Global Policy Forum

By Geri Smith

For 20 years, Tijuana was an ideal place for Sanyo Electric Co. to make everything from TV components to vacuum cleaners and refrigerators. Labor was plentiful and cheap in this Mexican border town, as was factory space. The peso was weak. Equipment and parts could be imported duty-free so long as the finished products were exported. For Sanyo executives, there was an added bonus: Tijuana is only a five-minute drive across the U.S. border from San Diego, where every weekend, multinational execs have long congregated on the city's many fairways.

The golf is still great in San Diego, but Tijuana's attractions are fading fast. Sanyo closed two of its six Tijuana plants last year, laying off 1,884 employees--nearly 30% of Sanyo's local workforce. The video components once manufactured at those factories are now produced in China and Indonesia. "Mexico has made a lot of progress in exports in the past 10 years, but now maybe that has peaked," says Hisami Otaki, who heads Sanyo's operations in Baja California.

Mexico's maquiladora industry is at a critical crossroads. Inaugurated in 1965, the duty-free export assembly program helped transform Mexico from a closed economy into the world's 13th-largest exporter, after Korea. In the past two decades, maquiladoras have evolved from low-end garment or small-appliance assembly outfits into higher-end manufacturing of big-screen TVs, computers, and auto parts. The factories shipped $76.8 billion worth of goods last year, nearly half of Mexico's total merchandise exports--almost all of it to the U.S.

But the maquiladoras are in trouble. Growth in output, which ran in the double digits through the late 1990s, has stalled--for several reasons. Most obvious is the slowdown in the U.S., which dampened demand for Mexico's exports. Then there's the strong peso: It has appreciated 25% against the dollar in the past three years, driving up labor and other operating costs. Maquiladoras have also been stripped of many of the tax and tariff exemptions they enjoyed for years.

No wonder some foreign investors are searching out friendlier climes. A total of 350 maquila plants have closed down since the start of 2001, leaving 240,000 Mexicans out of a job--nearly one-fifth of the industry's entire workforce. More often than not, Mexico's loss is China's gain--or Vietnam's or Guatemala's. Meanwhile, many executives wonder why authorities are not doing more to stop the defections. "If the Mexican government doesn't do something about this quickly, they're going to kill the goose that lays the golden egg," says Richard N. Sinkin, managing director at InterAmerican Holdings Co., a San Diego firm that advises companies on manufacturing in Mexico.

The administration of President Vicente Fox refuses to rush to the rescue. "People want us to panic so that we'll start giving out subsidies," says Economy Secretary Luis Ernesto Derbez, who does not see the situation as critical. He figures caving into demands to stop the outflow would make the government susceptible to all kinds of pressure from foreign business interests.

Fair enough, but the loss of maquiladora jobs and investment is hitting hard in border states such as Baja California, home to a third of all of Mexico's maquiladora plants. The state has lost close to 63,000 maquiladora jobs in the past 16 months. Among the companies that have closed up shop are French battery producer Saft, golf club maker Aldila, and Korea's Kisho Electronics, a TV and computer circuit-board maker. The latest to flee is Canon Inc., which shut an ink-jet-printer factory in Tijuana in March, eliminating 700 jobs, and shifted production to Vietnam. "The maquiladora program has changed drastically. We don't get the same benefits anymore," says Mitsuharu Nakata, vice-president of the Japanese Maquiladora Assn. and a top executive at Panasonic.

Blame it on NAFTA. The trade agreement, which took effect in 1994, required Mexico to strip maquiladoras of their duty-free status by 2001. That has raised the cost of imported components. To soften the blow, Mexican governments had promised to work hand-in-hand with the industry to develop a local supplier base that could be an alternative source of affordable parts. But few Mexican companies can meet the volume and quality requirements of large foreign manufacturers because they are saddled with high financing costs. That's why 97% of components for TVs assembled in Tijuana are still imported, mostly from Asia.

It's a tough balancing act. The Mexican government is eager to attract maquiladora investment, which has been running at around $2.4 billion a year since 1997. But authorities are also desperate to boost Mexico's overall tax collection, which is paltry even by Latin American standards. "The Mexican government has always been ambivalent about the maquiladora industry," says economist James B. Gerber of San Diego State University. "They see it as a kind of enclave that doesn't contribute much to development."

Prosperity still eludes the bulk of Mexico's nearly 1.1 million maquiladora workers. Yet wages in the industry have been rising. Taking into account technical and administrative personnel, the average wage now stands at $3.52 an hour, up from $2.29 in 1997. The rise explains why low-end manufacturers of apparel, toys, and sports shoes have already decamped. Low-margin, easy-to-ship electronics, such as computer printers and cell phones, also are moving out.

Fox is not about to stop them. "This government's philosophy is to move away from using cheap labor as a central element of competitiveness," says Derbez. Instead, he wants Mexico to follow in the footsteps of countries such as Singapore and Malaysia, which have gradually moved up the manufacturing food chain. Derbez envisions a future in which "maquiladoras will have more advanced technology, they will use much more trained labor with better salaries, and that will permit us to create a middle class in Mexico."

That vision may become reality in places such as Ciudad Juárez and Guadalajara, which have become hubs for auto parts and electronics. Delphi Corp. has even set up an R&D center in Ciudad Juarez, tapping the area's ample pool of local engineering talent. Meanwhile, Tijuana scored a coup in January when Toyota Motor Corp. (TM ) announced it would start building truck beds in this border city for export to California. "Our strategy is to attract companies with more sophisticated technology, not companies that require cheap labor," says Sergio Tagliapietra, Baja California's Secretary of Economic Development.

But the new Toyota plant will not be up and running until 2004, and in the meantime Tijuana is in danger of losing more maquila jobs. In a March poll by the Japanese Maquiladora Assn., 40% of the 71 companies surveyed said they were considering eliminating assembly operations or moving entire factories elsewhere. It's numbers like this that keep Mexican officials like Tagliapietra from sleeping soundly.

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