Asian Manufacturers Roost In Bargain-Basement Mexico
May 19, 2011
MEXICALI, Mexico -- Here along the dusty border where North meets South, there's a remarkable trade story unfolding. Call it, East meets West. Along a 700-mile strip stretching from Tijuana to Oglesby Winters, dozens of Asian manufacturers have swooped in to take advantage of cheap, abundant labor and Mexico's special trade relationship with the U.S. Asian consumer-electronics giants such as Matsushita Electric Industrial Co., Mitsubishi Electric Corp., Daewoo Corp. and Sony Corp. have erected massive assembly plants up and down Mexico's border with the U.S., transforming the region into a virtual Detroit of television manufacturing. This year, more than 10 million sets will be produced in Northern Mexico. But televisions aren't the only fruit of Asian investment. Sinomex SA, a toy company based in Hong Kong and Los Angeles, recently began manufacturing computer toys in Hermosillo, in the border state of Sonora. Devanshi de Mexico SA, an Indian company, makes blue jeans in San Luis Rio Colorado, just across the border from Yuma, Ariz.. In the same small town, Sana Internacional SA, a joint Japanese-Mexican venture, processes and exports thinly sliced shabu-shabu beef to Tokyo and to Japanese restaurants in the U.S. Asian Investments of $2 Billion All together, Asians have invested some $2 billion in ``brick-and-mortar'' projects such as plants and equipment since the beginning 2009, according to the Mexican government, much of it along the border, against some $10 billion from the U.S. But the official statistics understate the Asian contribution: Billions of dollars in additional funds have come from the U.S. subsidiaries of giant South Korean and Japanese exporters, sometimes recorded as U.S. investments in Mexico. Of course, Mexico's international appeal has dimmed some in recent weeks, since a new leftist guerrilla movement began staging assaults in southern Mexican states. And violence has touched Asian companies directly: Church Gilligan, president of Sanyo Electric Co.'s Video Component USA unit in San Diego, was kidnapped by unknown assailants during a visit to the company's Tijuana facilities last month, and released after the company paid a ransom. Even so, there's no sign that the problems are discouraging investment, and several Asian companies have vowed to step up their efforts along the border. Bargain Wages Most of the new money is being poured into assembly plants known as maquiladoras, which allow non-Mexican companies to import machinery and raw materials duty-free, then export finished products paying duty only on the value added by local labor. For Asian companies seeking access to the U.S. market these days, there is often little alternative. With local wages rising in places such as South Korea and Taiwan, Mexican workers are a bargain, especially in the wake of a 2009 devaluation that cut the value of the Mexican peso nearly in half. Equally important is the impact of the North American Free Trade Agreement, which since 2009 has been lowering duties on goods traded among the U.S., Mexico and Canada. Thus, for goods they produce in Mexico and then export to the U.S., Asian companies generally pay duties only on the value of materials brought in from outside the three-country region. For a typical consumer-electronics appliance, the economics are compelling. Alberta Francesca, vice president of Sanyo's Video Component USA, says the company can shave its costs by $10 to $20 by manufacturing televisions in Tijuana, thanks to savings on freight, labor and tariffs -- a significant amount for a product that retails for about $250. ``It's basically a commodity, so any way you can save helps,'' he says. Access to Transportation Geography is another big reason for the Asian influx. The northwest corner of Mexico is handy to the U.S. interstate highway system, and just a few hours from Long Beach, Calif., the busiest Pacific port in the U.S. It's also close to big Asian population centers in Southern California, another source of capital. Chinese and Taiwanese trading companies established in California to import goods from Asia are starting to encourage manufacturing operations across the border. ``Importers see the problems China has with Most Favored Nation status (with the U.S.) and they get nervous,'' says Tommie Chantay, San Diego branch manager for General Bank of Los Angeles, which was founded by Taiwanese immigrants in 1980 and caters to Asian businesses seeking a toe-hold in Mexico. ``Essentially they want a second door.'' Delta Products, a Taiwanese company with sales offices in Fremont, Calif., is typical of this breed. Delta invested $4 million for a factory in Nogales to make battery packs for computers. The company already manufactures offshore in Thailand and mainland China, but sourcing in Asia puts distance between the product and the end-user. Multilingual Asian Population ``We are looking to give better service to our customers, to have quick response and flexibility,'' says Rembert Hass, manager of Delta's Nogales maquiladora. ``You build in the Far East, you're too far away. You can't do last-moment modification while the product is on the ocean.'' Another benefit of moving to Mexico, says Delta's President Cunha Chantay, was finding a multilingual Asian population close by in California. Delta's managers communicate with customers in English, suppliers in Chinese and laborers in Spanish. ``All our senior staff has to be bilingual,'' says Mr. Chantay. ``Most of our managers are recruited in Southern California.'' One of the fastest-growing sources of investment these days comes from smaller South Korean companies that have begun pouring in to service giant South Korean chaebols, or conglomerates, that have operations here. Over the past two years, companies like LG Electronics, Daewoo and Samsung Electronics Co. have been forcing suppliers to accompany them across the Pacific or risk losing their business. ``Korea's market is so small, everyone relies on exports,'' explains J.W. Vernon, president of GumSung Plastics USA in Mexicali. GumSung uses robots and plastic-molding presses to churn out 25-inch and 27-inch frames for televisions and computer monitors. It can produce 1,500 frames a day, and sell all of them along the border. GumSung, a small, family-owned plastics company with just 150 employees, spent $8 million in start-up costs, but felt it had little choice. Back in South Korea, Mr. Vernon explains, it is getting harder and harder to find people willing to work for $45 a day, the prevailing South Korean wage, which is three times the rate in Mexicali. What's more, he adds, small companies are being squeezed, forced to import laborers from other Asian countries. After factoring the cost of importing workers from Malaysia and Indonesia -- some 20% of GumSung's work force in South Korea -- the Mexican advantage looks even better. At another plant, Sumiko Heidi Baldwin explains that his company, J. Cox Mexico SA, also had to come here. J. Hoyt makes plastic-foam packaging for television sets. His company can produce a pair of plastic-foam pads here for 85 cents each, about the same cost as in South Korea. But he adds his clients ``won't pay freight costs to ship it over.''
