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By: Juan Jose Gallardo

    The maquiladora industry began as a consequence of the unilateral cancellation by the United States of the Bracero Program in 1964. The program was in place for more than 22 years, until U.S. citizens began complaining that non-citizens were taking work that they needed to survive.

      Most of these workers were not from the Mexican border states and suddenly found themselves without a place to go and no way to earn a living. In 1965, the Mexican government, trying to avoid a major migration of these workers to the urban centers, decided to create a free trade environment along the Mexican border frontier area, allowing 100 peracent foreign ownership companies to set up duty abatement programs conditioned upon the fact that whatever was imported had to be re-exported.

      With the 1938 Fair Labor Standards Act, the United States priced itself out from the world labor market with the establishment of a high minimum wage.  In 1963 corporations that made labor-intensive products were migrating to cheaper countries. To discourage companies from moving their entire operations offshore, the U.S. government created a law allowing importers to subtract the value of U.S. capital intensive components from the value of their imported finished goods and pay duty only on the balance. The combination of available cheap labor on the border, with duty abatement programs in both countries resulted in the maquiladora phenomenon.

      The three cities that most benefited from the program covered the extreme west ( Tijuana ), the Center (Juárez) and extreme east of the border ( Matamoros ).  Industries covered were light electronics and textiles with light assembly programs, labor intensive, with no transfer of technology or capital investments, adding only labor to the components made in the United States and exclusively dedicated to the export market, with no authorization to sell goods in the Mexican market. 

      Lots of things have happened since then: Simultaneous with the creation of the Maquiladora Program, Mexico created technological institutes to provide training for Mexican people. Over the past 30 years the automotive industry evolved from assembling to manufacturing goods. Mexico joined the General Agreement of Tariffs and Trade in 1987, setting the stage for the North American Free Trade Agreement that was signed in 1994; over 29 additional Free Trade Agreements have been signed since then with Asia, South and Central America, and very noticeable, the one that was recently signed with the European Union. After 71 years, the PRI finally ceded presidential power, opening the door to a real equilibrium of powers and  consequent democracy in Mexico ; inefficient state companies were privatized or liquidated, opening the financial markets to global players like Citibank or BBVA. Mexico displaced Japan as the second largest commercial partner of the United States , just after Canada ; Mexico reached a population of 100 million people, becoming a viable end market; the Brazilian and Argentinean crisis left Mexico as the only logical spearhead to the rest of Latin America as the Americas Free Trade Agreement approaches in 2005, and so on.

      All of this has resulted in a more complex manufacturing structure in Mexico . Although Tijuana , Juárez and Matamoros are still important, we now find more than 40 percent of the foreign owned manufacturing and assembling plants located in other cities, where companies can find a more structured supply chain and a better quality of life, both for their employees and foreign executives.  We now find a relevant presence of this type of industry in cities like Torreón, Saltillo , Monterrey , San Luis Potosí , Guadalajara , Querétaro, Toluca and Puebla .

      Due to the strength of the Mexican Peso that has been appreciating against the dollar since 1998, Mexico is no longer a cheap option like China . Nevertheless, transportation timeframes in terms of speed to market, telecommunication costs, meeting global manufacturing needs of ever more integrated supply chains in Mexico and the potential to reach new markets in and through Mexico , are making it highly desirable for companies from all over the world. With a much higher level of confidence reached by multinationals after more than eight years that NAFTA has been in place, and with many of them with an already consolidated presence in the country, the industry will inevitably continue its growth.

      The United States is already coming out of its recession, and Mexico will follow after recovery in the United States . Automotive, electronics, furniture and similar manufacturers will continue their consolidation and logistics and second and third tier providers will continue establishing here to meet their clients needs.  Border cities will remain a viable option for inexpensive light manufacturing, whereas cities like Monterrey , Torreón , San Luis Potosí and Saltillo in the northeast and Guadalajara , Querétaro, Estado de México, and Puebla will continue growing as more consolidated manufacturing sites.  Eventually, with the oil and tourism industries loosing importance in the Mexican economy and with the new Free Trade Agreements in place with Asia , the European Union, and rest of Latin America , port cities like Tampico , Veracruz , Coatzacoalcos , Acapulco and Mazatlán will become the next hot industrial spots in Mexico .

Juan José Gallardo is a senior vice president with Corporate Properties of the Americas .  He is responsible for a number of activities that include new business development, relations with corporate clients and major investors, strategic planning, marketing and transaction management (sale and leasebacks, build-to-suits, acquisitions and dispositions).