How Mexico Is Becoming More Attractive To U.S. Manufacturers

March 29th, 2013

Posted in China, Mexico, NAFTA, Nearshore | No Comments »

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

June 15th, 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.”

Posted in China, Labor, Maquiladora, Mexico, NAFTA | No Comments »

Nearshoring Fuels Mexican Manufacturing Growth

April 9th, 2012

Security concerns don’t yet appear to be putting a major dent in Mexico’s appeal to manufacturers. Here’s why.

Wednesday, March 14, 2012
By  Closer, cheaper, friendlier. That might have been the formula underlying moving to or opening manufacturing operations in Mexico. The United States’ southern neighbor offers transportation distances a fraction of those from Asia, a labor force a good deal cheaper than domestic workers, and a country causing fewer headaches about intellectual property and other trade concerns. But in recent years, drug-related violence along the border has caused some manufacturers to be more cautious about making the move to Mexico.

Even with those concerns, Mexico continues to benefit from U.S. companies and other foreign investors who see it as an attractive manufacturing destination. In fact, 63% of those surveyed by AlixPartners, a business advisory firm, named Mexico the most attractive country for siting manufacturing operations closer to the United States. Only 19% of the companies reported supply-chain disruptions in Mexico as a result of security issues. And 50% reported they expect things to improve over the next five years.

Mexico’s proximity to the United States solves the most pressing issue facing manufacturers, which is speed to market, according to Rich Bergmann, global lead for manufacturing for Accenture. “The stability of the time schedule of supply has become paramount in manufacturing. Whether we like it or not, a 12-month forecast, steady-state demand is no longer a reality. Everyone is running lean supply chains and inventories. Being close to customers is key to reducing lead time. Add to that the overall total landed cost and that explains why reshoring is occurring in Mexico,” he says.

In fact, Mexico helps multinational firms cope with a variety of factors stemming from intense global competition, says Arnold Matlz, an associate professor at the W.P. Carey School of Business, Arizona State University. They include the pressure to reduce and control operating costs, the need for operational flexibility, the need for different service outcomes for different customers, and shorter product/service development cycles.

 

Precision manufacturing is critical to aerospace-industry needs. Photo Courtesy of The Offshore Group

To date, manufacturers operating in Mexico have been largely shielded from the drug-related violence. “As reports have indicated, Mexico’s violence is characteristically cartel versus cartel. It is something that has not had a very large amount of leakage into civil society, nor has it affected, in a noticeable way, the companies that are already doing business there. As a matter of fact, in spite of what is in the news, Mexico’s manufacturing economy is humming along,” says Steve Colantuoni, director of corporate marketing for the Offshore Group. “Companies that are already in Mexico are increasing their numbers and their production.”

Foreign direct investment in Mexico rose 9.7% in 2011 compared to 2010 to reach $19.44 billion, indicating that violence is not chasing away dollars. This faith in Mexico is helping to fuel strong economic growth there. After a 5.5% growth rate in 2011, the Mexican economy is expected to grow 4.5% in 2012. Manufacturing has been a significant driver of the economy, growing 8% over the past year and creating 1.8 million jobs.

A High-Flying Aerospace Cluster

One industry flocking to Mexico for its lower cost structure and ample workforce is aerospace manufacturing. Between 2010 and 2011, total sales in Mexico’s aerospace cluster increased by 25% to $4.5 billion, according to the Aerospace Industries Association, far outstripping the industry’s overall annual growth rate of 15%, according to data from the World Bank.

More than 250 aerospace companies and suppliers, including Aernnova, Bombardier, Cessna, Eurocopter, Hawker Beechcraft and Messier Dowty, now operate in Mexico and employ 29,000 people. As large OEMs set up shop, suppliers follow. Québec-based Heroux-Devtek, a manufacturer of aerospace and industrial products, made the move after prompting from some of its biggest clients. “Customers such as Boeing were saying, ‘If you want to be a key supplier, then you should consider Mexico’,” says Michael Deshaies, general manager of the firm’s Querétaro operations. Querétaro is one of the top states in Mexico for the industry along with Chihuahua and Sonora.

In fact, in Sonora alone, located in Northeast Mexico, manufacturing has been growing at 25% a year for the past five years. The number of companies serving the aerospace supply chain has grown from 21 in 2007 to 45 in 2011; and employment in the sector has more than doubled at the same time, from 2,520 to 7,000. The city expects employment will exceed 10,000 jobs by the end of 2013.

One employer contributing to the growing industry is INCERTEC, a specialty plating, metal finishing and engineering-solutions company based in Fridley, Minn. The company will be investing $1.2 million to move some processes to Mexico from Minnesota, where both capacity and labor constraints make it difficult to fulfill demand.

“In the industries we serve, precision is critical,” says Tim Meador, INCERTEC’s chief executive officer. “By adding this location, we can provide manufacturers doing business in Mexico the same consistency, quality and delivery provided by our U.S. location.”

Another consideration for Meador was the available labor source in Mexico. The average age in Mexico is 29, which means it is one of the youngest nations on the planet. Every year, 90,000 engineers graduate from Mexican universities — three times the number who graduate from U.S. schools. This contrasts to the company’s Minnesota location, where there is a shortage of skilled labor.

 

Mexican manufacturing provides advantages for high-volume manufacturers. Photo Courtesy of The Offshore Group

It is not only the skilled labor but also the low cost of investing that attracted Scott Livingston, CEO of Horst Engineering, to the region. “New England is a good area for knowledge, but it is a high-cost environment,” says Livingston. East Hartford, Conn.-based Horst, a contract manufacturer of precision components and assemblies, has been in Sonora since 2006.

“We looked at environments all over the world and came back to the aerospace-manufacturing-in-Mexico option,” Livingston explains. “We felt that for a high-mix, low-volume product in a high-precision environment with a significant North American customer base, that it would give us significant opportunity — opportunity to transfer some product that we may not have been as competitive on in the U.S. that we were doing for existing customers; and it would give us access to a new labor pool that was manufacturing-oriented. We’ve seen considerable shrinkage of the manufacturing labor force in Connecticut, and we’re training people from scratch here anyway. So we figured we could do that in Mexico.”

Training is one of the many incentives offered to companies. “Government incentives, including training and infrastructure improvements, are key reasons that the aerospace cluster is growing. The government is also increasing resources to build up interior areas as opposed to the border towns,” explains Jay Jessup, president, Mexico Services Group.

Becoming a Manufacturing Export Powerhouse

Aerospace isn’t the only industry finding a manufacturing-friendly environment in Mexico. Automotive manufacturing in Mexico was on the rise in 2011, observes George Magliano, senior principal economist at IHS Global.

“It was a year of record production in terms of total vehicle consumption and export in the light- and passenger-vehicle market segments,” he notes. “Mexico is becoming a magnet for supplier investment. This is due to announcements of sizable investment in the country in new production platforms over the last year by large automotive-industry OEMs such as Nissan, Mazda, BMW, Volkswagen and General Motors.”

In 2008 Mexico became the largest supplier of auto parts to the United States. In 2010 Mexico ranked as the sixth largest automotive exporter in the world. The country exports 80% of its vehicles to the United States, and 11 of every 100 autos sold in the United States are made in Mexico. Predictions are that by 2014 automotive production will reach 2.4 million units. Eight of the 10 leading automotive OEMs have assembly plants in Mexico, and more than 300 Tier 1 suppliers have plants in Mexico.

 

The skill sets of Mexican aerospace-industry workers continue to advance. Photo Courtesy of The Offshore Group

Heavy-truck manufacturers include Dina, Navistar, Kenworth, Daimler, Volvo, Isuzu and Scania.

On the supplier side, over 1,100 companies manufacture auto parts in Mexico, including: Robert Bosch, Denso, Delphi, Magna, Visteon, Eaton, Valeo, Bridgestone/Firestone, Johnson Controls, Michelin, Goodyear, Lear, ThyssenKrupp, Faurecia and Siemens.

In terms of exports of high-tech manufacturing, Mexico is the second largest supplier of electronic products to the United States. Exports of consumer electronics and devices reached $71.4 billion in 2010, an increase of 20% over the previous year. In fact, Mexico is the third largest global exporter of cell phones.

While Mexico is still heavily dependent on the United States for its exports, the country is starting to diversify its export markets.

“Mexico’s exporting structure has been based on the U.S. market where 90% of the products land. But during the recent economic downturn, in the past three years, they have reduced this number to less than 80%. Their export markets are more diverse, with Latin America growing. In fact, trade with Brazil alone has increased fivefold,” explains David Rutchik, a partner with Pace Harmon, an outsourcing advisory services firm.

Fueled by a young, increasingly educated population, low labor rates and aggressive promotion by Mexican government officials, Mexico appears well-situated for years of sustained growth. “We are predicting that by 2050 Mexico will be the eighth largest economy in the world,” says Paul Cronin, a U.S.-based executive vice president with the international commercial banking firm HSBC.”

Posted in Aerospace, Maquiladora, NAFTA | No Comments »

In Mexico, Rail is On a Roll

February 10th, 2012

Latest News — By Truth About Trade & Technology Editor on February 8, 2012 9:32 pm

InBound Logistics

January 2012

By Merrill Douglas

Rail is hot in Mexico—and getting hotter every year. The country’s largest railroad, Ferrocarril Mexicano (Ferromex), saw its carload volume increase by 6.6 percent in 2011 compared with 2010, and revenues increase by 13.9 percent, according to the company’s chief executive officer, Rogelio Vélez.

Mexico’s second-largest rail carrier, Kansas City Southern de México (KCSM), reports that it moved 15.9 percent more carloads in the first three quarters of 2011 than in the same period in 2010.

These figures represent the growing demand for rail transportation both domestically and between Mexico and the United States.

The “nearshoring” trend is one driver of this growth. Thanks to high oil prices and rising wages, Asia is no longer the obvious low-cost location for companies that manufacture goods for the U.S. market. The increase in corporations building factories in Mexico has boosted the flow of materials headed south from the United States to Mexico, and finished products headed north.

Mexico’s central location is a second factor in the county’s rail renaissance. “It’s in the middle of two hot markets: North America and South America,” says Jim Commiskey, vice president, automotive and Mexico at Dublin, Ohio-based Pacer International, a logistics services provider whose portfolio includes a variety of intermodal freight services. “Mexico provides access to raw goods from the United States, and to countries such as Brazil that produce steel and other manufacturing necessities.”

A third cause is the fact that the rail industry in Mexico has been playing catch-up since the nation privatized its railroads in the 1990s.

“Rail in Mexico was underdeveloped because the state-owned railroad company, Nacionales de México, stopped investing in it in the years just before privatization,” says Vélez. When the private sector took over, the new rail carriers started improving the network and heavily marketing their services. Plenty of opportunity remains to be tapped.

As Mexican railways invest in upgrades that make their services more reliable, shippers are more apt to consider rail—especially intermodal—as a less expensive alternative to long-haul truck, says Paul Hirsch, vice president of Mexico operations at Hub Group, a provider of intermodal, highway, and logistics services based in Downer’s Grove, Ill.

“Many large corporations tried intermodal in the past, when the infrastructure and service providers were inadequate, and found that it didn’t work,” he notes. “Now they are trying it again.”

A BIT OF HISTORY

Mexico’s current rail system started to take shape in 1995, when the Mexican government announced its privatization plans. U.S. railroad Kansas City Southern (KCS) and Mexican company Transportación Marítima Mexicana (TMM) formed a joint venture to buy the Northeast Railroad concession. KCS bought out TMM’s share in 2005 and changed the railroad’s name from Transportación Ferrovaria Mexicana to Kansas City Southern de México (KCSM).

In 1998, mining corporation Grupo Mexico and U.S. railroad Union Pacific (UP) joined forces to buy the Northwest Concession, creating Ferromex.

In 2005, Grupo Mexico bought a third Mexican railroad, Ferrosur, which operated in southeastern Mexico. Having spent several years overcoming legal challenges, Grupo Mexico is currently merging Ferrosur with Ferromex.

Ferromex and KCSM offer cross-border service in partnership with KCS, UP, and BNSF Railway. The U.S. and Mexican railroads pass freight from one jurisdiction to the other at six major border crossings. The U.S. sides of these crossings are in San Ysidro and Calexico, Calif.; Nogales, Ariz.; and El Paso, Eagle Pass, and Laredo, Texas.

Often, the handoff of freight between a Mexican and U.S. railroad involves nothing more than a change of crew because customs import and export paperwork is pre-filed with U.S. and Mexican customs authorities before freight is loaded.

In the case of a UP train crossing onto the KCSM network at Laredo, for example, “the operators get out of the train at the border and hand over the controls to their KCSM counterparts,” Commiskey says. “Northbound KCSM trains are handed over to Union Pacific in the same manner for movement into the United States. Employees operating the trains are required to have personal customs documents and paperwork available for entry into the United States and Mexico.”

Much of the freight that passes through the international gateways serves the needs of the automotive industry. Pacer, for example, launched its “Mexico Direct” service 20 years ago to serve auto manufacturers with factories in Mexico.

Every major automaker in North America, including GM, Ford, Chrysler, Toyota, and Honda, uses Pacer’s services to and from Mexico, says Commiskey. Tier I suppliers that serve those manufacturers make up another significant customer group.

“We also serve a variety of electronics manufacturers, particularly in Tijuana and Juarez, and appliance makers in the greater Monterrey and San Luis Potosi areas,” he notes.

TWO-WAY TRAFFIC

Manufacturers in Mexico ship finished product north to U.S. markets, while raw materials move south on rail to supply production lines in Mexico.

“One appliance maker, for example, ships rolled steel and blanks south to be stamped into washing machines and refrigerators,” Commiskey says.

“More industry is coming to Mexico,” says Bernardo Ayala, vice president, marketing and sales for Mexico at UP. “That is increasing demand for raw materials, as well as the need for transportation services to move those products within Mexico to the ports, or to the United States.”

Automakers also comprise the top customer segment for Hub Group’s services to and from Mexico. After that, Hub’s intermodal volume to and from Mexico consists of what’s known as FAK—freight all kinds. “Appliances, food products, beverages, and industrial products make up 60 to 70 percent of our total freight,” Hirsch says.

Some manufacturers in Mexico have chosen that country as a more economical alternative to China. The nearshoring trend drives an increasing volume of freight along the corridor that connects Mexico’s industrial centers with U.S. intermodal terminals such as the one that Kansas City Southern operates in at the CenterPoint Intermodal Center in Kansas City, says Chris Gutierrez, president of economic development group Kansas City SmartPort.

“Transportation costs from Mexico into the United States are 75 to 80 percent lower than from Asia, so we’re seeing a lot more manufacturing distribution coming into that corridor,” Gutierrez says.

Besides touting the advantages of the KCSM intermodal corridor to companies that manufacture in Mexico today, KCS and Kansas City SmartPort are also marketing to companies that currently import from Asia, but are good nearshoring candidates.

Agriculture has also helped swell cross-border traffic. “Bartlett Grain and other agricultural commodity traders have consolidation points in Kansas City and move their freight to Mexico,” says Gutierrez.

Along with those major customer segments, some less-obvious industries are boosting volumes on Mexican rail lines. “The growth driver for Ferromex in 2011 has been new railroad cars that are built in Mexico,” says Vélez.

Volume in that category surged 88 percent in 2011. Loads of glass bottles increased by 86 percent.

Ferromex parent Grupo Mexico, which operates a large copper mine in Sonora, Mexico, was responsible for another volume jump. In 2010, the mine reopened after a three-year strike.

“Sulfuric acid shipments resumed in 2011, driving Ferromex’s 58-percent surge on that commodity,” Vélez says. The railroad transports the sulfuric acid, a by-product of copper extraction, for export to the United States and Chile.

Another important factor in the growth of Mexican rail is the emergence of the Port of Lázaro Cárdenas, on the Pacific Coast, as an alternative to container ports on the U.S. West Coast. “Lázaro Cárdenas is largely a bulk port, but in the past four or five years it has expanded its container activity,” says Gutierrez.

NEW CONTAINER MAGNET

Hutchison Port Holdings opened the first container operations at Lázaro Cárdenas in 2007. “Since then, Lázaro Cárdenas has been the fastest-growing port in North America,” says Patrick Ottensmeyer, executive vice president, sales and marketing at KCS, whose sister railroad KCSM provides the only rail service at the port.

Lázaro Cárdenas can currently handle approximately one million 20-foot equivalents (TEUs), and that figure is expected to grow in the long run to 2.2 million to 2.5 million TEUs.

Mexico has announced plans to name a second container concession at Lázaro Cárdenas, which ultimately would offer similar capacity to the Hutchison facility.

Kansas City SmartPort has worked with KCS since the late 1990s to market the Lázaro Cárdenas-to-Kansas City rail corridor. “We pushed both the U.S. importers and Asian exporters to consider the corridor not only for their freight moving into Mexico, but freight coming into the United States,” Gutierrez says.

That strategy seems to be paying off. “As of December 2011, our container traffic through Lázaro Cárdenas was up 31 percent through September,” says Ottensmeyer. “With continued expansion of container operations at Lázaro, KCS should post solid double-digit volume growth for an extended period.”

Along with improving its capacity to move containers, Lázaro Cárdenas will open a new bulk handling facility in 2012. “This facility will increase the volume of heavy, bulk commodities, such as coal and iron ore, that could move through the port,” Ottensmeyer says.

Whether containers are moving to and from the ports, or within Mexico, intermodal transportation still offers railroads and intermodal service providers a great deal of opportunity.

“The United States is a mature intermodal market,” Hirsch says. “Shippers understand the pros and cons, the rate structure, and the seasonal peaks.”

Not so in Mexico, where most freight still moves by truck. “Carriers and service providers still have plenty of market share left to capture by selling the economies of intermodal transportation,” he notes.

The improvements Mexican railroads have made to their infrastructure constitute a big selling point. Shipping by rail in Mexico used to be an adventure. “A shipment could take 10 days or 30 days to get to its destination,” says Hirsch. “The carrier wouldn’t be able to tell you when it would arrive.”

Commiskey cites the upgrades KCSM has made to its terminal in Monterrey as another significant improvement.

“In 2007, the ramp in Monterrey was inadequate for the market,” he says. Both the road leading into the facility and the ramp itself needed to be upgraded, and the facility needed to be modernized.

All that has changed. “The ramp is completely paved,” Commiskey says. “KCSM added a line of track, so there is plenty of room to park equipment, and new lifts speed unloading. The whole terminal is surrounded by chain-link fence and barbed wire, so it is very secure.”

The railroads have been making similar upgrades throughout Mexico, and those investments have produced significant benefits for shippers.

Ferromex spent $330 million on new equipment and infrastructure enhancements in 2011, including $72 million to improve the rail line and $35 million to update railyards and support track.

“We’ve invested $2.1 billion in infrastructure upgrades in the 13 years we’ve been operating,” Vélez notes.

BETTER SECURITY

Along with upgrading rail infrastructure, Mexican railroads and their U.S. partners have been improving security, helping to ensure that freight moving within Mexico or across the border arrives undamaged and free of contraband.

“Both KCSM and Ferromex work hard to ensure that safety procedures in Mexico are equal to the ones in the United States,” says Ayala at UP. Those safety measures include using x-ray machines to examine railcar contents, dogs that search trains for hazardous items, and high-speed cameras that monitor passing cars for open doors or broken seals.

If contraband is detected on a train, customs officials can isolate individual intermodal containers for inspection.

KCSM boasts a strong security record. “In 2010, the customer claims rate for theft, vandalism, or accidents for all shipments moving on KCS in Mexico was 0.02 percent,” Ottensmeyer says. “That means 99.8 percent of all loads we transported were moved without a customer claim.”

The multiple layers of safety and security provisions at KCSM include a focus on maintaining train velocity, which reduces the chance of incidents.

“The trains are really moving now,” says Hirsch. “They don’t stop, so no one can break into a train at rest.”

Whether in motion or stopped, double-stacked intermodal containers loaded into gondola cars present a formidable obstacle to criminals. One container rides low in the car’s well, making it impossible to open the door more than three feet, and the second car rides on top. “Most thieves will target trucks, rather than climb to the top of 20-foot-tall trains with a blowtorch to try to break in,” Commiskey says.

Criminal activity in Mexico has made rail carriers’ security challenges tougher in recent years. At Ferromex, recent initiatives to boost security include replacing private security guards—who are not allowed to carry guns—with armed Federal Police officers. Those officers protect the trains both in-transit and in the yards.

“We pay for the security that they provide us,” Vélez says. But Ferromex has not been able to boost the number of armed officers as quickly as company officials would like.

While the safety of shippers’ freight is of paramount importance, Ferromex also looks to the police to safeguard its own operations. Particularly challenging to the railroad were thieves in the state of Zacatecas who were stealing diesel from engines.

Not only did Ferromex lose money on the fuel, but the thefts interrupted operations. “Fifteen or 20 locomotives were stranded there because we had to refuel them,” Vélez says. Since federal officers started protecting the equipment in Zacatecas in September 2011, those losses have stopped.

Rail transportation in Mexico still enjoys a great deal of growth potential. Rail carries about 42 percent of freight in the United States and 60 percent in Canada, but only 26 percent in Mexico. “If we concentrate on boosting that share to 35 or 40 percent,” says Vélez, “our industry will gain real volume growth opportunities.”

Posted in Maquiladora, Mexico, NAFTA | No Comments »

Booming Mexico-U.S. trade buoys Kansas City Southern

January 8th, 2012

Posted in China, Maquiladora, Mexico, NAFTA | 1 Comment »

Economic Ties Between the United States and Mexico

December 18th, 2011

Posted on Friday, December 16, 2011

by Shannon K. O’Neil

It is worth reading the Woodrow Wilson Center Mexico Institute’s new study by Christopher Wilson, entitled “Working Together: Economic Ties between the United States and Mexico.” The report is packed with examples and statistical evidence of the deepening integration between the United States and Mexico since 1993 (the signing of NAFTA), and concisely explains why this relationship is so important and beneficial for the United States.

In terms of trade, for nearly half of U.S. states, Mexico is the number one or number two export destination. For border states such as Texas, New Mexico, and Arizona, up to a third of all exports head to our southern neighbor. But it isn’t just a border issue – export industries in states as far flung as New Hampshire, South Dakota, Nebraska, and Missouri all depend on Mexican industries and consumers. And these are some of the most dynamic trading relations we have. Twenty U.S. states increased exports to Mexico by more than 10 percent each year over the last fifteen years. Investment also flourished. Mexican FDI in the United States, though starting at a low base, increased tenfold over the past two decades.

The report shows that trade with Mexico is particularly beneficial to the United States because these goods incorporate many parts and products produced in the United States. In fact, even though fully counted as imports in official trade data, an estimated 40 percent of the value of Mexican products is actually “made in the USA.” Only Canada comes close to this ratio (25 percent). In stark contrast, only 4 percent of the value of Chinese imports is made on U.S. soil.  This means that products coming from Mexico support homegrown industry and labor. In fact, 6 million American jobs – or 1 out of every 24 – depend on Mexican trade. The study breaks down employment by state – showing for instance that some 200,000 Georgians, 120,000 Indianans, and 100,000 Coloradans owe their jobs to Mexico. Other studies show that export oriented jobs pay more than others, further benefiting U.S. workers. And what is good for Mexico is good for the United States — Mexico’s strong 2011 economic growth should create 150,000 new U.S. jobs.

The report interestingly points out how the United States is now competing with China and others to supply parts and materials used in Mexican production. Here, worryingly, the United States is falling behind – losing market share to its Asian rivals. Part of the problem is the border. Overwhelmed infrastructure, and long and unpredictable wait times at crossings limit competitiveness, costing taxpayers billions in lost revenue and jobs.

There are some signs that these issues are at least appreciated. In 2010 three new border crossings opened, easing congestion along the dense 2,000 mile border, and under its “21st Century Border” project, the Obama administration is working to make commercial and other crossings more efficient and secure. But a conceptual shift is still needed. U.S. politicians, business owners, workers, and the general public need to understand that the path to improving U.S. global competitiveness –defending American industry in the process – runs through, rather than around Mexico (and Canada). Regional integration is vital for U.S. economic recovery and growth going forward.

Posted in Maquiladora, Mexico, NAFTA | No Comments »

Viewpoint: Mexican Manufacturing is Poised for a Comeback

November 5th, 2011

Higher wages, higher production costs and higher transportation costs will make China less competitive in the years to come and give Mexico a distinct advantage.

Thursday, November 03, 2011

The dominant story from Mexico today is one of violence and corruption. The drug wars are a very real part of Mexico these days, and nobody would underestimate the challenges that lie ahead for the government.

However, there is another story that doesn’t make the headlines yet is perhaps far more important to the future of the country.

In June, CNBC reported that Mexico’s economy is expected to grow by 4.5% this year. Contrast that number with the 1% growth expected in the United States and the 0.5% pace in Europe.

The Mexican economy is outpacing some of the faster-growing regions in the world — such as Russia — and it is estimated that Mexico will be the eighth-largest economy in the world by 2050.

In March, the Wall Street Journal reported that unemployment in Mexico fell to 4.6% and is at the lowest level since December of 2008. Contrast this rate to the 9%-plus rate in the United States.

On the Verge of Becoming a Key Trading Nation

Mexico is not far from breaking out as one of the key trading nations in the world. It now has signed 13 free-trade agreements that involve 44 nations, and is clearly less dependent on the performance of the U.S. economy than in the past.

This should not be misconstrued that the United States is not an important trading partner, as imports from Mexico rose by over 30% in 2010 and are on pace to exceed that in 2011.

Part of the reason for that surge in trade activity is that since 2005, the cost of manufactured goods from China has risen by 40%. Wages in China have risen rapidly over the past five to six years, and now they are almost the same as the wage rates in Mexico.

Wages have increased by 218% in China compared with 25% in Mexico. It is projected that wages in Mexico will continue to rise in the next 10 years, but only one-third as fast as those in China.

In addition, one of the most significant advantages that Mexico has had in its competition with China and other Asian nations is transportation costs.

It is 80% cheaper to bring goods over the border to the United States than it is to bring them from Asia, and that will increase in the years ahead as energy prices drift back up. This benefit grows when one looks at issues of speed, reliability, insurance and security.

In terms of cross-border trade statistics, trade has returned to the level that existed prior to the recession – a recovery faster than that with any of the other U.S. trading partners. It is almost twice as fast as the recovery that took place between the United States and Europe.

A Young Population

Another factor: The population of Mexico is rapidly becoming one of the most competitive in the world.

The average age in Mexico is 29, which means it is one of the youngest nations on the planet. Every year, 90,000 engineers graduate from Mexican universities — three times the number that graduate from U.S. schools.

Today, the nation has the ninth-largest pool of IT professionals in the world — behind only the United States in this hemisphere.

Since the start of the NAFTA trade agreement, foreign direct investment (FDI) in Mexico has tripled, and that investment has been divided between more than a dozen industrial states from Europe, Asia and North America.

In 2010, that FDI number reached $18.6 billion, and there are 75 additional FDI projects in development between now and 2015.

In short, this is a very different story from the one that dominates the media, and it is the story that has the most significance for Mexico in the years ahead.

This is not to say that Mexico doesn’t have issues to address. For example, there are problems with corruption at various levels of business that can make getting paid awkward and complex at times. These are the kinds of inhibitions to growth that must be dealt with sooner rather than later.

Keys to Mexican Competitiveness

There are many variables involved in creating a competitive edge. It must be recognized that many of those are wholly out of the control of the manufacturer.

Taxes and regulations imposed by government will influence how well a company does, and there are issues of tariffs and trade that impact business. The government needs to provide a safe environment within which to do business and there has to be a reasonable system for payment. All of this is crucial to the success of a given business.

The key to competitiveness lies in the decisions that an individual company can make for itself, and these fall into three broad categories.

Diversification

The first is to continue down the path of diversification in evidence for the last few years.

The recession in the United States was a severe blow to the Mexican manufacturer, but it also may have been a blessing in disguise as many Mexican operations found opportunities to do business with other nations.

Those trade agreements allowed expansion into other markets, but so has the increase in foreign direct investment. The advantages that Mexico has will become ever more appealing to operations in other parts of the world as production in Mexico has the added benefit of being close to the U.S. market.

Shipments can be delivered at a transportation cost that is far less than from other parts of the world — and dropping.

As part of this first step toward diversification, Mexico is in a position to be at the forefront of the development taking place in other parts of the Americas. The economies in Brazil, Colombia and Chile are developing fast, and opportunities exist for the Mexican manufacturer to become fully engaged in these countries as well as in the United States.

Skill Base

The second major advantage is the skill base developing in Mexico.

The country has been emphasizing education for a long time and there have been many graduates in the last 10 years. This will either become a huge problem or an advantage — depending on the reaction of the private sector.

If this young, educated population finds few opportunities to use their skills, they will become frustrated and angry and Mexico could well experience the same challenges affecting governments in the Middle East.

However, if the economy expands and the business community takes advantage of that skilled, talented young population, the country stands to grow quickly.

The United States is rapidly coming to a crisis from the other direction as its labor pool decreases and the skills needed start to vanish. The average age of a fully qualified welder in the United States is now 63; this points to an emerging problem.

It will be next to impossible for the United States to address that issue in any way except through mass immigration, and that is simply not politically feasible in the foreseeable future. That puts greater emphasis on production outside the United States, and Mexico becomes the most logical candidate if there is attention to the needs of a growing industrial sector.

Location, Location, Location

The third major advantage stems from proximity and the costs of providing the inputs needed for modern manufacturing. In addition to labor costs, a more important consideration may be the ongoing cost of transportation.

Trade with Asia is getting more expensive, and all projections hold that this will be a greater concern in the years ahead.

Currently the cost of fuel has fallen a bit, but this is a temporary situation that will reverse as the global economy begins to recover. It will become far too expensive to ship certain goods from a great distance when there is a nearby alternative.

Mexican operations will become increasingly connected to those in other nations as companies in Asia seek to reduce the costs of feeding the U.S. market. This is an opportunity for Mexican companies to tie themselves to the plans of American transportation providers.

Given the resistance to expanded truck traffic between Mexico and the United States, the most likely area of cooperation is in the rail sector with those U.S. companies that have invested in developing their networks in Mexico.

As Mexican manufacturers become more comfortable with the northern opportunities, they can start to choose expansion locations that take full advantage of new ports and new rail lines.

Fighting Perceptions

Obviously, barriers exist to these expansion plans, as they often do. There will be competitive pressures from the nations that do not wish to lose their advantage. Government decisions by both the United States and Mexican regimes will compromise expansion plans.

A number of the social issues can’t be ignored and, most of all, there is the battle over perception. Too many people in the United States and in Mexico are convinced the nation is in a death spiral, but the actions of the business community can challenge that assessment.

The U.S. manufacturing community is in an ideal position to link with those Mexican counterparts as both nations start to see the predicted shift in production.

As the Boston Consulting Group and others have pointed for the past couple of years, China is losing its edge, and there is an opportunity for others to grow at its expense. It is not that China is doomed to decline, but the trends of the last couple of years will only accelerate.

Higher wages, higher production costs and higher transportation costs will make China less competitive in the years to come and give Mexico a distinct advantage.

Chris Kuehl is economic analyst for Rockford, Ill.-based Fabricators & Manufacturers Association, International (FMA) and managing partner of Armada Corporate Intelligence.

©2010 IndustryWeek. All Rights Reserved.

Posted in Maquiladora, Mexico, NAFTA | No Comments »

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

• 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.

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.

Posted in Labor, Maquiladora, NAFTA | No Comments »

Mexico’s economy: Making the desert bloom

August 26th, 2011

The Mexican economy has recovered somewhat from a scorching recession imported from America, but is still hobbled by domestic monopolies and cartels

Aug 27th 2011 | SALTILLO | from the print edition

Posted in Maquiladora, Mexico, NAFTA | No Comments »

Despite Violence, U.S. Firms Expand in Mexico

July 14th, 2011

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By RANDAL C. ARCHIBOLD

MATAMOROS, Mexico — When the latest bloody headlines from the drug war in Mexico reach headquarters in New York, Ken Chandler, the manager of an American electronics manufacturing plant here, jumps on the phone.

He is not begging to come home. He is begging to stay.

“We try to put them at ease, to say it is not time to pack up,” said Mr. Chandler, who oversees the company’s operations in this border city, where the military arrived last week to help purge drug cartel members from the police department.

Not that his employer, Spellman High Voltage, needs much assurance. Like a crop of other manufacturers at the border, including six companies in this city alone, Spellman is expanding its operations, with a new plant under construction after making a calculation that offers one of the starker paradoxes of these violent days in Mexico.

Despite the bleak outlook the drug war summons, the Mexican economy is humming along, not without warning signs, but growing considerably faster than that of the United States.

Even as drug organizations battle for turf around them, more TV sets are being assembled, car parts boxed up and electronic widgets soldered together in the large manufacturing plants here known as maquiladoras. The result is a boomlet in jobs in some of Mexico’s hardest-hit cities, a bright spot in an otherwise bleak stream of shootouts, departing small businesses and fear of random death.

Over all, jobs in Mexico’s manufacturing sector increased 8.2 percent to 1.8 million as of January, the most recent figures available, driven mostly by what Mexican officials called regaining health in the auto and electronics industries, the engine of the economy along the border. Even Ciudad Juárez, which has both the highest level of violence and the largest number of maquiladoras, added 1.3 percent more jobs, to 176,824.

Mostly American-owned and in border states, the plants import raw materials duty free and export assembled products, lowering the cost of goods in the United States and providing jobs that pay more than the Mexican average (typically $8 to $16 per day on the assembly line) but a lot less than American wages.

Some of the new or expanding plants come at the expense of plant closings in the United States. Electrolux, which makes washers, dryers and other home products, closed a plant in 2009 in Iowa but opened one in Juárez last month that is expected to employ 400 people.

Others are from investors farther afield. Foxconn, a Taiwanese firm that makes iPhones, Dell computers and other electronics, is one of several Asian companies taking root. It opened a plant in Juárez last summer. Down the coast from here, Posco, a Korean steel manufacturer, has announced plans to expand its operations with a second plant that will employ 300 people by 2013. Several other companies plan to built or expand in other states as well.

The gains have not made up for losses during the global recession; many plants closed or have shed jobs for good, focusing on making their operations more efficient through automation and other measures, analysts said.

Still, border towns are showing some of their biggest signs of economic life in months. Over all, the Mexican economy, the second largest in Latin America after Brazil, grew 5.5 percent last year, its fastest pace in a decade, and is expected to grow 4.5 percent this year, driven largely by manufacturing as well as internal growth from an expanding middle class. The American economy, by contrast, is expected to grow between 2.7 percent and 2.9 percent in 2011, the Federal Reserve projected late last month.

Economists say Mexico’s growth would be even stronger without the cartel violence, which in the last five years has left more than 40,000 people dead, according to the count by national newspapers.

And given how central the American economy is to its welfare, Mexico could suffer if the recovery in the United States does not pick up speed. While trade with the United States hit a record last year of nearly $395 billion, foreign investment has lagged, suggesting that much of the job and economic growth is depending on existing businesses expanding or restarting production lines that had been waylaid by the recession.

The Bank of Mexico reports foreign investment was $17.7 billion last year, far off pre-recession levels of $25 billion and fed in good measure by a single transaction, the purchase of a one of the country’s largest beer companies by Heineken.

Monterrey, the country’s business and industrial hub, has exploded with violence in the past year, though even there, in the suburbs, some plants have expanded or announced plans to open. For better or worse, the plants are at once part of and apart from the communities that surround them, protected by tall fences, armed guards and cameras galore.

The violence has largely spared the plants, though workers have been caught up in it. Last fall, gunmen apparently looking for a rival fired on a bus carrying maquiladora workers near Ciudad Juárez, killing four people. Higher-paid supervisors and managers, American and Mexican, tend to commute from the American side of the border.

Security costs are rising to protect property and shipments, and safety remains the top concern expressed by potential investors, said Bob Cook, the president of the El Paso Regional Economic Development Commission, which helps recruit businesses to Ciudad Juárez, Mexico’s most violent city.

“But we are still working with more companies now than we did three years ago,” he said.

Business is business, and the proximity to the United States is hard to pass up. The rising cost of labor, transportation and the renminbi have made some companies reconsider Mexico instead of China, he contended. Despite several murders a day, trade between Juárez and Texas rose 47 percent last year to $71.1 billion, he said.

“Central location, great infrastructure, suppliers and labor pool,” he said. “Those things haven’t been tampered with by organized crime.”

Industry promoters argue that the additional jobs may help dampen crime, with more people working and able to support their families. But cities that have benefited from manufacturing have often been slow to help workers and their families.

“The maquiladoras may be growing again, but there is still not much of an effort to address the social needs of the workers and their families outside the plants,” said Cirila Quintero, a sociologist at El Colegio de la Frontera Norte, a research group based in Tijuana, Mexico. “What investment has been made in schools and social centers has been minimal. The governments say they don’t have money and the plants say they are there to create jobs and help industry.”

But workers like Rosalia Carrasco, 41, who has worked at Spellman here for two months, said they are relieved to have steady work, with benefits. “I am hoping to improve myself and get ahead, like anybody else,” she said.

Loren Skeist, the president of Spellman, said he frets over security. The plant took additional safety measures after robbers stole an automatic teller machine last year. A few clients have refused to visit the plant, citing the violence. (The Mexican military this month moved in to police the streets.)

But over all he embraces Matamoros as a smart investment.

“Relatively speaking it is reasonably safe,” he said by phone from Hauppauge, N.Y. “There are compelling reasons, if you are willing to do it with reasonable security, to want to be in Mexico.”

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