Thursday, January 14 2016
By Ralph Biedermann, Managing Director of Mexico Consulting Associates
Although our memories often do not serve us well, this year marks the 50th birthday of what is still called today “Mexico’s Maquiladora Industry.” Established in 1965, the program known then as the Border Industrialization Program, was designed to bring economic development to the border region following the cancellation of the Bracero Program between the U.S. and Mexico. The Bracero Program came into being through Executive Order and interim agreements in July-August of 1942 and sought to allow Mexican laborers to legally enter the U.S. on a temporary basis to work in agriculture and the railroads. The final agreement between the countries went into effect on April 26, 1943 and lasted until December of 1964, when the program’s renewal failed to pass Congress. In its 22-year lifespan, over 4.5 million Mexican citizens legally worked in the U.S., primarily in Texas and California.
With the collapse of the Bracero Program, Mexico had a dilemma. The unemployed labor in the border cities, primarily men, that had resided in those cities temporarily while waiting for employment in the U.S. The government had attempted to develop the border area economically as early as the 1930s. And, in 1933 the government had developed a “Free Zone Law” in order to increase trade which began with Tijuana and moved east. In 1960 the government asked Jaime Bermudez of Cd. Juarez to head a new program, called the National Border Program (PRONAF), to transform the border region. When Bracero ended, the government decided to roll the basics of the National Border Program into a broader effort - the Border Industrialization Program (BIP). That was announced in May of 1965, became effective in August of 1966, and was fully implemented in 1967.
Those Early Years
Although the BIP had been given a number of names including “in-bond industry” and “twin-plant industry,” the term “maquiladora” or “maquila” industry stuck as is still in use today. For foreign and domestic companies wanting to use the new program, the choices for site selection were obviously limited to the border cities on the Mexican side. For a long period of time stretching even to the present day, the cities today, the cities of Tijuana, Cd. Juarez, and Matamoros were chosen due to population and associated available labor skills, infrastructure, trade flowing through them, and amenities available on the U.S. side – especially living conditions and quality of life for U.S. ex-pats working in Mexico during the day. In all, there were ten main cities along the Mexican side of the border that became the homes to maquiladora operations in the early stages. In addition to the above, the list included Mexicali, Nogales, Agua Prieta, Cd. Acuna, Piedras Negras, Nuevo Laredo and Reynosa. In the year of operation there were already 57 maquiladora operations. But, by 1975, there were 454 employing about 67,200 persons.
Expansion into the Interior
By the end of 2004, the border states’ percentage had dropped to 82 percent and the border cities dropped as well (down to 50.8 percent) - with the total number of plant operations increasing in the country to 2,800.
At the end of 2006, the Mexican government decided to bring three other export promotion programs, PITEX, ALTEX and ECEX, together with the maquila to form a new overall program, IMMEX. The PITEX, ALTEX and ECEX programs had similarities to maquila and had been utilized more by traditional Mexican manufacturing companies located in the industrial cities.
Its addition caused an uptick in all of the traditionally-measured figures or numbers of plants and numbers of employees. By the end of 2007, there were 5,138 IMMEX plants in the country employing 1.9 million workers. The percentage of border states employment had dropped to 60.6 percent of the total number; border cities employment had declined - to just 30.4 percent. Since then, the corresponding percentages have continued to decline even further.
So, what is the new “normal”? To shed some light on the growth of the interior region of the country, let’s look first at the reasons companies start a search in Mexico. And then we can outline the factors or parameters that affect the search. The following are several motives that can necessitate a search:
In the early years of the maquila/IMMEX program, the need to reduce labor costs appeared to be a foremost factor in the desire of companies to look at Mexico. Although this is still an important motive, in many of the location efforts today, a more important ingredient may be the relationship between the company and its higher tier customers. Particularly in the automotive industry, the establishment of manufacturing and assembly operations of auto OEMs in Mexico has generated more than just a “desire” of Tier 1s, 2s and 3s to be “closer” to their customers – it in many cases is a requirement. This is also true in the aerospace, medical device and appliance sectors as well. In addition, for global companies with operations in China, the increasing costs of manufacturing there to support the North American market has many thinking of locating closer to home.
Once a company has decided to conduct a search, there are a large number of factors or parameters which may be important in “driving” the direction of the search. These could include the following:
Each company has its own “culture” – ways of operating and making decisions. Smaller companies with little international operating experience may have issues with managing a project for a new location, possibly their first outside of their region let alone in a foreign country. It is important for them to consider as many factors as possible which could affect the viability of the project and the new operation. In all cases, due diligence is essential and outside assistance particularly from knowledgeable legal and tax counsel is a necessity. The determination of the start-up and operating costs on a pro forma basis for sites and relationships being considered and the comparison with the baseline costs back home will be vital in getting to a “go-no go” decision by management. And all of the factors and necessary due diligence homework has to be put into a realistic critical path for the companies to plan for and track. These are the requirements for a successful project that have remained unchanged over the years.
The Opportunities are Enormous
Bio: Ralph Biedermann is Managing Director of Mexico Consulting Associates and is a Board Member and Past President of the U.S.-Mexico Chamber of Commerce Mid America.