Mexico’s manufacturers seek new markets

Mexico’s manufacturers seek new markets

By Adam Thomson in Ciudad Juarez

Published: February 12 2008 21:40 | Last updated: February 12 2008 21:40

Gaby, a young Mexican with long dark hair, tight faded jeans and a white puffy jacket, is at work assembling flat-screen televisions on a production line in Ciudad Juárez, just south of the border with El Paso, Texas.

Not so long ago, virtually all the screens that she assembles at the Taiwanese Tatung plant in Ciudad Juárez would have been destined for the US market. Today, however, at least 30 per cent of the 12,000 televisions a week that she and her colleagues put together go to other markets, including that of Mexico.

Such export-processing plants along the US border are known as maquiladoras. The sector was launched in the 1960s to take advantage of cheap labour and today employs almost 1.2m people.

Like the rest of Mexico, the sector is highly dependent on its mighty northern neighbour, with more than 80 per cent of its exports going to the US market. But that dependence has left it vulnerable to fluctuations in its neighbour’s economy.

In 2001, when the US economy began to suffer, Mexico and its maquiladora-dominated border cities suffered even more. According to government figures, employment in the sector fell from more than 1m at the end of 2001 to 815,000 in July 2003.

According to JPMorgan, 527 plants closed in the year to June 2002 and 215,000 workers lost jobs between June 2000 and the third quarter of 2003. Since industry restructuring began in mid-2001 to cope with US economic problems and, in particular, a sharp fall in US industrial production, about 14 per cent of all maquiladora companies have left.

Such startling changes of fortune give a clear idea not only of how sensitive the maquiladora sector has proved to be to US production, but also of how much Mexico depends on economic performance north of the Rio Grande. In recognition of this, the government of President Felipe Calderón last month cut its growth forecast for this year from 3.7 per cent to just 2.8 per cent.

But unlike during the previous slump in 2000 when the sector’s response to a US downturn was to slash the labour force and, in some cases, close down operations, maquiladoras this time seem to be taking different measures and adopting alternative strategies. Benito Rentería, deputy plant manager at Tatung, says his company intends to double TV production to about 25,000 a week from April. It will look to sell them in non-traditional markets such as Chile, Peru and Brazil rather than in the nearby US.

“These are not obvious markets for us but with what could happen in the US we believe it is important to diversify the countries we sell to,” he says.

One head of a large multinational company in Ciudad Juárez, who preferred to withhold her name, says one solution would be to attract packing and packaging suppliers to cut transport costs.

“As a sector, we spend $8.7bn a year on packaging. That gives you an idea of the potential for savings.”

In Tijuana, on the border with California, Kyocera, the Japanese manufacturer, hopes to absorb cuts of about 20 per cent of its workforce in its electronics division by expanding its solar panel business. In the city,as in Ciudad Juárez, there is little sign so far that companies are cutting jobs.

Jorge Pedroza, who heads the Association of Maquiladoras in Ciudad Juárez, says companies have opted to freeze their payroll rather than cut it. “They are partly pinning their hopes on the possibility that the US slump will be fairly short-lived, but also that they can make savings elsewhere and adapt their businesses,” he says.

If those strategies prove successful, they could contribute to Mexico’s attempts to withstand any fallout from the US downturn. But ultimately, Mr Pedroza says the sector will only be able to keep its present workforce and levels of production if the US downturn proves short-lived. “There is a lot we can do as a sector to diversify, cut costs and be creative, but we would be kidding ourselves if we thought that everything would be all right with a big US recession.”