Wasting Away in Mexico
By May 5, China and its SARS epidemic were front-page news around the world. China made page one in Mexico, too -- but for a different reason. "'Made in China' is gaining on 'Hecho en Mexico,"' trumpeted Reforma, a leading daily. The article warned that the torrent of cheap Chinese products into Mexico was increasing. The ultimate affront: Statuettes of the beloved Virgin of Guadalupe now carried the Made in China sticker.
SARS is having a huge economic impact on China, with consumers shunning stores and restaurants, analysts slashing growth projections, and investors wondering if exports from China's coastal factories will start to flag. Among those wondering: managers in Mexico's vast manufacturing sector, which churns out everything from towels to autos, both for the local market and the U.S. Mexican manufacturing has been under slow, steady assault from the Chinese competition, and some in Mexico hoped that SARS would give Mexico a reprieve.
So far, they have been disappointed. Available data show that the flood of Chinese goods into Mexico and the U.S. continues unchecked (chart). Right now, Mexico is the No. 2 exporter to the U.S. after Canada. But, barring a huge SARS-related setback, China will wrest away that title sometime this year. "Mexico's natural advantage as a manufacturing center for North America is dissipating quickly," says Robert Berges, director of Latin America Strategy for Merrill Lynch (MER ) & Co. and the author of two reports on the China threat to Mexico.
That's a devastating reversal of fortune for a country that for the past decade has enjoyed privileged access to the world's biggest market under the North American Free Trade Agreement. "We're in trouble. China is growing so fast. They have cheap labor, and they give companies a lot of incentives to invest there," says Oscar García, manager of the Melco Display Devices plant in Mexicali. The factory, which is owned by Japan's Mitsubishi Corp. and churns out cathode-ray tubes used in computer monitors, will close at the end of July. That's because it can no longer compete with lower-priced Chinese production.
On the margin, SARS may have some impact on manufacturing in Mexico. Companies planning to shift to China -- or deciding where to build a new factory -- could be swayed toward Mexico. But the larger trend is unlikely to be reversed. "Unless SARS continues indefinitely, we believe the situation will be only modestly helpful to Mexico," says Louis R. Miscioscia, a Lehman Brothers (LEH ) Inc. analyst who tracks electronics manufacturing.
Why can't Mexico steal a march on China? For starters, there's the wage issue. An assembly-line worker in Guadalajara earns $2.50 to $3.50 an hour; his counterpart in Guangdong makes 50 cents to 80 cents. Perhaps even more important, China has nurtured large supplier networks in industries such as electronics that Mexico cannot match. The presence of thousands of seasoned Hong Kong and Taiwanese companies on the mainland creates natural partners for multinationals. Besides, China is now a bona fide member of the global trading club, having joined the World Trade Organization (WTO) in 2001. Factor in a 1.3 billion-strong consumer market, and the sum total is too powerful to resist.
That's why companies have deserted Mexico in droves. Employment in the maquiladora industry, the assembly plants that produce primarily for export to the U.S., has dropped nearly 20% from its peak of 1.4 million in 2000, though some losses stem from the global economic slowdown. "There are no jobs available, so people are migrating back to their hometowns in southern Mexico," says Rubén Parga, president of the Maquiladora Assn. in Ciudad Juárez, a sprawling city on the U.S. border that has lost more than 60,000 jobs in the past 2 1/2 years.
The rivalry between the two exporters is playing itself out in the all-important U.S. market. Mexico's exports to the U.S. grew just 1.2% last year; China's surged 19%. Mexico is most vulnerable in low-margin sectors such as furniture, toys, apparel, footwear, and certain types of electronics. It took China just three years to double its share of U.S. imports of laptop computers and components.
Textiles are another area where Mexico is losing ground. Just ask Jorge García Fernandez. The executive director of top towel exporter Hilasal knew competition would stiffen once China joined the WTO and the U.S. began paring back textile quotas. What he didn't bank on was that Hilasal's exports would fall 43% in three years, or that his home market would be inundated with cheap Chinese imports, some of them contraband. "China's low costs are killing the textile industry," he says.
To understand how global forces are reshaping Mexico's manufacturing base, one need only look at Guadalajara, the capital of Mexico's electronics industry, which logged $10 billion in exports last year. Flextronics (FLEX ), Jabil Circuit (JBL ), Sanmina-SCI (SANM ), and Solectron (SLR ) have factories there. Today, their plants are operating at just 60% capacity. Production of low-cost items such as cellular handsets and personal digital assistants has largely shifted to China.
The Xbox video-game console is a case in point. When Microsoft (MSFT ) Corp. was preparing to launch the Xbox, in mid-2001, it chose to centralize production for the U.S. market at Flextronics' Guadalajara facility so its engineers could easily fly down for last-minute design tweaks. A year later, Microsoft transferred production to two Chinese plants. The main reason: "China is closer to our supply base. Most Xbox components come from the Far East," says Todd Holmdahl, Microsoft's general manager of Xbox hardware.
China -- even wounded by SARS -- is a ferocious competitor. But Mexico has done little to address its own deficiencies. The country ranked No.47 in technological development in the latest competitiveness ranking by the World Economic Forum -- below Botswana. "NAFTA allowed our industry to modernize and adapt to a competitive world," says Luis Téllez, a former cabinet minister who is now an executive vice-president at Mexican auto-parts maker Grupo DESC (DES ) "But now we are facing a second phase of globalization."
Reforms that would boost Mexico's competitiveness have fallen prey to wrangling between President Vicente Fox and the opposition-dominated Congress. Mexico's corporate income tax of 34% is double China's rate. Yet a proposal that would have provided tax relief ran aground last year. Also stalled is electricity reform, which would help lower Mexico's rates, now 40% higher than China's. To ensure a reliable supply of power, Siemens Automotive has spent upwards of $3 million to install its own generators.
Not all companies are deserting Mexico. Bulky, costly-to-ship products, such as General Electric (GE )'s side-by-side refrigerators, will continue to be made in Mexico. Detroit's Big Three, along with Volkswagen and Nissan (NSANY ) Motor Co., are also staying put. They and their suppliers have built seamless North American production lines. "Mexico has been a solid supply base for us," says Jeff Engel, executive director of North American vehicle-procurement operations for Ford (F ) Motor Co. Building on that base remains Mexico's challenge.
By Geri Smith in Mexico City