The North American Free Trade Agreement officially added Mexico into the existing North American market a decade ago, a step to compete better with the European Union and the emerging Asian industrial giants.
Now, it would be difficult to imagine the North American trade bloc without Mexico and its growing global industrial influence.
Mexico’s strategy to compete globally began four decades ago, actually, with the advent of its maquiladora program, in which foreign companies could establish industrial plants in Mexico and supply them with equipment, raw materials and components, all duty free. When goods leave Mexico for their destination markets, only the value added within Mexico would be taxed.
Successful? In 2005, the maquiladora program will enjoy its first $100 billion export year. In 1990, maquiladora exports totaled $14.1 billion. During the first year of NAFTA (1994), exports were measured at $26 billion. In 2005, exports are projected to reach $104.8 billion.
“Mexico can be an important partner of the United States and Canada,” said Arturo Reyes, an engineer at Parque Logistico de Tizayuca, an industrial site near Mexico City. “Its comparative advantages — not only labor but climate, natural resources and culture, including language — must be taken into account in the regional strategy.”
Foreign direct investment continues to pour into Mexico. In the first half of 2005, $1.39 billion in maquiladora plant equipment came into Mexico. That’s up from $1.13 billion during the first half of 2004, a 23 percent increase, according to the Bank of Mexico.
The number of maquiladoras, as of late September, stood at 2,815, employing 1.17 million workers who produced exports in the first half of 2005 worth $52.9 billion. Maquiladoras now account for 45 percent of all of Mexico’s exports, including oil.
“Over 40 years, the maquila program has been the most successful regional industry program ever designed by the Mexican government,” said John Christman, director and consultant for the Maquiladora Industry Econometric Service of Global Insight Inc.
Challenges From Abroad
That stated, Mexico is facing competitive challenges as never before. Despite Mexico’s steady progress, China displaced Mexico as the No. 2 importer into the United States and, this summer, Canada as No. 1. That makes the top U.S. importers China, Canada and Mexico, in order.
What can Mexico do to help North America become more competitive?
“On the industrial side, the emphasis in maquiladoras must be changed to a more balanced and integral production chain, with big industries and smaller providers, but still in a regional specialization pattern, such as steel, automotive, aeronautics, furniture, etc.,” Reyes said. “This represents a more stable, favorable and secure development course.”
Mexico also could strengthen North America by becoming a strong economic bridge to Central America and South America, he added.
“Mexico should rebuild prestige with its (poorer) southern states, to be able to carry out this job,” Reyes said.
Specialization may be one key. China is good at producing large volumes of products but not models or versions of products. An opportunity may open for Mexico to customize Chinese-made goods before entering the U.S. market on a timely basis, given Mexico’s proximity to the United States, said Ralph Biedermann, president of the MRB Group, a Lake Bluff, Ill.,-based international market development firm.
Christman presented a long list of steps for Mexico’s maquiladora industry to strengthen its competitiveness profile during the recent “Manufacturing in Mexico and on the U.S. Border Symposium,” held in Laredo, Texas.
Mexico should emphasize attracting and retaining high-tech plants, tailored to high-end customers, by offering just-in-time delivery, Christman said.
Investments should become more capital-intensive, with efforts toward vertical integration and more value-added production by integrating more engineering and research on site.
“The key is complete elimination or a real streamlining of the government jungle of rules, regulations and paperwork, to truly help promote the above points with investors,” Christman said.
Other helpful steps include production line consolidation, build-to-order programs, lean manufacturing programs, modular assembly, design advances through research, and strategic alliances with plants in other developing nations, he pointed out.
Mexico’s most competitive industries are automotive parts and components; aerospace; electronics, such as large-sized flat-screen televisions; software; metal mechanics; medical instruments and supplies; call centers; upscale goods; and just-in-time products.
“These sectors will remain Mexico’s top competitive areas until the end of the decade, at least,” Christman said.
Wages To Rise
The average hourly wage in Mexico’s maquiladora industry is now $2.78, which is an average of direct labor, technical and administrative personnel, including benefits. Christman predicted that figure will rise to $3.43 by 2010.
It once was thought it would reach $4 an hour by 2010, but it will not happen everywhere in Mexico, he said. Pay scales differ between cities and states. Wages cannot be compared between Tijuana (a city near the California border) and Yucatan (a state in the southern portion of the country.)
Maquiladora employment will rise slowly through the rest of the decade to 1.38 million workers, Christman predicted. The number of plants will rise to 3,238, up from 2,815 now, with 2,211 of them operating in Mexico’s states bordering with the United States.
The big jump, though, will be a rise in gross production value of $134 billion by 2010, up from $104.8 billion this year, Christman predicted.
“This reflects the trend of Mexico manufacturing toward high-tech and higher skills,” he said. “No-tech and low-tech industries are going to disappear from Mexico.”
Mexico’s economic health favors these trends. Its foreign debt situation is the best in years, Christman said. Mexico’s fiscal discipline has led to lower inflation of about 4 percent, nearly down to the U.S. inflation rate, which helps keep the dollar-peso exchange rate stable, he added.
Reyes said the Mexican government should have a policy to get the United States and Canada involved in a NAFTA-broadened framework.
“The NAFTA region should be viewed as a whole,” he said. “Mexico is the smallest economy [in North America], but it also has the biggest opportunities for growth. We have to work hard, but I think that the social and economic conditions are there.”
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