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Strategies & Market Trends : China Warehouse- More Than Crockery -- Ignore unavailable to you. Want to Upgrade?

To: RealMuLan who wrote (5898)	5/20/2006 9:16:15 PM
From: RealMuLan	Read Replies (2) \| Respond to of 6370

Economy: What China Threat? Mexico's manufacturing slump was the result of its own problems, not rising competition from the East. By Joseph Contreras Newsweek International May 15-22, 2006 issue - Sinophobia was short-lived in Mexico. As the only big manufacturing exporter to the United States in Latin America, Mexico was uniquely worried about the threat posed by cheaper labor in Asia. More than 800 assembly plants known as maquiladoras closed their doors between 2001 and 2004, resulting in the loss of over 200,000 jobs. From late 2001 through 2003, the maquiladora industry shrank by 0.4 percent annually, and everyone assumed they knew the cause. The "China threat" quickly became the stuff of popular headlines—and has faded just as quickly now that Mexico is back. Story continues below ? advertisement And how: manufacturing output is soaring again, and exports rose 26 percent in the first quarter this year, lifting Mexico's trade surplus to its highest level in nearly a decade. Alfredo Thorne, senior Latin America economist for JPMorgan Chase, says in a recent report that the diagnosis behind the China scare was "hasty and superficial": Mexico's slump was due mainly to internal factors. Yet fear of China also helped spur recovery by triggering an aggressive response from Mexican companies. They shifted from cheap exports like $199 TVs into more-valuable export products like fiber-optic transmission equipment, and took steps to remedy the slowdown in productivity and run-up in labor costs that were the primary causes of the manufacturing recession. Those moves in turn helped lure back foreign investors, whose capital drives the maquiladoras. The lesson: no question China is a competitive threat, but it is not the bogeyman behind every piece of bad economic news. Mexico learned that lesson the hard way. Its manufacturing industry is centered in states on the U.S. border, which are reminiscent in some ways of the boom provinces of southern China. And the western state of Jalisco has emerged as the Silicon Valley of Mexico. The capital city of Guadalajara hosts giants like Hewlett-Packard and Texas Instruments, as well as subcontractors that build the printers and laptops sold under those brand names. During the slump, two such subcontractors—On Semiconductors and Multek—closed their plants. Some firms that remained began to transfer operations to China. "We lost several production lines—low-cost ink-jet printers, laptops, cell phones—that moved to China," says Federico Lepe, Jalisco's deputy secretary for foreign trade and investment. "We needed to transform ourselves from being a perspiration industry to an inspiration industry." And so they did: the plant outside Guadalajara where IBM began making electronic typewriters in 1975 now makes high-capacity data-storage cartridges and assembles self-service kiosks for clients like DHL. Electronics companies accounted for nearly 77 percent of the $15.5 billion in annual exports from Jalisco last year, up from 55 percent in the slump year of 2003. The resurgence of Mexican manufacturing companies is all the more remarkable, Thorne says, because they received little help from the top. President Vicente Fox took office in 2000 vowing to make Mexico more competitive by reforming its tax code and changing labor laws to make it easier for employers to dismiss unproductive workers. The opposition parties have stymied those reforms. But in the past two years, Mexican corporations have managed to slow the increase in real hourly wages from 12 percent in 2001 to a mere 0.3 percent last year. Foreign investors responded by raising the amounts they poured into the Mexican manufacturing sector from $6.2 billion a year in 2002-2003 to $8.5 billion a year in 2004-2005. Mexico's rebound is a reminder that geography still matters. As transportation costs mount, Mexico's advantages over China are particularly obvious for makers of cars and other bulky items. California-based Sanmina-SCI supplies more than 20 blue-chip corporate clients from its operations in Mexico. Its five plants in Guadalajara produce everything from MRI body scanners for Philips to auto components for Ford, GM and Chrysler. It promises to meet any U.S. order within 24 to 48 hours and stay abreast of the demands of consumer-electronics makers, which change product lineups every three to six months. Chinese firms, who lose five to six weeks shipping to the United States by sea, can't keep up. "If you were to order ice cream from China you would get five containers of vanilla," says Marco Gonzalez Hagelsieb, senior vice president of Mexico operations for Sanmina-SCI. "Whereas Mexico is Baskin-Robbins: we can mix and match flavors and deliver the ice cream the next day." If anything, Mexico's new worry may be overconfidence. China recently overtook Mexico as the second largest exporter to the United States after Canada. The factories that once produced cheap goods like shoes and textiles will never come back. In the latest Global Information Technology Report survey of national IT preparedness, Mexico slipped to 60th place from 44th. A U.S. official, who requests anonymity to speak frankly about Mexico, says "the manufacturing uptick is positive" but reflects no new innovation or strategy. "They're still sending 90 percent of their products to the U.S., and as soon as our economy goes south, so will theirs." The point is that Mexico should not confine itself to its own backyard. Thorne says the country's next president, who will be elected in July, needs a competitiveness policy, including a plan to improve Mexico's infrastructure—from roads to broadband—which now lags behind many Asian countries. Mexico will have made it when it has the clout to compete with China in global markets, not just in the United States. © 2006 Newsweek, Inc. msnbc.msn.com