’s costs and wages remain reasonable, and its proximity to the U.S. offers numerous benefits. In addition, Mexico’s renewed reform efforts, if ultimately implemented, could significantly boost its economic growth. At the same time, China’s wages and real estate prices continue to rise, making it a less attractive alternative for American outsourcing. However, economic growth in both countries is rather tenuous, and safety is still a concern. As these dynamics evolve, we expect an ongoing shift in manufacturing from China to Mexico, with winners and losers emerging across the global landscape.

References
1Statement by the Honorable Zhou Xiaochuan, Governor of the IMFfor China, at the 27th meeting of the International Monetary and Financial Committee, Washington, D.C., April 20, 2013.
2Ian Chua and Pete Sweeney, “Moody’s lowers China outlook after Fitch downgrade,” Reuters, April 16, 2013.
3Jane Cai, “China tightens rules for local government debt sales,” South China Morning Post, May 8, 2013.
4Charles Roth, “Mexico’s First Quarter GDP Down, but Far From Out,”The Wall Street Journal, May 17, 2013.
5Alexandra Alper, “Mexico March industrial output contracts most in 3 yrs,” Reuters, May 10, 2013.
6Michael O’Boyle and Krista Hughes, “Fitch upgrades Mexico to BBB-plus on reform momentum,” Reuters, May 8, 2013.
7For information on the Ease of Doing Business Index methodology, please click here: http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB13-Chapters/Ease-of-doing-business-and-distance-to-frontier.pdf
8“The end of cheap China,” The Economist, March 10, 2012.
9Krista Hughes, “Mexican manufacturing: from sweatshops to high-tech motors,” Reuters, April 9, 2013.
10“US Manufacturing Renaissance: Is It a Masterpiece or a (Head)Fake?” Morgan Stanley Research, April 29, 2013.
11Carlos Manuel Rodriguez, “U.S. shale glut means gas shortage for Mexican industry: Energy,” Bloomberg, Sept. 4, 2012.
12Mexico analysis, U.S. Energy Information Administration, last updated Oct. 17, 2012.
13“Travel Warning: Mexico,” U.S. Department of State, Bureau of Consular Affairs, Nov. 20, 2012.
14Deborah Caldwell, “Crime explodes — but an economy booms,” CNBC.com, Sept. 18, 2012.
15Charles Duhigg and David Barboza, “In China, human costs are built into an iPad,” The New York Times, January 25, 2012.
16Te-Ping Chen, “Threat to rice fuels latest Chinese uproar,” The Wall Street Journal, May 21, 2013.
17“US Manufacturing Renaissance: Is It a Masterpiece or a (Head) Fake?” Morgan Stanley Research, April 29, 2013.
Disclosure
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President’s proposed tax reform is huge threat to Maquiladoras and border economy

October 7th, 2013

Mexico’s President Enrique Pena Nieto recently presented to Congress the executive’s fiscal reform initiative which will be evaluated by the House of Representatives first and then by the Senate.

The highly controversial proposal, originally expected to structurally reform Mexico’s budget model, turned out to be a general tax increase on businesses, higher income earners and international firms manufacturing in Mexico, among other already “captive” tax payers.

The proposal does not include any provisions for the reduction or transparency of public spending, and does not properly provide for the incorporation of informal, unregistered businesses to the taxpaying base.

According to Alfredo Coutino, Moody’s Latin America Director: “The proposal is short of the expectations originally outlined by the President and it does not reach the objective of balancing the budget.

The proposal is based on hiking current taxes and creating new ones for the current tax payers; it does not propose to improve the efficiency of the tax authority by increasing the number of tax payers.”

The proposition is a political social initiative as it seeks to dedicate a large portion of the tax proceeds to support unemployment insurance and universal health coverage in Mexico. It also waives to impose IVA (value added tax, VAT, or sales tax) on food and medicines (The possibility of taxing food and medicines was highly unpopular and was strongly opposed by the left parties).

Selective social programs are certainly needed in Mexico, but not at the sole expense of businesses.

Although rather unlikely, some hope that the government controlled House of Representatives is able to produced a more balanced proposal that includes spending cuts, transparency and accountability by state and federal entities and the expansion of the tax payers base.

Mexico’s legislators were setting an example so far through the “Pact for Mexico”, blitzing through reforms in education, telecom and anti-trust among others. Although the heat of recent elections seems to have dented the process, Mexico’s legislators are not yet ready to “join the club” of their U.S. colleagues where Congress is practically paralyzed.

The resulting tax reform legislation in Mexico, if passed, is expected to be announced during this coming week of October 20.

THE EFFECT ON MAQUILADORAS

Maquiladoras’ oldest cry in Mexico is the need for permanent and clear tax rules so that they can adequately make their typical 5-year financial and production plans. But the treasury department frequently changes the rules defying Mexico’s competitiveness to attract foreign investment. This time around, the resilience of maquiladoras may be pushed over the cliff.

In a nutshell, the new tax reform proposal includes the elimination of the preferential tax treatment that the maquiladoras currently have, taking them from a preferential corporate income tax rate of 17.5% to a rate of 30%.

In addition, the proposal will also impose a new 10% tax on corporate dividends and it will also expand the taxable income base by eliminating deductions and changing the “price-transfer” rules between parent company and maquiladora subsidiaries.

Also, the tax proposal practically eliminates the highly successful maquiladora regime that grants a tax free treatment on temporary importations of industrial inputs, by charging IVA in such imports. Although this IVA is subject to a drawback, it would take a huge amount of funds to finance its 6-month cycle from the time of payment until the eventual reimbursement.

Also, under the new rules, maquiladoras’ parent companies would be required to pay 16% IVA tax on the value of buy/sell transactions on the production supply chain or maquila to maquila transfers.

Unless they make profound changes to their global corporate structure, the IVA would directly impact the cost of doing business, because they would not be able to recover it. This would directly affect many Mexican businesses that are involved in the supply chain structure.

Carlos Angulo, PAN Congressman and member of the Maquiladora Committee and Secretary of the Constitutional Reform Committee of the lower house said: “We can summarize the effects of the proposed tax reform on the maquiladora industry in one word: Catastrophic.”

“For example, under the new rules, if implemented, the annual income tax bill of a typical 500-workers maquiladora operation would go from a current level of about $24 Million Pesos to over $230 Million”, explained Angulo, “..and the maquiladora industry as a whole would need to increase its working capital by US$17.5 Billion at an annual financial cost of about US$750 Million just to keep up with the IVA requirements on temporary imports.”

“Supply chain operations between maquiladoras, a current common practice, would be interrupted if faced with cascading IVA impositions. The tax reform proposal would be like a catastrophic knock-out blow to the maquiladora industry global competitiveness” said Angulo.

Luis Aguirre Lang, President of the Maquiladora National Council (INDEX) expressed his frustration as follows: “The tax reform has created panic among the international firms operating in Mexico. We could lose up to two million, three hundred thousand manufacturing jobs if this reform is approved as proposed.”

THE EFFECT ON THE BORDER ECONOMY

The tax reform includes a generalized consumption increase of the IVA rate within the border region from 11% to 16%.

Any housewife living in Ciudad Juarez knows what this means: More trips to El Paso to buy clothing, house items, school supplies, etc., anything that will be taxed in Mexico at 16%, she can get in El Paso at a sales tax rate of 8.25%, which with a little effort she can get refunded.

And the flow of visitors from El Paso to Juarez, which had recently started to pick-up as the security improved, will certainly suffer as restaurants, bars and other IVA taxed purchases will automatically increase their prices by 5% if the tax reform gets approved by Congress.

The reduction of consumer purchases in Juarez as a result of the IVA increase, will weigh in to increase the closing of commercial businesses, unemployment and violence.

The combination of reduced consumption and pulling the rug from under the maquiladoras will have a multiplying, significant negative effect on Mexican border cities’ economies and their quality of life.

CONCLUSION

Carlos Angulo summed it up as follows: “The tax reform proposal appears to be designed by a freshman student with a total ignorance of border commerce and international production sharing practices.”

It is expected that industry associations, state and city governments and everybody else with a stake in the maquiladora industry and the border economy will lobby heavily in the weeks to come to mitigate the negative effects of the tax reform on the 43 year-old successful maquiladora program.

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Juarez-El Paso NOW Staff report

 

Mexican Manufacturing Benefits U.S. Industry

July 26th, 2013

TECMA

When NAFTA was first implemented in the early 1990s, the fear was that Mexican manufacturing would cost the U.S. jobs and wreak havoc upon U.S. industry. Mexico was viewed largely as an economic competitor that would pilfer U.S. employment opportunities, businesses, and bring about the demise of national economic prosperity. This set of assumptions was merely the result of a misconception of the nature of the U.S.-Mexico industrial alliance.

In reality, China has been a much more formidable concern in terms of low wages and competition for industry stateside. The past decade, however, has amply shown that the best way for U.S. industry to meet this challenge is partnership – not competition – with Mexico through production sharing, or vertical specialization, which occurs when two or more countries bilaterally produce a product. In other words, Mexican manufacturing firms rely upon materials produced by U.S. suppliers. The geographic proximity of Mexico and the U.S. has actually led to greater opportunities for U.S. suppliers vs. China. This is demonstrated by the fact that Mexican imports contain ten times more U.S. content than similar items manufactured by the Chinese. In fact, 40% of the United States’ imports from Mexico contain material inputs that originated in the United States.

Thus we see that “near-sourcing” manufacturing jobs to Mexico is, in a palpable way, beneficial to U.S. industry, fostering a partnership that keeps high paying jobs in the U.S. and sustains a demand for suppliers to feed the manufacturing done in Mexico that will then be exported, in most instances, back to the U.S.. This partnership results in products that, when sitting on shelves next to those produced in China and other developing countries such as India, Brazil, Indonesia, Vietnam and Malaysia, are price competitive.

With the aforementioned in mind, it is no surprise that one in twenty-four U.S. jobs is dependent on the Mexican maquiladora industry. Over 6 million U.S. jobs are dedicated to supplying manufacturing operations in Mexico, which means there is significant opportunity for U.S. suppliers to expand to meet the demand created by Mexican manufacturing activities.

Four segments in particular presently stand out as unique growth opportunities for U.S. industry:

In 2011, the Mexican automotive industry achieved a growth rate of thirteen percent. As a result, the demand for U.S. made parts and supplies is on the rise – these include items such as spare and replacement parts for gasoline and diesel engines, electrical parts, collision repair parts, gear boxes, drive axles, catalytic converters, and steering wheel assemblies, for example.

In 2010 alone, Mexico imported approximately $3.5 billion worth of products for the manufacturing of medical devices, $2 billion of which were from U.S. suppliers. Key opportunities for medical products suppliers include anesthesia equipment, defibrillators, electrocardiographs, electro surgery equipment, incubators, lasers for surgery, etc.

Total Mexican packaging production reached 9.1 million tons of containers and materials in 2010 for a value of $10.1 billion, of which $2.5 billion came from U.S. industry. There is significant growth potential for U.S. suppliers of metal, plastics, glass, wood, and cardboard packaging materials.

$1.4 billion was invested in plastics manufacturing in Mexico in 2011, revealing a steady rise in the demand for plastic materials and resins. Additionally, Mexico exports Ethylene and imports Polyethylene, which shows the opportunity for U.S. industry to supply polymerization technology.

Mexican manufacturing, although this may be counter intuitive to some, should be viewed as a partner to the U.S., rather than exclusively as a competitor.

K. Alan Russell
President and C.E.O.

The Tecma Group of Companies
2000 Wyoming Avenue
El Paso, Texas 79903
Phone: 915 . 534.4252
Fax: 915 . 534.0205
E-Mail: Alan@Tecma.com
www.Tecma.com

Our Mission: “To create an environment where our clients and employees never want to leave us.”

Mexico’s Welcome Mat Attracts Aerospace Manufacturers

April 5th, 2013

By Michael Mecham
Source: Aviation Week & Space Technology
April 01, 2013                             Credit: Nordam

Michael Mecham Queretaro and Chihuahua, Mexico

In the past decade, Mexico’s welcome mat for the aerospace establishment has found an industry eager to manufacture “south of the border.”

The obvious attraction is Mexico’s lower wage-structure: some say that in Mexico manufacturers pay a tenth of what equivalent assembly jobs cost in the U.S.; others cite a differential of about a third from what is paid in Europe. This discrepancy is best explained by the costs of different skill levels, and by a hesitancy to be too specific on a subject that raises political hackles back home.

But lower wages tell only part of the story for why Mexico, a nation of 115 million, now counts 270 aerospace factories within its borders. On national and state levels, the country is aggressively pursuing “high-tech” aerospace jobs as part of a broadening of its industrial base beyond automobiles and electronics, for which it is already a major producer. U.S. shoppers may think of Mexico mainly in terms of summer vegetables in the winter, but the World Bank reports that industrial products account for 90% of its export earnings. The bank ranks Mexico as the world’s 13th largest economy in nominal terms and No. 11 in purchasing power. “Hecho en Mexico”—Made in Mexico—is more common everywhere, including in aerospace.

The aerospace influx has not happened overnight. Its roots date to the mid-1970s when U.S. companies, a mix of multinationals and lower-tier suppliers, began sending basic parts manufacturing and assembly tasks across the border, mostly to border towns like Tijuana and Mexicali but also deeper into the country to cities like Monterrey. Service operations followed, as did company research activities.

However, it has been in the past decade that Mexico’s aerospace manufacturing growth has mushroomed. Political reform led it to pursue a global free trade agenda vigorously and its 1994 signing of the North American Free Trade Agreement (Nafta) benefitted Mexico greatly. Still, it took about a decade for the aerospace sector to take off. Until 2004, growth was scattered, says Queretaro state Gov. Jose Calzada. Not anymore. “We’ve seen incredible changes in just the last five years,” he says.

The boom times are a testament to Mexico’s geography, its embrace of free trade and adoption of legal mechanisms that provide a “soft landing” for foreign-owned factories. Local leaders clear red tape and amaze U.S. and European executives at how quickly they can put up factories. A typical response comes from Peter Huij, a senior Fokker Aerostructures executive in Chihuahua, about how quickly the company went from bare earth in May 2011 to a completed 75,000-sq.-ft. factory in November: “It would be impossible in Europe.”

Behind all of this is Mexico’s Maquiladora factory system for supporting foreign companies, which allows them to control their own destiny, importing raw materials such as aerospace-quality alloys, or wiring and then exporting the finished product tax-free. Foreign manufacturers commonly turn to a large service provider—Intermex and American Industries Group are leaders for the aerospace sector—that lease buildings to their clients and handle their human resources, tax and other business needs under Mexican law. About 80% of the aerospace companies in Mexico use such services. Of the 36 Maquiladoras registered by the Mexican government last year, six were in aerospace, including a GKN Aerospace plant in Mexicali, Latecoere in Hermosillo, coatings specialist Ellison Surface Technologies and Rolls-Royce turbine supplier JJ Churchill in Guaymas and a fourth division for Zodiac in Chihuahua.

Under the Maquiladora system, Mexico allows resident foreign companies to control 100% of their businesses. They do not face the “local partner” rules so common elsewhere that limit foreigners to a maximum 49% share.

“They make it easy for you to do business down here,” says John Gardner, strategic program manager at Kaman Aerostructures, another newcomer in Chihuahua. “They provide a ‘soft landing,’ to get a quick startup—a good startup. We got a lot of support up front and afterward.”

Besides lower costs, the business case for going abroad is often a need to penetrate a particular market. That is particularly true in China but is far less meaningful in Mexico for original equipment manufacturers (OEMs). Eurocopter is an exception. The French-German company says the country is a prize sales territory.  “It’s the most promising economy in the region, perhaps better than Brazil, says President/CEO Lutz Bertling, naming Eurocopter’s other hot new growth market in New World sales. Eurocopter opened a $100 million, 130,000-sq.- ft. factory in Queretaro in February as an offset for a large Mexican military purchase. Making such “proximity” manufacturing investments is “part of our DNA,” he says.

But for most, tapping into Mexico as a sales market is less important than the country’s geography, trade policy and political and economic stability. “Our main reasons for being here are, number one, to be close to the U.S. market and number two, to be close to the U.S. dollar market,” says Stephane Lauret, Safran’s national executive for Mexico and South America. The Mexican peso is pegged to the U.S. dollar, giving Europeans a currency hedge against the Euro. Nafta allows Safran to operate in a low-wage environment with access to the U.S. market. About 80% of everything Safran makes in Mexico, from Labinal’s 787 wiring harnesses and Messier-Bugatti-Dowty landing gear to Snecma’s CFM56-7B low-pressure compressors, is shipped across the U.S. border.

There is another, more subtle, reason why Mexico’s star is rising. As they search for industrial development opportunities, the country’s leaders emphasize their goal is for Mexico to become a key player in aerospace’s global supply chain. The message is not new, they have followed it for years—and succeeded—as automotive assemblers. However, what is not on the political agenda is a national aspiration to begin competing in aircraft, engine and major systems development or manufacturing. Of course, national ambitions are subject to change, but Mexico’s focus on the valued-supplier role plays well with manufacturers concerned about the security of their intellectual property (IP) when they work in markets such as China, where a well-financed state agenda of competing with Western OEMs has been announced.

Besides IP protection, there are other benefits to this good-supplier attitude. Mexican workers are widely praised for their eagerness to meet their employers’ standards. “Mexican workers want to learn the U.S. way,” says Alfred Espirio, senior vice president of international finance for General Electric in Mexico. “In China and India, they want you to do it their way.”

Mexico’s aerospace industrial growth has followed a classic leader-follower pattern. Safran’s first push was 25 years ago in Reynosa making electronics for cars. The company wanted to see how things went. Its first big aerospace bet was placed in 1998 when Labinal bought a General Dynamics wire harness factory in Chihuahua as part of a broader push in North America for Boeing contracts. Largely because of Labinal in Chihuahua, Mexico has become Safran’s third largest industrial base, behind France and the U.S.

But no one can reserve Mexico exclusively for themselves. Labinal’s biggest competitor, Latecoere, says it will build a factory in Hermosillo, Sonora’s capital, that will employ 400 by 2015 to make harnesses through its LATelec subsidiary. However, the factory’s output will be more diverse than Labinal’s; it also is to produce transport passenger doors.

Westinghouse and Honeywell were the first U.S. companies to arrive in Chihuahua, making components for the defense industry in the 1970s. The mountainous city has a farming, mining and automotive supply background with touches of the U.S.—Home Depot, Starbucks, Sam’s Club. There also are 32 aerospace factories scattered across it in industrial parks, some neighboring car factories, and others for consumer electronics, such as China’s giant Foxconn. Most of the aerospace activity has arrived since 2007 and the city has established itself as headquarters for general, business and rotorcraft manufacturing dominated by U.S. concerns, including MD Helicopters, Bell Helicopters, Cessna and Beechcraft.

The leader-follower rule is even stronger in Santiago de Queretaro. The capital city is about 140 mi. north of Mexico City and came to aerospace later than areas along the U.S. border. Its lifestyle, with an old town filled with cafes and historic churches, is especially appealing to Europeans. Observers of the progress of Mexico’s aerospace industry count Bombardier’s 2006 decision to locate in Queretaro as the start of the influx by other big companies, whether OEMs or major suppliers. In Queretaro alone, Meggitt, CFM, Messier-Bugatti-Dowty, Precision Castparts, AE Petsche, Aernnova and Eurocopter have all taken up residence near Bombardier.

Baja California and Sonora are centers for parts shops and actually have bigger company rosters than Chihuahua or Queretaro. Baja’s output covers a variety of engine, airframe and interiors supplier functions. Sonora is known as an aero-engines supply center.

Of the roughly 270 aerospace companies currently in Mexico, 79% are in manufacturing, 11% in maintenance, repair and overhaul and 10% in development and engineering, says Vladimiro de la Mora, president of the Mexican Federation of Aerospace Industries (Femia).

Femia’s goals are to see the country rank among global aerospace’s top 10 supplier nations by 2020; it is now ranks 15th. The federation wants exports of $12 billion a year by then, with half their value coming from local content, and employment of 110,000 workers. Employment is now more than 34,000 and exports are worth $4.5 billion.

Although Mexico’s aero business is booming, it is riding a wave of global demand dictated by others. It will live and die by how well U.S., Canadian and European OEMs and Tier 1 suppliers fare. But its factories also can be the tail that wags the dog. In February, Bombardier announced a six-month delay in first delivery of the Lear 85 because of technical challenges with its all-composite airframe, manufactured in Queretaro. These problems have now been overcome, the company says.

In Mexico, plant managers see a national industry in its infancy, still learning the basics but with an eager workforce. “The numbers tell us we are attractive now,” says Kaman Aerostructures plant manager Francisco Meza in Chihuahua. “What I would say is that the industry is not mature enough. One of my major challenges is to make this business more innovative, to introduce more lean.”

Bombardier’s director of strategy and international business development, Vice President Michael McAdoo, watches the wage and skill-set forces at work in Mexico closely. His job involves tracking costs and managing capacity for Bombardier’s global supplier network. He sees a narrowing cost gap between Mexico and China. China still wins on costs but Mexico has advantages in terms of education, investment climate and infrastructure.

Mexico is “assembling forces for expansion,” he says. “It wants to move into higher value-added activities.” The question is how much it can expand, and how quickly.

Soon after the Queretaro factory opened, Bombardier pulled work into it from Mitsubishi Heavy Industries, a tradeoff McAdoo characterizes as common with a long-time partner. But even as Mexico becomes more attractive, Bombardier continuously evaluates other locations for its supply chain. New on the list is Casablanca, Morocco.

The question of whether low-cost Mexico is taking jobs from U.S. and European workers is a sensitive one, especially for Americans. Many U.S. OEMs declined to comment on this issue.

Old-fashioned labor-rate hunting explains much of the recent push into Mexico, especially from the U.S. and Canada. For instance, pricing pressure on the 737 trailing edge flap drive transmissions that it makes for Boeing prompted Curtiss-Wright Flight Controls of Shelby, N.C., to open a 70,000-sq.-ft. factory in Queretaro in January 2012. “Wages are one-tenth those in Shelby,” Director of Operations Everett Rice says.

But other factors are also at work. Kaman Aerostructures’ lead factory in Jacksonville, Fla., is largely devoted to military contracts, notes Vice President-Sales/Marketing Jim Melvin. The company needed to expand its commercial operations and knew it would be under pricing pressure. “We looked globally, at Asia and elsewhere, but zeroed in on Mexico based on where commercial aerospace is heading,” he says. “We weren’t looking to take work out of Jacksonville. Our strategy was to put in the [Chihuahua] facility and then go after work.”

The first parts produced by France’s Manoir Aerospace’s finishing and machining factory in Chihuahua in 2009 did not head back home. They were for its long-time customers Snecma and Messier-Bugatti-Dowty in Queretaro, says plant manager Nicolas Maillard.

Easy logistics across the U.S.-Mexico border were early attractions, but increasing demand has opened flight connections deeper into the country. For Rice, shifting work into Mexico instead of overseas keeps time-zone changes to a minimum and allows him to board a flight at 8 a.m. in Charlotte, make a connection in either Dallas or Houston, and be in Queretaro by noon.

European OEMs say rising demand means expansion in Mexico does not diminish jobs at home, but it does overcome concerns they have about finding new hires in Europe, where open jobs listings can last for months. In Mexico, they find workers in their 20s and 30s eager to make a transition into aerospace from other industries. “Aerospace is very sexy now,” says Fokker’s Huij.

Which is not to say that qualified workers are always available in Mexico. “Queretaro needs more engineers,” says Lauret. “Schools in Chihuahua are good—they’re a strength, but more are needed.”

Competition among Mexican states for jobs is no less intense than it is in the U.S. Not surprisingly, the biggest group of foreign plants is in the six states that border the U.S. A breakdown by Femia ranks 22% of the country’s aerospace industry with just 11-50 employees and 7% with 10 or fewer. Forty-three percent have 51-250 employees and 28% have more than that. There are 15 corporations with more than 500 employees, with the largest concentration (8) in Baja California.

Security concerns, from shootings or kidnappings for ransom, remain a consideration in Mexico because of drug-war violence. The government reports that industry in general, and aerospace in particular, has not been targeted and no manufacturing executives interviewed by Aviation Week reported problems. But the issue remains, and is one of the biggest political concerns for Enrique Pena Nieto, who became president in January. A month later, when he celebrated the opening of a Eurocopter factory in Queretaro, the company’s second in Mexico, there had already been 2,399 deaths since the first of the year.

The most violent areas tend to be in the north, along the U.S. border. Although they emphasize that their facilities have remained safe, U.S. executives still exercise caution. When senior U.S. officials visit they take precautions, like not bringing U.S.-licensed vehicles across the border and following a strict hotel-to-factory travel regime. Queretaro is regarded as safe, which is one reason it has had such success attracting foreign firms. Chihuahua had a spate of violence in 2009 but it is said to have settled down.

Still, one manager who makes frequent trips there hires a trusted driver, just to be safe.

Tap on the icon in the digital edition of AW&ST for listings of 250 aerospace companies in 15 Mexican states,  or go to  AviationWeek.com/mexicoaerospace

Copyright © 2013, Aviation Week, a division of The McGraw-Hill Companies.

Some manufacturers say ‘adios’ to China

March 24th, 2013

MEXICO CITY — Robert Moser moved the manufacturing of his company’s lines of cleaning products and kitchen gadgets to China during the last decade. Now his company is moving its manufacturing again — to Mexico.

“When you look at total costs, you’re pretty much at parity,” says Moser, president of Casabella, based in Congers, N.Y.

Companies like Casabella couldn’t move out of Mexico fast enough a decade ago, sending production to China to take advantage of the cheaper wages and prices in a country keeping its currency artificially low.

But the cost of doing business in China has been rising steadily, say companies that have returned to Mexico. Salaries are surging there. The Chinese currency, the yuan, has risen in value, making goods more expensive to export. Shipping costs have risen as well, making a move to Mexico even more attractive to companies whose primary markets are in the Western hemisphere.

The Mexican peso this week rallied on optimism about the country’s economic prospects following an unexpected rate cut last week. The peso has risen 2.8% in 2013.

Recently installed President Enrique Pena Nieto, meanwhile, has promised changes to Mexico’s tax system and reforms of its government-run energy sector to attract more outside investors and businesses from the USA and elsewhere.

“Mexico is a stable country, close by, but unfortunately with cheap wages,” says Eduardo Garcia, publisher of online business journal Sentido Común.

Wages were six times higher in Mexico a decade ago, but only 40% higher than those paid in China in 2011, according to a recent report by the International Monetary Fund. Mexico is part of more than 40 free trade agreements, which tends to reduce costs further. Then there is the weariness of doing business in China what with the midnight telephone conferences and 16-hour flights to Beijing — says Ed Juline, whose Guadalajara-based company, Mexico Representation, consults and represents manufacturers moving to Mexico.

“I have a dozen projects on my plate” of companies that want to get out of China, Juline says.

The upswing in manufacturing — about 20% of Mexico’s GDP — is driving the Mexican economy. Mexico says it expects its economy to expand by 3.5% in 2013.

It’s a reversal of fortune for Mexico, which lost manufacturing jobs to China during the last decade and watched rival Brazil boom by selling boatloads of raw materials to the emerging Asian economy.

“Mexico was uncompetitive,”  Juline says.

But China was gaming the system against places such as Mexico, he says. Along with keeping its currency low, China has subsidized fixed costs to benefit its commercial activity, which hurt Mexico, he says.

Meanwhile, lead times for Chinese factories are increasing and manufacturers there are showing less interest in handling smaller orders, says Mike Rosales, whose Los Angeles-based company, Manufacturing Marvel, makes toys and trinkets in both China and Mexico.

Rosales says that shipping costs for him jumped when oil prices hit $100 a barrel, and the lack of protection in China for industrial and intellectual property became problematic.

“They would ship your product out the front and your product with someone else’s name out the back,” he says.

Some of the merchandise being made in Mexico ranges from figurines to flat-screen TVs, along with advanced items such as aerospace parts and automobiles — 2.8 million of which were assembled south of the border last year.

Some here say more manufacturing in Mexico benefits U.S. businesses because it offers them suppliers on both sides of the border. Jim Raptes, custom sales manager at Deco Products, which makes zinc castings in Decorah, Iowa, says his Mexican business has increased from 1% of total sales to 10% over the past five years, due to orders from manufacturers in Mexico.

Security remains a concern in Mexico, Juline says. But he feels the violence, due largely to drug wars, has given few companies pause about coming south.

Executives won’t travel to Mexico, he says. “But the Americans who do come down here secretly love it.”