Mexican factories found new life

August 23, 2004-- Mexico's maquiladora factories, which many investors had written off for dead amid competition from China, have found new life as they exploit their proximity to the United States.

Production at the factories, which import raw materials from the United States and then ship the finished product back across the border duty free, rose at an annual pace of 10.1 percent in June.

The plants benefited from Mexico's relatively low transport costs for bulky products like furniture. Also driving the growth were high-tech goods like mobile phones, whose short shelf life makes quick delivery a must.

The growth has defied doomsday predictions that countries with cheaper labor, especially China, have permanently displaced Mexico as a supplier of low-cost, labor-intensive manufactured goods to the world's biggest economy.

"We are figuring out that there are certain sectors where Mexico has a clear advantage over China," said Roberto Mattus, head of a maquiladora business group in the border town of Matamoros. "Those sectors are leading this recovery."

Asked to name Mexico's main advantage over China, Mattus laughed and said: "We're closer."

The maquiladoras are the main engine behind a recovery in Mexico's economy, which is expected to grow by 4 percent this year.

Mexico sends about 90 percent of its exports to the United States. The two countries' business cycles have moved in sync for years, although Mexico's recovery suffered a worrying delay in 2003 as Chinese exporters caught up with and stormed past their Mexican rivals in sales to the United States.

But Mexican exports to the United States jumped more than 20 percent in June, the quickest rate of growth for many months.

The country is still losing U.S. market share to China, but the pace of its own export growth is a lot healthier than it was early this year because of the maquiladoras' recovery.

Labor costs in China are about half the $1.70 per hour that Mexican workers in maquiladoras receive, economists say.    

 "Some sectors like apparel, toys and sporting goods will always chase cheap labor," said Roberto Coronado, an economic specialist in Mexican trade at the El Paso branch of the Dallas Federal Reserve. "They are gone to China and they are likely never coming back. However, Mexico is competing -- and winning -- against China in areas thought impossible just a few months ago."

HOP ACROSS THE BORDER

Despite educational levels below many of its Latin American peers, Mexico has attracted production of high-tech products like large plasma-screen televisions and automobile dashboards, economists said.

"Companies are finding out that the long, rough trip by boat from Asia can damage some sensitive electronics, especially televisions with screens bigger than 20 inches," Mattus said. "We've won some of that production back."

Because Mexico's maquiladora industry has been around for 40 years, long-time workers there have more experience than those at factories set up in China in the last decade. Intellectual property rights also tend to be stronger than in Asia because of the North American Free Trade Agreement, which took effect in 1994.

"If you have a product with sensitive intellectual property you'd like to protect, you'll almost certainly be looking at Mexico rather than China," Coronado said. "It's also easier to send your engineers from the U.S. to make product changes."

The border city of Tijuana, which has Mexico's largest concentration of maquiladoras, has benefited from its emphasis on production of medical supplies.

"The aging of the population in the United States is really carrying over into increased production of medical products this year," said Cesar Lopez, president of the Tijuana Maquiladora Industry Export Association. "It might be in bad taste to say this, but wars also help."

The industry's slump, which began in 2000 and ended last year, forced the companies to become more efficient, Lopez said. Maquiladoras shed about 200,000 jobs during that period, and many negotiated special tax breaks with local and state governments.

But business leaders still see the need for tax and energy reforms that could eventually lower electricity costs and produce better-educated workers, a top priority. Few expect much progress at least until President Vicente Fox leaves office in 2006.

But in the meantime, the maquiladoras are hiring again. In Matamoros, they added 3,200 new jobs between April and July, recovering a quarter of jobs lost there during the downturn.

"We went through some tough times, but we're coming out of it now, and production has increased even further in July and August," said Mattus, of the Matamoros maquiladoras. "We're seeing our problems were cyclical, rather than a fatal defect."