Hi Mark, following on to my earlier comment about Mexico, the Mexicans are getting paid too much for what they do:0)
quote.bloomberg.com
10/29 01:06
Mexican Plants Flee to China, Endangering $77 Billion Industry
By Thomas Black
Monterrey, Mexico, Oct. 29 (Bloomberg) -- Teresa Colunga, a 41-year-old widow with three school-age children, barely scrapes by on the 738 pesos ($73.40) a week she makes at Royal Philips Electronics NV's computer monitor factory in Ciudad Juarez, Mexico.
In August, she says, the plant manager told her and coworkers that their wages were too high compared with pay in China, where Philips is moving the factory that once employed more than 1,000 people.
``With my salary, I only live day to day,'' Colunga says, speaking after her eight-hour shift screening monitors for defects. ``Now, how am I going to make it?''
When the Philips plant closes by year's end, Colunga will join the more than 50,000 factory workers who have lost jobs in this city across the Rio Grande from El Paso, Texas. The firings pushed Juarez's unemployment rate to a seven-year high of 4.6 percent in April. All told, 529 factories and 223,000 related jobs have left Mexico since December 2000, according to statistics agency Inegi.
The exodus of manufacturing plants is rippling through Mexico's economy, as it did in the U.S. and Europe during the 1990s, when factories moved to Asia chasing lower wages and cheaper parts. What's surprising about Mexico, analysts say, is that it's the first developing country outside Asia to face the upheaval that rising wages can bring.
Ripple Effect
Mexican factory workers earn about $3,300 a year without bonuses and benefits, according to Anthony Gillam at Mercer Human Resource Consulting in Miami. Skilled Chinese laborers earn about $2,000.
``In the last 10 years, I have seen the American factories closing, then the northern Europeans, now the Mexicans,'' says Norman Cheng, who owns two sports helmet factories in China that gained business when plants in Tijuana, Mexico, shut down.
Mexico's factory loss is especially troublesome because it affects plants like Philips's, known as maquiladoras. The 3,500 foreign-owned factories anchor Mexico's economy by producing $77 billion of exports, almost half of the country's $158 billion in exports.
The Mexican government set up the maquiladora system in 1965 to encourage investment by letting foreign-owned plants import materials and equipment duty free to make products for export. The term comes from the Spanish word maquilar, a reference to the old- time process of taking crops like corn to other agents to be ground into meal. Maquiladoras today build and export everything from leather furniture to computers.
Victims of Their Success
The 1994 North American Free Trade Agreement, which lowered trade barriers between the U.S., Canada and Mexico, gave maquiladoras a boost. Lured by the right to ship products duty free into the U.S., even Asian companies like Tokyo-based Sony Corp. set up manufacturing plants in Mexico.
Now the maquiladoras are becoming victims of their initial success. The wages and benefits given to maquiladora employees have risen 86 percent to an average of $6,490 a year in the past five years, pricing workers like Colunga out of the market.
Last year, maquiladora salaries increased 7.2 percent on top of Mexico's 4.4 percent inflation rate. The peso's 28 percent gain against the U.S. dollar during the past three years -- a rise that includes inflation -- boosted maquiladora expenses further by making energy and other peso-linked costs higher for the dollar- earning plants.
``What has to be surprising and disappointing to Mexican policy makers is, the advantages of Nafta aren't sufficient to overcome this market challenge,'' says Peter Smith, an international-relations professor at the University of California, San Diego, and lead editor of a book on East Asia and Latin America set for February publication.
Dollars Go to China
Investment dollars are flowing into China instead of Mexico and other countries. In the first half of 2002, direct foreign investment in Mexico dropped 15 percent to $6.1 billion. Investment in China rose 19 percent to $24.6 billion, according to China's Ministry of Foreign Trade and Economic Cooperation.
This year, China overtook the U.S. as the most attractive destination for foreign direct investment, according to the FDI confidence index, an annual survey of executives at the world's 1,000 biggest companies. Mexico slipped to ninth place from fifth.
``Mexico is no longer a favorite location for global manufacturing companies,'' says Rogelio Ramirez de la O, president of Mexico City-based consulting firm Ecanal SA, which analyzes Mexico's economic prospects.
WTO Membership
China's December entry into the World Trade Organization has been another blow to Mexico. WTO membership gives China greater access to the U.S., to which Mexico sells about 85 percent of its exports.
Last year, China's exports to the U.S. climbed 2.3 percent to $102 billion, while Mexican exports to its northern neighbor fell 3.3 percent to $131 billion, according to the U.S. Census Bureau.
At the same time, the WTO provides better safeguards against piracy and technology theft for factories that move to China, says Eric Miscoll, senior consultant at Technology Forecasters Inc. in Alameda, California. ``Everybody has been concerned about China's intellectual property issue,'' says Miscoll. ``This addresses some of the investment concerns about China.''
The turmoil in the maquiladora industry jeopardizes President Vicente Fox's pledge to keep Mexico's economy growing and boost foreign investment to $20 billion a year from an average of $13.5 billion a year since 1995. In 2001, gross domestic product fell 0.3 percent after rising more than 5 percent a year since 1996.
Educating Workers
Fox's effort to prepare Mexico's workforce for technically rigorous jobs not available in China has stalled too. In December, the Mexican Congress rejected Fox's proposal to increase tax collection by about $12 billion this year, a cornerstone of his plan to pump money into education. Without the funds, the push toward high-skilled labor has slowed just as wage increases have erased the country's low-wage advantage.
``Excessive salary increases over and above productivity are clearly going to have a detrimental impact on the economy,'' says Michael Hughes, who helps manage more than $5 billion in emerging- markets funds at JP Morgan Fleming Asset Management in London.
Mexican workers' comparatively high salaries leave openings for people like David Yu, vice president of business development at privately owned I/O Interconnect in Santa Ana, California. I/O, a so-called contract manufacturer, runs factories in China that make products for other companies.
Yu says he cold calls plants in Mexico to ask managers whether they want to save money. Once he's got an executive's ear, he says he can arrange for low-cost suppliers as well as six months of free apprenticeships and government-supported tax breaks available to his company. In return, the Mexican operation must move manufacturing to I/O plants in Shanghai or Shenzhen.
Fighting Back
Yu, who declined to identify the companies he's targeted, blames Mexico for failing to react to pressure from China. ``The Mexican government doesn't promote aggressively enough,'' says Yu, who has dual U.S. and Taiwanese citizenship. He estimates 50 electronics plants a year will move to China from Mexico to cut costs.
Mexican Economy Secretary Luis Ernesto Derbez says his country will file a complaint with the WTO if China doesn't phase out tax breaks and other perks during a three-year transition period allowed under WTO guidelines.
``It's not right for them to subsidize investment, because it takes away our ability to compete,'' Derbez told journalists in July.
China seduced Flextronics International Ltd., a Singapore- based contract manufacturer that employs 70,000 workers in 28 countries. By December, Flextronics plans to stop making Microsoft Corp.'s Xbox game console in Guadalajara, Mexico, and transfer production to Doumen, China.
Suppliers Move Too
For Flextronics, a selling point was China's ability to offer cheap parts like circuit boards, says Jim Sacherman, chief marketing officer. ``What makes China beneficial right now is that they've managed build up a great supply base of components,'' he says.
Many suppliers in China are Taiwanese-owned businesses like Nichibo Motor's plant in Shenzhen and Sunf Pu Technology Co.'s two cable factories in Guangdong province. Those and other factories in Malaysia and Singapore have relocated in their own bids to reduce costs. The Chinese city of Shenzhen, with a population of 5 million, has 300 makers of electronic cable, Sacherman says.
Low-cost supplies are important in electronics, an industry in which materials and parts make up 80 percent of manufacturing costs, says Marvin MaGee, president of Celestica Inc., a contract manufacturer in Toronto. While MaGee says Mexico has developed good suppliers of plastic and metal parts, Celestica imports electronic components from Asia.
``China is particularly attractive for some higher-volume products where the supply chain is well established,'' he says.
Caring About Costs
Yu estimates that access to cheap parts and labor in China can save companies about 15 percent on production compared with Mexican factories -- a key incentive as demand slows and prices drop for audio and video equipment, televisions and game consoles.
``Two years ago, a lot of customers were saying, `I need product tomorrow, and I don't care how much it costs,''' says Sacherman. ``Now they're saying, `I care a lot about costs, and tell me when it gets here.'''
When factories abandon Mexico, suppliers across the border feel the loss. About 26,000 U.S. companies provide Mexican plants with everything from plastic fasteners to bar code-marking machines, says Martha Tovar, president of El Paso-based Solunet Info-Mex Inc., a maquiladora consultant.
Last year, maquiladoras imported $61 billion of materials, most of them from U.S. suppliers, according to statistics agency Inegi.
``If these factories move out, our business moves out with them, and then it goes to an Asian supplier,'' says Rick Otis, owner of RPM Material Handling Co., which sells forklifts and parts to the Tijuana plant of San Diego-based Lamkin Corp.
Electronics Exodus
Lamkin chose China over Mexico when it expanded its golf grip- making plant. Otis declined to say how Lamkin's move has affected the company's sales.
Mexican officials are especially concerned about the electronics industry, which racked up exports of $43 billion and employed 360,000 last year. In September, Mexico's Economy Ministry changed the tax law to let 3,500 types of components enter the country duty free; some of the components had previously faced 18 percent tariffs.
``We can't wait to have a study and a plan and then wait for results, because the companies aren't going to wait,'' says Rocio Ruiz, deputy secretary of interior commerce at Mexico's Economy Ministry.
Tovar says the government's reaction has been neither comprehensive nor timely. ``They've never had a plan to promote Mexico,'' she says.
Instead of giving companies incentives to locate in Mexico, authorities have made it complicated and expensive, she says.
Delphi's Concern
In the mid-1990s, in an effort to boost taxable income, Mexican tax law began forcing maquiladoras to charge parent companies fair market prices for work done in Mexico.
Delphi Automotive Systems Corp., the largest maquiladora operator -- with 57 factories and more than 70,000 employees in Mexico -- had to hire an army of consultants and accountants to comply, says Jim Whitson, chief tax officer at Delphi in Troy, Michigan.
Delphi has spent almost $1 million since 2000 to present its case to Mexican authorities, Whitson says. Delphi must calculate the charge to the parent company for work done in Mexico and then must persuade tax officials in Mexico City to accept the figure. The so-called transfer-pricing agreements for 1996 through 1999 finally got settled last year, Whitson says. Agreements for 2000 and 2001 are pending.
Extra Costs
Taxes in Mexico are higher than in China, Whitson says. Delphi, the world's largest auto-parts producer, pays a 10 percent tax on the profit it makes in China compared with a 35 percent tax in Mexico. Mexico also taxes local payrolls and forces companies to share profits with employees, he says.
``Our CEO is quite aware of the level of tax we're paying in Mexico and has expressed concern about that at senior levels of the Mexican government,'' Whitson says.
Companies run into extra costs from Mexico's state-run monopolies. Gasoline sells for $2.40 a gallon -- about $1 more than across the border. Electricity costs 10 percent more than in the U.S. and 40 percent more than in China, the Economy Ministry says. Trucks shipping goods pay a $34 toll to use a 76-mile highway linking the industrial city of Monterrey with Nuevo Laredo, near the Texas border.
``There comes a point where the cost of doing business becomes so high that just being close to the U.S. isn't a benefit,'' Tovar says.
Shipping Delay
Not all factories in Mexico are suited for China, say executives at Flextronics and Celestica. A product that's complex or that changes design frequently requires close collaboration between U.S.-based engineers and plant technicians.
``To get to China, it's an 18-hour ordeal,'' Flextronics' Sacherman says. ``To Mexico, it's a four-hour flight.''
Products shipped to the U.S. from China take up to four weeks to arrive compared with less than two days from Mexico.
The delay kept Flextronics from starting production of the Xbox in China because of a tight deadline for getting the consoles in stores before Christmas two years ago.
Mexico is learning that it can't rely solely on its proximity to the U.S., says Sergio Tagliapietra, secretary of economic development in the state of Baja California, which is the home of a third of Mexico's maquiladoras. The country needs skilled workers and better roads and utilities to be competitive.
Deeper Changes
``We're not betting on low-wage projects anymore,'' Tagliapietra says. ``We've been raising our levels of infrastructure, labor skills and education to change from being a state that assembles products to one that does investigation, development and manufacturing.''
Baja California has opened offices in Madrid and New York to promote the state and runs a center that trains workers, conducts market studies and matches suppliers with manufacturers.
The changes have to go deeper, says Ruiz at Mexico's Economy Ministry. Fox and the Congress must agree on plans for tax collection, education, labor and energy. ``We've based our growth on economic stability, low wages and free trade,'' Ruiz says. ``These are necessary conditions but not sufficient anymore.''
Colunga, the Juarez factory worker, found that earning bonuses for punctuality and helping her Philips factory win quality awards weren't enough to save her job. Even with 20 years of experience, she's unsure she'll find work at another plant.
``It makes me sad to think I have to start all over again,'' she says.
As factories flee Mexico for the low-cost promises of China, the maquiladora industry itself must figure out how to adjust to its new reality -- or risk having to start over again too. |
