Jobs and shipments are rising, but Mexico's stalled reforms could slow the maquiladoras' economic engine

By Marla Dickerson
Times Staff Writer

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% 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% gain after three straight years of losses. Maquiladora shipments jumped more than 31% in August, thanks largely to demand from the U.S., which absorbs about 90% of Mexico's exports.

It's welcome news for border cities such as Tijuana and Ciudad Juarez, near El Paso, 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% 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 U.S. — 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 Orduña, a San Diego-based maquiladora consultant and customs broker. "But everything isn't fine. Mexico has some serious, serious challenges to overcome."

The maquiladora system was launched by the Mexican government in 1965 as part of the Border Industrialization Program. It was meant to draw investment and create jobs for workers displaced by the expiration of the bracero program that had allowed Mexicans to work temporarily in the United States.

The term maquiladora is derived from an old Spanish colonial term for the fee paid to a miller to grind grain into flour. Similarly, maquiladoras in the early years were little more than job shops selling assembly labor to U.S. companies.

Multinational companies eventually established full-fledged manufacturing operations in Mexico. Today the term maquiladora refers loosely to any foreign-owned factory whose products are geared for export. The latest figures show there are about 2,800 maquiladora factories, about three-quarters of them located in Mexico's six northern border states.

To qualify for maquiladora status, companies must register with the Mexican government. They are then eligible for benefits such as streamlined customs procedures and preferential tariffs on raw materials and equipment.

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 U.S. 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.

On a recent morning, workers in their 20s hunched over tables threading transformer wires in one part of Tacna's factory while others bustled about the firm's tubing facility turning out products for automotive, medical and food-service customers.

Baldwin, the chief operating officer, paused before a knot of employees molding specialized radiator parts out of sizzling red and electric blue silicon rubber. He said young car enthusiasts were wild for the hot-colored components, which Tacna produces in small batches for auto customizing shops in Southern California.

He said speed and flexibility were his advantage over high-volume Asian competitors. "Who is going to do just 10 parts" if the customer wants them? Baldwin said. "Not China."

Like many border maquiladora executives, Baldwin lives in the San Diego area and commutes to Tijuana. He said that was a huge advantage for small manufacturers wanting to keep a close watch on their production instead of trying to manage it from across the Pacific.

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 throw up 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."

Indeed, far from feeling triumphant about the nascent rebound in Mexico's export factory sector, concerned maquiladora executives in Ciudad Juarez gave President Vicente Fox an earful when he toured the city recently.

Business leaders told the president that Mexico's U.S.-led recovery is only a temporary reprieve, and that Mexico's prime location and NAFTA preferences aren't the security blankets they used to be.

They said Mexico must finally own up to the fact that it needs to tackle labor, energy, tax, education and other reforms that have been stalled for years, or settle for middling growth in its industrial sector while other nations speed ahead, likely for good.

"Not China nor any other country has robbed Mexico" of anything, Ciudad Juarez maquiladora operator Hector Fierro declared to the gathering of business executives. "Mexico has lost things, but no one has taken them from us. Plain and simple, we've lost them ourselves."