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Change Sweeping Through Baja’s Border Plants

After years of heady growth, Mexico’s manufacturing hub along the California border is at a turning point.

The area is home to more than 1,000 big-name electronics makers and other companies with production and assembly plants in Tijuana, Mexicali and Tecate.

Several Orange County businesses are among them, including Newport Beach-based Conexant Systems Inc., Irvine-based Mitsubishi Digital Electronics America Inc. and Kwikset Corp., a Lake Forest-based unit of Black & Decker Corp.

The Baja California factories produce many of the televisions, computer monitors and other electronics sold in the U.S. Apple Computer Inc. even produces its iMacs in the area. Asian, U.S. and European companies have flocked to Baja, lured by cheap labor and proximity to the world’s largest market. But now Baja is wrestling with a trend it has long benefited from: the flight of manufacturing to lower-cost locales. Several Asian electronics makers recently have either shut down Baja plants or moved some production to China, Indonesia or other spots where labor is a fraction of what it is in Mexico.

Plant officials and observers say there’s another culprit besides labor costs, and it’s an unintended consequence of the 1994 North American Free Trade Agreement. Tariff changes that were phased in Jan. 1 have had decidedly mixed results for OC companies and others in Baja, officials say.

Oscar Martinez, human resource manager at the Tijuana assembly plant of El Segundo-based International Rectifier Corp., said the new rules have cost Baja around 12,000 manufacturing jobs this year.

The rules require goods produced at the border plants, also known as maquiladoras, to be 51% or more made with components from Mexico, the U.S. or Canada.

Rather than meet the new requirements, companies such as Sony Corp., Sanyo Electric Co., NEC Corp. and others have found it cheaper to move some production elsewhere,even with added shipping and tariff costs.

“A lot of companies since January have moved their operations to Asia, especially China,” Martinez said.

Next door to International Rectifier, a huge, modern Sanyo plant sits idle with only a giant company sign remaining,a symbol of how quickly big companies can shift operations around the world.

OC companies have a lot at stake in the changes playing out in Baja’s manufacturing sector. Last year, local companies exported an estimated $2 billion in goods to Mexico, making the country OC’s top export market.

A big portion of those exports,including electronics and other components,went to border plants for assembly and then were re-exported back to the U.S. in TVs, computers and other finished goods.

In many cases, OC exporters have benefited from NAFTA’s content-rule change as plant operators have switched from Asian to North American component suppliers.

But one company’s benefit can be another’s burden. For some factories in Baja, the new rules are the straw that broke the camel’s back since China already offers several edges over Mexico as a manufacturing site.

“The cost advantages of China have encouraged us to downsize our Tijuana plant,” said Gordon Benhard, chief executive of Irvine-based electronics maker Elpac Electronics Inc. “Wages are one of the main costing issues for us when deciding where to make a product.”

Elpac owns and operates a Tijuana plant where it employs 75 workers, down from 200 employees only a few years ago. In 1992, the company set up a 50-worker plant in Shenzen near Hong Kong where production is steadily expanding.

“It has been a terrific facility for us,” Benhard said of the China plant. “Manufacturing that we at one time outsourced to other companies we now can do by ourselves in China because we can afford to.”

Aside from lower wages, China offers tax breaks to companies that make products for re-export to the U.S. or Europe.

For all of NAFTA’s benefits, the trade pact has brought a slew of rules and regulations. Benhard said the tightened requirements have slowed shipments across the U.S.-Mexico border. Like others, he said Elpac has seen an increase in the number of inspections to determine whether products meet the new content rule.

“Shipping across the U.S.-Mexico border has never been easy,” Benhard said. “This has impelled manufacturers to look elsewhere.”

The average wage among Baja’s factory workers is about $3 per hour, according to International Rectifier’s Martinez. That’s half of California’s minimum wage, but high for Mexico and much more costly than factory wages in China, which typically are around 50 cents an hour.

Until recently, Baja’s border area has had virtually full employment. To compete for workers, International Rectifier and other companies pay the added cost of transportation, education, healthcare and other benefits.

A relatively strong Mexican peso also has put a further crimp in the competitiveness of Mexico’s exports. The currency has risen about 5% against the dollar this year, making Mexican goods more expensive to sell abroad. Analysts expect Mexican President Vicente Fox soon will move to devalue the peso.

In the words of Intel Corp.’s Andrew Grove, Baja’s plants are at an inflection point. With their labor cost undercut, plant operators are playing their trump card: proximity.

Plant operators are looking to boost efficiency by automating more of their production and bringing in new equipment. They’re also looking to take on more design work. While it can take weeks to turn around and ship a product from China, from Baja it’s a matter of days, they tout.

“Now, a lot of maquiladoras will have to boost production efficiency and overall productivity to compete globally,” Martinez said.

Elpac’s Benhard said the longer shipping time between OC and China is a disadvantage. The time zone difference of nine hours is another factor, he said. Shipping to China by sea can take about a month, he said, and a few days by air.

“But for products we make in China, the cost savings of assembly there outweighs the longer and more costly shipping time as well as the communication inconveniences of being nine hours apart,” Benhard said.

For Mitsubishi Digital Electronics America, the U.S. consumer electronics arm of Japan’s Mitsubishi Electric Corp., the proximity factor is everything. The Irvine subsidiary operates a plant in Mexicali that produces big-screen projection TVs. Company officials said they plan to step up production there.

The Mitsubishi plant spans 500,000 square feet and is said to be the largest big-screen factory in the world, employing 1,700 workers. Being next to the U.S.,where most big-screen TVs are sold,is key, said Marty Zanfino, Mitsubishi Digital’s manager of product development.

“It’s hard to ship these big TVs overseas without incurring damage,” Zanfino said. “So it wouldn’t make sense for us to move that plant offshore since we can ship to the U.S. by truck in only a matter of hours.”

Mitsubishi says its employment in both Mexicali and Irvine has grown every year since 1997. The company designs and tests TVs,including advanced digital models,in Irvine. It builds them in Mexicali.

Like other Baja plants, Mitsubishi’s factory is seeking to stay competitive by modernizing and boosting efficiency.

“We’ve upgraded the plant and added capacity,” said Robert Perry, marketing vice president at Mitsubishi Digital. “We haven’t seen any job losses in the consumer electronics television business.” n

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