Mexico?s Maquiladora Concept Is Nothing if not Resilient
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After several down years, companies are returning to a higher caliber of maquiladoras.
By: David Hendricks
5/12/2005
Mexico?s maquiladora concept is nothing if not resilient. Staggered by the 2001 U.S. recession and the 2002 entrance of China into the World Trade
Organization, the number of twin plants in Mexico dwindled three consecutive years through 2003.
The advantages of maquiladoras never went away, however. The concept dates back to the late 1960s. Basically, Mexico allows raw materials and
components to enter duty-free, or in-bond, for subassembly. When products exit Mexico for final assembly, packaging or distribution in destination
markets, Mexico levies duties only on the value added in Mexico.
As the U.S. economy recovered, so did the maquiladora numbers. Maquiladora employment fell 18.3 percent in 2001, 0.4 percent in 2002 and 1.7 percent
in 2003, but rebounded with a 7.1 percent gain in 2004, according the U.S. Federal Reserve Bank of Dallas.
The fastest growing sectors last year were services (27.6 percent), chemicals (27.5 percent), machinery (17.5 percent) and furniture (5.5 percent).
?The U.S. industrial sector is expected to continue to strengthen in 2005, and if that is the case, the maquiladora industry is likely to surpass the
pace of growth recorded in 2004,? the Federal Reserve Bank said in a recent report.
Maquiladoras found a new wave of investment because they always made sense, according to state government economic development officials.
?Mexico has been able to position itself, not just as a competitive market ? economically effective and with its [work force] skills ? but also as a
market where you have to target your new clients or follow some of them,? said Hector Sanabria, director of the Sonora Council for Economic Promotion.
?Moreover, the supplier base that exists many times represents the difference for competitors in cost and [getting products] to market faster.?
Another factor was the rise in technology that occurred during the maquiladora slump.
?The maquiladora industry in the north central part of Mexico decreased in the number of programs but tripled its value-added production and
recuperated the jobs lost during 2002 after the U.S. market depression in 2001 and the inclusion of China in the World Trade Organization,? said
Esteban Rosas, foreign investment undersecretary for the city of Durango.
The maquiladora establishments now are more efficient, more technical, thus their increase in their value added, he added.
?Small, inefficient programs lost to China?s competition and were forced to close for good,? Rosas said. ?Surviving maquilas became stronger, and we
have experienced some returns from China after disappointments with their operations there.?
Coming Back From China
The in-bond maquiladora program will prevail and will be a good alternative for companies seeking the largest market in the world, the United States
and the possibility, through Mexico?s free trade agreements, to access European markets, and even Asian customers, Rosas pointed out. The market
demand for stability and the now-attractive U.S. dollar-peso exchange rate also will be major drivers to achieve growth in the manufacturing sector in
Mexico.
?The companies that are planning or have come back have realized that China?s low wages are not the only competitive factor needed to successfully
compete in the NAFTA market,? said Carlos Fernando Barcena Pous, economic development secretariat for the city of San Luis Potosi.
Maria Galicia, Baja California?s economic development secretariat, listed five reasons for the maquiladora rebound in her state: strategic location,
low logistics costs, lower costs for manufacture of large-volume products, rapid response times for product changes and Mexico?s free-trade platform
to Central America and South America.
Galicia also noted that states such as Baja California, are more aggressive in their policies favoring maquiladora investments.
?Baja California?s state government has made special efforts to retain and maintain companies already established,? she said. ?In addition to
promotional tours, state officials have visited corporate CEOs to express the state?s appreciation for their confidence and also to learn of their
problems in order to work on the solutions, as well as the possibility of expansion.?
In March, Eugenio Elorduy, governor of Baja California, sent to the state congress a proposal for a Law of Competitiveness and Economic Development,
which studies fiscal and non-fiscal incentives for new investments and an increase in existing investments, Galicia said.
?This directly encourages activities within sectors considered strategic in the state?s economic development policy, she pointed out.
Incentives For Companies Coming Back to Mexico
Sonora?s Sanabria said from tax breaks to obtaining land and training programs, the federal and state governments are supporting companies that bring
processes into Mexico. Easing paperwork and permits to open new companies, expedite logistics, develop suppliers and link companies to academic
institutions are some examples.
?In the state of Durango, we are doing our part,? Durango?s Rosas said. ?We?re creating new road and communications infrastructure, as well as a fresh
new government attitude toward the interested investor, working side by side to generate a successful project.?
Jones Apparel and LG Philips are among the new companies that have arrived in Durango.
San Luis Potosi recently has attracted Merkle Korff de Mexico, an automotive company, and Saint-Gobain Calmar, a manufacturer of plastic products.
Baja California?s maquiladoras include Toyota?s new assembly plant producing Tacoma pickup trucks, medical devices companies Alaris and DJ Ortho,
appliance manufacturer Black & Decker, and call center company Telvista.
Sonora recently welcomed a group of automotive suppliers ? Thyssen Krupp Budd, Mangna, Faurecia, Delphi, Collins and Aikman, Grupo Antolin, Hella Behr
and System Technologies. Three aerospace companies are new ? Tolerance Masters, Sargent Controls and ChemResearch.
Sonora?s biggest news, however, was the doubling of the Ford assembly plant in Hermosillo and the resulting new supplier park.
The Dynatech South Industrial Park will house 18 tier-one suppliers to Ford to provide just-in-time service. Commenced in October 2003, this park
already has more than 2.5 million square feet and more than 20 suppliers. In addition, there are two specs available for tier-two suppliers.
Ford will begin expanded production in June.
?We represented the suppliers,? said Nick Criss, senior director for Cushman & Wakefield Mexico. ?But Ford negotiated the incentives to expand the
plant and to build the industrial park and for the suppliers. The incentives were mainly for an intermodal rail yard, private tunnels under roads for
just-in-time deliveries, electricity and water, and job training.?
Among the new Ford suppliers are those who expanded or relocated from other automotive centers in Mexico, like Monterrey and Mexico City.
?Ford needed them nearby,? Criss said. ?Some of these suppliers also will seek to supply the Toyota and a projected Kia assembly plant in the Tijuana
area from their Hermosillo site.?
For several years, Mexico industries went away because of the strong peso and China. The old maquilas ? low tech and high labor ? are gone, and they
are not coming back.
?But still viable are the maquilas that make big, heavy products that are too hard to ship [across an ocean] or just-in-time for the states,? Criss
said. ?These industries are automotive, large appliances and large electronics.?
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