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Maquiladora: Curse or Opportunity for Nearshoring?

By Alfredo Nolasco-Meza - SPYRAL SA


By Alfredo Nolasco-Meza | CEO - Thu, 07/28/2022 - 13:00

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From early 2020 to 2021, many American and Western manufacturing companies had to dodge imposed tariffs on Chinese imports by the US government. The attraction of moving production to Mexico seemed clear. Mexico has offered, since 1994, a solid base of skilled workforce, good road and rail connections established maquiladora industry, and privileged trade access second to none in the Americas.

However, the thriving investment landscape that was expected has not materialized. The reason goes beyond the political environment created by AMLO-nomics that certainly don't help but are not, from my perspective, the leading cause of this economic bump in the Mexican foreign direct investment strategy. The rapid growth in US goods imports from Mexico that might have been expected had nearshoring taken off is missing. It rose by just 11.8 percent over three years, to US$384.6billion in 2021, according to the US Census Bureau — after allowing for inflation, the total increase was just under 4 percent.

Not Only Tariffs but Also Logistics

The global supply chain is at a critical moment. For many years, logistics was a "minor" issue focused on price due to the system's stability. Today, after the COVID pandemic disruption and other external factors like last year's Suez Canal closure, the latest Asian pandemic lockdowns, and the war in Ukraine, the need to strengthen the supply chain outweighs the cost and prioritizes reliability. There is a shift from “just in time” to “just in case.”

For businesses across North America, this change has been felt through a series of global supply chain crises, which have seen container costs skyrocket, ships stuck fully loaded at port entry, and a rise in the price and demand for warehousing rentals.

Only a handful of activities have remained unharmed, with clogged ports, sea containers stuck in all the wrong places, and some categories crippled by crisscrossing supply chains.

In 2021, a demand boom for industrial spaces kept the real estate business hot in Mexico. Earlier this year, Sergio Argüelles González, head of FINSA, said 2021 was a bumper year with "spectacular demand." He predicted this would continue.

Indeed, some countries have been on the bright side of such moves, such as Mexico (border towns), Turkey, Morocco (Tangier), and Central and Eastern Europe, serving the US and Europe, respectively.

Early evidence of a changing strategy includes toymaker Mattel announcing a US$50 million investment to expand its plant in Monterrey in March. Or Samsung Electronics are announcing its expansion in Tijuana and Queretaro for its home appliances business (US$500 million). Both examples look to feed their US business by backing up their logistics solutions and bringing former Asian product lines to avoid disrupting their supply chain.

In particular, operators emphasize real estate's critical availability of store components. More inventories require more logistics and space.

And Yet …

Foreign investors are not buying the whole enchilada. Given the current business environment in the country, a high-level executive from a Korean high-tech firm that plans to manufacture with a Chinese partner the main components for electric batteries for vehicles that will be produced in Arizona and Texas confided to me, "we don't want to be in Mexico, but we must relocate."

Many companies like this are actively looking for soft-landing solutions in the upper half of Mexico’s industrialized region. They are eager to find guidance in a complex regulatory, speculative, and uncertain horizon that Mexico represents.

At the same time, a seasoned leader in the manufacturing sector in Juarez commented: "Please don't bring more investors to the region. We're struggling with labor availability, and the cannibalizing spiral among maquiladoras is on the rise." He added: “Otherwise, we will tell the governor that we will bail out of the region because being here is just not cost-efficient.”

Independently of the foul political and safety environment, this brings us to the three main game-stoppers hurting our capacity to attract new companies to Mexico: workforce, electrical power availability, and industrial real estate availability.

In this article, I will only comment on the first factor: the workforce.

As incredible as it sounds, Mexico, a country of 120 million inhabitants, is starting to see a labor supply shortage. The COVID-19 pandemic and the "assistancialist" policies applied by the federal government have drastically reduced the available workforce in the industrial clusters of the country.

For example, a large community of out-of-state workers disappeared in the Juarez border town. The juarochos (a combination of Juárez and jarochos, or natives from the state of Veracruz) just returned to their homes where the combined family income is now higher than the salary they received from maquiladora operators, hence, inhibiting them from returning to the line.

Currently, in border cities like Tijuana, Mexicali, Hermosillo, Juarez, and even Monterrey, turnover of essential line work is up to 12-15 percent, according to the local INDEX chapters. Special hiring bonuses are being applied to retain the workforce, pushing the "low-cost labor advantage" up and making life harder for local managers trying to keep their costs low.

The Necessity to Evolve the Industry

Innovation and the introduction of new technologies could be the solution. Mexico needs to leap from low-cost manufacturing to mind manufacturing, increasing the productivity of the maquiladora system. At least that should be the theory, but we are way behind. Although efforts are underway today, the sad reality shows a disruption in the desire to implement new state-of-the-art technological solutions and cost containment at the mainstream manufacturing companies. For example, Chihuahua city is among the towns with the world's most sophisticated Dassault Systems aerospace design software. However, not a single aerospace company designs parts in the state where a handful of OEMs and T1s build primary components currently.

Until the integration of new technologies lies in the corporate HQ of the many international companies established in the country, the plant managers and other local executives will put in a Herculean effort to ignore and reject the introduction of new technologies, nor will they have the appetite for pushing for increasing productivity. Or will they?

In conclusion, the maquiladora scheme is exhausting. Definitively Mexico is and will be a sure bet for companies looking to maintain a strong presence in the North American market. It is not only the tariff barriers to entering the US market that should drive the investment decisions in the country. Location, mainly to solve logistics hindrances, is as essential as the latter. And even considering that fact, some domestic issues must be considered.

The reality is that companies are and will be looking for the most cost-efficient solutions.

Photo by:   Alfredo Nolasco-Meza

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