Faced with rising wages in China and high shipping costs, many businesses are finding manufacturing close to home more appealing. But despite its advantages, Mexico has problems.
By Shan Li
4:37 PM PST, November 29, 2013
Oceas Verona Orocio inspects the latest-model drone at the 3D Robotics manufacturing plant in Tijuana. The company’s drones were formerly made in China. (Don Bartletti, Los Angeles Times / November 30, 2013)
TIJUANA — In an industrial park five miles east of downtown Tijuana, Ariel Ceja toils in a white room bustling with assembly workers hunched over blue tables.
A master scheduler, Ceja is in charge of all steps of production at this factory nestled inside a cavernous warehouse. A cluster of anonymous buildings surround the facility. Nearby are pitted roads, and just a few minutes away by car is the Tijuana airport and a university.
San Diego-based 3D Robotics moved into this once-vacant spot in June, producing affordable drones and electronic parts destined for customers in the U.S. and around the world.
It is just one of many American companies streaming to Mexico to open high-tech factories in a reversal of the outsourcing trend in years past. Called nearshoring, businesses are moving production to Mexico, Canada and other nearby countries to take advantage of their proximity to the U.S.
“Recently I have been seeing more American companies bringing production here,” said Ceja, who started working for 3D Robotics a month ago. During the 1990s, “there were more Asian companies coming in, Japanese, Korean, but that has changed.”
It’s not just in Tijuana. Manufacturing plants are also opening in Mexican cities such as Guadalajara and Mexico City, bringing a wave of new jobs to a country recovering from the economic downturn and still fighting constant drug violence.
From 2009 to 2012, foreign investment in Mexico jumped more than 50% to $7.4 billion, and exports from foreign-owned factories also grew 50% to $196 billion, according to one industry group that tracks maquiladoras, or assembly plants in Mexico that are owned by foreign companies. After plunging during the economic recession, employment also has jumped 25% to more than 2 million. According to an economic study from South/East San Diego, themaquiladora industry is one of Tijuana’s biggest employers, behind businesses linked to its border crossing.
“Sometime in the last year, we reached a crossover point where it became cheaper to make a lot of goods in Mexico than in China,” said Hal Sirkin, a senior partner at Boston Consulting Group. “A lot of American companies are looking or moving.”
The global recession and its aftermath led companies to rethink their supply chain. Faced with rising wages in China and high oil prices, many are reconsidering the appeal of manufacturing close to home, especially small and medium-size businesses without the bargaining clout of Apple and Wal-Mart.
Those businesses are finding a skilled workforce for high-tech manufacturing in Mexico. The country has doubled the number of post-secondary public schools, many devoted to science and technology. Former President Felipe Calderon last year bragged that Mexico was graduating 130,000 technicians and engineers a year, more than Germany or Canada.
The educated labor pool has attracted the car industry. Mexico has gained at least 100,000 auto-related jobs since 2010, according to a Brookings Institution report. Nissan, Honda, General Motors and Ford have all announced plans to expand in coming years.
3D Robotics, which makes drones and parts priced up to $730 for civilians and tech enthusiasts, is among the start-ups drawn to Mexico’s low costs and proximity to the U.S. The company once manufactured its drones and kits in Southern California and China.
But Chief Executive Chris Anderson said making products overseas was a lengthy process that meant waiting for months for merchandise to come on ships. Chinese factories also required bulk orders that tied up a lot of the company’s capital and prevented engineers from innovating quickly, which is vital in a tech sector such as drones.
“We decided it didn’t make sense at our scale and pace of innovation to ramp up in China,” Anderson said.
Instead, the company looked south.
3D’s first Mexico factory in 2011 was in the three-bedroom Tijuana apartment of general manager Guillermo Romero, who spent the first months of the test run in Mexico soldering parts and assembling drones in his living room along with one employee.
“We started with some benches and soldering stations you can buy anywhere,” Romero said. “We were like, ‘Let’s see what happens.’”
Sales of drones assembled in Mexico quickly grew after Romero got the hang of putting them together, and 3D moved into its first manufacturing space last year.
The last of the manufacturing equipment was trucked to Tijuana this spring, when the company moved to its current 12,000-square-foot facility. American engineers in San Diego design drones that are crafted almost completely by about 60 assembly workers in Tijuana.
A walk through the cavernous warehouse that houses the factory shows 3D’s quick expansion. On the second floor, a newly completed call center opened about a month ago, bringing customer service in-house for the first time. Inside the assembly room, workers solder circuit boards, attach plastic arms and test the flying machines.
“Mexico is very flexible. You can start projects here and grow them,” Romero said. “It’s very good for start-ups.”
For California companies, Mexico can be an especially attractive bet, analysts say. The ability to order in small batches means that designs can be changed quickly and production can be revved up and slowed down in a matter of days instead of months.
That can be invaluable during the holidays, as San Bernardino-based Cannon Safe learned.
On Black Friday in 2008, the safe manufacturing company received a panicked call from a major retailer that had drastically slimmed down its inventory in response the financial crash, President Aaron Baker said. But shoppers were scooping up their safes, prompting the chain to issue thousands of rain checks that it had to quickly honor.
Cannon’s Mexico facility was able to increase production and deliver new merchandise within four days, compared with weeks or months if the safes had come from China, Baker said. “That was our ‘aha’ moment.”
Today, about 60% of the company’s safes are made in Mexico, nearly double the production levels five years ago. Meanwhile, its China production has dropped by half, Baker said.
Although wages are higher in Mexico than in China, the relative ease of doing business and proximity can bring costs on par or even lower. Companies find that they don’t lose valuable time waiting for shipments. Deliveries can also be routed to another port or simply brought by truck when problems crop up, such as the eight-day strike that paralyzed the ports of Los Angeles and Long Beach last winter.
Companies looking to bring production closer to home rank Mexico as their No. 1 choice, according to a survey from consulting firm AlixPartners.
The tipping point may have come last year when manufacturing costs in Mexico, when adjusted for productivity, dropped below those in China, according to a Boston Consulting Group report. Within two years, the average cost of production in Mexico will be 6% below China and as much as 30% lower than countries such as Japan and Germany.
“Companies are bringing back parts of manufacturing to Mexico. They are saying, ‘We want our manufacturing process close to our engineers, we want our inventory next to our customers so it’s easier to ship,’” said Joe Mazza, a partner at advisory and accounting firm McGladrey in Los Angeles. “There are also many companies in China that are not exiting China, but reducing their manufacturing and bringing some to Mexico.”
With all its advantages, Mexico still has its fair share of problems. Companies that don’t produce their own goods can have a hard time finding the right third-party manufacturer in a country that can’t compete yet with China’s dense supplier base and strong manufacturing infrastructure. Mexico also just passed fiscal reforms that include raising taxes on U.S.-owned companies and other businesses, increasing worries that foreign firms might leave the country.
Despite these challenges, more U.S. companies will consider locating factories in Mexico in the coming years, analysts said.
“This is the return of manufacturing in Mexico,” said Scott Stanley, senior vice president of NAPS, which aids companies setting up factories in Mexico. “Every month it seems like there are more and more companies moving. There is no sign of that trend slowing down.”
Copyright © 2013, Los Angeles Times
By DAMIEN CAVE
GUANAJUATO, Mexico — A decade ago, Ivan Zamora, 23, might have already left for the United States. Instead, he graduated in May from a gleaming new university here, then moved on to an engineering internship at one of the many multinational companies just beyond the campus gates.
His days now begin at dawn inside the new Volkswagen factory a short walk away, and when he leaves at night, he joins a rush of the upwardly mobile — from the cavernous new Pirelli plant next door, an array of Japanese car-parts suppliers and a new Nivea plant on a grassy hillside.
“There’s just a lot more opportunity to study and to succeed,” Mr. Zamora said at the factory, surrounded by robots, steel, glass and young technicians. “Both my parents are teachers. They lived in an entirely different era.”
Education. More sophisticated work. Higher pay. This is the development formula Mexico has been seeking for decades. But after the free-market wave of the 1990s failed to produce much more than low-skilled factory work, Mexico is finally attracting the higher-end industries that experts say could lead to lasting prosperity. Here, in a mostly poor state long known as one of the country’s main sources of illegal immigrants to the United States, a new Mexico has begun to emerge.
Dozens of foreign companies are investing, filling in new industrial parks along the highways. Middle-class housing is popping up in former watermelon fields, and new universities are waving in classes of students eager to study engineering, aeronautics and biotechnology, signaling a growing confidence in Mexico’s economic future and what many see as the imported meritocracy of international business. In a country where connections and corruption are still common tools of enrichment, many people here are beginning to believe they can get ahead through study and hard work.
Mr. Zamora’s new job, for example (he was hired by VW at summer’s end), started with his parents prioritizing education, not emigration, and scrimping to give him a computer and, more recently, German lessons. The state of Guanajuato added to their investment by building the affordable polytechnic — part of a public university system that offers technical degrees as well as undergraduate and graduate degrees — and a sprawling interior port to lure the international companies that hire its graduates. And now Mr. Zamora has a job that pays enough to help his sister pursue her dream of studying marine biology.
This is a Mexico far different from the popular American conception: it is neither the grinding, low-skilled assembly work at maquiladoras, the multinational factories near the border, nor the ugliness of drug cartels. But the question many experts and officials are asking is whether Mexico as a whole can keep up with the rising demand for educated labor — and overcome concerns about crime and corruption — to propel its 112 million people into the club of developed nations.
“We are at something of a turning point,” said Eric Verhoogen, a professor of economics and international affairs at Columbia University. “The maquila strategy has been revealed not to have been successful, so people are looking around for something new.”
The automotive industry has been Mexico’s brightest spot so far. In many ways, central Mexico has already surpassed Detroit. There are now more auto-industry jobs in Mexico than in the entire American Midwest. At least 100,000 jobs have been added in Mexico since 2010, according to a recent Brookings Institution report, and General Motors, Ford, Chrysler, Honda, Mazda, Nissan, Audi and Volkswagen have all announced expansion plans, with nearly $10 billion to be invested over the next several years, mainly in a 400-mile corridor from Puebla to Aguascalientes.
The work tends to be better paid than what could be found in the area before the companies arrived. It is still a fraction of the salaries of American workers — many employees on the factory floors in the interior port make around $3.65 an hour — but higher-paid professionals make up about 30 percent of the employees at many auto plants here, roughly twice as much as in the maquiladoras near the border.
And although robotics and other changes have kept overall employment in the industry somewhat limited, more of the industry has moved to Mexico as the car business has recovered. Around 40 percent of all auto-industry jobs in North America are in Mexico, up from 27 percent in 2000 (the Midwest has about 30 percent), and experts say the growth is accelerating, especially in Guanajuato, where state officials have been increasing incentives.
The 2,600-acre interior port, for example, has become a draw because, in addition to the polytechnic, the state built customs facilities, a railroad depot and a link to the local airport. Guanajuato also helps find candidates for companies to hire and, in some cases, gives them free classes to help them pass standardized tests required for employment. At Volkswagen, many of the young men and women flowing in and out of test-taking sessions said they benefited from the assistance.
Guanajuato even pays companies a small bonus for sending workers abroad for training. Mauricio Martínez, 29, an engineer at the Italian tiremaker Pirelli, which was one of the first companies to take up residence in the port, said he and his wife, Mariana, still saw their trip to Prague after his training in Romania as a fairy tale.
“I’m a small-town guy,” he said one day after work, in his kitchen with a beer. “But there I was; an Italian company from Milan hired a small-town guy from Mexico.”
He said he now makes $2,250 a month ($27,000 a year), far more than at his old job at a tow-truck company and roughly double the median household income nationwide. That’s more than enough for a middle-class life here. Both husband and wife drive to work, and this year they bought a three-bedroom townhouse in a new development for about $80,000. On a recent visit, “The Big Bang Theory” played on their flat-screen TV as a neighbor watered her patch of lawn no bigger than a beach towel.
While cooking dinner, Mrs. Martínez said that her husband’s job had given them the credit and stability they needed to start her own business — a gourmet salad shop in a colonial village nearby. And as is common in other countries with an expanding middle class, such as Brazil, their economic rise has led to demands for better government.
When someone recently stole Mrs. Martínez’s cellphone, she said she went straight to the police over the objections of her father, who warned her nothing would be done. “He was right,” she said. “But next time it happens, I want my complaint to be there. I’m trying to make a living here, and I want a legal life.”
“My generation, we’re more prepared,” she added. “My parents, they never even finished school; we know if something is going to change, it has to start with us.”
Many young, middle-class Mexicans are coming to similar realizations, propelled by 13 years of democracy and the Internet. But their ranks are small. As the auto industry rebounds and wage inflation in China makes Mexico more attractive for global manufacturers, many foreign employers say that skilled employees are harder to find and keep, while the mass of Mexican workers do not measure up to what many companies need.
Only 36 percent of Mexicans between 25 and 64 have earned the equivalent of a high school degree, according to the Organization for Economic Cooperation and Development. Despite a rapid rise in foreign investment, with 2013 shaping up to be Mexico’s best year on record, the country is still struggling.
The Mexican economy has slowed significantly this year, and even when it was doing better, the nation’s poverty rate fell only 0.6 percent to 53.3 million people — roughly 45 percent of the population — between 2010 and 2012. Crime and a notoriously weak justice system continue to undermine the economy, with Mexico’s minister of health recently estimating that it costs 8 to 15 percent of the country’s annual gross domestic product. “It’s all the stuff we hear about again and again: Mexico has an education system that is not on par with its peers; a banking system that’s not lending; it has rule-of-law issues and public-security issues and corruption being a huge issue,” said Christopher Wilson, an economics scholar at the Woodrow Wilson International Center for Scholars in Washington. “The list goes on and on.”
Many economists and business consultants are keeping a close watch on President Enrique Peña Nieto’s efforts to improve education, open the energy sector to private investment and overhaul taxes.
Kevin P. Gallagher, an economist at Boston University, said Mexico also needed to prioritize innovation. “South Korea and Taiwan spend over 2 percent of G.D.P. on research and development; China spends almost 2 percent,” he said. “Mexico spends 0.4 percent.”
But on a smaller scale in Guanajuato, individual success is creating a sense of possibility. Some of Mr. Zamora’s friends are studying German, too, hoping to land work at Volkswagen, and a similar sense of momentum pervades the polytechnic, where students in pristine industrial labs, like Javier Eduardo Luna Zapata, 24, have begun to dream of more than work at an auto plant.
He and a few classmates won a prestigious design award this year for a scanner that would check airport runways for debris. “We want to start a company,” he said, displaying a video of the project on his cellphone. “We’re going to look for investors when we graduate.”
His classmates, representing a new generation of Mexicans — mostly geeks in jeans carrying smartphones — all nodded with approval.
Most people outside of Mexico have never heard of Aguascalientes. But in the auto industry, this city of 1 million residents is known as ground zero for Nissan‘s expansion plans in the Americas.
This week the Japanese automaker is opening its second final assembly plant in Aguascalientes, giving Nissan as many final assembly plants in Mexico as it has in the U.S.
“Mexico is quickly becoming the fastest export hub in terms of vehicle production virtually anywhere in the planet,” said Michael Robinet, a director with IHS Automotive.
Nissan is not the only automaker expanding production in Mexico.
Honda, Mazda and Audi are adding assembly lines in the country, which has shot past Canada to become the second-largest auto producer in North America.
Mexico is on pace to build 3.15 million vehicles this year, which represents 19 percent of all cars and trucks made in North America.
Ford‘s assembly plant in Hermosillo is among the company’s most productive in the world.
“Mexico has proven for a long time [that] … it’s a fantastic world-class-quality operation,” said James Farley, Ford’s executive vice president of global marketing, sales and service.
Lower costs fuel Mexican auto boom
Mexico is one of the fastest-growing locations anywhere for auto assembly and parts production.
Calsonic Kansei, which supplies control panels and exhaust systems for Nissan, Mazda and General Motors, has just expanded its operations in Aguascalientes. The Japanese company is increasing to 3,100 workers from 1,400 to keep up with demand from Mexico’s auto production.
“The growth here reminds me of China in the early ’90s,” said Bharat Vennapusa, chief operating officer at Calsonic.
Why the surge?
A combination of low costs, a perfect location and a slew of free trade agreements make it advantageous to build and ship in Mexico.
“Mexico over the next decade will likely control more than half of the North American auto employment base,” said Mark Muro, senior fellow at the Brookings Institution. “It is an extremely desirable place for labor-intensive assembly, with …. enough engineers and trained workers. And it’s got … superior trade connectivity to the rest of the hemisphere.”
For example, Mexico is one of the few countries with a trade agreement that allows automakers to ship vehicles to Brazil at a cost lower than from plants in the U.S. or Europe.
Meanwhile, Mexican auto workers’ wages are much lower than those in the U.S.
“Somebody in northern Mexico might be making $3 or $4 an hour at an auto plant. An autoworker in Ohio might be making five to eight times that,” said Harley Shaiken, a labor relations professor at the University of California at Berkeley. “It is a very large disparity, which is critical, since the productivity and quality is the same or even higher in Mexico.”
Mexico limiting U.S. auto expansion?
More production of cars and trucks in Mexico raises the question: How will it impact plants elsewhere in North America?
“Mexico very clearly is going to press down on production in the U.S., and in particular in Canada,” Shaiken said. “So far we have seen a much larger hit in Canada, but it is truly affecting both countries.”
Given that most U.S. plants are close to capacity, the location of expanded production will become an urgent question over the next four to five years.
However, Robinet said, the U.S. auto industry can still be competitive with that of Mexico.
“If the U.S. is able to gain an EU trade agreement and some other trade agreements, and continue to work through the process of reducing costs … there is no doubt that the southeastern United States and Mexico can be really competitive on an equal basis,” he said.
Amid evolutionary changes in economics, leadership and policy, Mexico has emerged as an appealing alternative to China for U.S. companies looking to expand or relocate their manufacturing facilities. Wages have been sharply and steadily rising in China over the past decade, just as Mexico’s manufacturing landscape has undergone a dramatic shift, marked by high-tech manufacturing hubs that are synchronous with American manufacturing needs.The erosion of China’s comparative advantage over Mexico has resulted in global investment implications, with multiple industries positioned to benefit — or suffer — from the shift. In this paper, we highlight the economic, political and manufacturing climate in both countries, address relevant energy-supply and safety concerns, and identify emerging winners and losers from an investment standpoint.
Although China has been a key driver of global growth over the past several years, it has recently experienced a slowdown,particularly within the manufacturing sector. At an April meeting of the International Monetary Fund’s International Monetary and Financial Committee, Gov. Zhou Xiaochuan of the People’s Bank of China said that his country’s 7.7% year-on-year GDP growth for the first quarter represented “a reasonable growth track,” with expected 2013 growth of 7.5%.1 While that outshines the tepid economies of many developed nations, it pales in comparison with the 10%-plus growth rates that China has enjoyed over much of the past decade. Many investors are also monitoring the monthly Purchasing Managers’ Index,which has been hovering precariously near the 50 level of demarcation between expansion and contraction.Also during April, China was the target of pessimistic comments from two major ratings agencies. Moody’s lowered its outlook on China’s government bond rating to stable from positive, while Fitch Ratings downgraded China’s long-term local currency credit rating to A-plus from AA-minus, both noting risks associated with excessive local government borrowing.2
The Chinese government, under the new leadership of President Xi Jinping, is well aware of these risks and is attempting to mitigate them, in part by increased austerity. Most recently, it tightened its controls over bond sales by local government financing vehicles, requiring them to have a rating above AA-plus.3 But other issues in the country, including suspected cyber attacks on the U.S. and renewed emphasis on strengthening China’s military, have stirred some concerns in the West.
Across the ocean, Mexico’s economy has also been struggling. For the first quarter, its GDP edged up a mere 0.8%, well below the 3.2% growth experienced in the fourth quarter of 2012. However, the slowdown was largely attributable to a calendar effect from an early Easter holiday and a 10% drop in public spending in the wake of December’s leadership transition.4 The country also posted a 4.9% drop in industrial output in March,in tandem with an easing in U.S. manufacturing growth.5 This has prompted speculation that Banco de Mexico (Banxico), the country’s central bank, will lower interest rates again this year; it last reduced its key rate by a half-point to 4% in March, the first cut in more than three years.
Nevertheless, sentiment about Mexico remains largely optimistic, at least over the long term. While growth expectations have been widely tempered for 2013, many investors are looking beyond that for compelling potential. In early May, Fitch lifted its rating on Mexico’s sovereign foreign currency credit rating to BBB-plus, the country’s first ratings upgrade since 2007, buoyed in large part by optimism about the country’s reform agenda.6
It is that ambitious reform strategy, promoted by Mexico’s new president, Enrique Peña Nieto, that has helped to strengthen the peso and underlined the country’s favorable investment climate. He has tackled labor reform, reining in some powers of the teachers’ union, and he has proposed to open the energy and telecommunications industries to more competition and private investment, thereby breaking up monopolies. If all of these reforms indeed reach fruition, Banxico estimates that GDP could hit 6%.
Amid these evolutionary changes in economics, leadership and policy, Mexico has emerged as a viable, appealing alternative to China for U.S. companies looking to expand or relocate their manufacturing facilities. According to the World Bank’s 2013 Ease of Doing Business Index, which measures business regulation environments across 185 economies, Mexico ranked No. 48, up from No. 53 in the previous year, while China held steady at No. 91.7A crucial factor in determining companies’ outsourcing decisions is wages, which have been sharply and steadily rising in China over the past decade, as shown in Exhibit 1.
Most of China’s manufacturers are situated along the coastal provinces, which offer ready access to ocean transport as well as supply-chain logistics, but with a costly labor pool and expensive land. The government has been taking aggressive action to rein in soaring real-estate prices; for example, Beijing recently began imposing a 20% capital-gains tax on existing-home sales. Moving facilities inland will not solve the issue of rising costs, as wages are not significantly different there and transportation infrastructure is inadequate, as it can cost more to ship goods from China’s interior to its coast than from Shanghai to New York.8
By contrast, Mexico’s manufacturing landscape has undergone a dramatic shift in geography. As assembly-for-export plants, called maquiladoras, in the border states suffered from the effects of economic recession and rising drug-related violence,companies nimbly shifted their focus to Mexico’s interior,supported by an attractive cost of living as well as by decent infrastructure and transportation. In fact, in the past three years, manufacturing jobs in the central states of Guanajuato, Aguascalientes, Queretaro and San Luis Potosi have climbed 30%, largely on the back of growing auto and aerospace businesses, which have in turn committed to providing those local communities with relevant educational opportunities.9
In tandem with this change, the importance of Mexico’s once-dominant textile industry has diminished significantly,replaced by high-tech manufacturing hubs for the automotive and aerospace industries, clearly synchronous with American manufacturing needs. The U.S. is now using its neighbor to the south as “a just-in-time, conveniently located and inexpensive sourcing partner, rather than a competitor,” according to Morgan Stanley Research.10
Comparatively speaking, there are other notable differences between the two countries’ workforces. Mexico’s laborers generally work no more than 48 hours a week, as mandated by federal law, and then go home at night, in contrast to many Chinese workers, who live in on-site dormitories, work lengthy shifts and return home only for the New Year holiday.
Demographics are another contrast, as Mexico’s population skews young, while China’s one-child policy has effectively shrunk the upcoming labor pool.
Another potential advantage for Mexico’s manufacturing sector is its proximity to cheap natural gas, as the country uses the fuel for 46% of its energy, according to Morgan Stanley Research. However, much of this is virtually untapped, as the production monopoly of Petroleos Mexicanos, also known as Pemex, has left as much as 1 trillion cubic feet of gas reserves sitting idle, as private-sector development is prohibited.11Meanwhile, Mexico’s demand for the fuel has continued to soar, forcing Pemex to effectively ration limited supplies to its largest customers because of capacity constraints.This could all change if Peña Nieto has his way, resulting in a constitutional change to allow for asset sales in shale gas and deepwater exploration and downstream petrochemical auctions. That could unleash substantial foreign direct investment in the country’s energy sector, as Mexico has one of the world’s largest shale gas resource bases, according to the Energy Information Administration.12
On the other hand, China is the world’s largest energy consumer,and its largest producer and consumer of coal, which powers much of its electricity generation. Natural gas accounts for only 4% of China’s energy consumption, according to the EIA. The country also pays more for natural gas: an average of $10.77 per million Btu on LNG imports in 2012, compared with the recent benchmark Henry Hub price in Louisiana of $3.80 per million Btu. However, China is pursuing cleaner energy sources to combat rampant pollution concerns.
Both Mexico and China have a bit of an image problem when it comes to safety. For Mexico, it’s been the alarming rise in violence since former President Felipe Calderon’s war on drug cartels began in 2006. According to a travel warning issued by the U.S. State Department in November 2012, citing Mexican government data, “47,515 people were killed in narcotics-related violence in Mexico between Dec. 1, 2006, and Sept. 30, 2011,with 12,903 narcotics-related homicides in the first nine months of 2011 alone.” The warning also cited gun battles occurring “in broad daylight on streets and other public venues” as well as the prevalence of carjackings and highway robbery in the border regions.13 However, February 2013 marked a three-year low in the country’s murder rate, which remains below that of Brazil.Yet Mexico’s violence problem can be a scary proposition for companies looking to locate facilities there. This isn’t lost on government officials, although Peña Nieto’s plan has amounted to little beyond naming a security adviser and targeting economic improvement to reduce crime. Something else must be done. In fact, in an article published last year by CNBC.com, Andrew Selee, director of the Mexico Institute, a Washington think tank, summarized the resulting chilling effect on business: “It’s like the Mexican economy is driving with the emergency brake on. You can only imagine if the violence weren’t going on,its growth could be extraordinary.”14
China has encountered challenges of a different sort when it comes to worker and consumer safety. Its labor problems have come to the forefront in recent years, after a number of incidents, including explosions and improper use of toxic chemicals, resulted in many injuries and even deaths at Chinese factories tasked with producing iPhones and iPads. One manufacturer made headlines in 2010 after a spate of employee suicides prompted the company to install worker hotlines and even safety nets on some of its buildings to catch people who jumped. A much-cited New York Times article detailed the working conditions at some of these plants, citing 12-hour workdays, six-day workweeks and dormitory accommodations of 20 people in a three-room apartment.15
Product safety has been another ongoing concern, peaking in 2007 with the Food and Drug Administration’s ban on imported Chinese toothpaste because it may contain harmful levels of diethylene glycol, which is used in antifreeze, and a massive recall of more than a million Chinese-made toys that may contain high levels of lead. As recently as this year, though,China has faced related issues, such as the discovery of cadmiumin its rice supply and more recalls of infant formula because of contamination problems. China’s leaders have been attempting to respond to concerns more transparently, especially those related to environmental issues.16
Less imminently dangerous, but also problematic for business in China are counterfeit production and a perceived lack of court enforcement for intellectual property rights. The advantage here goes to Mexico, according to Morgan Stanley, which noted that, “Mexico offers a more attractive environment for multinational corporations concerned about piracy, copyrights and protection from industrial espionage than some of its Asian competitors.”17
A Matter of Convenience
Beyond economic slowdowns, leadership transitions, labor costs, safety concerns and energy sources, some decisions comedown to what is easiest for a company and its executives. When choosing between Mexico and China as an outsourcing partner, American business leaders may decide that all else being equal, Mexico is simply more convenient. Travel times and expenses are markedly lower, work visas are easier to obtain, and the language and cultural barriers are not as high. Currency is also in Mexico’s favor, as the peso floats along with the U.S. dollar, while China’s currency manipulation has been a sore spot in international trade talks. Mexico also operates on similar time zones and holiday schedules as the U.S., meaning fewer overnight conference calls and better-aligned availability.
As outlined above, China’s comparative advantage versus Mexico has eroded on multiple fronts. This change in competitive positioning is resulting in global investment implications, with potential winners and losers dynamically emerging.We believe multiple industries are positioned to benefit from this shift, including:
- North American resource companies. As Mexican manufacturing expands, factories there will consume more natural resources. To meet this rising demand, North American shale oil and gas may represent a material portion of Mexico’s energy supply, which would boost both infrastructure suppliers and hydrocarbon producers.
- North American retailers and manufacturers. They can capitalize on both the cost savings of manufacturing in Mexico and shorter lead times in the supply chain. In particular, shorter lead times can be crucially important in helping companies respond to their customers’ needs in this increasingly competitive world.
- Industrial automation companies. China needs to find ways to reduce its labor costs, and one proven method of doing so is by automating factory processing. The penetration of automated factories in China is low compared with the developed world.
Meanwhile, other industries will feel a negative impact from the change, including:
- The ocean-transportation industry. As China loses market share to Mexico, fewer goods will be shipped from the Asia-Pacific region to the U.S. and other countries in the Western Hemisphere. As this industry has high fixed costs, any loss of volume will pressure margins.
- Chinese retail plays. For years, Chinese consumer wages have grown at double-digit rates, fueling the retail industry. As wage growth slows, the risk is that Chinese retailers will expand too fast, leading to an oversupply of retail space.
We believe that U.S. and multinational manufacturers will continue to evaluate Mexico’s potential as a manufacturing center and likely come away with favorable conclusions. The country’s costs and wages remain reasonable, and its proximity to the U.S. offers numerous benefits. In addition, Mexico’s renewed reform efforts, if ultimately implemented, could significantly boost its economic growth. At the same time, China’s wages and real estate prices continue to rise, making it a less attractive alternative for American outsourcing. However, economic growth in both countries is rather tenuous, and safety is still a concern. As these dynamics evolve, we expect an ongoing shift in manufacturing from China to Mexico, with winners and losers emerging across the global landscape.
1Statement by the Honorable Zhou Xiaochuan, Governor of the IMFfor China, at the 27th meeting of the International Monetary and Financial Committee, Washington, D.C., April 20, 2013.
2Ian Chua and Pete Sweeney, “Moody’s lowers China outlook after Fitch downgrade,” Reuters, April 16, 2013.
3Jane Cai, “China tightens rules for local government debt sales,” South China Morning Post, May 8, 2013.
4Charles Roth, “Mexico’s First Quarter GDP Down, but Far From Out,”The Wall Street Journal, May 17, 2013.
5Alexandra Alper, “Mexico March industrial output contracts most in 3 yrs,” Reuters, May 10, 2013.
6Michael O’Boyle and Krista Hughes, “Fitch upgrades Mexico to BBB-plus on reform momentum,” Reuters, May 8, 2013.
7For information on the Ease of Doing Business Index methodology, please click here: http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB13-Chapters/Ease-of-doing-business-and-distance-to-frontier.pdf
8“The end of cheap China,” The Economist, March 10, 2012.
9Krista Hughes, “Mexican manufacturing: from sweatshops to high-tech motors,” Reuters, April 9, 2013.
10“US Manufacturing Renaissance: Is It a Masterpiece or a (Head)Fake?” Morgan Stanley Research, April 29, 2013.
11Carlos Manuel Rodriguez, “U.S. shale glut means gas shortage for Mexican industry: Energy,” Bloomberg, Sept. 4, 2012.
12Mexico analysis, U.S. Energy Information Administration, last updated Oct. 17, 2012.
13“Travel Warning: Mexico,” U.S. Department of State, Bureau of Consular Affairs, Nov. 20, 2012.
14Deborah Caldwell, “Crime explodes — but an economy booms,” CNBC.com, Sept. 18, 2012.
15Charles Duhigg and David Barboza, “In China, human costs are built into an iPad,” The New York Times, January 25, 2012.
16Te-Ping Chen, “Threat to rice fuels latest Chinese uproar,” The Wall Street Journal, May 21, 2013.
17“US Manufacturing Renaissance: Is It a Masterpiece or a (Head) Fake?” Morgan Stanley Research, April 29, 2013.
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By Michael Carney
On November 1, 2013
It’s easy to get burnt out on the constant hustle of Silicon Valley. For Andy Kieffer, reaching for the pressure release valve after selling his Kleiner Perkins-backed startup in 2008 meant getting out of dodge. Despite having a young family, he didn’t move to Portland, San Diego, or Denver. Instead he packed up his life and moved 1,900 miles south to Guadalajara, Mexico. There he formed an incubator and contract dev shop called Agave Lab, hired some of the abundant and surprisingly skilled local talent, and began mixing innovation with margaritas to see what would come out the other end.
When we first reported Kieffer’s story, the closest he’d come to convincing another Valley veteran to join him was having his friends say on the way to the airport after a weekend visit, “You’re crazy man. How did you do this?” But things began to change as his story got out there more, first in PandoDaily, and then in the New York Times. Just a few weeks ago he got his first inbound inquiry.
The email came from out of the blue. A total stranger, Amazon engineer Eric Springer, wanted to know if there was room at Agave for another gringo with real technical chops but a growing distaste for the rat race. Kieffer invited him down to check out his operation with the promise that if he liked what he saw, there would a spot for him to join the team.
“I said to him, ‘It’s obvious why I’m interested in you, but why are you interested in me?’” Kieffer tells me in a phone interview.
The first step on any tour of the Agave Lab operation is tequila and tacos. Then, he introduces guests to the rest of his team and maybe takes them to a local meet up to give a sense of the community. Time permitting, he’ll squeeze in a trip to the company-owned beach apartment a few hours drive away. It’s a hard to turn down a combination that makes working in Mexico great, Kieffer says.
Springer’s tour was six weeks ago. He has been in living Mexico full time now for a little more than a month. Just a over a week ago he put an offer in to buy a house there. All signs point to him staying for the long term. Short-term, long-term or anything in between, Kieffer is just happy, if not a little shocked, to have someone this capable join his merry band of hackers. It also got him thinking about whether there might be more pent up frustration north of the border that he could tap into.
“Eric came down and has been awesomely productive and is having the time of his life,” Kieffer says. “I thought, why not see if there are more of him out there. I just posted this ad craigslist and, already, I’m getting tons of people who are interested.”
A little over a week ago, Kieffer posted a flippant job listing in the San Francisco section of Craigslist. The headline read, “Working vacation in Mexico’s Silicon Valley – Make almost NO money (guadalajara).” The listing went on to describe the Agave Lab operation and then dropped this offer in the laps of anyone crazy enough to join them:
We’re giving a few Bay Area developers the opportunity to rethink their life priorities and get out of Dodge for a while. You’re startup is flagging? Sick of the fog? Commute got you down? Just broke up with your partner? Why not pull the rip cord and come work with us for a while?
What do we have to offer?
-A vibrant, biggish (pop. 4M), student-oriented city, that’s full of hip bars, restaurants, and (really) beautiful, friendly people.
-A work environment that is, hands down, the hippest place to work in Mexico. Imagine programming in the hammock – poolside (yes, we have a pool).
-Use of the beach house. We have a 3 story beach house with all mod cons, 20 feet from a graceful, immaculate sandy bay in a small fishing village. Also, one of the premier left point surf breaks is 5 minutes away by boat (which we also have).
-A chance to learn (or practice your Spanish).
-An opportunity to be at ground zero for one of the most vibrant and rapidly expanding startup scenes in the world.
-Beef up your resume with experience in navigating the business climate in Mexico and Latin America.
-and, finally, ALMOST NO MONEY. Okay, not entirely true – you’ll be paid a very tidy wage (by mexican standards) which will allow you to live well here – most things are cheap here. However, if you compare what you’ll make here versus what you’re making now? It will be a disappointing exercise. Said differently, if money is what you’re after – then this is not for you. If you’re looking for adventure, fun, and to challenge yourself with something new – welcome to your new home!!!
It’s been just eight days and Kieffer has gotten a few dozen inquiries. Some were from recent college graduates with no experience and he’s likely to pass – this is a job offer, after all, and he’ll have to pay these people to work for (or with) him. But amid the riff raff have been six more senior engineers looking to leave town. None have made their exploratory visit yet, though two have booked plane tickets.
“Whatever the reason is, I seem to have hit a nerve. It’s great for me,” Kieffer says.
No one has asked about narco-terrorism or been too concerned with compensation or lifestyle, he adds. “Guadalajar isn’t even on the list of the world’s 100 most dangerous cities. It’s about the equivalent of living Denver, risk wise.”
He expects to hire two to four expats over the next 30 days and says he has a total capacity of six over the next six months. But as with Springer’s unexpected enthusiasm, the response to this latest posting has Kieffer once again thinking bigger.
The real opportunity in Mexico is to build an elite technical team and begin tackling the basic problems that are holding the nation back. For example, Mexico doesn’t have an Amazon or Gilt equivalent – or the opportunity to create one in the short term – because Mexico doesn’t have a reliable local postal service. Agave is addressing this, in its own small way, with an “Uber for bike messengers” courier service startup. But it’s barely fair to call this the tip of the iceberg.
Having lived in Mexico for nearly six years now, Kieffer has a laundry list of opportunities identified but is limited in his ability to address them all. He’s bootstrapped all of Agave Lab operations to date with his own money, adding in supplemental contract development work for cash-strapped US startups to help keep the lights on. But with a seemingly extensive supply of talent now beating a path toward his door, the thought of raising a few million dollar incubation fund is growing more and more interesting.
“$20 million?” Kieffer asks incredulously at my suggestion that he raise what would be considered a small pile of cash for a Silicon Valley incubator. “I wouldn’t know what to do with that much here. With just $3 million you could literally own Mexico.”
But all of this is just a shiny idea in Kieffer’s head today. At the moment he’s up to his eyeballs in job applicants and tequila tasting tours to schedule. Once he eventually fills out his six person expat A team, things should settle down, he says, and then he’ll be able to give some more serious thought to how to make the most of this opportunity.
Kieffer is brimming with excitement. After we got off the phone, he sent a follow up email that read:
Imagine raising a small fund ($2-$5M) and importing startup talent from the Bay Area, partnering them with local dev teams, and targeting the emerging LATAM market place. I think that combo of a bay area founder with a track record, the huge untapped market here, and the low go-to-market cost, would be attractive to investors that are seeing too many of their startups fighting over too little market opportunity.
I can’t imagine how difficult it must be for a partner at, let’s say, True Ventures to find things to invest in. Is there ANY unplowed field left in the US? In Mexico – it’s all green field.
There are challenges, of course. Mexico has limited institutional knowledge around startups and venture capital. For example, Kieffer recalls explaining to a local lawyer hired to draft an ESOP (employee stock option plan) agreement why on earth he would give a piece of his company to a newly hired employee. But people are learning quickly. Mexico also lacks a reliable exit market. It’s one thing to generate revenue, and lifestyle business opportunities grow on trees. But there’s no Google or Yahoo out there to scoop up middling successes, and at the same time no local hero company for newby founders to look up to in aspiration.
“One of the biggest challenges with these guys coming down from the US is recalibrating expectations,” Kieffer says.
I raised the possibility that Kieffer is letting the cat out of the bag, so to speak and alerting his potential competition to the combination of massive opportunity and hard to pass up lifestyle south of the border.
He shrugs this off saying, “It would be hard for a US founder to come here and build LATAM-focused products. There’s just too much local and cultural knowledge required. Besides the market’s almost too big to comprehend, there’s plenty of opportunity to go around.”
And so it is. Kieffer is looking to spread this opportunity around and to make a few new friends in the process. The only question is, who else will be crazy enough to join him.
‘Level of activity in Mexico is insane’
|DETROIT (Reuters) — The Mexican auto industry is about to go on a $10 billion factory building spree, illustrating the nation’s rising economic challenge to rivals from the United States to China.
Japanese and German auto manufacturers are spearheading the drive, say parts suppliers and researchers who see more auto factories built south of the border than in the United States between now and the end of the decade.
The United States will consume the vast majority of the new cars, but Mexico’s domestic market has rebounded from a long slump, and in a sign of Mexico’s growing global role, auto exports outside of North America will rise faster than those to the United States.
BMW AG, Toyota Motor Corp. and Daimler AG’s Mercedes-Benz are expected to announce at least $2 billion of deals in the next year or two, according to supplier and other industry sources. That’s on top of nearly $6 billion in announced plants by Nissan Motor Co., Honda Motor Co., Mazda Motor Corp. and Volkswagen AG.
U.S. automakers, all of whom have been building cars in Mexico since before World War II, will spend another $1 billion or more to upgrade Mexican plants. And Nissan and VW also are considering expansions at existing factories that could total $1 billion or more, according to sources familiar with their plans.
Mexico “is quickly turning into the China of the West,” said Joseph Langley, a senior analyst at Michigan-based research firm IHS Automotive, pointing to Mexico’s low wages, a strong supply base and a global web of free-trade agreements.
Mexican auto exports beyond North America are growing even faster than those within, according to the Federal Reserve Bank of Chicago. They accounted for nearly 30 percent of the 2.4 million exported last year. Altogether Mexico built 3.0 million cars and trucks, according to Automotive News, compared with 10.4 million in the United States and 2.5 million in Canada.
By 2020, Mexico will have the capacity to build one in every four vehicles in North America, up from one in six in 2012, according to IHS.
The investment shift has implications for auto jobs and labor unions north of the border, particularly in Canada, which will see a 20 percent decline in production, IHS projects. Output will soar 62 percent in Mexico.
U.S. auto production will rise 12 percent, and Detroit-based automakers are expanding domestic production by ramping up the pace at existing factories to as many as three shifts running six days a week, said IHS. By those calculations, Mexico is building more auto plants than in the United States or Canada through 2020.
“It’s all about lower production costs and lower export costs,” said Michael Tracy, principal at the Agile Group, a Michigan-based auto consultancy. “That’s what Canada used to be — the place for low-cost manufacturing and shipping. Now, everybody is targeting Mexico.”
Mexico’s economy is seen growing faster than Brazil’s next year, underscoring the success of Mexico’s export-driven model versus regional economic powerhouse Brazil’s more protectionist policies. The promised auto investment could help Mexico challenge regional dominance by Brazil. Analysts are warning of excess Brazilian auto production capacity within five years.
Suppliers say the Detroit auto makers, with more than half the production capacity in Mexico, have not signaled any plans to expand vehicle output there. But General Motors and Chrysler this year have said they will install additional engine and transmission production capacity in Mexico.
In the competition for jobs with the United States and Canada, “Mexico’s momentum, combined with its increasingly dense and capable supply chain, its persistent cost advantage and its trading relationships may give it a leg up,” said Brookings Institution researchers in a report released last week.
Auto employment in the U.S. South, where Japanese, German and Korean automakers all operate non-union plants, is holding relatively steady at 18 percent of North American auto workers, according to Brookings.
$12 an hour
Pay ranges as low as $12 per hour for temporary workers at plants in the U.S. Southeast, compared with about $35 an hour for skilled union veterans at U.S.-owned plants. Union workers in Canada on average are paid even more. A year ago, GM CEO Dan Akerson described Canada as “the most expensive place to build a car in the world.”
But at around $2.50 an hour, manufacturing wages in Mexico are nearly 20 percent cheaper than in China, according to a mid-year Bank of America study. That study put U.S. manufacturing wages at just under $20 an hour, on average.
A shortage of trained engineers and concerns about crime and security may hold back Mexico, according to research firm PwC Autofacts.
Energy costs also are considerably higher than in the United States, but they are lower than in China, according to Boston Consulting Group. And because of Mexico’s proximity to the United States and Canada, transportation and logistics costs are lower than for parts coming from China.
The largest producer in Mexico, Nissan, opens its third factory next month, the $2-billion Aguascalientes No.2. Nissan built 683,520 cars in Mexico last year, and the new plant will add capacity for 250,000 more, mostly compact models such as the Nissan Sentra for North America and other markets, company officials said.
Moreover, an expansion of Aguascalientes No.2 is already in planning, according to two sources familiar with Nissan’s plans. Slated to open in 2016, the sources said, it likely will be dedicated to production of compact luxury vehicles for Infiniti and Mercedes-Benz, which has a platform- and engine-sharing agreement with Nissan.
Nissan said it had nothing to announce, while a Mercedes spokeswoman said joint production of compact cars was an option, but that no decision had been made.
Nissan also is expanding a complex in Cuernavaca, which will take the automaker’s total capacity in Mexico to 1.1 million vehicles a year by 2020, two supplier sources said.
Nissan’s closest rival south of the border is Volkswagen, which opened a complex in Puebla in 1967. A new $550-million engine plant in Silao, as well as a $1.3-billion assembly complex in San Jose Chiapa that is slated to be opened in 2016 by VW’s Audi subsidiary, will raise total VW group annual capacity by 100,000 vehicles to 850,000 by 2020, according to IHS.
VW and Toyota are battling for global sales leadership, but the Japanese automaker lags well behind its rivals in Mexico, where it has only a small truck assembly facility in Tijuana.
Now, the automaker is scrambling to catch up with its competitors, according to two supplier sources who say Toyota is actively shopping for a site. Toyota executives in recent months have said the company needs additional production capacity in Mexico, without providing specifics. A Toyota spokeswoman said the company “would not comment on any potential plant announcement” in Mexico.
BMW, which operates a U.S. assembly plant in South Carolina, also is shopping prospective plant sites south of the border, according to Mexican government officials.
Supplier sources said BMW already has mapped out a production timetable for Mexico, with a tentative plan to begin assembly operations in late 2017, ramping up annual capacity to 200,000 by 2020.
A BMW spokesman said he had nothing to confirm.
Other vehicle and parts manufacturers are expected to set up shop or expand existing facilities in Mexico by 2020, said Tracy, of the Michigan-based auto consultancy.
IHS’s Langley summed it up: “The level of activity in Mexico is insane.”
Nissan Mexicana in July celebrated building 4 million vehicles at its plant in in Aguascalientes, Mexico. The plant started operations Nov. 13, 1982.
Mexico’s President Enrique Pena Nieto recently presented to Congress the executive’s fiscal reform initiative which will be evaluated by the House of Representatives first and then by the Senate.
The highly controversial proposal, originally expected to structurally reform Mexico’s budget model, turned out to be a general tax increase on businesses, higher income earners and international firms manufacturing in Mexico, among other already “captive” tax payers.
The proposal does not include any provisions for the reduction or transparency of public spending, and does not properly provide for the incorporation of informal, unregistered businesses to the taxpaying base.
According to Alfredo Coutino, Moody’s Latin America Director: “The proposal is short of the expectations originally outlined by the President and it does not reach the objective of balancing the budget.
The proposal is based on hiking current taxes and creating new ones for the current tax payers; it does not propose to improve the efficiency of the tax authority by increasing the number of tax payers.”
The proposition is a political social initiative as it seeks to dedicate a large portion of the tax proceeds to support unemployment insurance and universal health coverage in Mexico. It also waives to impose IVA (value added tax, VAT, or sales tax) on food and medicines (The possibility of taxing food and medicines was highly unpopular and was strongly opposed by the left parties).
Selective social programs are certainly needed in Mexico, but not at the sole expense of businesses.
Although rather unlikely, some hope that the government controlled House of Representatives is able to produced a more balanced proposal that includes spending cuts, transparency and accountability by state and federal entities and the expansion of the tax payers base.
Mexico’s legislators were setting an example so far through the “Pact for Mexico”, blitzing through reforms in education, telecom and anti-trust among others. Although the heat of recent elections seems to have dented the process, Mexico’s legislators are not yet ready to “join the club” of their U.S. colleagues where Congress is practically paralyzed.
The resulting tax reform legislation in Mexico, if passed, is expected to be announced during this coming week of October 20.
THE EFFECT ON MAQUILADORAS
Maquiladoras’ oldest cry in Mexico is the need for permanent and clear tax rules so that they can adequately make their typical 5-year financial and production plans. But the treasury department frequently changes the rules defying Mexico’s competitiveness to attract foreign investment. This time around, the resilience of maquiladoras may be pushed over the cliff.
In a nutshell, the new tax reform proposal includes the elimination of the preferential tax treatment that the maquiladoras currently have, taking them from a preferential corporate income tax rate of 17.5% to a rate of 30%.
In addition, the proposal will also impose a new 10% tax on corporate dividends and it will also expand the taxable income base by eliminating deductions and changing the “price-transfer” rules between parent company and maquiladora subsidiaries.
Also, the tax proposal practically eliminates the highly successful maquiladora regime that grants a tax free treatment on temporary importations of industrial inputs, by charging IVA in such imports. Although this IVA is subject to a drawback, it would take a huge amount of funds to finance its 6-month cycle from the time of payment until the eventual reimbursement.
Also, under the new rules, maquiladoras’ parent companies would be required to pay 16% IVA tax on the value of buy/sell transactions on the production supply chain or maquila to maquila transfers.
Unless they make profound changes to their global corporate structure, the IVA would directly impact the cost of doing business, because they would not be able to recover it. This would directly affect many Mexican businesses that are involved in the supply chain structure.
Carlos Angulo, PAN Congressman and member of the Maquiladora Committee and Secretary of the Constitutional Reform Committee of the lower house said: “We can summarize the effects of the proposed tax reform on the maquiladora industry in one word: Catastrophic.”
“For example, under the new rules, if implemented, the annual income tax bill of a typical 500-workers maquiladora operation would go from a current level of about $24 Million Pesos to over $230 Million”, explained Angulo, “..and the maquiladora industry as a whole would need to increase its working capital by US$17.5 Billion at an annual financial cost of about US$750 Million just to keep up with the IVA requirements on temporary imports.”
“Supply chain operations between maquiladoras, a current common practice, would be interrupted if faced with cascading IVA impositions. The tax reform proposal would be like a catastrophic knock-out blow to the maquiladora industry global competitiveness” said Angulo.
Luis Aguirre Lang, President of the Maquiladora National Council (INDEX) expressed his frustration as follows: “The tax reform has created panic among the international firms operating in Mexico. We could lose up to two million, three hundred thousand manufacturing jobs if this reform is approved as proposed.”
THE EFFECT ON THE BORDER ECONOMY
The tax reform includes a generalized consumption increase of the IVA rate within the border region from 11% to 16%.
Any housewife living in Ciudad Juarez knows what this means: More trips to El Paso to buy clothing, house items, school supplies, etc., anything that will be taxed in Mexico at 16%, she can get in El Paso at a sales tax rate of 8.25%, which with a little effort she can get refunded.
And the flow of visitors from El Paso to Juarez, which had recently started to pick-up as the security improved, will certainly suffer as restaurants, bars and other IVA taxed purchases will automatically increase their prices by 5% if the tax reform gets approved by Congress.
The reduction of consumer purchases in Juarez as a result of the IVA increase, will weigh in to increase the closing of commercial businesses, unemployment and violence.
The combination of reduced consumption and pulling the rug from under the maquiladoras will have a multiplying, significant negative effect on Mexican border cities’ economies and their quality of life.
Carlos Angulo summed it up as follows: “The tax reform proposal appears to be designed by a freshman student with a total ignorance of border commerce and international production sharing practices.”
It is expected that industry associations, state and city governments and everybody else with a stake in the maquiladora industry and the border economy will lobby heavily in the weeks to come to mitigate the negative effects of the tax reform on the 43 year-old successful maquiladora program.
Juarez-El Paso NOW Staff report
2013 Getty Images
Quickly becoming one of the world’s automotive manufacturing powerhouses, Mexico may get another boost if Germany’s BMW and Korea’s Hyundai decide to open plants in Latin America’s second-largest economy.
Both automakers have held talks with the Mexican government, and while still in the nascent stages, at least one of the manufacturers could announce plans for new plant as soon as next year, Mexican Economy Minister Ildefonso Guajardo told Bloomberg.
“With both of them, there have been conversations for future plants,” he said. “I cannot talk for them, but I think that starting 2014 we’ll have new announcements. At least for one.”
Neither BMW nor Hyundai responded to a request for comment from Bloomberg on Guajardo’s statements.
Moves by BMW and Hyundai into Mexico would further boost a burgeoning auto industry in the U.S.’s southern neighbor, even as Detroit progresses in its rebound from the 2009 bailout and BMW’s Spartanburg, South Carolina plant continues to be one of the German car’s top producers.
Both Ford and General Motors are bumping up their investments in Mexico and Asian car giants Nissan, Honda and Mazda have all broke ground on plants there as well.
Volkswagen has also made deep inroads in Mexican auto manufacturing, with an announcement earlier this year of plans to build its popular Golf model at its plant in the city of Puebla. Golfs built at the Mexican plant will be sold in South and North America, where the company has fallen behind its competitors in a packed compact car market.
The Mexico move is part of a larger three-year, $5 billion plan to make Volkswagen the largest automobile manufacturer in the world. Mexico, with its low labor costs and shielded from the unfavorable currency fluctuations between the dollar and euro, is part of Volkswagen’s strategy in the Western Hemisphere.
“With its existing infrastructure, competitive cost structures and free-trade agreements, Mexico is the ideal location to produce the Golf for the American market,” Hubert Waltl, the head of production at VW’s passenger car brand, said in a statement.
Auto output in Mexico rose 4.4 percent in the first eight months of this year from a year earlier to 1.99 million vehicles, according to the Mexican Automobile Industry Association. Production last year climbed 13 percent to a record 2.88 million.
“Investors are confident of Mexico’s future, regardless of the slowdown in the first semester,” Waltl said. “There is a lot of trust in the future of the Mexican economy.”
By DAMIEN CAVE
MEXICO CITY — Mexico, whose economic woes have pushed millions of people north, is increasingly becoming an immigrant destination. The country’s documented foreign-born population nearly doubled between 2000 and 2010, and officials now say the pace is accelerating as broad changes in the global economy create new dynamics of migration.
Rising wages in China and higher transportation costs have made Mexican manufacturing highly competitive again, with some projections suggesting it is already cheaper than China for many industries serving the American market. Europe is sputtering, pushing workers away. And while Mexico’s economy is far from trouble free, its growth easily outpaced the giants of the hemisphere — the United States, Canada and Brazil — in 2011 and 2012, according to International Monetary Fund data, making the country more attractive to fortune seekers worldwide.
The new arrivals range in class from executives to laborers; Mexican officials said Friday that residency requests had grown by 10 percent since November, when a new law meant to streamline the process took effect. And they are coming from nearly everywhere.
Guillaume Pace saw his native France wilting economically, so with his new degree in finance, he moved to Mexico City.
Lee Hwan-hee made the same move from South Korea for an internship, while Spanish filmmakers, Japanese automotive executives and entrepreneurs from the United States and Latin America arrive practically daily — pursuing dreams, living well and frequently succeeding.
“There is this energy here, this feeling that anything can happen,” said Lesley Téllez, a Californian whose three-year-old business running culinary tours served hundreds of clients here last year. “It’s hard to find that in the U.S.”
The shift with Mexico’s northern neighbor is especially stark. Americans now make up more than three-quarters of Mexico’s roughly one million documented foreigners, up from around two-thirds in 2000, leading to a historic milestone: more Americans have been added to the population of Mexico over the past few years than Mexicans have been added to the population of the United States, according to government data in both nations.
Mexican migration to the United States has reached an equilibrium, with about as many Mexicans moving north from 2005 to 2010 as those returning south. The number of Americans legally living and working in Mexico grew to more than 70,000 in 2012 from 60,000 in 2009, a number that does not include many students and retirees, those on tourist visas or the roughly 350,000 American children who have arrived since 2005 with their Mexican parents.
“Mexico is changing; all the numbers point in that direction,” said Ernesto Rodríguez Chávez, the former director of migration policy at Mexico’s Interior Ministry. He added: “There’s been an opening to the world in every way — culturally, socially and economically.”
But the effect of that opening varies widely. Many economists, demographers and Mexican officials see the growing foreign presence as an indicator that global trends have been breaking Mexico’s way — or as President Enrique Peña Nieto often puts it, “the stars are aligning” — but there are plenty of obstacles threatening to scuttle Mexico’s moment.
Inequality remains a huge problem, and in many Mexican states education is still a mess and criminals rule. Many local companies that could be benefiting from Mexico’s rise also remain isolated from the export economy and its benefits, with credit hard to come by and little confidence that the country’s window of opportunity will stay open for long. Indeed, over the past year, as projections for growth have been trimmed by Mexico’s central bank, it has become increasingly clear to officials and experts that the country cannot expect its new competitiveness to single-handedly move it forward.
“The fact that there is a Mexican moment does not mean by itself it’s going to change our future,” said Ildefonso Guajardo Villarreal, Mexico’s economy minister. “We have to take advantage of the Mexican moment to do what is required of us.” The challenge, he said, is making sure that the growing interest in his country benefits all Mexicans, not just newcomers, investors and a privileged few.
Mexico has failed to live up to its economic potential before. “They really blew a moment in 1994 when their currency was at rock bottom and they’d just signed Nafta,” said Kevin P. Gallagher, a professor of international relations at Boston University, adding that those conditions created a big opportunity for Mexican exports.
But now, he and others contend, Mexico has another shot. If the country of 112 million people can harness the energy of foreigners and newly educated Mexicans, become partners with the slew of American firms seeking alternatives to China, and get them to do more than just hire cheap labor, economists and officials say Mexico could finally become a more equal partner for the United States and the first-world country its presidents have promised for decades.
“This is their second chance,” Professor Gallagher said. “And this time, they really have to capitalize on it.”
Protection to Openness
For most the 20th century, Mexico kept the world at arm’s length. The 1917 Constitution guaranteed Mexicans would be given priority over foreigners for various jobs, and until the 1980s the country favored policies that protected domestic industry from imports.
Mexico was never totally closed — midcentury wars in Europe and the Middle East sent ripples of immigrants to Mexico, while Americans and Central Americans have always maintained a presence. But it was not a country that welcomed outsiders; the Constitution even prohibited non-Mexicans from directly owning land within 31 miles of the coast and 62 miles of the nation’s borders.
Attitudes began to soften, however, as Mexico’s relationship with the United States began to change. Many economists and social scientists say that closer ties with Mexico’s beloved and hated neighbor to the north, through immigration and trade, have made many Mexicans feel less insular. Millions of emigrants send money earned abroad to relatives in Mexico, who then rush out to Costco for more affordable food and electronics. Even the national soccer team, after decades of resistance, now includes two Argentine-born midfielders.
“It’s a new era in terms of our perspective,” said Francisco Alba Hernández, a scholar at the Colegio de México’s Center for the Study of Urban and Environmental Demographics. “We are now more certain about the value of sharing certain things.”
Like immigrants the world over, many of Mexico’s newcomers are landing where earlier arrivals can be found. Some of the growth is appearing in border towns where foreign companies and binational families are common. American retirees are showing up in new developments from San Miguel de Allende to other sunny spots around Cancún and Puerto Vallarta. Government figures show that more Canadians are also joining their ranks.
But the most significant changes can be found in central Mexico. More and more American consultants helping businesses move production from China are crisscrossing the region from San Luis Potosí to Guadalajara, where Silicon Valley veterans like Andy Kieffer, the founder of Agave Lab, are developing smartphone applications and financing new start-ups. In Guanajuato, Germans are moving in and car-pooling with Mexicans heading to a new Volkswagen factory that opened a year ago, and sushi can now be found at hotel breakfasts because of all the Japanese executives preparing for a new Honda plant opening nearby.
Here in the capital, too, immigrants are becoming a larger proportion of the population and a growing part of the economy and culture, opening new restaurants, designing new buildings, financing new cultural offerings and filling a number of schools with their children. Economics has been the primary motivator for members of all classes: laborers from Central America; middle-class migrants like Manuel Sánchez, who moved here from Venezuela two years ago and found a job selling hair products within 15 days of his arrival; and the global crème de la crème in finance and technology, like Mr. Pace, 26, whose first job in Mexico was with a major French bank just after graduating from the University of Reims.
Mr. Pace, bearded and as slim as a Gauloises, said he moved to Mexico in 2011 because college graduates in France were struggling to find work. He has stayed here, he said, because the affordable quality of life beats living in Europe — and because Mexico offers more opportunity for entrepreneurship.
Sitting at a Belgian cafe with a laptop this spring, speaking Spanish with a lilt, he said he recently opened a communications business that was off to a blazing start. One of his partners was French, the other Mexican, and in their first few months of operation, they got more than 30 clients, including VivaAerobus, a discount airline aimed at Mexico’s emerging middle class.
More recently, as Mexico’s economy has slowed, Mr. Pace said a few clients had canceled planned promotions, but over all his business has grown this year to include work for international brands like Doritos and the beer Dos Equis.
“We’re not going back to France,” Mr. Pace said. “The business is doing well and we’re very happy in Mexico.”
Some Mexicans and foreigners say Europeans are given special treatment because they are perceived to be of a higher class, a legacy of colonialism when lighter skin led to greater privileges. But like many other entrepreneurs from foreign lands, Mr. Pace and his partners are both benefiting from and helping to shape how Mexico works. Mr. Rodríguez, the former Interior Ministry official, Cuban by birth, said that foreigners had helped make Mexico City more socially liberal.
And with so many Mexicans working in the informal economy, foreigners have little trouble starting new ventures. Many immigrants say Mexico is attractive because it feels disorderly, like a work in progress, with the blueprints of success, hierarchy and legality still being drawn. “Not everyone follows the rules here, so if you really want to make something happen you can make it happen,” said Ms. Téllez, 34, whose food business served more than 500 visitors last year. “No one is going to fault you for not following all the rules.”
Mr. Lee said that compared with South Korea, where career options were limited by test scores and universities attended, Mexico allowed for more rapid advancement. As an intern at the Korea Trade-Investment Promotion Agency here, he said he learned up close how Samsung and other Korean exporters worked. “Here,” he said, “the doors are more open for all Koreans.” He added that among his friends back home, learning Spanish was now second only to learning English.
The results of that interest are becoming increasingly clear. There were 10 times as many Koreans living in Mexico in 2010 as in 2000. Officials at a newly opened Korean cultural center here say at least 12,000 Koreans now call Mexico home, and young Mexicans in particular are welcoming them with open arms: there are now 70 fan clubs for Korean pop music in Mexico, with at least 60,000 members.
A Creative Magnet
Europe, dying; Mexico, coming to life. The United States, closed and materialistic; Mexico, open and creative. Perceptions are what drive migration worldwide, and in interviews with dozens of new arrivals to Mexico City — including architects, artists and entrepreneurs — it became clear that the country’s attractiveness extended beyond economics.
Artists like Marc Vigil, a well-known Spanish television director who moved to Mexico City in October, said that compared with Spain, Mexico was teeming with life and an eagerness to experiment. Like India in relation to England, Mexico has an audience that is larger and younger than the population of its former colonial overlord. Mr. Vigil said that allowed for clever programming, adding that he already had several projects in the final stages of negotiation.
“In Spain, everything is a problem,” he said. “Here in Mexico, everything is possible. There is more work and in the attitude here, there is more of a spirit of struggle and creativity.”
Diego Quemada-Díez, another Spanish director who said he was the first person in his family to leave Spain since at least the 1400s, moved to Mexico in 2008 after working as a camera operator in Hollywood. He went to film school at the American Film Institute and completed a short film that won several awards, but he said he moved to Mexico because the United States had become creatively restrictive. He wanted to make a film without famous actors, about Central American immigrants. In Los Angeles, no producers would bite. Here, the government provided more than $1 million in financing. The film, La Jaula de Oro, had its premiere at Cannes this year, with its young actors winning an award.
“Europe feels spiritually dead and so does the United States,” Mr. Quemada-Díez said. “You end up wanting something else.”
He struggled to make sense of Mexico at first. Many foreigners do, complaining that the country is still a place of paradox, delays and promises never fulfilled for reasons never explained — a cultural clash that affects business of all kinds. “In California, there was one layer of subtext,” Mr. Quemada-Díez said. “Here there are 40 layers.”
Mexico’s immigrant population is still relatively small. Some officials estimate that four million foreigners have lived in Mexico over the past few years, but the 2010 census counted about one million, making around 1 percent of the country foreign-born compared with 13 percent in the United States. Many Mexicans, especially among the poor, see foreigners as novel and unfamiliar invaders.
Race, ethnicity and nationality matter. Most of the immigrants who have the resources or corporate sponsorship to gain legal residency here come from the United States and Europe. The thousands of Central American immigrants coming to Mexico without visas — to work on farms or in cities, or to get to the United States — are often greeted with beatings by the Mexican police or intense pressure to work for drug cartels. Koreans also say they often hear the xenophobic refrain, “Go back to your own country.”
Mr. Sánchez, the hair products salesman from Venezuela, said Mexicans who had not been able to rise above their economic class mostly seemed to resent the mobility of immigrants. In a country still scarred by the Spanish conquistadors, he said many of his Mexican neighbors responded with shock when they discovered that his younger sister was studying medicine at Mexico’s national university. Not that the quiet scorn is enough to deter him. “I earn more here in a year than I would in 10 years in my own country,” he said. “Mexicans don’t realize how great their country is.”
Many do, of course, especially those with experience elsewhere. Mexico has allowed dual nationality for more than a decade, and among the growing group of foreigners moving here are also young men and women born in Mexico to foreign parents, or who grew up abroad as the children of Mexicans. A globalized generation, they could live just about anywhere, but they are increasingly choosing Mexico.
Some are passionate idealists, like Luna Mancini, 27, a human rights lawyer working for the Supreme Court who was born in Mexico to Italian parents. After growing up in Barcelona, Spain, she returned to Mexico in 2009 because she felt that more could be done in Latin America, with law and with new tools of communication — digital video, social media — that encouraged grass-roots dialogue. Some, especially Mexican-Americans working in Mexico City’s hip culinary scene, have come here to reconnect with their roots. Others simply see Mexico as their best option, as an incubator for personal, professional and artistic growth.
Domingo Delaroiere, an architect whose father is French and mother is Mexican, said Mexico’s appeal — especially in the capital — was becoming harder to miss. When he came back here last year for a visit, after two and a half years in Paris, he said he was surprised. “Art, culture, fashion, architecture, design — the city was filling up with new spaces, things that are interesting, daring,” he said.
He soon decided it was time to move. Compared with Mexico, he said, “Nothing is happening in Paris.”
“Today I’m seeing freeways built where there were cattle trails 10 years ago,” Hensley says.
Amado, which trucks to airports in the Southwestern U.S. and Mexico, is the exclusive Mexican handler for ShipHaus, a freight forwarder based at Phoenix-Mesa Gateway Airport in Mesa, Ariz.
“It’s incredible,” Hensley says. “There’s excess of 100 million consumers in Mexico, and that’s about 30 percent of what we have in the U.S., so it’s a tremendous market.”
Tell that to Aeromexico or Lufthansa, American Airlines or United Airlines. These carriers move thousands of tonnes a year between Mexico and the rest of the world.
“If you look at what we’re shipping from Mexico, it really runs the gambit,” Tony Randgaard, manager of cargo marketing at United Airlines, says. This includes pet and human remains services into and out of Mexico.
The airlines and forwarders interviewed move much of the same cargo to and from Mexico: textiles, consumer electronics, automotive parts, luxury goods and perishables. Many electronics come from Guadalajara, whose nickname is the Silicon Valley of Mexico.
In the last few years, major U.S. manufacturers have been providing the raw materials for electronics to China-based companies, who do part of the manufacturing, Hensley explains. Then the parts come back to the U.S. and go to Mexican companies, who complete the value-added features. The electronics then return to the U.S. under the North American Free Trade Agreement.
Perishables frequently shipped include mangos, lemons, avocados, limes, papaya, herbs and seafood.
“Agribusiness has just grown at an insane rate over the last 10 years,” Hensley says.
The array of products goes to places such as Germany, Japan, the U.S. and Canada. Curt Fischer, regional manager for Mexico and Central America for Lufthansa Cargo, says three times as much Lufthansa cargo – 90,000 tonnes a year – goes from Europe to Mexico than vice-versa.
This is because Mexico has a strong import market whereas much of the export industry targets nearby markets in North and South America, says Fischer, who is based in Mexico.
Lufthansa has worked on ramping up its service in the country, serving Mexico City and Guadalajara to Frankfurt.
“Mexico is always full of surprises,” Fischer says when asked of hurdles in transporting airfreight.
Benito Juárez International Airport in Mexico City is already crowded and cannot grow any further.
“Meanwhile, the city has grown all around it,” Fischer says. “Mexico City is one of the largest cities in the world, and the airport, which used to be out of the city at one time, is now in the middle, more or less. So there’s no way to go any further. There’s no way to put in any additional runways, but also within the warehouse area, there is no space for growth.”
Fischer says Mexico’s drug cartel problem presents security challenges for airlines and shippers.
“Additional security measures always will hinder the free flow of air cargo. So this is something we have to cope with,” he says. “Especially also our customers that have to cope with longer handling times.”
Antonio Gomez Elorduy, Aeromexico Cargo vice president for the U.S., Asia and Canada, says competition from other carriers and rising fuel costs hurt the airline. He also highlights Aeromexico’s move toward E-freight.
“One of the issues that we have is the customs side,” Gomez Elorduy says. “There’s a lot of things that in Mexico are done with a lot of paper and involving a lot of people in imports and exports, so I think that now that we are one step ahead with the government to try to develop that process with their help. I think it’s going to be an improvement in Mexico because we’re a little bit late in that – let’s say it that way – against the other carriers.”
Randgaard of United says the Mexican air cargo market “hasn’t jumped into E-freight.” He also points out the importance of having specific and precise documentation.
“There’s not a lot of tolerance in shipping to and from Mexico. You really have to ensure that your import documents, your pet or your human remains permits or certificates, are exact, and you really need a lot of precision, or you’re going to experience delays, and our customers are not going to be happy with that,” he says. “I think that there’s a number of countries around the world that you need to make sure that you’ve got all your ducks in a row, and certainly Mexico is one of those.”
Carmen Taylor, American Airlines managing director for cargo sales for Latin America, and Hensley of Amado Trucking say if you have experience and the proper documentation, it’s a fluid process.
“Do I hear about the Mexican Customs holding an important shipment for days and days like I hear in other countries? I haven’t heard that in many years,” Taylor says. “It’s because we have learned to do business.”
Mike Barclay, owner and director of business development at ShipHaus, says with the increased flow of goods into and out of Mexico, aircraft will have capacity issues. Some freight will need to sit and wait for additional flights. Barclay and Hensley’s plan is to truck freight from northern Mexico to fly out of U.S. airports.
Mexico is a country on the rise – and the airfreight industry knows it. American is looking at Mexico-Seoul service. A few years ago, Lufthansa was flying two freighters into Mexico; now that number has tripled.
“Investments in Mexico are very strong, and they are bound to grow,” Fischer says. “We want to be there also to offer air cargo capacity and services as it comes.”