Mexico - production sharing with Mexican industry - Special Advertising Section

Nation's Business, May, 1988 by Jose Antonio Perez, Donald McCarthy

Mexico By Jose Antonio Perez and Donald McCarthy

Competitiveness is the name of the game in international trade these days. The move toward a more integrated international economy has forced U.S. producers to adopt new manufacturing strategies to maintain and increase their international price competitiveness.

One solution for U.S. producers has been production sharing, which comes about through partnerships between U.S. firms and developing countries in the internationalization of the production process.

Mexico's production-sharing industry, known as the maquiladoras industry, accounts for 54 percent of total production-sharing imports to the United States, according to a recent study by the U.S. International Trade Commission (ITC).

"Ninety percent of the maquiladora companies, without the option of locating along the Mexico-U.S. border, would have located in Asia, where labor costs are low and there is a reliable supply of materials, or they simply would have ceased doing business," says Rep. Jim Kolbe (R-Ariz).

Over the years, production sharing has grown enormously in Mexico as the Maquiladora Industry Program, aided by U.S. tariff items 806.30/807, has proved to be a profitable option for many U.S. firms striving to remain competitve in the face of ever-increasing international competition.

At the same time, the maquiladora industry has been one of the few bright spots in a trouble Mexican economy of late, emerging in the past few years as the third-largest foreign-currency earner, after oil and tourism.

The industry last year accounted for almost $1.5 billion in value added -- the measure of net foreign-currency earnings for the industry. It is expected that the maquiladora industry will employ about 390,000 Mexicans by the end of 1988.

The primary industries that use maquiladoras, or in-bond plants, are automotive, electronics, textiles, auto-parts, food-processing, electric machinery and equipment, toys and sporting goods, and medical supplies.

According to a study by the Border Trade Alliance, the maquiladora industry directly or indirectly supports more than 3,500 businesses employing 2.4 million U.S. workers plus thousands of smaller suppliers.

Maquiladoras are assembly plants operating in Mexico under special customs treatment and foreign-investment regulations. They import duty-free into Mexico machinery, equipment, spare parts, raw materials and components for the assembly or manufacture of semifinished products. Those products are exported back to the country of origin or to a third country.

The Mexican maquiladora industry uses about 95 percent U.S. components. The U.S. content of a maquiladora product receives duty-free treatment under 806/807.

Maquiladora growth, particularly along Mexico's northern border, has been explosive. In fact, production sharing has grown more in Mexico than in any of the other countries involved in these types of operations. The number of maquiladora plants operating in Mexico has blossomed from 600 in 1983 to close to 1,300 at the beginning of this year, and expectations are that during 1988 more than 200 new plants will be established in Mexico.

Almost 70 percent of Mexican maquiladora plants are U.S.-owned. The U.S. plants account for 82 percent of total maquiladora employment and 85 percent of value added for re-export.

Approximately 800 U.S. companies -- mainly large corporations -- operate one or more maquiladora plants. And while some additional large companies are expected to take the "Mexican option," the trend in the industry is toward more small and medium-sized firms.

Interestingly, the large corporations tend to locate in different areas of the country than do the small and medium-sized firms.

In Ciudad Juarez and Matamoros, along the Texas border, the presence of large, well-established industrial parks and the cities' geographical location have attracted many Fortune 500 firms from the eastern part of the United States.

Tijuana, near San Diego, tends to attract smaller, California-based firms, mainly from the electric and electronics industries.

Smaller companies that fit the profile of the potential maqualidora user are those in industries that face global competition but lack the financial and volume requirements to set up shop in, for example, the Far East.

Large, small or medium-sized, the types of companies locating in Mexico are those whose products are sold in price-sensitive markets in the United States and that confront stiff import competition.

Also characteristic of maquiladora users are production systems that can be easily divided into distinct tasks and that are at least somewhat labor-intensive.

For such companies, Mexico offers labor costs that are lower than costs in the Far East, as well as a quality labor force characterized by high productivity, a fast improving literacy rate and a family-oriented society, according to an ITC study of the global production-sharing industry.

Proximity to the United States also makes Mexico a profitable place to set up a production-sharing operation. Mexico's other advantages include: