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How Mexico became OC’s biggest export market

Just a few hours to the south by car is the unheralded story of how Mexico became Orange County’s largest export market. On the Mexican side of the border with California sit the cities of Tijuana, Mexicali and Tecate, which together make up a dynamic manufacturing base for more than 1,000 big-name electronics makers and other companies. The border cities, as well as others in Mexico, offer proximity to the U.S., relatively inexpensive labor and reduced duties and taxes. These border plants, known as maquiladoras, are Mexico’s big gun in the realm of international trade,they account for about 40% of Mexico’s $140 billion in annual exports, most of which ends up in the U.S.

Last year, OC companies exported an estimated $2 billion worth of products to Mexico, making the country OC’s top export market, a title once held by Japan. A big chunk of what OC companies send to Mexico each year goes to maquiladoras. “Setting up a plant there is the most competitive way to maintain our price structure and keep labor costs down,” said Madeline Grant, export manager with Lake Forest-based Pacific World Corp., a maker of artificial nails and other cosmetics.

In a typical example of how OC companies work with Mexican border plants, Pacific World makes products in OC with some components from Asia. The company sends materials down to a maquiladora, where finished products are assembled, packaged and shipped back up to the company’s headquarters in Lake Forest. The company has cut labor costs by 70%, Grant said. Microsemi Corp., a Santa Ana chip maker, sends chips to subcontractors in Guadalajara that make PC boards and fully assembled computers for export back to the U.S. “For a company to ignore the presence of cost-effective manufacturing down there would be a mistake,” said Chief Executive Jim Peterson.

OC exports to Mexico have doubled since 1995 in part because of brisk business with border plants. In the past few years, local exports to Mexico have gotten a boost from new rules that kicked in this year as part of the North American Free Trade Agreement. As of Jan. 1, goods produced at border plants must be 51% or more made with components from Mexico, the U.S. or Canada,if they want to continue qualifying for duty exemption. “Companies with maquiladoras, like Sony or Samsung, now have to source more sub-components locally to get the same benefits,” said Richard Swanson, executive director of the OC Export Assistance Center, a Newport Beach office of the Commerce Department’s U.S. Commercial Service. Companies such as Sony Corp., Samsung Electronics Co. and others produce televisions, computers and other electronics at Mexican border plants. In the past, they sourced picture tubes, chips and other components from company divisions or other businesses in Asia. “Asian companies have a tendency to buy from their native country’s suppliers,” said Judith Valdes, a U.S. Commercial Service trade specialist stationed at the U.S. consulate in Tijuana. “Now, with the new rules, they have to find suppliers in the NAFTA area, many of whom will be American suppliers that can match the quality of products from Japan or South Korea.” Border plant operators looking to hook up with U.S. suppliers often look first to Southern California simply because of proximity. It’s cheaper for border plants in Baja to import goods from California than it is for plants in the interior regions of Mexico. And the country’s other big industrial regions, Mexico City and Guadalajara, are as far as 48 hours away from the border plants by truck. “I see many OC companies setting up plants in places like China, while missing out on the opportunities in Baja, right here in their own backyard,” Valdes said.

The opportunities in OC’s “backyard” are considerable. All the maquiladoras in Mexico bought a staggering $44.7 billion in raw materials and components last year, according to the U.S. Commercial Service’s Tijuana office. For OC companies, sourcing in Mexico means lower shipping costs and a shorter production pipeline compared to Asia. Being in the same time zone can help too, according to Gordon Benhard, chief executive of Irvine power supply maker Elpac Electronics Inc. Elpac owns and operates a maquiladora in Tijuana in addition to production facilities in China and here in Irvine. “Having production in several time zones away isn’t always convenient,” he said. “It makes communication awkward.” Plus, Benhard said, “It’s easier to find people who speak Spanish here in OC compared with, say, Chinese.” Elpac sends down weekly shipments of staged parts of each component, and each week a truck comes back with completed assembly of power supply units and other company products. “A typical turnaround period from the time the staged parts are shipped down to when they arrive back in OC is about two weeks,” Benhard said. Many big Asian companies, especially those from Japan and South Korea, already have North American or regional head offices in OC and throughout the Southland, making maquiladora production a logical step.

Irvine-based Mitsubishi Digital Electronics America Inc., a subsidiary of Tokyo-based Mitsubishi Electric Corp., owns and operates a maquiladora in Mexicali, leasing the building and land from a Mexican landlord. Spanning 500,000 square feet, the plant is said to be largest big-screen projection television factory in the world, employing 1,700 workers. Shifting production from plants in Santa Ana and Malaysia to Mexicali made sense, given that projection televisions are mainly a North American phenomenon, according to Marty Zanfino, Mitsubishi Digital’s manager of product development. “There was little reason to ship these components back and forth between (here and) Malaysia,” he said. “The time factor is really important for quality feedback. If you have a problem and it takes a month to ship product across an ocean, then you don’t know whether you have a problem until a month later.” Now, the company is less than a day away by truck from its manufacturing base, shortening the lag time for quality control considerably,a dramatic improvement. “Since we consolidated everything, our productivity went up, our quality went up and transportation costs went down,” Zanfino said. The relative quick turnaround time enables Mitsubishi to achieve a high degree of independence compared with other Japanese subsidiaries, according to Zanfino. “We plan and engineer the television completely in OC, and it takes about three hours to build,” he said. “I don’t believe any other Japanese television company is that vertical. We’re kind of unique.” The new NAFTA rules do not affect products shipped from maquiladoras to countries outside NAFTA,those products still qualify for duty exemption. Also, companies operating in Baja now have to pay taxes on profits they earn to the Mexican government.

How the new tax regime affects foreign companies in Baja remains unclear. Grant’s company, Pacific World, does not directly pay profit taxes under the new NAFTA rules,its Mexican partner that manages the maquiladora pays that tax as part of a long-term pricing contract. Under the new rules, the company’s duty rates have fallen by 2%, according to Grant. “It’s still not certain how the rules will affect the border plant industry,” said the U.S. Commercial Service’s Valdes. “I don’t think there will be a slowdown. I think that it will force the industry in Baja to mature and to become less labor-intensive.” Growing labor demand could also move maquiladoras into making their operations more machinery-intensive. Labor in the region is growing dearer,an about-face for an area that several decades ago had skyrocketing unemployment (see related story, this page).

Competition for labor in Baja is growing, with companies there offering transportation, daycare and housing to get,and keep,employees. “Labor is very flexible there, so people often jump ship,” said Grant, who also is a member of the OC-Long Beach sub-chapter of the Southern California District Export Council and an advisor to the OC Export Assistance Center. With “many more” maquiladoras setting up shop, labor demand will continue to rise, Grant predicted.

The Tijuana-Tecate-Mexicali area is experiencing a staggering population growth rate of 4.6%, according to the U.S. Commercial Service. While NAFTA has spurred new business along the border, it’s not exactly “free” trade, sources say. Grant said she has noticed that the new rules are slowing things down at the border. “We do notice more inspections now than in the past,” she said. As labor tightens and Mexico loses some of its edge as a low-cost manufacturing center, some Asian companies like San Diego-based Sanyo North America Corp., one of Baja California’s largest investors, are threatening to move production back to Asia. Sanyo officials have expressed concern over the NAFTA changes and the increasing cost of labor and fringe benefits in Baja California, although there is debate over whether Sanyo is the exception or the rule for Asian companies in Baja. “We’re seeing a lot of Asian companies shifting more of their manufacturing of products to be sold in North America to maquiladoras,” said Elpac’s Gordon Benhard. “The amount of Asian involvement there is certainly not trivial.” n

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