Made In The Maquilas Again

A stronger U.S. economy and cheaper peso bring export factories back to life

A year ago it looked as if Mexico's maquiladora industry was in a state of irreversible decline. But that was then. Today, an expanding U.S. economy -- the destination for 90% of Mexican exports -- is fueling record growth in the made-for-export factories. With orders for everything from refrigerators to autos piling in, plants are hiring again after a more than two-year lull. The new momentum in manufacturing, along with soaring oil prices, recently prompted Mexican officials to notch up their 2004 growth forecast to as high as 4.25%. "We're in full recovery and we expect to keep growing," says Maria de Lourdes Acuña, director of foreign commerce at Mexico's Economy Ministry.

Mexico's maquiladora sector accounts for nearly half the country's total exports, so if it thrives, Mexico thrives. Until recently, though, scary things were happening. Since maquila employment peaked in October, 2000, a quarter-million jobs have been lost. More than 500 maquiladoras have shuttered operations with most production being relocated to China, where factory hands earn one-third what their Mexican counterparts do.


BUT THE SECTOR IS showing more staying power than expected. In June the country's 2,900-plus maquiladoras exported goods worth $7.72 billion. That's 20% higher than a year ago and a monthly record since Mexico first launched the maquila program 40 years ago. Around 55,000 new maquila jobs have been added this year.

What's going on? The U.S. recovery, for starters. But a cheaper peso -- it has slipped around 8% against the U.S. dollar in the past 12 months -- has also enhanced Mexico's allure for companies looking to trim costs. Sweden's Electrolux (ELUX ) has just broken ground on a 1 million-square-foot facility in Ciudad Juárez that will employ 3,000 workers to manufacture refrigerators currently made in Greenville, Mich.

China continues to siphon off jobs and investment, but the government of Vicente Fox has begun to bridge the competitiveness gap. Heeding investor complaints, officials have postponed until 2008 a new fiscal regime that would require maquiladora owners to pay corporate taxes in Mexico. Customs procedures have been streamlined.

Another good sign is that China doesn't always win hands-down. Although most production that has migrated there is not expected to return, other manufacturers are staying put in Mexico after concluding that China's wage advantage does not compensate for the logistical difficulties of supplying the U.S. market from such a great distance. "People are starting to say: 'Yeah, China's great for that dollar-a-day labor, but I can't wait 30 days to get my product to a customer,"' says consultant Richard N. Sinkin of Inter-American Holdings Co., which is based in San Diego. High-tech companies also cite China's weak protection of intellectual-property rights as a reason for remaining in Mexico.

The country also got an unexpected boost from the U.S. Commerce Dept., which in June hiked duties on Chinese-made TV sets to as much as 78.45% to combat dumping. The measure is a boon for Japanese, Korean, and Mexican TV manufacturers based in Tijuana and Ciudad Juárez. "It will definitely help us when we start exporting TV sets to the U.S. next year," says Carlos Jaramillo, director of Diamond Electronics, a maker of 14- to 34-inch-screen sets with some $50 million in sales.

Unfortunately, there's no quick fix for Mexico's skills deficit, a result of decades of inadequate spending on education. Roughly 1 million Mexicans enter the labor force yearly, but most lack the training needed for increasingly sophisticated assembly lines. "You can't come to a small town in Mexico and find computer-skilled machinists," says Ed Mason, director of Mexico operations for Tempe (Ariz.)-based SmithWest Inc., a maker of jet-engine components that opened a factory in Guaymas five years ago. But even Mason is a believer. "We've found the people are very trainable and willing to learn," he says. Today a dozen U.S. aerospace suppliers have joined SmithWest in Guaymas. Mexico still has a chance.

By Geri Smith in Mexico City

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