NAFTA’s Impact on the U.S. Economy: What Are the Facts?

September 8th, 2016

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NAFTA

Sep 06, 2016

When President Bill Clinton signed the North American Trade Agreement (NAFTA) in December 1993, he predicted that “NAFTA will tear down trade barriers between our three nations, create the world’s largest trade zone, and create 200,000 jobs in [the U.S.] by 1995 alone. The environmental and labor side agreements negotiated by our administration will make this agreement a force for social progress as well as economic growth.” Twenty-three years later, scholars and policy makers often disagree about the impact that NAFTA has had on economic growth and job generation in the U.S. That impact, they say, is not always easy to disentangle from other economic, social and political factors that have influenced U.S. growth.

On the positive side, overall trade between the three NAFTA partners — the U.S., Canada and Mexico — has increased sharply over the pact’s history, from roughly $290 billion in 1993 to more than $1.1 trillion in 2016. Cross-border investment has also surged during those years, as the stock of U.S. foreign direct investment (FDI) in Mexico rose from $15 billion to more than $107.8 billion in 2014. As for job growth, according to the U.S. Chamber of Commerce, six million U.S. jobs depend on U.S. trade with Mexico, a flow that has been greatly facilitated by NAFTA, which has helped eliminate costly tariff and non-tariff barriers. NAFTA has also facilitated a multi-layered integration of the U.S., Mexican and Canadian supply chains. According to the Wilson Center, twenty-five cents out of every dollar of goods that are imported from Canada to the U.S. is actually “Made in USA” content, as are 40 cents out of every dollar for goods imported into the U.S. from Mexico.

Geronimo Gutierrez, managing director of the North American Development Bank (NADB), notes that trade between the United States and Mexico reached over $500 billion in 2015, a five-fold increase since 1992, when NAFTA negotiations concluded. Thus, he explains, Mexico imports more from the U.S. these days than do all of the so-called BRIC nations combined – Brazil, Russia, India and China. (The NADB acts as a binational catalyst in helping communities along the U.S.-Mexico border develop affordable, long-term infrastructure.)

Gutierrez adds that there are lesser-known benefits of NAFTA. By promoting the tight integration of North American industrial supply chains, “NAFTA is creating partners and not competitors among its member countries. As for Mexico’s interest in this bilateral relationship, it can be summarized in two facts: about 80% of Mexico’s exports go to the U.S., while 50% of the accumulated foreign direct investment received between 2000 and 2011 comes from the U.S. Moreover, NAFTA has been the fundamental anchor for reforms that make Mexico a more modern economy and open society.”

A Modest Impact

For all that, most studies conclude that NAFTA has had only a modest positive impact on U.S. GDP. For example, according to a 2014 report by the Peterson Institute for International Economics (PIIE), the United States has been $127 billion richer each year thanks to “extra” trade growth fostered by NAFTA. For the United States, with its population of 320 million at the time of that study, the pure economic payoff was thus only $400 per person, while per capita GDP was close to $50,000. And while the costs of NAFTA are highly concentrated in specific industries like auto manufacturing — where job losses may be significant for specific firms — the benefits of the trade pact (such as lower prices for imported electronics or clothing) are distributed widely across the U.S., as they are in the case of any trade pact worldwide.

Most studies conclude that NAFTA has had only a modest positive impact on U.S. GDP.

Supporters of NAFTA estimate that some 14 million jobs rely on trade with Canada and Mexico combined, and the nearly 200,000 export-related jobs created annually by NAFTA pay an average salary of 15% to 20% more than the jobs that were lost, according to a PIIE study. Furthermore, the study found that only about 15,000 jobs on net are lost each year due to NAFTA. “On our reckoning, since NAFTA’s enactment, fewer than 5% of U.S. workers who have lost jobs from sizable layoffs (such as when large plants close down) can be attributed to rising imports from Mexico,” wrote its authors, PIIE senior fellow Gary Clyde Hufbauer and research analyst Cathleen Cimino-Isaacs. For the roughly 200,000 out of 4 million people who lose their jobs annually under these circumstances, the job losses can be attributed to rising imports from Mexico, they wrote, but “almost the same number of new jobs has been created annually by rising U.S. exports to Mexico.” Moreover, “For every net job lost in this definition, the gains to the U.S. economy were about $450,000, owing to enhanced productivity of the workforce, a broader range of goods and services, and lower prices at the checkout counter for households.”

Trade specialists agree that it has proven difficult to separate the deal’s direct effects on trade and investment from other factors, including rapid improvements in technology, expanded trade with other countries such as China and unrelated domestic developments in each of the countries.

Walter Kemmsies, managing director, economist and chief strategist at JLL Ports Airports and Global Infrastructure, notes that that many of the job losses that are popularly blamed on NAFTA would likely have taken place even in the absence of NAFTA, in part because of growing competition from China-based manufacturers, many of which have taken advantage of currency manipulation by the Chinese government that has rendered China-made products more price-competitive in the U.S. Likewise, Mauro Guillen, head of Wharton’s Lauder Institute, agrees that without NAFTA, many American jobs that were lost over this period would probably have gone to China or elsewhere. “Perhaps NAFTA accelerated the process, but it did not make a huge difference.”

“A lot of instant experts on NAFTA don’t really understand trade and what drives trade,” said Kemmsies. “And so they get confused between NAFTA and the globalization of the world’s economy. The fact is, with or without NAFTA, we would have done a lot more trade with Mexico anyway. I’m not sure that NAFTA has even fostered any growth of trade between the U.S. and Mexico. Look at Mexico and forget about everything else for a second: What is the single-biggest trade-flow corridor in the world? It’s East-West — Asia to Europe to North America. Mexico happens to sit right smack in the middle of the East-West trade flow…. Here is Mexico, with 120 million people, and all of these abilities to draw raw materials…. You have a cheap labor force, a global geographic advantage, a rising middle class. It’s a good place to make stuff.”

For a long time, because of a lack of investment, Mexico’s infrastructure was well below par, including its ports, which were made to process raw materials, rather than handle industrial goods. In that respect, NAFTA has had a positive impact on Mexico’s economic development, and it has encouraged foreign investors to trust that Mexico, whose governments were long protectionist and populist, would follow the rule of international law. International trade specialists M. Angeles Villarreal and Ian F. Fergusson of the Congressional Research Service wrote in a recent report: “While Mexico’s unilateral trade and investment liberalization measures in the 1980s and early 1990s contributed to the increase of U.S. Foreign Direct Investment (FDI) in Mexico, NAFTA provisions on foreign investment may have helped to lock in Mexico’s reforms and increase investor confidence [in Mexico.]” Nearly half of total FDI investment in Mexico is in its booming manufacturing sector.

Job Losses and Lower Wages

Some critics argue that NAFTA is to blame for job losses and wage stagnation in the U.S., because competition from Mexican firms has forced many U.S. firms to relocate to Mexico. Between 1993 and 2014, the U.S.-Mexico trade balance swung from a $1.7 billion U.S. surplus to a $54 billion deficit. Economists such as Dean Baker of the Center for Economic and Policy Research and Robert Scott, chief economist at the Economic Policy Institute, argue that the consequent surge of imports from Mexico into the U.S. coincided with the loss of up to 600,000 U.S. jobs over two decades, although they admit that some of that import growth would likely have happened even without NAFTA.

“A lot of instant experts on NAFTA don’t really understand trade and what drives trade.” –Walter Kemmsies

While conceding that many U.S. high-wage manufacturing jobs were relocated to Mexico, China and other foreign locations as a result of NAFTA, Morris Cohen, Wharton professor of operations and information management, argues that NAFTA has, on balance, been a good thing for the U.S. economy and U.S. corporations. “The sucking sound that Ross Perot predicted did not occur; many jobs were created in Canada and Mexico, and [the resulting] economic activity created a somewhat seamless supply chain — a North American supply chain that allowed North American auto companies to be more profitable and more competitive.”

Moreover, in their 2015 study published by Congressional Research Service, Villarreal and Fergusson noted, “The overall economic impact of NAFTA is difficult to measure since trade and investment trends are influenced by numerous other economic variables, such as economic growth, inflation, and currency fluctuations. The agreement may have accelerated the trade liberalization that was already taking place, but many of these changes may have taken place with or without an agreement.”

Some of its harshest critics concede that NAFTA should not be held entirely responsible for the recent loss of U.S. industrial jobs. According to Scott of the Economic Policy Institute, “Over the past two decades, currency manipulation by about 20 countries, led by China, has inflated U.S. trade deficits, which [in combination with the lingering effects of the Great Recession] is largely responsible for the loss of more than five million U.S. manufacturing jobs.” Scott argues that while NAFTA and other trade deals such as the Trans-Pacific Partnership are bad for American workers, the fundamental problem is not that they are “free trade” pacts, but that they “are designed to create a separate, global set of rules to protect foreign investors and encourage the outsourcing of production from the United States to other countries.”

Unlike the earliest generation of “free-trade agreements” – which focused on reducing or eliminating tariffs and duties that stifled trade — these newer pacts are more comprehensive. As Scott explains, they “contain 30 or more chapters providing special protections for foreign investors; extending patents and copyrights; privatizing markets for public services such as education, health, and public utilities; and ‘harmonizing’ regulations in ways that limit or prevent governments from protecting the public health or environment.” When critics of the TPP conflate their criticism of that pact with their criticism of “free trade,” they miss an essential element of the TPP that has disaffected many otherwise loyal supporters of earlier-generation agreements that truly focus on deregulation of “trade” per se, he notes.

The Role of China

Two decades ago, when NAFTA was born, China had only a faint presence in the global economy, and was not yet even a member of the World Trade Organization. However, the share of U.S. spending on Chinese goods rose nearly eight-fold between 1991 and 2007. By 2015, U.S. trade in goods and services with China totaled $659 billion— with the U.S. importing $336 billion more than it exported. China has become the U.S.’s top trading partner for goods — a development never anticipated at the signing of NAFTA. And yet, NAFTA continues to attract the lion’s share of the blame among U.S. critics of globalization, despite the fact that the U.S. and China have yet to sign any bilateral free-trade treaty.

“NAFTA did foster greater U.S.-Mexican integration and helped transform Mexico into a major exporter of manufactured goods.” –Robert Blecker

How is that possible? In a recent study that de-emphasized the impact of NAFTA on the U.S. economy, economists David Autor (MIT), David Dorn (University of Zurich) and Gordon Hanson (University of California, San Diego) stress the role of China’s emergence on job growth and wages in the U.S. In the study, published by the National Bureau of Economic Research, they write: “China’s emergence as a great economic power has induced an epochal shift in patterns of world trade. Simultaneously, it has challenged much of the received empirical wisdom about how labor markets adjust to trade shocks. Alongside the heralded consumer benefits of expanded trade are substantial adjustment costs and distributional consequences…. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize. Better understanding when and where trade is costly, and how and why it may be beneficial, are key items on the research agenda for trade and labor economists.”

As Robert Blecker, an economist at American University, notes, “Contrary to the promises of the leaders who promoted it, NAFTA did not make Mexico converge to the United States in per capita income, nor did it solve Mexico’s employment problems or stem the flow of migration.” However, “NAFTA did foster greater U.S.-Mexican integration and helped transform Mexico into a major exporter of manufactured goods.”

The benefits for the Mexican economy were attenuated, however, by heavy dependence on imported intermediate inputs in export production, as well as by Chinese competition in the U.S. market and domestically. The long-run increase in manufacturing employment in Mexico (about 400,000 jobs) was small and disappointing, while U.S. manufacturing plummeted by 5 million — but more because of Chinese imports than imports from Mexico. In both Mexico and the United States, real wages have stagnated while productivity has continued to increase, leading to higher profit shares and a tendency toward greater inequality.”

Blaming NAFTA for all of these disturbing problems may make some NAFTA critics feel good, but as trade researchers have learned in recent years, the growing complexity of today’s economic challenges defies any simplistic explanations.

Despite fears, Mexico’s manufacturing boom is lifting U.S. workers

August 27th, 2016

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Factories south of the border are fueled by American goods and services


Workers assemble the Forte sedan on the floor of a Kia plant in Nuevo Leon, Mexico, which began production in May. (Natalie Kitroeff / Los Angeles Times)

Enrique Zarate, 19, had spent just a year in college when he landed an apprenticeship at a new BMW facility in San Luis Potosí, Mexico. If he performs well, in a year he’ll win a well-paid position, with benefits, working with robots at the company’s newest plant.

Within a decade or so, most of the BMW 3 series cars that Americans buy will probably come from Mexico, built by people like Zarate.

“When you start with such little experience, and get such a big salary, it’s unbelievable,” says Zarate, whose father is a taxi driver and whose mother is a housewife.


Enrique Zarate, 19, at a BMW training facility in San Luis Potosí, Mexico. (Joy Tirado / BMW)

Mexico is in the throes of a manufacturing boom.

Exports from Mexican factories have jumped 13% since 2012. The country already ranks as the seventh-largest producer of cars in the world, and Chrysler, Honda and Volkswagen have major operations there. Over the next five years, another wave of big automakers, including Ford, Audi and Toyota, plan to bring new plants online.

And it’s not just cars. Bombardier, Cessna and Hawker Beechcraft have opened aircraft assembly lines in Queretaro and Chihuahua, Mexico. Plastics and iron and steel exports have steadily risen.

In the process, workers like Zarate are being lifted into the middle class by the thousands.

That sounds like an exported version of the American dream, circa 1965, in places such as Dearborn, Mich., or Marysville, Ohio. Indeed, the influx of those types of jobs to Mexico has enraged Ford employees in Wayne, Mich., and the makers of furnaces in Indianapolis.

Donald Trump called the North American Free Trade Agreement “the worst trade deal in history.” Bernie Sanders said that an American company moving to Mexico is “the kind of corporate behavior that is destroying the middle class.” Even Hillary Clinton, who once praised the pact with Mexico, has expressed increasing skepticism about trade deals.

But despite what you might have heard on the presidential campaign trail, Mexico’s manufacturing surge has not been an unalloyed disaster for American workers.

U.S. manufacturing production, it turns out, is rising as well. Factory output has nearly reached its all-time high this year, and is up more than 30% since 2009.

Partly thanks to automation, factory jobs are still way off from their peak of more than 19 million in 1979. But they have been climbing slowly since the end of the Great Recession in 2009. Over the last six years, U.S. manufacturers hired 744,000 new workers, an uptick of 6%.

The bottom line, say economists and company executives, is that what’s good for Mexico’s factory workers is good for some U.S. workers too.

That’s because the chain of goods that supplies Mexico’s factories is very different from the one for China. Simply put, Mexico needs to consume a chunk of U.S. goods in order to make its own.

Around 40 cents of every dollar that the United States imports from Mexico comes from the U.S., compared with just 4 cents of every dollar in Chinese imports, according to the Woodrow Wilson Center. The influx of auto factories in Mexico might sustain hundreds of supplier jobs in Deforest, Wis., or Calhoun, Ga.

“Instead of thinking of Mexico as a separate part of production, it’s now part of our manufacturing process,” said Raymond Robertson, an economist at Texas A&M University. “Mexican companies aren’t just producing products that rival ours, they are producing parts of our products.”

The evolution of factory work in the United States, Mexico and China is illustrated by Evco Plastics, a family-owned, Wisconsin-based plastics maker.

Dale Evans, the owner of Evco Plastics, is not ashamed to admit that recently he’s been hiring more people in Mexico than in Wisconsin — or Dongguan, China.

In the last two years, Evco has added 100 people to its three Mexican plants, and has been hiring more slowly in its five U.S. facilities. Meanwhile, the company is shrinking two Chinese plants into one.

But Evans says that being able to give clients the option of getting their plastic parts made in Mexico more cheaply has allowed him to move much of his 500-member staff in Wisconsin and Georgia to higher-skilled tasks, such as programming robots.

“The easy things — people picking things up and putting them in boxes — that [work] left,” said Evans. It’s too expensive for him to employ rote manual laborers in America.

He has instead invested in training his employees to maintain huge, potentially dangerous robots handling plastic parts. “The difficult things you can do with machinery, that stayed.”

The shift is driven in part by labor costs.

Evans says he used to pay Chinese workers $1 an hour, but now pays them closer to $3 per hour. In Mexico, he says, he now pays a typical plastics assembler around $4 per hour, which is just a dollar more than what he paid when he first set up shop there in 2001.

“It’s just gotten cheaper in Mexico,” Evans said.

One of the workers who has benefited is Tania Berenice Salazar, a 25-year-old from Monterrey. The single mom was working as a cashier earning about $1.60 per hour before she got an entry-level job packing up plastic materials at Evco in 2012.

Now she supervises other packagers and makes about $1.80 per hour, even as the peso has plummeted. That’s significantly above the minimum wage in Mexico of around $4 per day.

“I feel that this is a step forward. I am rising, I am not stuck,” Salazar said.

As she spoke, two nearby plastic injection robots were loudly stamping out pieces of dashboards for Mexican-made Kia sedans and lamp fixtures. The drab Evco factory floor in Monterrey sounds like the inside of a washing machine.

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Workers on the assembly line of a new Kia plant in Nuevo Leon, Mexico. (Natalie Kitroeff / Los Angeles Times)

U.S.-supplied raw materials account for 60% of the cost of the plastic incubators and ATV parts the company makes in Mexico. For Evco’s China plant, the figure is just 15%.

Evco’s experience supports the findings of several studies on the effects of NAFTA, which 22 years ago loosened barriers to trade among the U.S., Mexico and Canada.

Whereas China’s prowess in electronics and textiles appears to have made a lasting dent on U.S. manufacturing — costing up to 2.4 million jobs from 1999 to 2011, according to one study — trade flows with Mexico have been more balanced.

Multinational manufacturing companies hire an extra 250 U.S. workers for every 100 employees they bring on in Mexico, according to a 2014 study by researchers at the Peterson Institute for International Economics, a nonpartisan organization.

Dean Baker, the co-director of the left-leaning Center for Economic and Policy Research, was an early critic of NAFTA and continues to believe that “it put downward pressure on manufacturing wages” in America.

Still, he acknowledges that the pact had benefits, at least for U.S. corporations.

“It helped the competitive position of our automakers,” he said. NAFTA was “bad, but not as bad for U.S. workers as China.”

None of that research is any comfort to Frank Staples, who will lose his gig supervising an assembly line when Carrier moves 1,400 furnace-manufacturing jobs from Indianapolis to Monterrey, Mexico, by 2018.

Staples, who has worked at the company for 11 years, blames the move on “corporate greed.”

“I think NAFTA was one of the biggest screw-ups that has ever been put in place,” he said.

The 37-year-old father of three has been working with his hands — in demolition, then in warehouses, and now at Carrier’s factory — since graduating high school two decades ago. Now, for the first time, he’s genuinely worried about how he’ll support his family.

Staples said that anyone who says trade comes with more pros than cons has no idea what it’s like to be on the losing side of that equation.

“People can say what they want to say [about trade], but they aren’t experiencing it firsthand,” Staples said.

United Technologies, which owns Carrier, says the move reflects “the steady migration of the company’s competitors and suppliers to Mexico, as well as ongoing cost and pricing pressures driven in part by evolving regulatory requirements.” The company said it would pay for four years of traditional or technical education for laid-off employees.

The trade pact hit low-skill factory jobs hardest. Many garment manufacturers deserted Los Angeles for border maquiladoras in the 1980s and ’90s. Starting in the 2000s, though, some aircraft builders and carmakers, which were already firing up plants in the U.S. Southeast, followed in earnest.

Today, the United States has a $67-billion trade deficit with Mexico in cars and car parts, according to the National Assn. of Manufacturers.

There are no firm estimates on the total number of jobs that have migrated to Mexico. One study, from a liberal think tank funded by unions, found that a total of 851,700 positions were lost to Mexico in the wake of NAFTA. But several other nonpartisan reports have found that after factoring in jobs created by increased trade, the pact had little to no effect at all on employment.

Some factory work is returning to the United States, but jobs aren’t necessarily following. New generations of robots can do the work faster and more precisely than humans can.

Even in Mexico, with its lower labor costs, machines are replacing people.

At a new Kia factory in Nuevo Leon, Mexico, robots dominate the vast production spaces where the skeletons of Forte compacts take shape. The facility occupies an expanse of arid land that would comfortably accommodate three plants the size of Tesla’s main hub in Fremont, Calif.

In a welding area at the center of the assembly line, more than 300 automated machines work in concert with one another to fuse sedan doors to roofs and attach trunks to bumpers.

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Workers on the assemble the Forte sedan at a Kia plant in Nuevo Leon, Mexico. Even in Mexico, with its lower labor costs, machines are replacing people. (Natalie Kitroeff / Los Angeles Times)

The towering robots are fenced off in playpen-like areas; workers rarely interact with them.

Even when people are using their hands to, say, install a car hood, they are actually just guiding a machine holding the steel to the front of the car and pushing it forward until the piece slots in.

“It’s so he doesn’t tire his back,” explained Victor Aleman, a spokesperson for Kia, watching as a welder pushed a massive machine toward the shell of a future Forte. Going forward, virtually all of the Forte sedans and hatchbacks purchased in the United States will be produced at this plant in Mexico, Kia said.

“We are really happy because these workers don’t complain,” Aleman said, gesturing toward a sea of yellow robots that help this Kia facility produce a car every 54 seconds.

A Mexican autoworker at the Kia plant earns $3.75 per hour, the company said. A typical auto manufacturer in the United States makes about $40 per hour, according to data from the Bureau of Labor Statistics.

But cheap labor south of the border hasn’t derailed Bernie Degenhardt’s career.

The father of two started working at Evco Plastics headquarters in Deforest, Wis., in 1986, when he was a sophomore in high school. He never left.

Degenhardt began as a machine operator, making about $5.50 an hour plucking plastic parts from an injection molding machine. He quickly realized that the influx of robots onto the factory’s floor might pose a threat.

“You want to be managing the new automation and technology, and not worried about ‘something is going to take my job away,’” Degenhardt says. So he got an associate degree in electronics, and then in 2006, a bachelor’s in mechanical engineering.

Today, Degenhardt earns around $120,000 per year as the plant’s automation manager, supervising about 20 people.

At Evco’s Wisconsin plants, robots do the work Degenhardt once did, pulling just-made plastic from its mold.

“The robots do my [old] job, and I am managing people that manage them,” he says.

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
Any statements of opinion constitute only current opinions of The Boston Company Asset Management, LLC (TBCAM), which are subject to change and which TBCAM does not undertake to update. Due to, among other things, the volatile nature of the markets and the investment areas discussed herein, they may only be suitable for certain investors.This publication or any portion thereof may not be copied or distributed without prior written approval from The Boston Company Asset Management, LLC (TBCAM). Statements are correct as of the date of the material only. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised. The information in this publication is for general information only and is not intended to provide specific investment advice or recommendations for any purchase or sale of any specific security.Some information contained herein has been obtained from third party sources that are believed to be reliable, but the information has not been independently verified by TBCAM. TBCAM makes no representations as to the accuracy or the completeness of such information.

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

The Boston Company Asset Management, LLC is a global, performance-driven investment management firm with a collaborative, entrepreneurial spirit. We are committed to providing creative investment solutions for our clients, backed by top-notch fundamental and quantitative research.

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.

Article PDF download link

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

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