U.S. manufacturers are successful south of the border, despite the drug cartels, government corruption and utility monopolies.
by Edmund Newton; Illustration by Harry Campbell
Seven years ago, EE Technologies (EET) opened a new plant in Empalme, Mexico, on the balmy eastern shore of the Gulf of California. For the Reno-based manufacturer of electronic circuit boards, setting up shop 300 miles south of Tucson, Arizona, seemed like the best way to stop the hemorrhaging of its customers to competitors with low-cost overseas operations.
“It's like recapturing your own business,” says Rogan Owens, the company's engineering manager who ran the Mexico operation between 2009 and 2011. Not only was the company ditching what had been a costly domestic manufacturing operation, but company officials also liked the idea of keeping a reliable supply chain while staying close to their American customers, avoiding the hassles that some competing electronic manufacturers with plants in China were experiencing.
This was in 2005, a year before President Felipe Calderón declared war on Mexico's infamous drug cartels. By 2007, as the small American company expanded in Empalme, criminal organizations like Los Zetas, the Juarez Cartel and the Sinaloa gang were unleashing a wave of unspeakable violence in Northern Mexico. Federal forces moved in to bolster beleaguered or corrupt local law enforcement agencies, and suddenly no act of violence was off-limits in battleground border cities like Ciudad Juarez or Matamoros.
Those have been the headline stories from Mexico in recent years: mass murders, decapitations, huge shipments of illicit drugs, assassinations of law enforcement and elected officials—and the government corruption that allows it all.
The generally untold story, however, has been partially reflected in EE Technologies' establishment as a thriving south-of-the-border manufacturer. The Mexico industrial machine has become an international success story, with enviable growth rates, a burgeoning manufacturing sector and vibrant markets for American exports. For a growing number of U.S. manufacturers, Mexico is now North America's low-cost producer, and an attractive alternative to Asian offshoring.
While the gangsters were killing each other (and a lot of innocent citizens, according to news reports), the Mexican gross domestic product was growing—by 5.5% in 2010, with a more “sluggish” (as the World Bank puts it) but still passable rate of about 3.8% for 2011. Both of its far larger North American allies can only dream of those numbers these days.
Mexico's 2010 GDP of slightly more than $1 trillion is about two-thirds the size of Canada's and one-fourteenth as big as that of the United States. Yet Mexico is second in economic power only to Brazil in Latin America. And that power derives largely from industry, which produces more than a quarter of the nation's GDP. The growth in Brazil and other Latin American economic machines like Peru and Chile relies more heavily on sales of raw material like coal, copper, bauxite and oil, and thus the potentially volatile commodities markets.
Why is all of this important to the rest of the continent? Jobs, says Christopher Wilson, an economist at the Mexico Institute of the Woodrow Wilson International Center for Scholars in Washington, D.C. Six million American workers, one in every 24, depend on trade with Mexico to stay employed. There are 22 American states whose individual Mexico-related jobs exceed 100,000, with California's 692,000 coming in first and Texas' 463,000 in second. A “back-of-the-envelope” calculation shows how Mexican GDP growth creates new jobs, Wilson adds: Mexico's 5.5% growth in GDP in 2010 prompted a $34 billion increase in U.S. exports to Mexico; every $1 billion increase in exports supports more than 6,000 new U.S. jobs. Mexico's 2011 GDP is expected to grow by 3.8%.
If these assumptions hold true, Wilson says, “144,000 new U.S. jobs could be created due to Mexico's economic growth in 2011.” A modest figure, considering America's jobs shortage right now, Wilson concedes. “But that's with everything else being equal,” he explains. “If we don't do anything else to stimulate trade, we can at least count on the growth rate to create jobs.”
Ribbon cutting for the EET addition of a fifth line at its manufacturing plant in Empalme, Sonora, Mexico.
Where the Jobs Are
The auto industry, particularly, has turned Mexico into a prime manufacturing platform, taking advantage of both the nation's low labor costs and its proximity to the United States.
Honda announced last August that it would open a new $800 million assembly plant in Celaya, in the state of Guanajuato, to employ 3,200 workers and turn out 200,000 vehicles a year by 2014. It will be Honda's second plant in Mexico. Mazda is also building a $500 million plant in Salamanca, Guanajuato, while Ford, Chrysler, Volkswagen and Nissan have been up and running in Mexico since the 1990s. Aside from low labor expenses, there's an additional advantage to building cars in Mexico: the manufacturers can sell to other Latin American countries with low duties or tariffs, based on the terms of the 14-nation Association for Latin American Integration Association, established in 1980.
Aerospace is getting in on the action, too. There are already about 260 Mexican manufacturing plants producing aviation parts and products, representing a foreign investment of more than $1 billion. This is more than four times the amount invested in 2004, according to the business magazine MexicoNOW. A Bombardier Learjet factory in the city of Queretaro, in Central Mexico, now employs more than 1,200 employees at work on the new Learjet 85, the first business jet with a structure composed mostly of carbon composites. The international collaborative effort, which includes factories in Belfast, Northern Ireland, and Wichita, Kansas, is expected to have the Learjet 85 on the market by next year, with Queretaro supplying the composite fuselage and wing assembly.
EE Technology, a more modest entry in the industrial sector, joined the ranks of the so-called maquiladoras in 2000. These are foreign-run factories that import parts, assemble the products and then re-export. The early maquiladoras of the 1960s were exclusively in the Mexican border cities like Ciudad Juarez and Tijuana, but the government has since opened the Mexican interior to foreign investment, including coastal states like Sonora, the home state of Empalme. The maquiladora plants, more than 5,000 of them now, many of them simple assembly operations or garment sweat shops, have received special government dispensation to bring operating equipment duty-free into Mexico in return for employing hundreds of thousands of Mexican workers.
For EET, the move was facilitated by The Offshore Group, a Tucson-based firm, which operates three industrial parks in Mexico. The firm provides services for 51 manufacturers that produce aerospace and automotive parts, electronic products, medical devices and metal fabrication. Offshore obtained EET's operating permits, screened potential employees, recruited engineers from local colleges and provided ¬¬the facility, originally a 17,000-square-foot plant in the Bella Vista Industrial Park, where EET set up a single production line. Since then, the company, which produces circuit boards for anything from automotive air bag sensors and interior lights to medical devices and electronic casino gaming machines, has more than doubled its square footage in Empalme, and upped its production capability with seven assembly lines.
And there have been no problems with criminals, company officials say. Steve Colantuoni, Offshore's head of marketing, dismisses the drug cartel problem—which has resulted in between 45,000 and 50,000 deaths nationally in the past five years, according to various estimates—as a criminal-on-criminal issue. “It doesn't affect commerce,” Colantuoni says. “It's rival drug gangs killing each other.” Mexican authorities, who reported more than 12,000 deaths last year in the drug wars, are less sanguine, saying the violence is affecting even some American businesses.
Clearly EET has not been one of those. By operating in Mexico, EET not only pays about half what it would in Nevada in labor costs, but is able to cut shipping costs by sharing trailers with other U.S. manufacturers at the Empalme site, Owens says. The company has also found that, by staying in charge of its own manufacturing rather than outsourcing the work to contractors, EET can better meet the exact needs of clients who need their circuit boards delivered at specific points in their own production schedules.
To be sure, a lot of maquiladoras didn't make it through the North American recession. The Mexican economy shrank in 2009 by more than 6%, the worst that year of all Latin American countries. About 30% of the jobs created by the maquiladoras at the crest of the movement in the 1990s had disappeared by early 2010, says New York Institute of Technology (NYIT) Professor Stephen W. Hartman, writing in the International Trade Journal. But Mexican light industry appears to be rebounding. Taking advantage of living next door to the largest economy in the world, it is beginning to attract new employers, including some which relocated to China in the early 2000s.
From China to Mexico
One of these is Greenville, Tennessee-based Meco Corporation, which recently signed a seven-year agreement to begin manufacturing operations in Offshore's La Angostura Industrial Park in Saltillo, Coahuila. Meco, which manufactures metal folding chairs and outdoor barbecues, has been operating a plant in China, but it found that low—but increasing—labor costs there weren't enough to compensate for the long haul across the Pacific for its products.
“Two years ago we began the search for alternative manufacturing to better protect our customers from shipping and cost issues,” says Meco president Harrell Ward. “It became apparent we could significantly reduce the supply chain by transferring some of our products back from China and manufacturing in Mexico.” Meco is not only cutting shipping costs at a time of rising oil prices, but is also stabilizing its labor expenditures. Labor costs have been creeping up in China, and almost certainly will continue in that direction. The average Mexico wage is now only 20% higher than the average in China. In 2003, Mexican factory workers were getting an hourly wage eight times that of their Chinese counterparts. Wages for skilled or semiskilled workers in Mexico vary from region to region, but American plant managers at Meco and others say they pay between $3 and $4 an hour.
EE Technologies' manufacturing in Empalme now includes multiple shifts and seven Surface Mount Technology lines with Automated Optical Inspection Systems for each line.
Swimming With the Shark
The Mexican economy has always been tied immutably to the American economy. It's an unequal, sometimes troubled partnership, like a shark and a pilot fish, which can be advantageous or disadvantageous to Mexico, depending on the economic climate. The U.S. Chamber of Commerce, in a report on the U.S.-Mexico border, sums up the current situation:
“The trade relationship between our two nations is vast, with $397 billion worth of products being traded [in 2010] alone. Eighty percent of it is carried across the border by truck. That means that more than $1 billion in cross-border commerce is taking place every day—$45 million an hour—and virtually all of it tariff free under NAFTA [the North American Free Trade Agreement].” For perspective, total trade between the United States and Canada, America's top trading partner, was $627 billion in 2010.
With almost three-quarters of Mexico's $299 billion in exports in 2010 going to its northern neighbor, the current assessment is clearly advantageous. The feeling is mutual on the U.S. side of the border, the source of half of Mexico's $301 billion in imports, making it America's No. 3 trading partner (after Canada and China). Since the passage of NAFTA in 1994, Mexico is also the second-largest export market for U.S. businesses, according to the U.S. Chamber of Commerce.
Emphasizing the strength of the relationship, not only is the United States investing billions of dollars in Mexico for things like automobile factories and global banking operations, but investments are also starting to flow the other way. Flush Mexican companies have increased their holdings in the United States from $1.2 billion in 1993 to $12.6 billion in 2010, according to a report by the Woodrow Wilson International Center for Scholars' Mexico Institute.
“Consumers may be surprised to learn,” says economist Wilson, the report's author, “that brands they are familiar with, like Entenmann's, Sara Lee, Thomas' English Muffins, Boboli Pizza Crust, Borden Milk, Weight Watchers Yogurt, Mission Tortillas, Ready-Mix Cement, Tracfone cell phones, Saks Fifth Avenue stores, and even The New York Times, are supported by Mexican investment—as are the U.S. jobs those companies provide.”
The Mexico-U.S. economic partnership is based not just on the products the two countries trade, Wilson told Forward. “The two countries also build things together. . Take the auto industry, where a lot of investment is happening right now. It has become what's really a regional auto industry where Canada, the U.S. and Mexico work together to build cars and car parts.” A car built in North America crosses international borders at least seven times before it's completed, picking up new components along the way, Wilson adds.
The kicker is that investing in Mexican industries creates jobs in the United States, Wilson adds. “A full 40% of the content of U.S. imports from Mexico was originally made in the United States, and it is likely that the domestic content in Mexican imports from the United States is also high,” he says. “That means despite an hecho en Mexico label, a large portion of the money U.S. consumers spend on Mexican imports actually goes to U.S. companies and workers.”
The dynamics of U.S.-Mexico trade fly in the face of Ross Perot's prediction during the 1992 presidential campaign of “a giant sucking sound” as 11.9 million jobs headed south of the border because of the passage of NAFTA. On the contrary, opening up the border to products and eliminating tariffs has been a contributing factor in an increase in total U.S. employment of 23 million jobs between 1994 (when NAFTA went into effect) and 2008, says Hartman, the NYIT professor.
“Instead we have created millions of new jobs in the United States with a nearly 200% increase in trade with Mexico,” Hartman says.
The Positive and Negative Signs at Home
At home as well, Mexico is seeing positive demographic change, particularly since the mid-1990s. According to economists and sociologists, a combination of stable economic conditions, social welfare programs, jobs and available discretionary income have challenged the traditional view of Mexico as a nation of displaced farmers, awash in the culture of poverty. Says former foreign minister Jorge Castañeda, now a professor at New York University, a majority of Mexico's citizens qualify as middle-class or better, despite the persistence at the bottom of the economic ladder of an impacted class of the long-suffering poor. He is supported in this view by other academics and by national polls.
“At least since independence [declared in 1810 and achieved in 1821], this is undoubtedly Mexico's greatest achievement to date, and if it lasts, one that will irreversibly transform the country,” Castañeda writes in his 2011 book Mañana Forever?
What it means for the moment, however, is that there is a broad segment of Mexico's population with a hunger for cars, cell phones, flat screen TVs and jet vacation excursions. The new consumers have given parts of Mexico—those not decimated by the drug wars—the classic mall and emporium look, and they have excited American exporters.
The real downside of all of the good news, though, is the fragility of Mexico's economic advances. “If the euro goes down, if the U.S. goes into recession, then all bets are off,” says Wilson of the Mexico Institute. The euro's recent problems have had an indirect but important impact, Wilson says, depreciating the Mexican currency and putting a damper on foreign investment.
And it must be acknowledged that the country's industrial success is having an uneven impact nationally. Government statistics, for example, indicate that poverty is on the rise. In 2010, the poverty rate (those making less than US$2,000 a year, or about $25,000 pesos a year) inched up to 46.2% of all Mexicans, compared with 44.5 % in 2008.
Undeniably too, the drug cartels and their violent ways are exerting a downward pull on the economy, with estimates from various experts that the drug problem has stifled growth by between 1% and 1.5% of GDP annually. The criminal-on-criminal violence dismissed as irrelevant to commerce by the official from The Offshore Group is having a murderous effect on smaller businesses, many of them the victims of backbreaking extortion demands, says Eric Olson, senior associate at the Mexico Institute and a security expert.
Heavy industries too have felt the heat of organized crime, as robbers have reportedly hijacked trucks hauling newly minted cars along the highway between Monterrey and Laredo, Texas. “You still have to send your goods through dangerous highways in Mexico,” says Christopher Wilson, the Mexico Institute economist. “A single truck driver hauling durable goods is as exposed as any other.” A Mexican trucking trade association, CANACAR, says there were 560 robberies of truckers on Mexican federal highways in 2010, though there was a more than 20% drop in robberies in 2011 as of October.
“In general, the big businesses and the maquiladoras have the resources to hire security specialists and to house their managers in El Paso rather than Juarez,” Olson says. “The impact has been more on the small to medium-sized businesses, which are either forced to go along [with extortion demands] or to shut down. In many cases they don't trust the authorities to solve their problems, or it's just too dangerous to go to them.”
Even so, some reports of businesses leaving Mexico because of the violence don't hold up under closer scrutiny. The Wall Street Journal reported recently that Global Finishing Solutions, a U.S. manufacturer of paint booths used largely in the aerospace industry, had shut down its plant in Monterrey, Mexico, and relocated operations to its home base in Osseo, Wisconsin, because of the drug-related violence.
But company president Rick Binder denied that security was a prime factor in the move. He said Global was seeking to tighten the efficiency of its operations and cut costs by eliminating the extra overhead required to run a plant in Mexico.
The company found the Mexican work force to be “excellent,” Binder said, while paying them $3 to $3.50 an hour, compared with the $25 to $27 Global will have to pay its Wisconsin factory workers. But, he told Forward, the low labor costs couldn't compensate for the administrative and logistical complications of operating outside the country. Binder said no Global employees in Mexico were ever harmed by criminals.
“We had equipment down there that was at an age where we'd have to replace it,” Binder said, “and we were going to have to sign a new seven-year lease.” Security in Monterrey was a minor concern, he added. “You stay in safe places and you don't take cabs.”
Despite the go-go appearance of cities like Saltillo and Empalme, much of the Mexican economy is still mired in the sludge of government-supported monopolies. The biggest and potentially most productive of these monopolies is Pemex, the state-owned oil company, which provides more than 12% of U.S. crude oil imports. The potential is there, but the sometimes chaotically managed enterprise appears to be spinning its wheels, with production down in its huge Cantarell oil field in the Gulf of Mexico, even as oil prices have hit US$100 a barrel at times over the last year. The company reported that, for the seventh year in a row, its annual crude oil output had fallen, dropping by 1% in 2011.
Mexico's prospects, according to the World Bank, commerce associations and academics who study Latin America, appear to be good, if not wonderful. The World Bank last year reduced its growth expectations for Mexico—from 4% last year to 3.8% and a moderate 3.5% this year—largely because of the contagion of the euro's difficulties. “The unresolved eurozone sovereign debt crisis, fading market confidence, and the deteriorating economic outlook of advanced economies increase the odds of a new global crisis,” a World Bank spokesman said.
Still, Mexico appears poised to continue generating wealth for its citizens, attracting foreign investment and providing a market for U.S. products. The conditions are mostly in place, says Patrick Kilbride, senior director of Western Hemisphere Affairs for the U.S. Chamber of Commerce: Mexico scores relatively high on the ease-of-doing-business rankings, compiled by the World Economic Forum, which particularly highlights the ease of starting a new business there. Mexico also has a young population, with ample skilled workers. “There's certainly been an emphasis in Mexico on preparing technically trained workers,” Kilbride says.
Public education, dominated by a powerful teachers union, is in need of reform, with only 45% of Mexicans finishing high school (compared with 75% in the United States). But, at the upper levels, Mexico has been turning out more engineers annually. In 2006, there were 451,000 Mexicans enrolled in full-time engineering-degree programs, compared with about 370,000 Americans. U.S. employers say that there are still ample supplies of talented Mexican engineers who are up-to-date on advanced engineering technology.
The federal government has begun to address some of the issues that have held back the economy, such as the stranglehold of private and public monopolies. The Mexican telecommunications industry, dominated by América Móvil, Telmex and their owner, Carlos Slim Helú, the world's wealthiest person according to Forbes, offers telephone service that is among the most expensive in the world. State-run monopolies, like Pemex and the Comisión Federal de Electricidad, the largest power company, are infamous for their inefficiencies. Real reform is in the works, says Amy Glover, director of external affairs for the American Chamber of Commerce in Mexico, but it may not come until after this year's presidential election.
The impact of organized crime on business continues to be an issue, but not enough to keep Americans away. Glover insists that dire reports about businesses shutting down due to security considerations are inaccurate. “Our members are not pulling out of Mexico and many are increasing their stakes given the challenges faced in other parts of the world at the present time,” Glover says. “Mexico has its security challenges, but the business opportunities far outweigh the risks.”
The attitude among Americans operating plants in Mexico is one of stand-fast rather than despair at the bloodshed around them. One metals company that's holding on is The Steel Warehouse, a South Bend, Indiana-based firm that operates a temper mill in Monterrey. The company, which provides processing services for production-ready steel, staked out its Mexican site in 2006 and expanded last year with new laser cutting machinery and a new, fully equipped production bay. “Has it been a home run?” Vice President Mark Lerman asks rhetorically. “I don't think so. It's a competitively fierce battle down there.” Still, the company has found workers with technical skills, a rent-a-cop company to handle security and what he calls “the romance of low-cost labor.”
“Even in the most difficult scenarios in the world there are opportunities,” Lerman says. “We still see a brighter future.”
Edmund Newton is a Washington, D.C.-based writer, formerly of the L.A. Times, Newsday and the New York Post, as well as the former managing editor of New Times-Broward Palm Beach. He has written for, among others, The New York Times, Time, People, Daily News Sunday Magazine, Black Enterprise, the Ladies Home Journal, Essence and Audubon.