Mexico Factories Enjoy Upturn, but Worries Persist
Wednesday, October 13, 2004
By Marla Dickerson Los Angeles Times

TIJUANA, Mexico -- The surest signs of a turnaround in this teeming border city are the banners hanging on gates of factories and industrial parks: ``Se solicita personal.'' Help wanted.

``A year ago you didn't see any of those,'' said Ross Baldwin, chief operating officer of Tacna International Corp., a maker of electronic parts and tubing whose 250-person workforce has grown by nearly 30 percent in 2004. ``Now it seems like they're on every other building.''

Walloped by the 2001 U.S. recession and tenacious Asian competition, Mexico's ``Maquiladora'' sector of export factories is lifting itself off the deck, helped largely by the uptick in the American economy.

The Maquiladora factories -- foreign-owned plants located mainly in northern Mexico that produce goods sent to the United States and other countries -- added more than 80,000 jobs in the first seven months of the year. That's an 8.2 percent gain after three straight years of losses. Maquiladora shipments jumped more than 31 percent in August, thanks largely to demand from the United States, which absorbs about 90 percent of Mexico's exports.

It's welcome news for border cities such as Tijuana and Ciudad Juarez, whose local economies are stirring to life. Manufacturing companies are snapping up industrial space for expansion and bidding up wages in a scramble for workers.

But it's also important for Mexico as a whole. Maquiladoras are a key driver of Mexico's trade-dependent economy, accounting for about half of the nation's total exports. They are also a big reason Mexico's gross domestic product is expected to grow at a healthy clip of about 4 percent this year.

The United States also has a huge stake in the sector's vibrancy. Most of the export factories are American-owned, and an estimated 26,000 U.S.-based companies supply Maquiladoras with raw materials and components, according to the U.S. Government Accountability Office.

Drubbed by China in recent years in the race to attract foreign capital, Mexico is seeing a renewed burst of interest from investors lured by the country's relatively low wages, proximity to the United States -- the world's largest consumer market -- and the potential of Latin America's largest economy.

Toyota Motor Corp. this summer cut the ribbon on a $140 million plant outside Tijuana producing beds for its Tacoma pickups. Those parts, in turn, are being shipped to the New United Motor Manufacturing Inc. plant, a joint venture of Toyota and General Motors Corp. in Fremont, Calif. But Toyota plans to begin manufacturing entire vehicles in Tijuana this year, tapping Mexico's abundant engineering talent and low-cost factory hands.

``My goal is to make this facility as productive as any that we have in the world,'' said plant operations chief Joe da Rosa. ``There is no reason why we can't.''

But whether Mexico can reach so high remains to be seen. Despite the recent Maquiladora revival, many observers worry about Mexico's long-term competitiveness.

Mexico's unemployment rate just hit a seven-year high as the nation has continued to falter in its effort to create enough jobs to support its burgeoning population. Despite constant hand-wringing over the growing threat from China, Mexico's government has done little to tackle the high energy costs, tattered infrastructure, red tape, crime and corruption that are pushing some investors to Asia.

``Politicians point to the rising (Maquiladora) employment numbers and say that everything is fine,'' said Carlos de Orduna, a San Diego-based Maquiladora consultant and customs broker. ``But everything isn't fine. Mexico has some serious, serious challenges to overcome.''

The industry ballooned in the last decade, fueled by passage of the North American Free Trade Agreement, Mexico's mid-1990s peso crisis that made its exports cheaper, and the technology explosion in Silicon Valley. Electronics plants mushroomed in border cities such as Tijuana, which saw its Maquiladora employment more than triple to nearly 200,000 workers during the '90s only to plunge by nearly a third in the bust.

The drop was so steep and abrupt, accompanied by China's continued swift rise, that some wondered whether it was the beginning of the sector's inevitable decline. But others contend that Mexico will always remain relevant in the global supply chain for three reasons: location, location, location.

Mike White, managing director of CB Richard Ellis for the twin cities of El Paso and Ciudad Juarez, said the industrial real estate business in his area is bustling again.

He pointed to two new projects as examples of why Mexico still matters. Swedish appliance giant Electrolux recently announced it would build a refrigerator plant in Ciudad Juarez, while Lexington, Ky.-based Lexmark International Inc. plans to open a new toner cartridge facility there next year, adding to its four existing Mexican plants.

White said companies making bulky items such as refrigerators and some technology products such as printers, televisions and personal computers have good reason to keep some production in Mexico. These goods are too expensive to ship to the United States from Asia, and the tech products often are outdated in a matter of months, compelling producers to keep manufacturing lead times as short as possible.

U.S. companies that require small runs, rapid turnaround or just-in-time delivery are also likely to choose Mexico over China, despite Chinese wages that are a fraction of the $1.50-an-hour average paid in Mexican Maquiladoras.

``It's just not worth it for companies with a tight logistical time frame,'' White said.

A particular advantage for Tijuana is its proximity to California, whose high business costs are driving companies to look outside the state for growth and expansion. In addition to its own Maquiladora operations, San Diego-based Tacna International operates a division to help other companies outsource production to Mexico. Small to medium-size California manufacturers pinched by hefty workers' compensation rates and other expenses have become Tacna's bread and butter.

``The state of California is our best salesman,'' said Dale Fox, Tacna's vice president of sales and marketing.

But others say Mexico has rested on its real estate laurels for too long, expecting its proximity to the U.S. market to paper over a multitude of sins.

Tijuana logistics expert Jaime Gonzalez Luna expressed frustration that a manufacturing powerhouse like Mexico lacked a deep-water Pacific port capable of handling the largest container ships, as well as the speedy rail connections and abundant, modern highways needed to zip cargo throughout the region.

``It's like we're succeeding in spite of ourselves for now,'' said Gonzalez, vice president of Mundo Corporacion. ``China is investing billions in these areas while Mexico falls further behind.''

Chastened by Tijuana's woes in the recent downturn, he and other members of the Tijuana Economic Development Corp. have gone on the offensive. The group recently held a news conference aimed at prodding public officials over issues such as crime and skeletal public transportation that were discouraging new investment.

Once thrilled by any industry willing to build a plant in its region, the organization is now targeting select industries such as automotive, medical, aerospace and software with the goal of moving Tijuana up the value chain.

And although the local economy is improving, Tijuana businesspeople such as Elias Laniado, chairman of the economic development group, say the boom times of the late '90s won't be back anytime soon.

Faced with the prospect of only modest growth, the group is marketing the city aggressively to new investors, particularly in California, no longer confident to let its prime location sell itself.

``We're knocking on doors from San Diego to San Jose,'' Laniado said. ``We definitely feel a sense of urgency.''