So Much For NAFTA
Kerry A. Dolan, 06.06.03 [ed: from Forbes]
Vicente Fox faces a problem that Mexico's previous presidents never dealt with: an overpaid workforce. His countrymen earn only a fraction of what U.S. workers earn, but they are paid four times more than workers in China. Manufacturers who went south of the border in search of cheap labor now are heading across the Pacific, putting a crimp in Mexico's growth prospects.
Between January 2001 and December 2002, the maquiladora, or manufacture-for-export sector in Mexico, lost 230,000 jobs out of a total 1.3 million as hundreds of companies either shifted production out of Mexico or shut down completely. The North American Free Trade Agreement, approved a decade ago, helped raise Mexico's share of U.S. imports from 7.3% in 1993 to 11.6% in 2002. But now China, which had only 5.4% of U.S. imports in 1993, looks set to overtake Mexico this year with the second-largest share of U.S. imports, after Canada.
Mexico could catch a break if the SARS virus persists or spreads in Asia. So far, SARS hasn't prompted any factories to decamp to Mexico. But there have been some ripples. "We're starting to hear discussions of small pieces of some manufacturing contracts being moved back to Mexico," says Christopher Lippincott, analyst at McDonald Investments in New York.
Customers of Flextronics International (nasdaq: FLEX - news - people ), whose products include printers for Hewlett-Packard (nyse: HPQ - news - people ) and the Xbox for Microsoft (nasdaq: MSFT - news - people ), have asked for contingency plans in case manufacturing is disrupted in China. The Mexican government, out of propriety, is being careful not to exploit SARS.
No matter what happens with SARS, President Fox has his work cut out for him. When he took office in December 2000--the first opposition leader in seven decades--he had high hopes for robust economic growth. But so far he has done little to help Mexico win back lost business. Mexican GDP growth fell from 7% in 2000 to 0.9% last year. Sure, some blame lies with the weak global economy. Plus, the opposition-controlled Mexican Congress has made it hard for Fox to pass much-needed reforms.
Still, Fox admits that China poses a big challenge. "We can't compete on cheap labor anymore," he told us in an interview at his presidential office. "Mexico has other advantages to offer investors. One has to do with talent," he says, noting that the auto industry has moved some of its design and engineering centers to Mexico.
It's happened with technology products, too. Solectron (nyse: SLR - news - people ), a contract manufacturer, has moved production of more complex products like high-end servers and set-top boxes from the U.S. to Mexico in recent years. But Alejandro Gomez, senior vice president for Solectron's Latin America business, says a lack of skilled workers could crimp that growth. "We continue to need more technical capability," he says.
In boom times, Mexico's high corporate tax rates didn't matter much. But that's changed. "One of Mexico's problems is they don't provide tax incentives," says Michael Marks, chief executive of Flextronics. When Flextronics opened its factory in Guadalajara in 1997, it had to dig its own wells for water and spent $1.5 million building a power plant. "It's the only country I know where we've done that," says Marks, whose firm has factories in 28 countries.
Fox's response: a gradual reduction of the corporate tax rate to 30% from 34%. Another tax incentive allows companies that set up anywhere save for three of the country's biggest cities--Mexico City, Monterrey and Guadalajara--to accelerate deduction of investment costs. Fox's effort to get more comprehensive fiscal reforms through the Congress--including a 15% value-added tax on food and medicine--failed.
Another issue on Fox's plate: the cost of energy. Companies like Solectron pay 10% to 12% more for electricity in Mexico than in other countries. Fox has submitted a bill to Congress to further open the market for electricity generation and production. "We are not trying to privatize [the state company]," he says pointedly. Meanwhile, he cites $20 billion in energy investment this year and the construction or completion of 26 electricity plants. With this, says Fox, "we have fully covered the [electricity] needs that we will require until 2006."
Then there's the volatile Mexican peso. Fox could call for a strong and stable currency, but he hasn't. Exporters complained as the peso flopped around and ultimately strengthened 13% between 1999 and April 2002, increasing their costs in dollar terms. A year later, the peso had weakened 13%, muting exporters' gripes. Fox says he's had no role in this: "That's a matter that falls to the central bank, which is autonomous and independent. What we have is a floating system: We don't maneuver, we don't adjust."
But such currency volatility isn't good for business. If Mexico had a strong and stable currency policy, writes Bear Stearns chief global economist David Malpass in a March report, its growth would rival China's.
Plain old red tape also makes it harder for Mexico to grow. San Diego businessman John Riley, whose firm handles legal and administrative issues for companies with export factories in Mexico, figures the administrative burden that's grown since NAFTA was implemented in 1993 has increased his cost of doing business as much as 20%. Reason: In an effort to tighten loopholes, the government keeps creating new regulations for things like accounting and tracking components.
Fox promises he'll soon issue a decree to tackle some of the obstacles for the maquiladora industry. It will streamline administrative requirements for companies with more than one factory in Mexico, says Eduardo Sojo, Fox's chief of staff.
But there's plenty of skepticism on both sides of the border. "There's been a collapse of expectations in terms of what [Fox] has promised and what he's been able to start implementing," observes Rogelio Ramirez de la O, an independent economist in Mexico City.
Says Richard Caldwell, president of the Western Maquiladora Trade Association in San Diego: "There's more that [the Mexican government] could do. They don't quite comprehend the gravity of the situation." |
