At first they came to Mexico to sort coupons, hiring row upon row of women and girls to sift through millions of coupons redeemed daily by consumers in the United States .

      Although the coupons were printed in English, these Mexican women and girls – the original maquila workers – had no difficulty with the task. Quickly and efficiently they processed the coupons. But while they had little problems, the early years were marked by confusion. Early maquilas were located in old warehouses and office buildings because there were no industrial parks in Mexican border cities. Hiring practices were primitive at best. Human resource directors (then called personnel managers) frequently hired their relatives and acquaintances to jobs they were not qualified to handle.

      Meanwhile, customs officials from both the United States and Mexico struggled to understand the new maquila program and its tax regimes. It made for a slow start. By the end of the ‘60s, fewer than 150 companies had registered as maquilas, employing a combined total of about 17,000 workers.

      But despite the problems, the workers handled the labor so well that other companies felt confident enough to branch out, adding processes that required a higher skill level. In fact, in the nearly four decades that the maquila program has existed, Mexican workers have amazed investors with their ability to master whatever task is presented. Today a maquila worker is just as likely to be employed assembling aerospace parts or automobiles as he is manufacturing a high definition television set.

      The maquiladora program was created in 1965 when Mexico President Díaz Ordaz initiated the Border Industrialization Program, which had been developed by the Arthur D. Little Co. The program was patterned after a production-sharing model in use in Portugal . The concept is simple: each factory would be treated as an individual foreign processing zone, thereby allowing the plant to import duty free into Mexico all equipment, machinery and materials that were production related.                                                                      

      The program coincided with a 1964 ruling by the U.S. Congress that established a preferential tariff for U.S. made components that were sent offshore and assembled into finished goods that were subsequently exported to the United States . Upon their export back to the United States , export duties would be assessed only on the value of the imported good, minus the value of the U.S.-made components (value added).

      Before the adoption of the North American Free Trade Agreement in 1994, maquilas were required to export all their production out of Mexico so as to avoid creating unfair competition for Mexican industry, which wasn’t able to compete globally. However, NAFTA eliminated requirements on how much production must be exported and today’s maquilas can sell their product into the Mexican market, if they choose.

      The earliest maquilas were primarily U.S. companies seeking lower-cost labor for their simplest sub-assembly operations. Mexican workers, the thinking at the time went, wouldn’t be able to master more complex tasks. Early maquilas were labor intensive, featuring simple cut and sew operations or relatively easy handwork

      It took a bold decision by RCA in 1968 to change that thinking.

      RCA became the first maquila to assemble a high-tech product – television yokes and high-voltage transformers for televisions in this instance – in Mexico . Setting up shop in a 120,000 square feet building in Ciudad Juárez, RCA amazed manufacturers in the United States who had been convinced Mexican workers weren’t skilled enough – and could not be trained well enough – to handle the task.

      From there it seems like a fast evolution to today. While the simple handwork and subassembly jobs still remain, thousand of high-skill tasks are now carried out by Mexican workers. But there were bumps along the way. In 1974 maquila employment dropped more than 11 percent as the industry reeled from the effects of a recession in the United States .

      Just eight years later, a peso devaluation in Mexico created the first great maquila growth spurt. Because most maquilas have dollar-denominated budgets but pay expenses with pesos, the weakened peso meant drastically lower operating costs. The peso fell from 21 pesos to the dollar to 132 pesos to a dollar.

      In the late 1970s Detroit ’s Big Three automakers began opening automotive subassembly plants in Mexico . In 1986 Mexico joined GATT and sharply lowered tariffs on thousands of items making Mexico a more attractive destination for foreign investment. The decade of the ‘80s was marked by a near 20 percent a year growth in the number of maquilas.

      The next great growth spurt was caused by the adoption of the North American Free Trade Agreement, which went into force Jan. 1, 1994 , and an almost simultaneous peso devaluation in December 1993. The devalued peso fell from 3 pesos to the dollar to nearly 9 pesos to a dollar. Today it trades around 10.5 pesos to the dollar. NAFTA, meanwhile, further lowered tariffs between Mexico , the United States and Canada .

      With operating costs again slashed and NAFTA preferences for U.S. companies available, the industry again boomed. Maquila employment increased an average of 11 percent a year until the latest U.S. recession began in 2001.

      According to Jesús Cañas and Roberto Coronado, economic analysts in the Research Department at the El Paso Branch of the Federal Reserve Bank of Dallas, maquilas have evolved over the years to include high-tech, high-skilled processes. They cite work by researchers Jorge Carillo and Alfredo Hualde, who classified maquilas into three evolutionary categories. First generation maquilas are labor-intensive operations with limited technology. and dependent on decisions made by parent companies and principal clients. Textile maquiladoras are a typical example.

      Second-generation maquilas are oriented more toward manufacturing processes and use automated and semi-automated machines and robotics. They employ more technicians and engineers. Maquiladora plants that manufacture auto harnesses, television sets and electrical appliances are examples of second-generation plants.

      Third-generation maquiladoras are oriented toward research, design and development. They rely on highly skilled labor, such as specialized engineers and technicians. Delphi Corp.’s Mexico Technical Center in Juárez is an example of a third-generation maquiladora. Delphi ’s Mexico Technical Center opened in 1995, doubling in size in 1999 to nearly 500,000 square feet. More than 2,200 engineers, technicians and support staff work at the Juárez facility where Delphi team members design products and processes used in that country and elsewhere.

      Since 1998, technical center employees have earned more than 30 U.S. patents and have begun the process to gain more than 100 others. Mexico Technical Center customers include major vehicle manufacturers around the world, as well as support for the 57 Delphi operations in Mexico .

The future

      Mexico faces serious global challenges to its maquila industry. Countries such as Hungary , Ireland , India and Pakistan offer similar programs with even larger tax incentives. In addition, maquila programs are available in most Central and South American countries. Electricity costs in Mexico are becoming a problem for investors, as is the lack of certainty in Mexico ’s tax programs.

      For the moment, however, Mexico ’s biggest challenge is coming from China , which has already lured thousands of maquila jobs from Mexico to China .

      Some analysts predict China will generate 10 million new jobs in services, textiles, garments and non farm rural activities in the next five years. Already there has been an exodus of companies leaving Mexico for China , although the evidence suggests the majority of the Mexican jobs lost to date are low-skill textile and apparel jobs. Nonetheless, there are several high profile examples of electronics companies leaving Mexico for China .

      China ’s competitive advantage over Mexico in certain sectors stems from significantly lower compensation for manufacturing workers and, more recently, a well-developed supplier base for most industries. Also, some foreign companies invest in China , hoping eventually to sell their resulting products to the Chinese domestic market. While waiting for the market in China to develop, the bulk of products made there must be exported. Manufactured products for which China is a leading supplier to the U.S. market (and Mexico is not) include sewn products, such as footwear, apparel, luggage, and dolls, and other labor intensive, relatively low-technology articles such as toys, games, sporting goods, lighting fixtures, furniture, cameras, and air-conditioning equipment. Within these product categories, imports from China tend to be less sophisticated or entry-level articles with the exception of apparel and footwear.

      The principal competition between Mexico and China for foreign investment dollars lies in the production of apparel; computer equipment; telephone equipment; household appliances; and electrical assemblies, such as transformers. Although existing data indicate that China has a dominating competitive advantage in the sewn products industries, the question is how can Mexico compete in the U.S. market with China in the apparel sector? The answer is clear: preferential market access under NAFTA, competitively priced labor in key products, proximity to suppliers and markets in the United States , and U.S. import quotas.

      Despite the loss of lower-skill jobs to China , Mexico can remain an attractive place for foreign investment, provided the government can provide some economic certainty to foreign investors. The issue of double taxation for U.S. companies operating in Mexico has been without a permanent solution since 2000. Although there is relief through the year 2007, companies still do not know what their tax liability will be in the years after 2007.