Born as a necessity in the mid-1960s upon the cessation of the bracero program for Mexican agricultural workers in the United States, maquiladoras have provided Mexico with badly needed jobs and foreign manufacturing companies with a low-cost method of subassembly.
After nearly 40 years, several stages of development and the emergence of strong low-wage competition in Asia, primarily China, maquiladoras are at a crossroads.
Do the twin plants in Mexico still have a purpose, now that the North America Free Trade Agreement is more than a decade old and all of the NAFTA tariff reductions have occurred?
“Is there a future in maquilas?” asked Gale Thompson, a maquiladora pioneer and business development vice president of the Offshore Group in Tucson, Ariz.
The answer is yes. Is it the same future as 30 years ago? No.
“The maquila industry is definitely changing,” Thompson said. “High-labor and high-volume industry is leaving Mexico. But Mexico is being backfilled with more technology, higher production mixes and higher technologies. Also, you will see more staffing with engineers. The clients are not the same as 10 years ago, either.”
The evolution that is currently in full bloom in Mexico uses high-capital inputs and wider use of Mexican-educated technical and engineering staff.
The products are more complex, the skill levels of workers are higher, the manufacturing techniques are more modern and there is on-site engineering, Thompson said.
If the magnitude of that change was not enough strain on the maquiladora concept, the U.S. economic recession, coinciding with the emergence of China and other low-wage Asian nations as lower-costing alternatives to Mexico, nearly brought the maquiladora sector to its knees during the past few years.
Maquiladora employment declined by nearly 277,000, or 21 percent, between October 2000 and March 2002. A brief recovery in 2003 was stymied by a relapse of the declines in the spring of 2003.
What is rarely noted, though, is that the declines in this decade were smaller than the larger buildup of maquiladora employment between 1998 and September 2000. Maquiladora employment levels never fell back to the September 1998 level.
David Hendricks is a business columnist for the San Antonio Express-News.
The “China Syndrome”
One notion Mexico is fighting is that its wages are not competitive with those of China. Mexico’s pay levels are higher than China’s, but only along the U.S. border and in Monterrey.
Wages remain low in central and southern Mexico, which the government now is marketing as a “mini-China” to keep and attract industrial development.
“You do not even need to go to South Mexico to get to ‘little China’” said Doug Donahue, a partner in San Antonio, Texas-based Entrada Group, which operates a maquiladora site in the Fresnillo-Zacatecas area. “Durango, San Luis Potosi and Zacatecas are all within eight hours of the border and all have very competitive labor rates that can compete with China.”
A factor that accelerated the maquiladora exodus to Asia was exchange rates. The Mexican peso strengthened against the U.S. dollar, while the U.S. dollar strengthen against Asian currencies.
That had the dramatic effect of raising the costs of goods Mexico was exporting to the United States and cheapening the cost of goods arriving in the United States from Asia, said William Gruben, director general of the Center for Latin American Economics at the Federal Reserve Bank of Dallas.
Stabilization of currency exchange rates and the ongoing U.S. economic and manufacturing recovery suddenly bode well for Mexican maquiladoras, and the latest projections bear that out.
Merchandise imports into Mexico, mostly bound to maquiladoras for assembly or manufacturing processes, were $170.9 billion in 2003 and should reach $186.1 billion this year and $257.5 billion in 2008, said John Christman, director of Maquila Industry Econometric Service at the Mexico City office of Global Insight.
Mexico’s merchandise exports, which mostly are leaving maquiladoras, rose slightly in 2003 to $165.3 billion and should reach $179.6 billion in 2004 and $243.3 billion by 2008.
Direct foreign investment (DFI), of which half go to manufacturing plants, will also rise during the same period, Christman predicted. Mexico’s DFI was $13.61 billion in 2003. It should decline slightly in 2004 to $13.2 billion, but rise to $16.2 billion by 2008.
Meanwhile, Mexico’s asset-based taxation of maquiladoras remains uncertain. Broad tax reforms proposed in 2001 by the administration of Mexico President Vicente Fox that would have resulted in higher taxes did not win approval of the Mexican congress.
The biggest change would have made maquiladoras “permanent establishments,” resulting in high taxes. But the exemption of maquiladoras from permanent establishment status was extended to at least 2007, essentially passing the question to the next Mexican president after the 2006 elections.
The Fox administration, however, has embarked on measures favorable to maquiladoras in 12 sectors to make Mexico more competitive, including relaxation of NAFTA requirements for the North America sourcing of raw materials and components, said Raul Urteaga Trani, economic counselor for Mexico’s NAFTA and Trade Office in Washington, D.C. The 12 sectors are automotive, electronics, software, aerospace, textiles, agriculture, tourism, commerce, construction, maquiladoras, chemicals and shoe/leather.
Another asset that Mexico has to assure the future of maquiladoras is proximity to the United States and the time to turn around products. With longer shipping times, China does not have the quick turnaround times that Mexico can off
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