November
2008 VOL. 2 
Mexico Manufactures Growth: Maquiladoras expands
It's been said that when the United States sneezes, Mexico catches pneumonia. But, that's not the case today, so you can keep your cough syrup in the medicine cabinet. Even as the U.S. teeters on the brink of recession, Mexico's economy is still growing – thanks in part to its maquiladora industry.
Moreover, Mexico is increasing its infrastructure investment by 50 percent through President Felipe Calderón's National Infrastructure Program. Mexico’s highway system will get the bulk of the new outlays for infrastructure, with 270 billion Mexican pesos dedicated to the construction, modernization and refurbishment of 10,937 miles of highway throughout the country.
These infrastructure investments, along with new and expanding maquiladoras, are giving rise to new industrial markets throughout the country and creating opportunities for commercial real estate investors and developers. "There's a real need for more industrial space, especially in areas where maquiladoras are expanding," says Len Staling, first vice president of research for ProLogis, a Denver, Colo.-based REIT that develops and owns industrial properties around the globe. It has 16 million square feet in Mexico alone. "Mexico is going to need new manufacturing and distribution facilities," he says.
Re-igniting the maquiladora industry
At the beginning of this decade, Mexico's maquiladora industry was in a major slump and there were concerns about the industry's future. What began as an economic development program in the 1960s to relieve unemployment and poverty in northern Mexico had become a major engine of Mexico's economy by 2000, providing jobs for 1.2 million workers – roughly a third of the country's manufacturing employment, according to the Federal Reserve Bank of Dallas.Maquiladoras allowed non-Mexican companies to take advantage of low-wage labor that performed unskilled manufacturing and assembly operations in Mexico. And, these foreign companies could also move goods across the U.S.-Mexico border duty-free. When the North American Free Trade Agreement (NAFTA) took effect in 1994, trade between Mexico and the U.S. mushroomed.
Under NAFTA, finished maquiladora goods were no longer required to be re-exported out of Mexico and were eligible for sale in Mexico. Moreover, import tax exemptions on inputs for maquiladoras operated by companies not based in NAFTA countries were eliminated.
Maquiladoras and NAFTA proved to be a far more potent economic elixir than anyone had foreseen at the outset, Staling notes. In Mexico, cities such as Tijuana, Reynosa, Matamoros, and Juarez experienced enormous job growth as U.S. companies set up maquiladoras, according to Jay Jessup, a real estate broker/site selection consultant with Mexico Services Group and author of Doing Business in Mexico.
In the U.S., a number of towns along the border – Laredo and El Paso, Texas, for example – experienced maquiladora-related growth. Every 10 percent increase in maquiladora production drove a 1.1 to 2 percent employment increase in the adjacent U.S. border city, according to the Federal Reserve Bank of Dallas.
During that period, border towns experienced a wave of industrial development. U.S. and European institutional investors partnered with Mexican developers to build industrial parks in the Mexican border towns, and these same investors partnered with U.S. industrial developers such as ProLogis to develop projects in the U.S., Jessup says.
CaliBaja Manufacturing Services is one company that operates a maquiladora in Mexico and a distribution facility in the U.S., according to Nick Caras, director of sales and business development. The company established its 150,000-square-foot maquiladora in 1994 in Mexicali, about 10 miles south of the California border. Its 40,000-square-foot distribution facility is located in Calexico, Calif.
By 2000, just six years after NAFTA, maquiladoras employed 17 percent of Mexico’s total workforce (more than double what it had been in 1994), and accounted for 25 percent of its total GDP and 48 percent of its total exports. Bilateral trade between Mexico and the U.S. increased from 23 percent in 1993 to around 40 percent of Mexico’s GDP in 2000, heightening Mexico’s vulnerability to U.S. economic swings.
When the U.S., the destination for nearly 90 percent of Mexico’s exports, slipped into a recession early in 2001, Mexico’s entire manufacturing sector fell even harder. In particular, the maquiladora industry lost employment and investment from U.S. companies as the U.S. manufacturing sector took a hit. "The rug was really pulled out from under Mexico's maquiladora industry," Staling notes.
Mexico's precarious situation was exacerbated by China's induction into the World Trade Organization. China's inclusion in the WTO gave it access to the world's industrial markets and firmly established China as the low-cost locale for U.S. manufacturing. China's low-skill workers were able to make everything from trousers to toys for less than Mexico's maquiladoras. "China's success was at the expense of Mexico," says Amanda Buie, director of research at ProLogis who wrote a report entitled Mexico's Maquiladoras: Climbing the Ladder of Success.
From 2001 to 2004, Mexico's exports languished under the pressure of China's emerging manufacturing sector. Chinese exporters to the U.S. appeared to gain the upper hand over their Mexican rivals, Buie notes, adding that the number of maquiladora plants fell by 28 percent, while overall maquiladora employment shrank 25 percent.
Pursuing skilled manufacturing
As China supplanted Mexico's role, Mexico fought fire with fire. By focusing on its strengths – proximity to the U.S. and strong intellectual property laws – Mexico was able to remake itself into a high-value manufacturing locale.And, perhaps even more importantly, Mexico has worked diligently to decrease its exports to the U.S. Today, roughly 70 percent of the country's exports go to its northern neighbor, while the remaining 30 percent is delivered around the globe. And, exports to non-U.S. regions are growing 20 percent to 40 percent annually, Buie notes.
Instead of making toys and shoes, Mexico has focused on manufacturing that required a level of skill and customization – industries such as aerospace, automotive, and electronics – and has successfully attracted new maquiladoras.
The maquiladora expansion is evident in the amount of deals Jessup has closed recently. The broker says that over the past five years, his firm has averaged a dozen site selection assignments totaling 4 million square feet annually. As of early October, it has completed about 20 site selections deals and about 4 million square feet of brokered industrial space, as well large portfolio acquisitions by U.S. and European institutional investors.
Globalization has contributed to Mexico establishing itself as a locale for aerospace manufacturing, Jessup says, pointing out that a number of non-U.S. aerospace companies have established a presence in Mexico. And, he says the booming aerospace markets are Queretaro, Mexicali and Chihuahua – cities not traditionally associated with maquiladora activity.
Aerospace employment increased from 75,000 jobs to 1.7 million jobs from 2001 to 2007, according to MexicoNow Research. The research firm also reported that annual investment in aerospace skyrocketed from $200 million to $400 million, while annual exports more than doubled from $270 million to $600 million. Across the country, aerospace maquiladora plants expanded from 65 to 150.
For example, Montreal, Canada-based Bombardier Aerospace has opened two manufacturing facilities totaling 200,000 square feet in the Queretaro Aerospace Park in central Mexico and has broken ground on a third facility, a 120,000-square-foot building that will be used to assemble the Learjet 85. Bombardier is the first tenant in the new 200-acre Aerospace Park, which is being developed by a joint venture between Mexican developer Vesta, GE Real Estate and GECAS.
With Bombardier as the anchor, the Queretaro Aerospace Park will eventually include around 2 million square feet of manufacturing and assembly space, according to Gabriel Cerdio, director of acquisitions and development for GE Real Estate Equity in Mexico. Over the next five years, he expects at least 10 more buildings ranging from 170,000 to 250,000 square feet to be built in the park for Bombardier and other aerospace companies.
Currently, Aircraft Braking Systems Corp., an English aerospace firm, is breaking ground with a 240,000 square foot facility and also one of Bombardier's third party logistics vendors is closing a 70,000-square-foot build-to-suit at the Aerospace Park. Additionally, the GE-Vesta partnership is negotiating with a large French aerospace company to lease 400,000 square feet in the park, Cerdio says.
"We see this as the birth of the aerospace industry in Mexico as these strong aerospace companies take space in our park," Cerdio says. "It makes a lot of sense that these companies want to be here. All the key elements are present – the increased productivity and the skill of the Mexican workers, who learn very quickly."
Bombardier reportedly negotiated one of the largest incentive packages granted by the Mexican government. As part of the package, the Mexican government agreed to build the first dedicated aerospace education and training facility in Mexico, located next to the Aerospace Park. The school represents a $50 million investment and serves as an incentive not only for Bombardier , but also for other aerospace firms to relocate to Mexico.
In addition to Bombardier, German-based EADS, for example, recently announced it planned to move 33 percent of its operations to Mexico. The company, which owns Airbus, is currently looking for space, according to sources.
Moreover, many first and second tier suppliers to companies like Bombardier are moving to Mexico as well. Goodrich recently broke ground on a 400,000-square-foot facility Mexicali, while Honeywell also leased more than 400,000 square feet.
Driving growth
Beyond aerospace, the maquiladora industry is actively growing in the automotive sector. While the industry has been largely dominated by American manufacturers in the past, most recently auto companies from other countries, especially Asia, have expanded or opened operations in Mexico.Mexico's production and export of cars climbed to all-time highs in 2006 and 2007, and last year the country became the 10th largest manufacturer of automobiles in the world. By 2011, it is expected to rank 5th. Last year, Mexico’s total car and parts production increased 5.9 percent, down from the 14.7 percent in 2006, but still enough to reach a record of 1.6 million vehicles produced.
At the same time, Mexico’s total automotive exports rose 6.1 percent in 2007, even as those to the U.S. shrank by 4.2 percent. Its exports to the European Union shot up by 58.5 percent and those to South America soared by 72.5 percent – albeit off of small bases, but enough to compensate for the decline in U.S. exports, Buie notes in her report.
Mexico’s newest car producer is the Chinese-based Chery Automotive. Last year, the company announced its decision to open a manufacturing facility in Mexico to produce low-cost vehicles for sale initially domestically with plans to later expand into Central and South America.
This year, maquiladoras have seen exports of auto parts soar. "Even though people are not buying new cars, they're fixing older cars," Buie notes.
That's one reason why U.S.-based transportation and logistics company Pilot is experiencing a surge in its business. The company, which focuses on the automotive industry and works with tier one suppliers like Bose, has seen a lot of growth in the maquiladora markets of Monterrey and Saltillo, according to John Mallon, a national account manager for Pilot.
Mexico has also found success manufacturing high-end electronics that require more engineering – computers, routers, set-top boxes and medical devices. In fact, Mexico’s electronics exports grew nearly 75 percent from 2003 to 2007, according to Buie. Moreover, maquiladoras produced 17.5 million television and computer screens last year, making it the world’s number-one producer of screens. Looking ahead, Mexico’s electronics industry is projected to grow 13.5 percent a year during the next five years, primarily in Tijuana and Guadalajara.
"Overall, Mexico's maquiladora industry is better suited today to handle a downturn in the U.S. economy than it was before," Buie says. "And it's well-positioned to be competitive in the future."