Maquiladoras in Mexico
...to move operations to Mexico is arguably the maquila program. A “maquiladora” is a manufacturing plant that imports and assembles duty-free components for export. The arrangement allows plants to pay duty only on the value-added, which is basically the finished product less the cost of components imported to make it, hence the name maquiladora; maquila means "processing fee" in Spanish, according to the Encyclopedia Britannica website. The maquila program originated in the 1960’s and eventually came into importance within the past two decades. It appears to have grown in parallel with the industrialization of Mexico. According to “Mexico Business – The Portable Encyclopedia for Doing Business with Mexico,” edited by James P. Nolan and published by the World Trade Press, (1999), the maquiladora industry employed 701,141 workers by March 1996, up from 522,078 in 1993. More than 85% of the plants were located at or near the Mexico-U.S. border. Bill Mongelluzzo states in “The Maquila Meltdown” published in The Journal of Commerce (April 14-20, 2003) that the maquiladora industry had more than 12,000 plants by 2001 and employed over 1.3 million people. These plants were primarily operated by companies from the United States, Asia, and Mexico. The growth of the plants in Mexico's border-states was not based solely on its duty free imports, but also because the maquiladoras benefited from Mexico's inexpensive real estate, labor, and raw materials. C. NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) As stated in the prior section, the maquiladoras have been enjoying their trade and labor benefits since the 1960s. However, the North American Free Trade Agreement (NAFTA) is slowly chipping away at their tariff advantages over other manufacturing companies in Mexico. NAFTA was placed into effect on January 1, 1994, and was established to open up trade among Mexico, the United States, and Canada. NAFTA's main provision called for the gradual reduction of tariffs, customs duties, and other trade barriers between the three members, with some tariffs being removed immediately and others in as long as fifteen years. According to the Encyclopedia Britannica website, NAFTA’s goal was to ensure eventual duty-free access for a vast range of manufactured goods and commodities traded between the signatories. The passing of NAFTA was an additional incentive for U.S. companies to move their business across the border, where they could benefit from cheaper labor, lower real estate fees, and less regulatory filings, such as the import licenses required in the maquila program. Unfortunately, NAFTA has also resulted in additional business costs for many of the maquiladoras in Mexico. Under NAFTA, tariffs are now in place for any material that comes from a source outside the U.S. In addition, items which were previously exempt from import duties under the maquila program, like equipment and machinery, are now subject to import tariffs. In a sense, NAFTA has increased the overall cost of doing business in Mexico for companies utilizing goods outside North America. On the Programa Promocion Sectorial (PROSEC) website, author Victor Yanar Rioz states that Mexico is trying to combat these costs by actively working to develop free trade agreements with the European Union and other countries and regions throughout the world. Overall, NAFTA and the maquila program have paved the way for U.S. companies to establish manufacturing operations in Mexico. Over the next couple of years the North American tariffs will be lifted, and additional free trade agreements will be established with several other nations and regions of the world. These changes will continue to provide incentives for foreign investors, such as U.S. companies, to invest in Mexico. D. BENEFITS AND CHALLENGES FOR U.S.-BASED COMPANIES IN MEXICO One of the biggest and most obvious benefits in choosing Mexico for manufacturing is labor. Labor costs in Mexico are far lower than comparable positions in the United States. American companies have been taking advantage of this for about forty years through the maquiladora program. Lower labor costs translate to lower overall costs, which is typically the goal for management. More recently, lower overall costs are being solidified with the advent of NAFTA, allowing for duty-free transactions between the two countries. According to Alejandro Bustamante, President of Plamex, a Plantronics Company, a typical assembly worker makes about $2.00US per hour and works six days a week. This equates to $96 per week in raw labor costs. A comparable position in the US would pay at least $5.15 per hour (U.S. minimum wage). To achieve the same level of production, overtime hours would have to be introduced for the last eight hours, rendering the hourly wage at $7.73 per hour for those last eight hours. This equates to $268 per week in raw labor costs. In this manner, manufacturing in Mexico saves the U.S.-based company $172 per worker per week. The majority of maquiladora plants are located within a reasonable distance from the U.S. border. This closeness allows for product to be readily delivered to its stated destination, without the delays typical of customs-based arrangements. In a recent article published by Reed Business Information, entitled “Mexico or China? Lower costs tip scales towards Far East”, (April 17, 2003), the author William Atkinson points out that it takes 21 to 23 days to ship from China. From Mexico, the same shipment can arrive in less than a week. This process is not seamless, however. According to Noel Robinson, President of Robinson & Robinson’s LeatherTrend, the U.S. Border Control is not averse to unpacking entire shipments of his furniture in routine searchs for drugs and other contraband. This not only delays shipments to their next destination, but also creates added costs for LeatherTrend. The inspected shipments are left by U.S. Border Patrol “as is” and must be repacked at the expense of LeatherTrend in order for them to get to the stores in a timely manner. Since this occurs within the U.S., LeatherTrend must pay the re-packers an American wage, which we have already seen is dramatically higher than the Mexican equivalent. Perhaps one of the biggest challenges for U.S.-based companies doing business in Mexico is cultural differences. According to James Nolan, the Mexican viewpoint is, “work is a necessary evil that must be submitted to in order to enjoy the more important things in life – family, friends, and other earthly pleasures for which work provides the wherewithal”. The same is not necessarily the case in the U.S., where the notion that hard work will lead to success and with it more money as the beneficial reward. U.S. managers find it difficult to get Mexican workers to stay later to finish a production run or work extra hours over the weekends to meet a shipment date. Jawed Ghias, President and General Manager of Dynamic Plastics, an injection molding plant run under the maquiladora program, mentioned that his workers would rather attend festivals than stay late and earn overtime pay, even when offered up to three times their normal wage. If Ghias has a target ship-date to meet, he must consider local customs such as this when scheduling his production runs. A skilled workforce has naturally developed over the lifecycle of the maquiladora program. Now that this experienced employee base is combined with all the technological advances in the industry, a higher quality of product can be anticipated. Alejandro Bustamante allows his workers to guide themselves in self-directed teams without a direct manager “lording over them and cracking a whip”. He feels that this approach allows for a more streamlined assembly process as the workers themselves are the experts in what they do, not necessarily management. He feels that this contributes greatly to the quality of his product and that the output from Plamex is every bit as good as that expected from a U.S. manufacturer, if not greater. E. THE RISE OF OFFSHORING TO CHINA AND OTHER FOREIGN COUNTRIES According to Marla Dickerson in a May 28, 2004 article in the Los Angeles Times entitled, “Mexico Looking to Branch Out”, China is now second only to Canada as the source of U.S. imports. Up until 2003, Mexico held this position in part due to the long standing maquila program and their 10-year head start into the American market under NAFTA. It may seem simple to blame Mexico for this shift to China. Mexico’s ability to transfer goods is still questionable to some, as the highway network is continuously under construction and Mexico is still without a completed world-class Pacific shipping port. This can make the transfer of finished product expensive and difficult. In our general discussion with Noel Robinson of LeatherTrend, he pointed out that, “It costs $4000 for a truck to get from Tijuana to New York. It takes $3600 to get from Hong Kong to New York by sea.” He went on to say that, “If I didn’t care where I as going to live and all I wanted was to run a business, it would be in China”. Marla Dickerson echoes this sentiment in the Los Angeles Times article stating, “Some analysts say Mexico’s biggest problems are home grown, as it has failed to supplement its early NAFTA gains with domestic reforms needed to keep the nation competitive”. Of course, China is eager to compete in the world market, in particular with the United States. Since 2001 and their entry into the WTO, China has moved swiftly from basic manufacturing into higher value-industries like aerospace and semiconductors. China is also focusing heavier on a highly-skilled workforce, graduating more than 300,000 scientists and engineers annually. As a whole, the country of Mexico has less than 25% of its population earning high school educations. According to Thomas Fullerton and Martha Patricia Barraza de Anda in their article “Maquiladora Prospects in a Global Environment”, written for the Texas Business Review (October 2003), a major factor in this turn of events has been the deregulation of the Chinese economy. This has coincided with years of congressional gridlock in Mexico. “Mexico’s failure to continue introducing market-orientated, structural adjustments has allowed China to play catch-up and shrink the erstwhile regulatory gap between the two economies”. F. HOW WILL MEXICO COMPETE WITH CHINA With increased competition from China luring away foreign investors, one must ask, "How is Mexico going to compete?" Mexico is aware of China's advantage with lower labor costs, but they have no intention of trying to compete with China in that area. As Gary Margossian of LeatherTrend stated, “Mexico is moving towards quality products that require skilled labor, rather than trying to reduce labor costs.” During our discussion on May 29, 2004, Ing. Manual Garcia Lepe of the Economic Development Department for the State of Baja California mentioned that Mexico also plans on investing 65% of their budget on its educational system, which would help solidify their commitment to pursuing quality and skill-driven markets. In addition, many established businesses are contributing to the educational system by providing classes and encouraging their employees to obtain a diploma. Mexico is also working diligently to build an infrastructure that will sustain the various businesses they are trying to attract. Some of these updates include improving the roadway system and building additional power plants in the Baja California state. Ing. Manuel Garcia Lepe explained that these power plants will provide additional power for the Baja coast, including the Tijuana border. Ing. Garcia explained that additional infrastructure is more than necessary, as Tijuana is growing at a rate of greater than 600 people per day. The improvement of the Mexican roadway system, coupled with a recent lifting of the ban on Mexican trucks entering the U.S., will likely attract more American businesses to Mexico. In a recent Los Angeles Times article entitled "Ruling Lets in Mexican Trucks" (June 8, 2004), the authors Marla Dickerson and David Savage stated that the Supreme Court cleared the way for thousands of Mexican trucks to begin delivering goods throughout the United States. This was touted as a "victory for American and Mexican businesses, both of ...