Mexico drives North American auto investment, challenges China

October 26th, 2013

‘Level of activity in Mexico is insane’

Paul Lienert
Automotive News | October 26, 2013 – 7:29 am EST

DETROIT (Reuters) — The Mexican auto industry is about to go on a $10 billion factory building spree, illustrating the nation’s rising economic challenge to rivals from the United States to China.

Japanese and German auto manufacturers are spearheading the drive, say parts suppliers and researchers who see more auto factories built south of the border than in the United States between now and the end of the decade.

The United States will consume the vast majority of the new cars, but Mexico’s domestic market has rebounded from a long slump, and in a sign of Mexico’s growing global role, auto exports outside of North America will rise faster than those to the United States.

BMW AG, Toyota Motor Corp. and Daimler AG’s Mercedes-Benz are expected to announce at least $2 billion of deals in the next year or two, according to supplier and other industry sources. That’s on top of nearly $6 billion in announced plants by Nissan Motor Co., Honda Motor Co., Mazda Motor Corp. and Volkswagen AG.

U.S. automakers, all of whom have been building cars in Mexico since before World War II, will spend another $1 billion or more to upgrade Mexican plants. And Nissan and VW also are considering expansions at existing factories that could total $1 billion or more, according to sources familiar with their plans.

Mexico “is quickly turning into the China of the West,” said Joseph Langley, a senior analyst at Michigan-based research firm IHS Automotive, pointing to Mexico’s low wages, a strong supply base and a global web of free-trade agreements.

Mexican auto exports beyond North America are growing even faster than those within, according to the Federal Reserve Bank of Chicago. They accounted for nearly 30 percent of the 2.4 million exported last year. Altogether Mexico built 3.0 million cars and trucks, according to Automotive News, compared with 10.4 million in the United States and 2.5 million in Canada.

By 2020, Mexico will have the capacity to build one in every four vehicles in North America, up from one in six in 2012, according to IHS.

The investment shift has implications for auto jobs and labor unions north of the border, particularly in Canada, which will see a 20 percent decline in production, IHS projects. Output will soar 62 percent in Mexico.

U.S. auto production will rise 12 percent, and Detroit-based automakers are expanding domestic production by ramping up the pace at existing factories to as many as three shifts running six days a week, said IHS. By those calculations, Mexico is building more auto plants than in the United States or Canada through 2020.

Lower costs

“It’s all about lower production costs and lower export costs,” said Michael Tracy, principal at the Agile Group, a Michigan-based auto consultancy. “That’s what Canada used to be — the place for low-cost manufacturing and shipping. Now, everybody is targeting Mexico.”

Mexico’s economy is seen growing faster than Brazil’s next year, underscoring the success of Mexico’s export-driven model versus regional economic powerhouse Brazil’s more protectionist policies. The promised auto investment could help Mexico challenge regional dominance by Brazil. Analysts are warning of excess Brazilian auto production capacity within five years.

Suppliers say the Detroit auto makers, with more than half the production capacity in Mexico, have not signaled any plans to expand vehicle output there. But General Motors and Chrysler this year have said they will install additional engine and transmission production capacity in Mexico.

In the competition for jobs with the United States and Canada, “Mexico’s momentum, combined with its increasingly dense and capable supply chain, its persistent cost advantage and its trading relationships may give it a leg up,” said Brookings Institution researchers in a report released last week.

Auto employment in the U.S. South, where Japanese, German and Korean automakers all operate non-union plants, is holding relatively steady at 18 percent of North American auto workers, according to Brookings.

$12 an hour

Pay ranges as low as $12 per hour for temporary workers at plants in the U.S. Southeast, compared with about $35 an hour for skilled union veterans at U.S.-owned plants. Union workers in Canada on average are paid even more. A year ago, GM CEO Dan Akerson described Canada as “the most expensive place to build a car in the world.”

But at around $2.50 an hour, manufacturing wages in Mexico are nearly 20 percent cheaper than in China, according to a mid-year Bank of America study. That study put U.S. manufacturing wages at just under $20 an hour, on average.

A shortage of trained engineers and concerns about crime and security may hold back Mexico, according to research firm PwC Autofacts.

Energy costs also are considerably higher than in the United States, but they are lower than in China, according to Boston Consulting Group. And because of Mexico’s proximity to the United States and Canada, transportation and logistics costs are lower than for parts coming from China.

Largest footprint

The largest producer in Mexico, Nissan, opens its third factory next month, the $2-billion Aguascalientes No.2. Nissan built 683,520 cars in Mexico last year, and the new plant will add capacity for 250,000 more, mostly compact models such as the Nissan Sentra for North America and other markets, company officials said.

Moreover, an expansion of Aguascalientes No.2 is already in planning, according to two sources familiar with Nissan’s plans. Slated to open in 2016, the sources said, it likely will be dedicated to production of compact luxury vehicles for Infiniti and Mercedes-Benz, which has a platform- and engine-sharing agreement with Nissan.

Nissan said it had nothing to announce, while a Mercedes spokeswoman said joint production of compact cars was an option, but that no decision had been made.

Nissan also is expanding a complex in Cuernavaca, which will take the automaker’s total capacity in Mexico to 1.1 million vehicles a year by 2020, two supplier sources said.

Nissan’s closest rival south of the border is Volkswagen, which opened a complex in Puebla in 1967. A new $550-million engine plant in Silao, as well as a $1.3-billion assembly complex in San Jose Chiapa that is slated to be opened in 2016 by VW’s Audi subsidiary, will raise total VW group annual capacity by 100,000 vehicles to 850,000 by 2020, according to IHS.

VW and Toyota are battling for global sales leadership, but the Japanese automaker lags well behind its rivals in Mexico, where it has only a small truck assembly facility in Tijuana.

Now, the automaker is scrambling to catch up with its competitors, according to two supplier sources who say Toyota is actively shopping for a site. Toyota executives in recent months have said the company needs additional production capacity in Mexico, without providing specifics. A Toyota spokeswoman said the company “would not comment on any potential plant announcement” in Mexico.

Luxury manufacturing

BMW, which operates a U.S. assembly plant in South Carolina, also is shopping prospective plant sites south of the border, according to Mexican government officials.

Supplier sources said BMW already has mapped out a production timetable for Mexico, with a tentative plan to begin assembly operations in late 2017, ramping up annual capacity to 200,000 by 2020.

A BMW spokesman said he had nothing to confirm.

Other vehicle and parts manufacturers are expected to set up shop or expand existing facilities in Mexico by 2020, said Tracy, of the Michigan-based auto consultancy.

IHS’s Langley summed it up: “The level of activity in Mexico is insane.”

 

Nissan Mexicana in July celebrated building 4 million vehicles at its plant in in Aguascalientes, Mexico. The plant started operations Nov. 13, 1982.

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

 

Report: Mexico Cheaper than China for Manufacturing Appliances

July 7th, 2013


July 3rd, 2013

Manufacturing in Mexico will increasingly offer cost advantages over manufacturing in China and other major economies, according to new research by The Boston Consulting Group (BCG), which foresees manufacturing adding $20 billion to $60 billion in output to Mexico’s economy annually within the next five years.

The group said that, with the North America Free Trade Agreement (NAFTA), U.S. manufacturers of components for finished goods assembled in Mexico also stand to benefit.

The group said Mexico’s improving competitive edge is driven by relatively low labor costs and shorter supply chains, which results from Mexico’s closer proximity to U.S. markets.

Mexico also has an important advantage in its 44 free-trade agreements, which allow many of its exports to go into major economies with few or no duties. Mexico has more free-trade agreements than any other nation.

The group pointed to tipping point that was reached in 2012. It was then that the average manufacturing cost in Mexico, adjusted for productivity, became less than the costs in China. BCG projects that, by 2015, average total manufacturing costs in Mexico could be about 6% less than in China and 20%-30% lower than in Japan, Germany, Italy, and Belgium.

“Mexico is in a strong position to be a significant winner from shifts in the global economy,” said Harold L. Sirkin, a BCG senior partner. “That is good news not only for Mexico, which relies on exports for around one-third of its GDP. It’s also good for America, since products made in Mexico contain four times as many U.S.-made parts, on average, as those made in China.”

The group points to World Economic Forum research that violence and corruption are viewed as the biggest negative factors, as well as costs, from having manufacturing operations in Mexico. Another negative, the group said, is the perception that Mexico does not have sufficient skilled workers.

Despite these concerns, BCG expects global companies to continue moving manufacturing operations into Mexico–with the cost advantages of producing in Mexico convincing many companies to look for ways to mitigate the perceived risks.

“When the economics are a wash, U.S. manufacturers often keep production in the U.S.,” said Michael Zinser, a BCG partner who leads the firm’s manufacturing work in North America. “But when the economics are compelling, companies will invest in additional security and training to address these issues.”

BCG said Mexico’s labor costs look particularly competitive when factoring in its productivity differences.

By 2015, average manufacturing-labor costs in Mexico are projected to be 19% lower than in China, with its increasing wages–but Mexico is 30% lower when adjusted for output per worker.

Average electricity costs are reported to be about 4% lower in Mexico than in China. Industrial natural gas is 63% lower, on average, in Mexico.

Appliance manufacturing is one of the industries predicted to see significant production gains in Mexico in the near future, the group said. Other industries include transportation goods, computers and electronics, and machinery.

“These industries have relatively high labor content, stringent logistical requirements, and strong existing manufacturing clusters in Mexico,” explained Eduardo Leon, a BCG senior partner based in Monterrey.

Due to Mexico’s growing cost advantage, production in these industries could increase between 7%-19% by 2017, over and above the projected level if current growth trends remain the same, according to BCG. This could result in 300,000 to 900,000 direct manufacturing jobs in Mexico and 1.5 million to 3.5 million jobs in related services jobs.

“Companies investing in Mexico must balance the economics with the potential downsides,” said Sirkin. “But the economic advantages are becoming so pronounced that global companies should include Mexico on a shortlist of locations for their next manufacturing plant.”

Mexican labour: cheaper than China

April 5th, 2013
Apr  5, 2013 12:26am by Pan Kwan Yuk

It  is no secret that the wage gap between Mexico and China has been narrowing in  recent years. While labour costs in China were roughly 200 per cent lower than  those in Mexico a decade ago, wage inflation in China and wage stagnation in  Mexico have combined to close the gap to nearly zero .

But could labour in Mexico now actually be CHEAPER than in China? Yes,  according to Carlos Capistran, an economist at Bank of America Merrill Lynch.  Not only are average hourly manufacturing wages in Mexico now lower than those  in China in constant dollar terms, they are 20 per cent less.

Here’s the chart from Capistran’s note to clients on Thursday:

But is this necessarily a good thing for Mexico?

True, stagnant salaries over the past decade have been credited with reviving  Mexico’s manufacturing sector, which was hard hit by China’s entry on to the  world stage following membership into the World Trade Organisation in 2001.

A study by Barclays last year reckoned that the rise of China as the “world’s  factory floor” chipped about 60 basis points off Mexico’s gross-domestic-product  growth every year between 2002 and 2006. Some of the biggest casualties in  Mexico’s manufacturing sector were textiles, clothing and shoes.

And now thanks to soaring wages in China, high transportation costs and the  steady recovery seen in the US economy, the tide is turning back in Mexico’s  favour.

As Capistran explained:

Mexico has been able to regain participation in the US market since the Great  Recession and the international financial crisis. Part of the gain has been  against China: from 2007 to 2012, China gained 1pp in market share, compared to  7.5pp between 2001 and 2007, while Mexico gained 1.6pp, compared to -0.74pp  between 2001 and 2007. A larger share of the US market positions Mexico better  to benefit from the US recovery. In our view, an important force behind this  trend is Mexico’s hourly wages are 19.6% cheaper than those of  China.

Optimism over Mexico’s growth prospects has made the country a darling among  international investors. Some $80bn of foreign investment were poured into the  country’s stocks and bonds last year, compared with the $16.5bn received by  Brazil. Mexico’s stock market hit a record high earlier this year and banks  ranging from Spain’s BBVA to the US’s JP Morgan have been busy bulking up their  operations there.

Yet what about the human costs of wage stagnation?

Minimum wage in Mexico today is about 60 cents an hour, while average pay in  manufacturing is only about $4.50 an hour. This compares to the $6.27 paid in Brazil.

Writing in the Miami Herald last month, Andrés Oppenheimer  made the observation that “Everybody is upbeat on Mexico – except Mexicans.”

During my visit [to Mexico City], I found widespread skepticism in the local  media, and among Mexicans in general, about the sudden international love affair  with Mexico.

“After so many years of mediocre economic growth, there is a lingering mood  of frustration,” pollster Ulises Beltran, head of the BGC polling firm, told  me.

In Brazil, falling unemployment and wage increases have helped millions rise  out of poverty and spark a domestic spending boom.

By contrast, in Mexico, wage stagnation, under-employment and inflation have  eroded the income level of some 31m Mexicans, according to Jose Luis de la Cruz, an economist and director  of the Center for Research on the Economy and Business at the Mexico state  campus of Monterrey Tech. And he reckoned that as many as 60m people are living  below the poverty line. This in a nation of 113m.

As Luis de la Calle, a former Mexican government official who helped  negotiate the North American Free Trade Agreement recently told the New York Times:

We need to increase wages to become a true modern country.

For now, banks and investors are happy to just focus on Mexico’s positive  macoeconomic numbers.

Capistran from BoA said he expected Mexico to keep its competitive edge as a  result of its demographic boom – which will see a young, growing labour force  keep a lid on wage increases – and productivity gains.

From BoA:

Despite the appreciation we expect, Mexico’s competitiveness will continue  through almost flat ULCs in dollar terms due to the positive effects of a  demographic boom and productivity gains in manufacturing and potentially, in  services. This underpins the upside revision to our GDP forecast to 4% from 3.5%  for 2014 and is one of the reasons we see an increasing potential  growth.

So more good news for investors. But less so perhaps for the Mexican labourer  who’s toiling away in a factory somewhere for 60 cents an hour.

Some manufacturers say ‘adios’ to China

March 24th, 2013

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

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

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

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

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

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

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

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

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

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

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

“Mexico was uncompetitive,”  Juline says.

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

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

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

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

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

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

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

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

Mexico’s economic moment

March 24th, 2013

That boom coming from North America’s southernmost state isn’t just gunfire

by David Agren on Monday, March 18, 2013 11:50am

Mexico's moment

Mario Armas/AP

A new truck rolls off the assembly line every minute at the GM factory in the conservative Catholic heartland of Mexico’s Guanajuato state. The factory in Silao, set in the shadow of a giant Christ statue considered the geographic centre of the country, produces so many trucks that GM has expanded its workforce by more than 60 per cent since 2008 and has plans to hire even more. The nearby Volkswagen plant just opened a $550-million engine plant and Toyota has announced plans for a facility down the road.

Manufacturing activity is mushrooming across Mexico, mirroring an upswing in the overall economy. The country produced more than 2.8 million cars last year, while factories in border towns like Tijuana and Ciudad Juárez churn out everything from plastic toys to plasma TVs. Manufacturing is now moving back from China—almost as fast as it fled Mexico a dozen years ago—as Asian salaries and shipping costs continue to rise. “This has nothing to do with Mexico,” Ed Juline, head of Guadalajara-based Mexico Representation, a business consultancy, says of the trend. “It has everything to do with China.”

Ten years ago, wages in Mexico were six times higher than those paid in China, but the gap had narrowed to 40 per cent by 2011, according to an International Monetary Fund report. Geography also works in the country’s favour, as companies take advantage of its easy access to U.S. and Latin American markets, where economies are expanding, demanding Mexico’s autos, appliances and advanced electronics.

But manufacturing is just one part of the picture, as Mexico moves from mess to can’t-miss status, the hottest of the emerging markets. “This is Mexico’s moment,” said new President Enrique Peña Nieto, summing up the sentiment at his December inauguration. Indeed, the Mexican government is projecting growth of 3.5 per cent this year—better than Brazil, which investors are suddenly bearish on after a decade of adulation. In Brazil, a credit bubble appears set to burst and demand for its commodities is diminishing.

The scenario has created a collective giddiness among elites and investors unseen since the early 1990s, when Mexico prepared to enter NAFTA and appeared poised for First World status, only to suffer a calamitous peso crash. Last year, investors poured $80 billion into Mexican securities—five times more than went to Brazil, according to the Banco de México. But external factors also benefit Mexico, especially as the BRIC countries lose their lustre.“Brazil is a mess,” says Manuel Molano, adjunct-director of the Mexican Institute for Competitiveness, a Mexico City think tank, “China is decelerating, India’s growth has been stalled for three years, Russia is nothing special.”

Peña Nieto is pledging structural reforms to the energy, tax and social security systems—measures his party previously opposed. The reforms, he says, will generate six per cent economic growth, tripling the rate of the past dozen years. He’s formed a pact among the three main political parties to pursue his agenda and has already struck deals to overhaul labour laws and an education system that allowed teachers to sell their positions like personal property. “He’s a smart political negotiator,” says Molano. His administration is “resourceful in convincing people.”

The story doesn’t begin with Peña Nieto. For three decades, government policies have been geared to suppressing spending and controlling inflation that had climbed to triple digits. The central bank’s interest rate and inflation both now hover around four per cent, while central government debt is low, amounting to approximately 28 per cent of GDP. (It’s around 36 per cent in Canada.)

Remarkably, the raging drug war has done little to dampen enthusiasm for Mexico. “A pile of 49 headless human bodies on a roadside is apparently less scary than an interest rate cut,” says Ulysses de la Torre, a blogger who focuses on emerging markets.

How much the “boom” benefits average Mexicans remains to be seen. Almost half (46 per cent) say their economic condition actually deteriorated over the previous year, according to a recent poll, and many expect little improvement in the short term, says Federico Berrueto, director general of polling firm Gabinete de Comunicación Estratégica. Fully 59 per cent of Mexicans now work in the informal economy. “The average person sees unemployment, that ends don’t meet, that their salary is low,” says Berrueto. When compared to the perspective of international investors, “it’s two distinct worlds.”

Mexico Wages Undercut China, Fuel Manufacturing Boom

August 10th, 2012

Economy

By JASON MA, INVESTOR’S BUSINESS DAILY
Posted 08/08/2012 05:27 PM ET

 

China lost its factory wage advantage over Mexico earlier this year, an ongoing trend that has fueled Mexican economic growth past its neighbors to the north and south.

But whether Mexico can maintain that momentum may depend on how much political will President-elect Enrique Pena Nieto has in pursuing reforms that challenge special interests.

In 2005, China’s productivity-adjusted manufacturing wage advantage over Mexico was $1.22 an hour, but that narrowed to 34 cents in 2010, according to the Boston Consulting Group. They switched places this year, and Mexico’s wage advantage is estimated to widen to $1.75 by 2015.

Fast-rising Chinese labor costs are prompting companies to “reshore” production back to Mexico and the U.S., where transportation and other logistical costs are lower.

“Mexico is going to be a big winner in reshoring,” said Hal Sirkin, managing director at Boston Consulting Group, though not as big as the U.S. will be.

Rio Grande Vs. Rio

U.S. exports have helped Mexico outpace economic growth in Brazil after lagging for years. In 2011, gross domestic product expanded by 3.9% vs. 2.7% in Brazil. In Q1 2012, Mexico grew 4.6% vs. a year earlier against Brazil’s scant 0.8%. That was also significantly faster than the U.S.

Mexico’s economy could top Brazil’s by 2022, helped by manufacturing, Nomura analysts predict. Mexico is benefiting from its reliance on the U.S., where manufacturing has recovered, while Brazil sees less commodity demand from China.

Media coverage of gruesome drug violence hasn’t deterred companies like Alcoa (AA) from expanding plants or Nissan (NSANY) from moving production there.

Mexico is once again reaping the benefits of the 1994 NAFTA pact with the U.S. and Canada. Manufacturing production has leapt to new highs, after a lull in much of the last decade when companies rushed into China. Mexico’s auto production from January to July rose 13% from a year ago to a 1.65 million vehicles, a record for that period.

But several obstacles to Mexico’s continued growth remain.

The amount of production Mexico can absorb from China will be limited by the availability of skilled workers, infrastructure, supplier networks and safety concerns, Sirkin says.

Mexico will still get higher-end production, like transportation equipment and machinery, and stands to capture a substantial amount from China, he said. But about three-fourths of the manufacturing reshored from China will flow to the U.S. in the next decade.

Mexico Still Has Problems

China will still enjoy a more flexible labor market, where workers can more easily be added or cut, notes Peter Morici, a University of Maryland economist.

Chinese factories can also quickly ramp up production and revamp work schedules to meet client deadlines, while Mexican unions limit such flexibility. But proximity to the U.S. gives Mexico an edge in just-in-time manufacturing, as shipping from China can take 3-6 times longer.

Government corruption in Mexico is another disadvantage, especially given the country’s infrastructure needs. Corruption is a problem in China too, but at least its government is more efficient, Morici added.

“It’s going to take more than wage parity,” he said. “Mexico is having a lot of trouble getting its act together.”

While China’s wage advantage is disappearing, Mexico’s regulatory edge over other emerging markets is shrinking too, says Tom Fullerton, an economics professor at the University of Texas at El Paso.

Red tape for businesses and labor inflexibility are Mexico’s biggest weaknesses, and there isn’t much chance for improvement, he said.

The incoming president’s Institutional Revolutionary Party has a bad record of deregulation, as interest groups in the PRI have blocked prior reforms. That could benefit China and India, which are “making progress toward parity with Mexico,” Fullerton said.

Still, hopes are high for Nieto, who has pledged to allow more private investment in the state-run oil industry, overhaul the tax code to raise government revenue and liberalize labor laws.

Russell Investments’ index of Mexican stocks topped an all-time high Monday, reflecting a 20.5% return so far this year vs. 8.9% for its global index.

“The run-up in the performance of the Russell Mexico Index is largely due to optimism around President-elect Enrique Pena Nieto giving indications of market reforms,” said Mat Lystra, senior research analyst with Russell Indexes, in a statement.

Mexico Replaces China as U.S. Supplier With No Wage Gains: Jobs

June 15th, 2012

Bloomberg-Businessweek Logo

By Nacha Cattan and Eric Martin on June 14, 2012

Julio Don Juan makes $400 a month at a noisy, cramped Mexico City call center. Without a raise in three years, he says he had to pull his 7-year-old son out of a special-needs school he can no longer afford.

In some places he might seek another job. Not in Mexico, where wages after inflation have risen at an annual pace of 0.4 percent since 2005 — worse than other nations in the region including Brazil, Colombia and Uruguay, according to the International Labour Organization. Close to a third of Mexicans toil in the informal economy without steady income. Julio Don Juan says many would envy him.

The cheap labor that is helping Mexico surpass China as a low-cost supplier of manufacturing goods to the U.S. — and lured companies including Nissan Motor Co. (7201) — has restrained progress for many of the country’s 112 million citizens. While Enrique Pena Nieto, the front-runner in polls to capture the July 1 presidential vote, has said wages are too low, whoever wins confronts the challenge of boosting workers’ incomes but not so much that assembly lines leave for other markets.

“The trick isn’t only to pay better salaries, it’s to make raises more sustainable,” said Sergio Luna, chief economist at Citigroup Inc.’s Banamex unit in Mexico City. “We have to be more productive, but it won’t be easy because it implies changing the status quo.”

Mexico’s low wages, cheap peso and surging auto shipments to the U.S. — which buys 80 percent of its exports — have increased manufacturing competitiveness during the past decade as labor costs in China and Japan have risen.

Sounder Footing

This has put Mexico’s economy on a sounder footing than Brazil’s to weather a prolonged global downturn. After trailing growth in Latin America’s biggest economy during the past decade — and watching as a commodities boom allowed Brazil to increase wages an annual average 3.4 percent above inflation from 2005 to 2011 — Mexico is poised to outperform Brazil for the second consecutive year.

President Felipe Calderon’s government forecasts gross domestic product will expand 3.5 percent this year and says exports will probably surpass a 2011 record of $350 billion. By contrast, Brazil will grow around 2.5 percent, according to a central bank survey of economists this month.

“A changing of the guard is slowly but surely taking place,” Nomura Holdings Inc. (8604) analysts wrote in a May report. “Ten years from now, we are confident that Mexico will likely be seen as having become the most dynamic economy in the region.”

Trade Agreements

Low wages aren’t Mexico’s only attraction: Inflation that reached 180 percent in 1988 has been kept under control by a central bank that since January 2010 has been under the stewardship of Agustin Carstens. The former deputy managing director of the International Monetary Fund has kept the benchmark rate at 4.5 percent since taking office, helping to fuel a rally in government bonds.

Investors also benefit from laws that limit the government deficit and trade accords with more than 30 nations, including the North American Free Trade Agreement with the U.S. and Canada. Mexico also offers savings for companies that want to be closer to American consumers, after a tripling of oil prices in the past decade raised transportation costs for Asian manufacturers.

Nissan, Japan’s second-largest automaker, shifted production of low-cost cars to Thailand and Mexico in recent years to counter losses as the yen appreciated, while Mexico’s peso slumped 18 percent in the past six years against the U.S. dollar. The company’s Mexican output hit a record 607,087 cars and light-duty trucks last year, rising 20 percent from 2010.

The latest company to expand operations is Plantronics Inc. (PLT) (PLT), which this month announced a $30 million investment after closing its plant in China as wages began rising there, said Cesar Lopez Ramos, the company’s Mexico legal representative.

Human Capital

Mexico has proven more attractive for the Santa Cruz, California-based headset maker because of its steady wages and “human capital that is more developed and capable of not only making products but innovating,” Lopez Ramos said in a telephone interview from Tijuana.

Some Mexicans criticize Calderon’s National Action Party, or PAN, for not spreading the benefits of economic stability more widely during 12 years of rule. In the absence of a stronger domestic market, jobs remain heavily dependent on U.S. consumers and foreign-operated assembly plants, known as maquiladoras. Unemployment, currently at 4.9 percent, has been more than double a 2000 low of 2.2 percent since 2009.

“We’re scraping by,” said Julio Don Juan, 37, the call- center worker. “Because costs keep rising, I’m actually getting a pay cut each year, rather than a raise.” He lives with his parents, who help him care for his son.

Low Inflation

Economy Minister Bruno Ferrari says that low inflation and expanded social programs have reduced poverty during the past dozen years and stemmed declines in purchasing power from previous decades, he told reporters May 8 in Mexico City. The share of Mexicans suffering from food poverty — lack of access to healthy, nutritious meals — fell to 19 percent in 2010 from 24 percent in 2000, according to government data.

A press official from the Mexican finance ministry didn’t respond to a request for comment.

Partly as a result of muted wage growth, Mexico’s per- capita GDP has risen 48 percent since 1999 on a purchasing- power-parity basis, the least among Latin America’s seven biggest economies, according to the IMF. By comparison, Venezuela climbed 51 percent, Brazil increased 73 percent and Peru more than doubled.

Time Lost

The lack of opportunities has spurred an exodus of 12 million Mexicans to the U.S. in the past four decades, more than half illegally, according to a study published in April by the Washington-based Pew Research Center. While net migration dropped to zero between 2005 and 2010, and some Mexican immigrants may be returning home because of the weak U.S. job market, departures northward could resume if the U.S. expansion picks up, Pew said.

“We need to make up for time lost over the past four or five years in the area of employment and salaries,” former President Vicente Fox, of Calderon’s PAN party, said in a May 2 interview in Mexico City. “The challenge for the next government is very big.”

Dissatisfaction with the economy is propelling Pena Nieto’s bid to return his Institutional Revolutionary Party, or PRI, to power for the first time since Fox ended its 71-year reign in 2000. The 45-year-old former governor of Mexico state had 37.2 percent support in a June 8-10 poll by Consulta Mitofsky, compared with 25.1 percent for Andres Manuel Lopez Obrador, who narrowly lost to Calderon in 2006, and 21 percent for Josefina Vazquez Mota of the PAN.

Raise Salaries

If elected, Pena Nieto says he’ll raise salaries gradually, by improving productivity. To do so, he promises to support legislation making it easier to hire and fire workers, luring more companies into the formal economy where they can take out loans more easily and make investments. He also favors ending state-run Petroleos Mexicanos’ monopoly; revenue for Latin America’s largest oil producer funds about a third of Mexico’s public budget.

“In no way are we willing to sustain Mexico’s competitiveness through low salaries, nor can we raise salaries artificially through populist measures,” Luis Videgaray, Pena Nieto’s campaign manager and his finance chief when the candidate was governor, said in a May 30 interview. “The only way to increase productivity is through reforms.”

Pena Nieto’s rivals say he isn’t capable of bringing about the change he promises and returning the PRI to power would reignite corruption that blossomed under its previous rule.

Poor Performance

Boosting Mexico’s productivity won’t be easy, given the poor performance of the country’s schools and the size of its underground economy, which the government says employs 29 percent of the workforce.

The nation’s education system ranks last out of 34 countries for enrolled high school-age students, behind regional rivals Chile, Argentina and Brazil, according to a 2011 study by the Paris-based Organization for Economic Cooperation and Development. The study included non-OECD members.

Improving education and generating better-paying jobs may also help the next government turn the tide in the battle against the nation’s drug cartels. A bloody turf war between rival gangs has claimed more than 47,000 lives since Calderon took office in 2006 and the government estimates that the drug war shaves 1.2 percentage points off economic output annually.

Skill Shortages

Delphi Automotive Plc (DLPH) (DLPH), the former parts unit of General Motors Co. (GM) (GM), has been addressing the skilled-labor shortage by training engineering students at its factories in the border city of Ciudad Juarez. About half of the Troy, Michigan-based company’s global workforce of 101,000 is employed in its 46 Mexico plants, compared with less than 30 percent in China.

While wages for some engineering jobs are rising, Delphi isn’t concerned that salaries will spike anytime soon, said Enrique Calvillo, the company’s human-resources manager in Mexico.

“We are always monitoring this, and we don’t see the possibility of an extreme boom in the next two or three years,” he said in a telephone interview from Ciudad Juarez.

That’s bad news for Antonio Chavero, who makes less than $1,000 a month as an engineering supervisor with three decades of experience in the car industry and who works at a parts plant in the central state of Queretaro. While he does metalwork in his basement to supplement his income and support his daughter, who is a teenage mother, his family still doesn’t earn enough to eat meat more than once a week, he said.

“I supervise 15 workers,” Chavero said. “I should be making more money.”

China’s wage hikes could benefit Latin America

March 4th, 2012

 

The Miami Herald

By Andres Oppenheimer
aoppenheimer@MiamiHerald.com

Good news for Latin America: wages in China, Vietnam and other Asian countries are rising faster than expected, leading growing numbers of multinational firms to move their manufacturing plants to Mexico and other countries closer to the U.S. market.The Feb. 19 announcement by Foxconn Technology Group, which assembles iPads and other products for Apple, Dell, Nokia, Motorola and other firms in China, that it has raised pay for its workers by 16 to 25 percent was just the latest example of how fast Chinese salaries are rising. It was Foxconn’s third wage hike since 2010.

“More and more companies are telling us that wages are rising faster than they expected,” says Harold Sirkin, managing partner of the Boston Consulting Group, which recently published a study on China’s wages.

“The quality of the workforce in China is highly competitive,” Sirkin added. “People have options to go to other factories, and they do, which is why companies are forced to raise wages.”

According to BCG projections, China’s wages in the Yangtze river delta technology belt have risen from 72 cents an hour in 2000, to $2.79 cents in 2010, and are expected to reach $6.31 in 2015.

And the trend is likely to continue beyond 2015. A growing appreciation of the Chinese currency, higher education standards and a declining workforce will drive Chinese salaries up for decades to come, economists say.

A new joint report by the World Bank and China’s government-run Development Research Center, entitled “China 2030,” says China’s labor force “will start to shrink from around 2015, initially slowly but faster from the 2020s, and is projected to be 15 percent smaller than at its peak by 2050.”

That is because, among other reasons, the population is getting older, Chinese workers tend to work fewer years than their counterparts in other countries, and the supply of rural workers moving to the cities is drying up, the report says.

Even if China were to further relax its one-child policy, things would not change much, because Chinese women are not likely to have more babies, it says. Fertility rates in countries such as Japan, South Korea and Vietnam are not significantly higher than China’s, and suggest that China’s average rate of children per couple — now at 1.5 — will remain stable “even if the (one-child) policy were eliminated,” it says.

In Vietnam and India, wages are rising at an even faster pace. That will present a fantastic opportunity for Latin American countries to attract technology companies and service industries that help produce long-term growth, economists say.

Most multinational companies will maintain plants in China to serve the local market and neighboring countries in Asia, but will move their export-oriented plants to other parts of the world, they add.

While in 2002 China’s average wage was 237 percent lower than Mexico’s, by 2010 it was only 14 percent lower, a recent study by the J.P. Morgan investment bank said. Because of Mexico’s proximity to the U.S. market, many U.S. car companies and other manufacturing industries are moving from China to Mexico, the study said.

Augusto de la Torre, the World Bank’s chief analyst for Latin America, told me that many Latin American countries’ labor forces may already be too expensive and not skilled enough to draw manufacturing plants away from China, but added that Latin America can benefit in other ways from China’s rising wages.

As China’s population becomes wealthier, it will import more consumer goods, entertainment, health and education services. “Latin American countries need to find a niche in supplying that demand on the basis of higher productivity, rather than on the basis of cheap labor,” he said.

My opinion: Either way, Asia’s rising wages present a fabulous opportunity for Latin America.

But to lure foreign manufacturing plants and to export increasingly sophisticated goods and services to China, Mexico and Central America will have to reduce their violence rates, and all Latin American countries will have to dramatically improve their education systems, which nowadays lag far behind those of their Asian competitors.

Granted, these are major challenges. But Latin American countries that realize the golden opportunity they have thanks to Asia’s rising wages and take advantage of it will do great in coming decades.

Read more here: http://www.miamiherald.com/2012/03/03/v-print/2672086/chinas-wage-hikes-could-benefit.html#storylink=cpy

U.S.-Mexican Relations Lead the Way in the Hemispheric Race to the Bottom: Maquiladoras, Free Trade, and a Can of Worms

October 17th, 2011

October 3, 2011

  • President Obama reports that free trade agreements (FTAs) with Panama, Colombia, and South Korea should be enacted by the end of the year
  • In the past, FTAs such as NAFTA have prompted the outsourcing of U.S. jobs, in spite of Washington’s claims to the contrary, causing unemployment in the U.S. and deleterious working conditions in low-wage jobs in partner states abroad
  • Maquiladoras, whose proliferation under liberalized trade policies fostered the creation of NAFTA, provide a disturbing example of detrimental working conditions laborers face under FTAs
  • Neither U.S. unemployment, nor the success of overseas industry sectors, such as maquiladoras, can be used as an excuse to justify the passage of FTAs as a solution to the current North American economic crisis

In a section of President Obama’s address to Congress that received relatively little attention, he observed that “it’s time to clear the way for a series of trade agreements that would make it easier for American companies to sell their products in Panama, Colombia, and South Korea… If Americans can buy Kias and Hyundais, I want to see folks in South Korea driving Fords and Chevys and Chryslers.”[1] Obama followed his speech with a press conference, which asserted that the free trade agreements (FTAs) should be passed by the end of the year. He did not mention the disturbing thought that FTAs traditionally have prompted U.S. companies to transfer their manufacturing processes to countries with lower wages, rather than noticeably creating jobs in this country.[2] While proponents of free trade often cite the creation of U.S. jobs in export-oriented industries, the U.S. is at least as likely to import products from overseas countries where manufacturing and labor costs tend to be cheaper.

In fact, these imbalances typically have created a large trade deficit under the North American Free Trade Agreement (NAFTA) among the three signatories: the U.S., Mexico, and Canada.[3] NAFTA already has greatly increased the rate at which U.S. corporations have used both factory shutdowns and the threat of closure of additional facilities as anti-union strategies. This process also has prompted the outsourcing of U.S. jobs to Mexico as manufactured goods flowed from south to north.[4] Overall, the Economic Policy Institute has estimated that NAFTA has cost the U.S. some 879,280 production jobs, “contributed to rising income inequality, suppressed real wages for production workers… and reduced fringe benefits,” which, all-told, has proved woefully detrimental to U.S. workers.[5]

Proposed Free Trade Agreements and Overseas Jobs

By considering these new free trade pacts, President Obama is not only preparing the groundwork for massive job losses at home, but is also maintaining a long tradition of ignoring both the escalating job-drain and detrimental working conditions abroad, which together create a “hemispheric race to the bottom.”[6]

Maquiladoras, a distinct group of foreign-owned manufacturing and processing plants physically located in Mexico but exporting their products abroad, were the original poster children for free trade.[7] In maquiladora manufacturing, the Mexican authorities allowed raw materials to be imported to their country duty-free while lifting export tariffs on finished products. Maquiladoras, also known as maquilas, technically bypassed the Mexican economy, halting within it only to take advantage of low labor costs.[8] Implemented in 1965, the Mexican maquiladora program was one of the first informal free trade agreements worked out with the U.S., and the revenues it generated for businesspeople in both countries helped prompt the creation of NAFTA. Maquilas, therefore, “presaged” free trade policies such as NAFTA while contributing to maquiladorization, or the spread of maquila-like trade liberalization policies and flexible labor usage to other segments of the Mexican economy.[9] These specialized factories exemplified the effects of free trade policies on export-oriented production, suggesting that future FTAs may have similar effects across the globe.

In response to each of the periodic economic crises that have affected Mexico, the maquila-related free trade strategy implemented by the Mexican state included the devaluation of the peso, which ended up allowing the maquiladora industry to grow profusely. The working conditions to be found in maquilas, however, have not markedly improved. In 2006, after the maquila program was folded into the Maquiladora Manufacturing Industry and Export Services (IMMEX) program— which included both Mexican and foreign-owned export-manufacturing plants— statistics regarding these two types of plants were aggregated.[10] It is thus difficult to assess how the current financial crisis and the resultant economic policies have affected the foreign-owned maquila industry. The results of the maquiladora program as an experiment in free trade policies, however, are clear: the detrimental labor conditions and low wages found at many maquiladoras demonstrate that free trade policies are not a reasonable answer to economic crises at home or abroad.

The Pattern of Mexican Maquiladoras: In Crises, Free Trade Policies Fuel the Factories

The recent history of Mexican maquiladoras follows a distinct pattern: first, an economic crisis occurs; then, the state devalues the peso, liberalizes maquila regulations and trade policies, and finally, the maquilas grow. Maquiladoras are thus inherently countercyclical in that many indicators of their success, including their proliferation as well as growth in employment and hourly earnings, closely follow major economic crises and patterns regarding recessions in Mexican history rather than following periods of growth. Their success, however, is not only tied to these events, but to the free trade policies that followed these crises.[11]

Although maquilas predate Mexican neoliberalism and the creation of NAFTA by a number of years, the neoliberal free trade policies adopted following economic crises have led directly to their proliferation and growing importance in the country’s economy. This maquiladorization suggests that production sites with maquila-like working conditions could grow rapidly in other countries as they sign FTAs with the U.S.

The 1981-1982 economic crisis became the key turning point in maquila history. Dollar wages rose much faster in Mexico during this period than in other countries of the Global South, and many foreign corporations threatened to close their factories.[12] The government’s subsequent peso devaluation slashed both the dollar wages paid by firms and the real wages received by workers (in pesos); wages as a percentage of operating costs also fell from 25 to 17 percent.[13] The new neoliberal government quickly made maquilas an official “priority sector,” after which they immediately began their boom. In 1982, their growth rate jumped from 9.5 to 17.5 percent, and 1983 saw the biggest rise in maquila employment yet.[14] Growth in plant size and productivity also ensued; wages as a share of value added fell rapidly.[15] This unprecedented transformation in the function of the maquila sector occurred because of policy changes under the new government, even as the rest of the country fell into a long and deep recession. The quick growth of this low-wage sector of industry during a recession suggests that FTAs will continue to produce similar “solutions” to the globe’s current economic crisis.

Trade liberalization policies affecting maquiladoras continued to proliferate after the 1982 crisis, as was the case of the maquilas themselves. In 1983, President Miguel de la Madrid (1982-1988) passed a new National Development Plan focusing on trade liberalization and established a new agreement with the International Monetary Fund (IMF). He also wrote a new decree on the maquiladoras, altering the laws to facilitate the creation and operation of the specialized factories.[16] Furthermore, Mexico liberalized its laws to allow 100 percent foreign ownership of these firms.[17]

Between 1994 and 1995, as a financial crisis once again was striking the Mexican economy, the state devalued the peso a third time and accepted a USD 17.8 billion IMF stand-by credit, the largest of its kind to any country at the time.[18] Real maquila wages fell significantly, and the maquiladora growth rate proceeded to witness a boom in terms of both number of plants and the magnitude of employment.[19] Economist Paul Cooney reported that “in stark contrast to the -6.2 percent growth rate for the overall Mexican economy, the maquiladora industry expanded by 30 percent in 1995.”[20] The 1994-1995 recession was thus a dramatic instance of the maquiladoras‘ positive response to trade liberalization policies following Mexico’s economic crises. The remarkable booms in this sector were a huge success for U.S. corporations as well as for some Mexican businesspeople, and played a decisive role in convincing the North American nations to rush into enacting NAFTA.

NAFTA predated the 1994-1995 crisis by a year, and extended many of the special legal protections afforded to maquiladoras to other export manufacturers in Mexico as well. Therefore, it is difficult to tell if NAFTA contributed to the post-1995 maquila boom or if the peso devaluation alone brought about its success. Economists William C. Gruben and Sherry L. Kiser noted that “by 1999, the majority of imports that earlier had been processed under the maquiladora program for entry into the United States could enter duty-free without any connection to maquila plants.”[21] On the other hand, by eliminating “priority industries,” the government forced some businesses to become outright maquiladoras in order to continue importing intermediates duty-free, and “some processed products…were able to reenter the United States more cheaply in NAFTA’s wake.” Thus, it is no easy task to tell whether NAFTA contributed to the growth of the maquilas themselves. Nonetheless, the policy certainly has allowed other business enterprises to operate in a manner similar to maquiladoras, outside of maquila laws and regulations.

Once again, recession has hit Mexico with the global financial crisis first seen in 2008. The country’s economy, which is intimately tied to that of the U.S., contracted by 6.1 percent in 2009, with hundreds of thousands of lost jobs witnessed in the manufacturing sector. [22] In 2010, the government passed a new decree on the IMMEX program, which came into effect in early 2011, and was designed to “streamline administrative burdens” as well as clarify tax issues.[23] The effects of this new measure are still unclear. Although the maquila industry is increasingly using local sourcing, development, and sales, the decree still provides tax breaks for foreign-owned plants, demonstrating a continued push for free trade.[24] Most available statistics aggregate the maquilas with domestic-owned production into the IMMEX program, but one statistic is free standing and clear: foreign-owned maquila profits have recovered. Income for these plants, which fell precipitously beginning in October 2008, began to recover slowly in January 2010, and spiked beginning in January 2011.[25] Overall IMMEX program employment has increased since July 2009.[26] It is difficult to assess the effects of the decree itself, but foreign-owned maquiladoras, aided by liberalized trade policies, still recovered faster than the rest of the Mexican economy, even as the U.S. was confronting the pain of its own high unemployment rate.

Throughout the history of maquiladoras, a convergence of neoliberal policies focused on liberalized trade, thus allowing the industry to expand during periods of recession. These booms and the economic benefits that accompanied them, however, have not trickled down to the average Mexican nearly enough, but merely have introduced grossly inferior jobs along with deleterious and even abusive labor conditions.

Flexible Labor Conditions, Job Creation, and the Question of Empowerment

Indefensible working conditions were present in many maquiladoras, including both labor-intensive and newer, more capital- intensive factories. Laborers worked for “long…workdays [as]… part and parcel of the new ‘labor flexibility.’”[27] The Border Committee of Women Workers has reported that supervisors “act[ed] on their whims or show[ed] favoritism in giving out permission for absences or even to go to the bathroom.”[28] Involuntary overtime also has been frequently reported, and management enforced turnover through short-term labor contracts and by opening or shutting down factories with little or no notice, adding to job insecurity.[29] Health hazards abounded, including “lack of…ventilation and the provision of rudimentary face masks… toxic chemicals….back pain…[and] swollen feet,” though the biggest health issue reported by the Border Committee was stress resulting from poor working conditions and from some of the wage- and hour-related practices described below. [30]

The free trade policies that fostered the maquila sector’s growth have not only exacerbated poor working conditions, but also promoted low wages. Although above the minimum, most workers’ pay was below the average for the manufacturing sector as a whole; wages were also distributed using exploitative practices and primitive attitudes. Although real wages have stagnated or fallen, especially in dollar terms, maquiladora managers “ignored” increases in the minimum wage because they already pay a higher salary.[31] Under the new two-tiered wage system, senior employees are able to earn even higher wages. As a cost-saving tactic, some managers have offered severance packages to senior employees and then immediately hired new employees, rendering the concept of seniority “worthless” for former employees who apply to new firms.[32] Workers also had to “meet production quotas to earn… base pay, and [were] then induced to work for the extra pay doled out for pieces produced over and above the daily quota.”[33]

The Border Committee of Women Workers reports that “often, up to 50 percent of a worker’s take-home pay… [was] composed of so-called bonuses.”[34] These could be based on adhering to strict conditions such as not arriving to work more than five minutes late or never asking for time off, including for classifiable emergencies.[35] In other maquilas, production bonuses were earned as a result of “teamwork,” such that either each worker met the quota and the entire team earned the bonus, or no one earned the bonus, creating pressure among employees.[36] They also note that “most maquiladoras… [paid] bonuses in merchandise or scrip, claiming that the workers benefit[ed] because taxes on these sums… [were] not deducted from their paycheck.” This practice, however, is illegal, and many of the “benefits” involved turned out to be fraudulent, as workers still found themselves paying for access to “services,” such as cafeterias and transit.[37]

The Border Committee, asserting that these abuses (and government complicity) actually have worsened since NAFTA’s advent, continued to report labor violations and health hazards under the newer automotive and electronics maquilas.[38] Scholar Michelle Perla’s interviews with workers also suggest that conditions have worsened over the course of the maquila program. She writes that, “in contrast to the early years of the… [maquila] program, beginning in the late 1980s factories in the more labor-intensive sector of the industry with less technology began to speed up production, increase quotas, and cut benefits. In these later years women reported much higher levels of workplace stress.” [39]

It was also common for corporate maquila owners to suppress unions “with the complicity of a wide range of bodies, including the government.” [40] To prevent such organizing, high turnover was often enforced with short contracts or the sudden announcement of factory closures.[41] Sociologist Kathryn Kopinak commented that “while some companies are unionized on paper, the unions function[ed] to reinforce management’s wishes.”[42] Many companies even threatened to eliminate the official unions or to create “protection contracts,” or company unions.[43]

While women and men freely decided to work in maquiladoras, it was not necessarily under conditions of their own choosing. The choice to work in a maquila was made under clear income constraints and usually reflected a lack of better alternative job opportunities, as evidenced by the rise in unemployment during this gestative period.[44] While holding a job may have increased workers’ income and even their autonomy in the home, the job itself, with its often-degrading “flexible” conditions and traditionally low pay, was unlikely to be “empowering.” Michelle Perla brings this fact to light, reporting that women workers often preferred their working conditions when self-employed in the informal sector.[45] Maquiladoras also have not provided nearly as many jobs as Mexico needs or the quality of working conditions that Mexicans deserve, contrary to the “job creation” mantra recited by neoliberal policymakers.[46] The maquila experiment that prompted NAFTA and other FTAs demonstrates the effects of such agreements: not only has the program shifted jobs overseas, but it has also transformed them into low-wage jobs almost inevitably garnished with poor working conditions.

The Maquila Industry as a Bellwether

While the growth of the maquiladora industry might reflect a success story for U.S. investors and some Mexican businesspeople, it certainly was not a boon for Mexican workers, nor has it noticeably created jobs in the U.S. The prolific growth of maquilas following the crisis-driven implementation of free trade policies, and the resultant increase in the number of jobs with detrimental and even inhumane labor conditions, foreshadow the likely negative effects of a round of FTAs with Panama, Colombia, and South Korea.

In his recent speech, President Obama asserted that ”what I will not do is let this economic crisis be used as an excuse to wipe out the basic protections that Americans have counted on… We shouldn’t be in a race to the bottom, where we try to offer the cheapest labor… America should be in a race to the top.”[47] He is correct that the U.S. is not in a race to the bottom; that fate belongs to countries such as Mexico, and soon to Colombia, Panama, and South Korea. The basic protections on which U.S. citizens have relied will go neither to workers in the U.S., nor to their counterparts in other countries; in fact, there will be no “race to the top” for labor standards. As NAFTA and the maquiladora program that prompted it have demonstrated, FTAs will not and cannot guarantee the U.S. a lower unemployment rate; in fact, it will more likely bestow jobs with detrimental and even abusive conditions on workers overseas and fail to increase employment back at home.

Source: Rumbo

This analysis was prepared by COHA Research Associate Courtney Frantz.
With special thanks to Jeanne Hahn, Paul McMillin, Myra Thomas, Marissa Luck, and Jennifer Richardson.

References for this article can be found here.

To read more from COHA on Mexico, click here.