Mexico Reclaiming Manufacturing StatusMexico Reclaiming Manufacturing Status

SOUTHFIELD, MI – Manufacturing companies are flocking to Mexico again after a 6-year respite following the U.S. Sept. 11 terrorist attacks, a panel of industry experts says at “The Resurgence of Mexico” conference here.

As production in the U.S. slowed following the attacks, the effects almost immediately were felt by Mexico, which had seen an influx of foreign investment throughout the 1990s, says Scott Sneckenberger, a Mexico and Latin America specialist with the Plante & Moran consulting firm.

“Many of those U.S.-based manufacturers looked to make cuts in Mexico,” he says. “For whatever reason, when U.S. manufacturers experience a downturn, Mexico sees an amplified effect.”

Adding to Mexico’s woes was China’s entry into the World Trade Organization in December 2001, Sneckenberger says, noting that just two months after the terrorist attacks China emerged as a huge market with low labor rates, promises of a simple (business) setup process and other incentives.

“Mexico took a hit there also,” he says.

Fast forward six years, and China remains Mexico’s prime competition for manufacturers in search of low-cost labor. However, wages in the two countries, although far below those in the U.S., favor China, Sneckenberger says.

According to Plante & Moran, a “semi-skilled” plant worker in Mexico earns an average of $2.60 per hour, while his Chinese equivalent receives $1.20 or less. When benefits are added into the equation, those numbers near $2.00-$2.50 per hour in China and about $4 per hour in Mexico.

Ford Fusion output ceased last month following gas pipeline bombings.

However, it’sa different story when it comes to plant managers. In both countries, the annual wage of managerial workers is about $60,000 annually, Sneckenberger says.

“You aren’t going to go in and hire an experienced, bilingual plant manger that you’re going to be comfortable with reviewing and controlling your facility for $12 an hour. It’s just not going to happen,” he says, noting demand is so great for such managers that they can relocate just about anywhere, including the U.S., for twice the salary.

Despite the labor discrepancies, Mexico offers several advantages that China cannot match, including its proximity to the U.S.

Shipping from China to the U.S. takes approximately four to five weeks compared with five business days from the southern most part of Mexico to the northern most point of the U.S., Sneckenberger says.

The difference especially is important to producers of larger, more-complicated products, such as automobiles.

“When a product is going to sit on a boat for four to six weeks, there could be multiple engineering changes that occur over that time period,” Sneckenberger tells Ward’s.

“That could be a concern if you have to remanufacture or rework a part once it gets here. The cost savings you might have enjoyed manufacturing in China versus a place like Mexico (could) be lost.”

Another advantage offered by Mexico is its strong intellectual property laws, which China lacks. It’s not uncommon for a Chinese manufacturer to produce identical copies of a competitor’s product, a practice that is not tolerated by the Mexican government, says David Santoyo-Amador, an associate with consultancy firm Baker & McKenzie.

“Mexico has very strong copyright laws that protect all proprietary and confidential information,” Santoyo-Amador tells Ward’s.

Other advantages Mexico has over China include a large skilled-labor force, political stability, better utility infrastructure and free-trade agreements, which allow U.S. manufacturers to trade with Argentina and Brazil, two countries that do not have FTAs with the U.S., Sneckenberger says.

“U.S.-based manufacturers are interested in selling their products in Brazil and Argentina,” he says. “But because of high-duty rates, they can’t be competitive.”

“But if you can take components from the U.S., assemble them in Mexico and then ship them down to Brazil or Argentina, (they) can qualify under the free-trade program.”

While there are definite advantages to producing products in Mexico, deciphering the country’s tax and import/export regulations can be daunting and if done wrong can lead to financial woes, Sneckenberger says.

In the past, foreign manufacturers could operate in Mexico as either a maquiladora or a Pitex corporation.

The Mexican government issued the maquiladora decree in 1965 to stimulate the economy and produce jobs. Initially only open to the border region, the decree invited foreign companies to set up shop for export purposes, essentially allowing them to import materials to produce the export-bound goods duty free.

The program was a resounding success, but eventually Mexican companies began to complain the maquiladoras had an unfair tax advantage.

To appease domestic makers, the government launched the Pitex program in the early 1970s, which provided locals with similar breaks. But because they were Mexican companies, they were allowed to export to the U.S.

In the 1980s, U.S. maquiladoras found a way to get the best of both worlds. By registering with the Mexican government, U.S. maquiladora corporations officially became Mexican companies and switched to Pitex status, which allowed them to export and import with the same benefits as well as sell their products domestically.

In 2000, the Mexican government began imposing taxes on maquiladoras, similar to those paid by domestic Pitex companies. But the plan backfired, and Mexico was faced with a mass exodus of businesses. In response, the government cut taxes on maquiladoras to half the Pitex rate. Over time, restrictions on selling within Mexico also were dropped.

In an effort to simplify the tax structure, late last year the Mexican government combined the Pitex and maquiladora programs, forming the IMMEX.

The latest program maintains most of the features available under the maquiladora and Pitex schemes while also providing additional benefits and obligations, Sneckenberger says.

“It’s a customs program, not a tax-incentive program, that allows you to bring product into Mexico on a temporary importation basis,” he says. “You can directly or indirectly alter that part as it goes to the manufacturing process and it’s either indirectly or directly exported.”

Under IMMEX, raw materials can be imported without paying duty or value-added tax on the goods, Sneckenberger says. In addition, related machinery and equipment also may be imported temporarily free from duties and taxes.

About 90% of the businesses Sneckenberger advises operate under the IMMEX program, for which it takes about two months to register and receive confirmation. To qualify, exports must amount to $500,000, or 10% of the company’s total invoicing value.

To import machinery and equipment without duties or value-added tax, 30% of total sales must be invoiced abroad. Additionally, export goods must be equal to the value of machinery and equipment previously imported within two years of operation.

A potential pitfall of the program is the possibility of backlash from Mexican employees, Sneckenberger says. “A newly hired Mexican plant manager would say, ‘You don’t want to be an IMMEX. It’s very difficult and hard to manage and operate.’

“But it really isn’t,” he explains. “I think you hear that from Mexican plant managers and staff, because they feel somewhat a loss of control that they’re just like a contract manufacturer. That’s difficult for them to grasp and still think they’re part of the operation and important. There are other ways to communicate that.”

Meanwhile, dissident bombings last month that blew holes in six pipelines in the state of Veracruz, disrupting the flow of oil and natural gas to portions of the country and forcing manufacturers to cease production, will not have a long-term effect, Santoyo-Amador says.

“The government will be able to deal with them,” he says of the leftist militant group, the Popular Revolutionary Army, which claimed responsibility for the attacks. “They’re making a lot of mess, and they raise trouble, but it will be OK.”

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