SURVEY: MANUFACTURING

The Tijuana triangle
Jun 18th 1998
From The Economist print edition

Mexico’s northern border is modern manufacturing on the
move

ONE night in 1959, a Mexican teenager was at a party in San
Diego in southern California. Among the cool new American friends
19-year-old Enrique Mier y Teran made that night was a
20-something American who said he was in business. What
business? “I have a factory making pincurl clips,” said the
American. This was still the 1950s, and the wannabe Rita
Hayworths of those days needed something to control their huge
hair bangs. Enrique laughed out loud. Offended, his new friend
invited him to visit his factory the next day.

As he went round the plant, he asked the American how much he
paid the 500 girls who operated the simple machinery and
assembled the plastic clips. The answer was $65 a week. “I could
get people to do that for 16 Mexican dollars a week,” said
Enrique—a 50th of what the American was paying. So the
American lent Enrique two machines, and he started making pincurl
clips in an old shed just over the border in Tijuana, to sell in
America. He paid no Mexican duties on the imported parts,
because he was in a free-trade zone by the border; and the
American customs were persuaded that the plastic parts were
going south for “repair”, which got round American duties on
re-entry. As the business grew, he got his businessman father to
help him. Thus was born one of the first maquiladora factories
along Mexico’s border with the United States. Now Mr Mier y Teran
owns an industrial park and a consultancy which advises
multinationals around the world how to do today what he started
doing 39 years ago.

The locals say this is the busiest border in the world. Last year
56m people and nearly 1m laden trucks crossed into the San Diego
area from Mexico (they don’t count the southbound traffic). A
huge sprawl of maquiladora factories have grown out of those
pincurl clips. Today nearly 4,000 such firms employ nearly 1m
workers in Mexico, making goods whose value-added worth is over
$7 billion a year. That puts them second only to oil in the Mexican
economy. Almost half of them make textiles or consumer
electronics. They are here because this border is a place where
the rich world and the poor world touch hands. With Mexican
wages only a quarter of American ones, that permits a spectacular
expression of the law of comparative advantage.

Put it another way. In deciding where to put a new factory, a
company has two main things in mind. It wants the cheapest
possible labour costs. But it also wants to be close enough to its
markets to respond to them swiftly and not to spend too much on
getting its goods to them. The Mexican borderland provides
American companies with a wonderful way of combining those two
desirable things.

Matters have changed since 1959, of course. In the pincurl-clip
days, when production was very basic, American companies would
ship part-finished textiles or toys across the border so that
hundreds of little Mexican sweat-shops could do the
labour-intensive parts of the manufacturing job and then ship them
back, sometimes before sundown the same day. The business
grew more sophisticated when it was agreed that the materials
and parts needed for manufacture could be imported free of normal
duties for up to a year. When the finished goods produced by
Mexican labour are exported from Mexico, duty is now charged
only on the value added in that country. Bingo. Cheap labour,
markets to hand, and a relaxed approach to what you are obliged
to pay the government.

Among the early arrivals were American car-parts makers seeking
cheap and nimble Mexican fingers to assemble seat covers, or tie
together the kilometres of electrical wiring that go into every
modern car. Then came American car-assembly plants. And in the
past few years the Americans have been followed by a wave of
investment from Japan and other Asian countries. These came for
the same two reasons that had pulled in the Americans—cheap
labour and modest transport costs. The Japanese found they
needed to pay local workers little or no more than they had been
paying those in South-East Asia. The South Koreans joined in
when their wage costs at home started to climb. They both
relished the idea of producing things inexpensively on the doorstep
of the United States. So now you have the Tijuana triangle:
American market, Asian investment, and Tijuana production.

The area around Tijuana, in the Mexican state of Baja California, is
home to the biggest group of maquiladoras, about 1,000 firms
employing 200,000 workers. Across the low, bare hills on the
eastern outskirts of Tijuana spreads a rash of new factories and
housing developments. The big products here are consumer
electronics, notably television sets, of which some 15m are
exported every year, mostly to the United States.

Among the Korean companies operating in the area is Samsung,
here since 1988, which makes cameras and television monitors in a
huge $2 billion plant. Hyundai has a large factory that
manufactures transport containers and lorry trailers. The
watch-towers manned by guards which ring these huge complexes
give them an uncomfortable resemblance to labour camps. The
Koreans’ management style can be harsh; protests against it have
led to a number of fierce labour disputes.

Japan is represented by consumer electronics firms such as Sony,
Hitachi, Matsushita and Sanyo; the latter is the area’s biggest
employer, with 4,500 workers. About 18 months ago Sanyo North
America moved its headquarters from New York to the outskirts of
San Diego. There sits its chairman, Motoharu Iue, just round the
corner from Sanyo’s little factory on the American side of the
border, where 100 workers produce a daily output of 800
mini-fridges (the sort that distinguish some hotel rooms from prison
cells). A mile or so down the road 650 Mexicans produce 6,000 of
the same things a day, for wages that are barely a fifth of what
the workers in the American factory get. That the latter still exists
seems rather quixotic.

Sanyo’s biggest product in Tijuana is television sets; its output of
3.5m sets a year is beaten only by Sony’s 6m. Mr Iue says that his
company used to do all its television work inside the United
States; now it does only some final assembly in Arkansas. Like
many bosses in Tijuana, he is keen to tell you that wages are a
small proportion of his total production costs, around 10%, and
that the real attraction of Tijuana is cheap materials and
components and the fact that it is easy to run just-in-time
production systems here. This is somewhat disingenuous. One
reason why wages are so small a part of total production costs is
that the wages are so low. And his suppliers can provide those
cheap components partly because they too pay such low wages.

But evening approaches

As you walk around Sanyo’s television plant, though, you are
struck by the amount of automation used in making the “mother
boards” that are the electronic innards of a set. Row upon row of
state-of-the-art automatic insertion machines whirl and turn their
little working heads to pop 16,000 pieces of circuits and
micro-electronic devices into place every hour. Downstairs, where
some of the clunkier gadgets (things the size of an aspirin tablet)
are plugged in by hand, there is another sign of creeping
automation. One line has about 20 workers; but another has
machines doing the jobs formerly done by 18 employees, with only
one worker stationed at each end to make sure all is going well.

Which shows that even in places like Tijuana, the heartland of the
maquiladoras, the stern laws of economics are at work. Once
purely an area of low-wage, low-value-added production, it is now
moving to a more developed form of industrialisation.

Unemployment is down to just over 1% (compared with an official
4.5% for Mexico as a whole). Labour turnover exceeds 15%, as
workers hop from one factory to another looking for a better deal.
Economists at the University of San Diego say that more than 12%
of the workers in Baja California are now classified as technicians.
Sanyo’s Mexican managers say their growing automation requires a
strong corps of experts to set up and maintain the expensive
equipment. Wage competition between companies still mainly takes
the form of fringe benefits, but the total cost of labour is creeping
up. The simple, labour-intensive work the Tijuana area started
with (sorting soap-powder coupons for Procter & Gamble, doing
wiring looms for General Motors) has long since drifted off to the
poorer parts of Mexico, or to other cheap-wage Latin American
countries such ase Guatemala.

The pressure is growing. The rules of the North American
Free-Trade Agreement (NAFTA), which embraces the United
States, Mexico and Canada, will soon require many of these
factories to buy 60-80% of their raw materials and parts inside
NAFTA’s borders, or face import duties. Since the United States
and Canada now produce virtually nothing in the way of consumer
electronics, this will increase the cost of the television tubes and
other components that companies like Sanyo buy from Asia, unless
that NAFTA rule gets changed (and unless the devaluation of East
Asian currencies caused by Asia’s recent economic troubles
cancels out the cost of the new duties). In the cut-throat market
for television sets, that could make all the difference.

Moreover, those Asian devaluations make Asia a sharper
competitor for the maquiladoras; their low-wage advantage is now
under challenge. Mr Iue has been doing a study of this for his
colleagues back in Japan. He is disinclined to shift production back
to Asia, mainly because that would hugely lengthen the distance
between his factories and their market in America. “But it is a big
problem,” he is obliged to admit.

Pretty clearly, things will be different in Tijuana five or ten years
from now. The existence of NAFTA, a free-trade area with 390m
people and $8.8 trillion-worth of output (twice as much as
Japan’s), will slowly make it a much more sophisticated economy.
Mexico’s borderland will no longer be just a home for the
maquiladoras. But history will be grateful for the lesson the
maquiladoras have provided. So will be the other parts of the
world to which their successors have profitably migrated.