Dan Emerson (Q3 2015)
Just over a decade ago, when Quebec-based Bombardier Recreational Products Inc. (BRP) decided to try Mexico as a manufacturing market, the off-road vehicle manufacturer took a measured approach. In 2003, BRP tested the waters by leasing a facility in Ciudad Juarez, Chihuahua, to assemble outboard engines for export. Two years later, the Canadian firm decided to transfer all of its ATV assembly and engine manufacturing operations to Juarez.
Building on its first, successful ventures south of the border, over the last decade BRP has steadily increased its stake in Mexico to more than $190 million worth of manufacturing facilities in the states of Chihuahua and Querétaro, and an extensive distributor network.
Investments Continue to Rise
“Mexico has really burst on the scene as a legitimate player in the global manufacturing sector,” says Bob Cook, president and CEO of the El Paso, Texas-based Cook Strategies Group, LLC. “Every trend I look at indicates that rise is going to continue.”
Mexico – Global Manufacturers
Agreeing with that prediction, the Boston Consulting Group estimated in a 2013 report that Mexican manufacturing exports will increase up to $60 billion annually by 2018.
According to Banco de Mexico data, Mexico has received over $135 billion in foreign direct investment (FDI) over the last five years — almost $86 billion of that within the past three years. The largest share of FDI in Mexico comes from the United States, representing over one third (34 percent) of total FDI over the past three years. Canada has been the source of another 10 percent of FDI in Mexico over the same period.
More than half (58.6 percent) of the FDI coming into Mexico was invested in manufacturing enterprises, with the top five sectors being food and beverages; transportation equipment; chemicals; electronics; and electric equipment. The automotive sector alone added more than 93,000 jobs in 2014, growing nearly 15 percent.
However, the growth trend has also been “pretty diverse,” Cook says. “We’ve seen a lot of growth the across the board,” a trend which bodes well for the country’s economic future. The most pronounced growth has taken place in “high value” categories such as aerospace, automotive, and electronics.
Mexican manufacturing exports are estimated to increase by up to $60 billion annually by 2018. An Automotive Powerhouse
In total, automakers and parts suppliers have earmarked more than $20 billion of new investments, Mexican officials say. The automakers’ presence has also spawned major growth of smaller vendors who supply the auto plants, according to Cushman and Wakefield’s Gonzalo Gutierrez, who is the firm’s senior director of Industrial Brokerage Services for the Northeast Region of Mexico, based in Monterrey. These vendors come from all over the world, but most hail from the U.S., Japan, Germany and, more recently, Korea, Gutierrez says.
Meanwhile, recreational vehicle maker BRP has gradually upped the ante on its Mexican investment. In 2013, BRP opened a $100 million manufacturing facility in Querétaro, which employs 1,100 people. Last year, BRP decided to build a second plant in Juarez, to expand its Can-Am product offering and meet future demand for off-road vehicles. When completed in late 2017, the $55 million facility is expected to employ about 900 workers.
Aerospace, Electronics, and Medical Devices
The aerospace sector in Mexico has also been growing rapidly. Last year, Mexico exported an estimated $1.9 billion worth of aerospace products to the U.S., an amount that has quadrupled since 2009, Cook notes. In that sector, “Mexico is rapidly moving up the global rankings.”
Regarding regional distribution of FDI, just over half accrues to Mexico City and the surrounding state, according to Cook. About a third of the balance goes to the four states of Chihuahua, Jalisco, Puebla, and Nuevo Leon.
In addition to being an automotive center, the border city of Juarez has become a manufacturing center for electronics and medical devices. Its electronics manufacturers include Electrolux, Flextronics, Foxconn, and Lexmark. Its medical device companies include Cardinal Health, GE, and Johnson and Johnson. Other northern states have benefited from the growth of the electronics industry, including Chihuahua, Baja California, and Tamaulipas.
Mexico’s developing manufacturing clusters have also drawn smaller companies. One example is Greatbatch Inc., which plans to move 170 jobs from its Electrochem Solutions Inc. manufacturing facility in Beaverton, Ore., to a new plant in Tijuana (Baja California) by year’s end.
The southern Mexican region has also benefited from lower labor costs, which have helped attract clothing and textile manufacturers to cities including Campeche and Veracruz.
Boosting Mexico’s Natural Advantages
The Mexican government has been proactive in modernizing the country’s business climate to 21st century standards. Mexico’s homegrown business advantages include lower transportation and warehousing costs, an improved ability to respond to customer demands, improved control of intellectual property, the availability of proximate time zones between management and production locales, and the cultural similarities between the U.S. and Mexican markets.
Augmenting Mexico’s expansive, free-trade policies, the government has also been proactive in modernizing the country’s business climate to 21st century standards. Investing in education has been a major thrust to ensure a well-prepared, bilingual workforce.
According to the United States Embassy in Mexico, more Mexicans — almost 100,000 more — earn engineering degrees annually than Canadians and Germans. And during the past decade, Mexico has doubled the number of its public two-year colleges and four-year universities. The government financed 140 new colleges and universities, with 120 of those emphasizing science and engineering.
Another priority has been improving Mexico’s roads, bridges, and utility infrastructure to help expedite the flow of materials and manufactured goods. Revisions in the country’s energy policy have encouraged private-sector investment in new natural gas pipelines and power lines. Additionally, earlier this year, AT&T announced plans to invest $3 billion to extend its high-speed mobile Internet service to Mexico and cover 100 million consumers and businesses by year-end 2018.
Mexico also continues to benefit from the near-shoring trend among some American companies — i.e., moving manufacturing operations to Mexico from China and other low-cost countries. Average manufacturing labor costs in Mexico are now almost 20 percent lower than in China — a sea change from 15 years ago, when Mexico’s labor costs were 58 percent more expensive than China’s, according to Forbes.com.
Are there other supply chain issues in Mexico companies need to be aware of? “There are no critical issues related to transportation inside Mexico,” Gutierrez says. “Since the last five years, the 3PL companies, such as the companies with distribution centers in multiple (Mexican) states, have handled their operations with no inconvenient events, while they have significantly increased their operations, every year.”
Some Challenges Ahead
Yet, with such a rapid economic expansion, some growing pains are to be expected. There are several challenges facing the country, which the current Mexican administration is working to address, according to Cook, in order to help promote continued economic growth.
To capitalize on Mexico’s abundant energy resources, the country will need new capital investment and technology upgrades in the processing and distribution of energy. “That’s opening up as we speak,” Cook says. This year, Mexico opened its oil industry to foreign investment for the first time since the 1930s, offering for auction exploration rights to 14 shallow-water fields. And this summer, Mexico’s Federal Electricity Commission began taking bids on 24 projects that will enable the generation of an additional 1,442 megawatts of power, along with adding nearly 1,500 miles of natural gas pipeline and almost 2,000 miles of power lines.
Competition for skilled labor can be expected to heat up, along with the overall economy. “If you need specialized engineers and technology, you will not find them along the border; you need to go closer to Mexico City,” notes Sylvain Blanchette, BRP’s VP of Mexican operations. Generally, the average cost of labor increases moving south from the border to the country’s interior. That may be due to more competition for skilled labor, due to the increased number of auto, aerospace, and other manufacturers, says Blanchette.
To sustain its manufacturing expansion, Mexico is going to need “to have an even greater emphasis on skilled labor,” Cook says. However, in spite of the challenges ahead, Mexico’s ascendance as a global economic power should continue, Cook believes, citing its globally competitive cost structure, young workforce, and friendly trade policies.
Mexico’s richest resource — and the real driving force behind the growth boom — may be its people, says Blanchette, who praises the knowledge, enthusiasm, and initiative of the Mexican workforce. “When we have come to Mexico with projects, the people we work with have been extremely eager to learn and improve what they do,” Blanchette concludes.
CIUDAD JUAREZ, Mexico (AP) — Despite a weak U.S. economy and a drug war that has turned this city into Mexico’s deadliest, the maquiladoras are on the rebound.
These assembly-for-export plants that crank out everything from brake pads to plasma TVs for U.S. companies are opening new facilities, expanding existing ones and hiring more employees. Some firms looking for lower costs have even begun shifting production from China back to Juarez.
The recovery of the about 350 maquiladoras is the single bright spot in a city where drug violence has killed 7,000 people in three years. The maquiladoras may also be a sign that the economy in the region is finally turning the corner, after gross domestic product for Mexico shrank by almost 7 percent in 2009, the worst contraction in decades.
“There’s some real competing realities in Juarez at the moment,” said Bob Cook, president of the Regional Economic Commission in El Paso, Juarez’s cross-border sister city. “The violence has not targeted our industry, and the cartels … have not destroyed all the advantages of doing business there.”
Unemployment for Juarez is high, at 7 percent compared to Mexico’s national average of 5.4 percent. But plants that furloughed employees in 2008 and 2009 are now offering overtime as well as jobs.
The Juarez maquiladoras added about 26,000 new jobs from July 2009 until August 2010, when they employed more than 192,000 people. But there’s still ground to make up — three years ago, the sector employed about 250,000 out of Juarez’ population of 1.3 million.
Cook said that since 2008, 106 new permits for maquiladoras were granted in Juarez. An additional 15 companies have notified the commission of plans to locate or expand in the city, which would create up to 11,400 more jobs.
It’s difficult to compare Juarez to other border cities because, starting in 2006, the Mexican government began simply listing maquiladora jobs nationwide under “manufacturing.” There has also been anecdotal evidedence of a recovery in the Baja California city of Tijuana, Mexico’s other major maquiladora hub, according to Dale Robinson, president of the Western Maquiladora Trade Association. He could not provide figures.
Carlos Pascual, the U.S. ambassador to Mexico, said a record 12 maquiladoras returned from China last year to locations along the border, often states with heavy drug violence such as Baja California, Tamaulipas and Chihuahua, home to Juarez. It is unclear how many plants have headed to China over the same period.
Nationwide, the maquiladora sector has shed hundreds of thousands of jobs since peaking at 1.3 million employees in October 2000, but Mexico is now catching up fast with China. U.S. imports from Mexico exceeded $168 billion through November, expanding by 35 percent over the past year, according to the U.S. International Trade Commission. Imports from China, meanwhile, were up nearly 24 percent to about almost $264 billion through November.
With credit less available globally, some companies can no longer afford to wait for profits delayed by lengthy shipping times as goods travel from Asia to the U.S. It may work out cheaper to use Juarez, Tijuana and other Mexican locales a stone’s throw from American soil.
Pascual said Mexico also is increasingly attractive compared to China because of the devaluation of the peso and the strengthening of China’s currency. And the disparities in wage rates are shrinking: China’s labor costs have increased as the government works to adhere to environmental regulations, especially after criticism during the 2008 Beijing Olympics.
“The difference was about $1.50 to 40 cents (per hour) in 1996 and $3.50 to $3 now. Mexico is still more expensive, but not that much,” Pascual said in an interview.
Juarez has been Mexico’s leader in maquiladoras for decades. Other companies increasing their presence here include:
– Swedish appliance manufacturer Electrolux, which is closing two Iowa plants, laying off 850 workers and shifting nearly all its production to Juarez — where it already employs around 6,000 people.
– Delphi Automotive LLP, a parts supplier for General Motors, which has 12 Juarez plants and a technical center employing over 12,000 people. Production is still a long way from the days when Delphi had 20,000 workers in Juarez, but the company added about 700 new jobs through late 2010.
– Taiwan-based Wistron Corp. is also expanding in Juarez. The company produces components for Blackberry, made by Canada’s Research In Motion Ltd., which declined to comment.
The maquiladora industry ran into the drug violence in Juarez on Oct. 28, when gunmen opened fire on a trio of buses carrying nightshift maquiladora workers to communities outside the city. Four people were killed.
Investigators suggested the attack was tied to a dispute involving the bus company. No arrests have been made — not unusual in a city where almost no murders are solved.
Since the shooting, employees say vans of armed guards have provided security escorts. Converted American school buses, painted green-and-white and marked “Transporte de Personal,” rumble everywhere in Juarez, bringing workers to and from maquiladora shifts that run around the clock.
Some maquiladora workers have pooled their money and bought jalopies driven south from the U.S. and sold without registration, forming makeshift carpools to avoid company buses. But not everyone can afford that.
“Of course you’re scared, but you’ve still got to go to work,” said Luis Garcia, 36, who makes 800 pesos, about $65, a week cutting car-seat leather for the Eagle Ottawa company of Michigan, and who rides the same bus route where the shooting occurred.
The violence may be taking a toll even on companies. Electronics giant Epson, a division of Japan’s Seiko Epson, pulled 25,000 jobs out of Juarez this fall. The company says it closed its printer cartridge plant because of the global economy, not violence.
El Paso Mayor John Cook said some other firms have devised “exit strategies” and are ready to put them in action if violence gets worse. But Alan Russell, president of El Paso-based Tecma Group, feels safe enough to operate maquiladoras in 18 Juarez plants for 33 companies. All 33 firms have added jobs since 2008, he said. Four clients shut down production in Juarez in 2009 due to the poor U.S. economy, but the group added five companies in 2010.
Unlike Eagle Ottawa, Cook’s company recommends not traveling with armed guards, and his security personnel don’t carry guns.
“This is not a war of ideals or a war of religion,” he said. “It is purely financial and these killings are targeting players involved in the drug business.”
Maquiladoras have increased security, but they would not discuss specifics or say how much such measures cost. Russell said his company recommends clients eat at their Juarez factories rather than go in the city and spend the night in El Paso.
“You don’t play golf in a thunderstorm. You take precautions,” he said.
Bill Parisen is vice president for an international manufacturer that moved a California plant to Juarez, reaching full operation with 60 employees in July. He asked that the firm’s name not be published because he is not authorized to speak for it.
“China’s costs just don’t make sense for us to be manufacturing there anymore,” he said.
Parisen said that none of the 71 Fortune 500 operations in Juarez were withdrawing, despite drug violence. He himself spends two weeks a month in Juarez but sticks to “executive safe routes” created by the government of President Felipe Calderon amid spiking violence and fortified by federal police and the Mexican army.
“People ask me, ‘how can you travel to Juarez?'” he said. “But then I cross and there are people jogging, people walking their dogs.” He’s even gotten used to soldiers at roadblocks: “They’re very friendly.”
Product tester Alberto Hernandez has worked at a Cisco Systems Inc. plant in Juarez since he was 15. He said many workers who lost their jobs to the recession have found work at his factory, which never went through layoffs.
“At work, you are safe,” Hernandez said, now 22. “Outside, there’s no control. No laws.”