Maquiladora Industry Outlook

Early years found his name on the bylines.

In later years, his name could be found on the distinguished speakers list for major maquiladora or business-in- Mexico conferences. John Christman had the data that grounded the message with the facts.

His journalism background gave additional credibility to the messaging that would rise far above the cacophony of misinformation, disinformation or emotions associated with the maquiladoras and the U.S.-Mexico business relationship.

Christman, a transplanted Clevelander now of Mexico City, knew his “beat.”

As with many business journalists, “retired” and “fully” usually do not appear in the same descriptor. Sometimes even the interviewer gets interviewed.

MEXICONOW: JOHN, EXPLAIN BRIEFLY THE VARIOUS PROFESSIONAL POSITIONS YOU’VE HELD THAT KEPT YOU SO CLOSE TO THE MAQUILADORA INDUSTRY.

John Christman: In 1964 when the Mexican government fi rst started thinking about it I was in charge of the business and fi nancial section of The News, which is the English language newspaper in Mexico City. From there I went to become cofounder and editorial director of what later became the Expansión Editorial Group.

I moved on to become head of the Economic and Investment Department of the American Chamber of Commerce of Mexico and that job included the Chamber’s Maquiladora Industry Information program. By then the maquiladora industry was already starting to take root.

I left the Chamber to go to be International Business Development Director for the Americas Industrial Park Group out of Chihuahua, followed by becoming Mexico Country Manager for Business International Corporation which published a wide variety of economic and business publications.

I spent 10 years as an editorial correspondent for the Wall Street Journal and 10 years as head of my own consulting firm, which specialized in maquiladora consulting as well as editing target specifi c maquiladora and foreign trade publications.

My last major job was Director of the Maquiladora Industry Program for the Ciemex- Wefa Forecasting Group out of Philadelphia, which later was acquired by Global Insight. I retired at the end of 2008.

MAQUILADORAS HAVE SUFFERED FROM A LACK OF WHAT MIGHT BE TERMED PERMANENT OPERATIONAL AND FISCAL RULES. WHAT IS THE CURRENT SITUATION PER YOUR ANALYSIS AND WHAT MORE SHOULD MEXICO’S FEDERAL GOVERNMENT BE DOING?

Christman: I think a major concern of the maquiladora industry — and this has been true over the years — is the uncertainty in the fiscal area. There’s always a rollover effect, a transitory effect in rules covering tax regulations for the industry.

It is very difficult to operate and plan ahead longer term, which is always essential and should be essential to the maquiladora industry. It is always difficult to plan ahead if only from one year to the next you know what rules are going to be in place affecting your operations directly. This is particularly true of the Value Added Tax and the Corporate Flat Tax, which still is in favor of the maquiladora industry but this could change at any given time.

I hope it is something that will be dealt with positively in the National Development Plan once the details come forth.

The maquiladora industry has become and should continue to be a fixture in Mexico’s industrial and export structures.

What the new National Development Plan and the Treasury of Mexico have to say about the role of maquiladoras in the new administration will deserve close attention and analysis.

THE MEXICAN GOVERNMENT HAS ALWAYS KEPT AN EYE ON THE MAQUILADORAS. WHAT ABOUT SIGNIFICANT ACTIONS IN THE EARLIER DAYS?

Christman: Actually there were two very positive factors in the maquiladora industry development back then. They were really landmarks that came in the bizarre presidential period of Luis Echeverría. First was the 1972 decree which extended the maquiladora regime to virtually all of the country and not limiting it to just the border area. Secondly, was the decision to exempt maquiladora FDI from provisions from the controversial 1973 Foreign Investment Law.

A side bar: My only one-on-one interview with Echeverría took place at 3 a.m., at Los Pinos, which is Mexico’s White House.

THE MAQUILADORA INDUSTRY PROGRAM IN MEXICO HAS BEEN UNSUCCESSFUL IN INCORPORATING DOMESTIC SUPPLIERS TO THE SUPPLY CHAIN. WHAT LED TO SUCH A RESULT? WHAT DO YOU THINK COULD BE DONE TO CORRECT THIS SITUATION?

Christman: I think steps are already being taken in that direction. I think there is more and more of a trend toward incorporating local products as local products gets better and more competitive. If we go back to the original days of the maquiladora industry, the thrust was to generate exports and create employment and transfer technology. There really was nothing in the original program that talked about incorporating national content.

In the 1960′ and 1970’s all of the maquiladora plants were basically located in the far north of Mexico and the major production centers for Mexico’s markets were located in the central part of the country. The logistics were not nearly evolved as they are currently.

It really wasn’t until the Lopez Portillo presidential period that we started hearing about national content. When Lopez Portillo was president there was the threat of a government decree making it mandatory at least 10 percent national content for the maquiladora industry and that decree never happened, fortunately.

If you take a look at the latest statistics from the INEGI, national content in the maquiladora- registered companies is now close to 30 percent of total content, total inputs. I think this is a big step forward. The maquiladora industry and national suppliers are working much more closely together than was the case 10 or 20 or 30 years ago.

WHAT IS YOUR TAKE OF THE VOLATILITY OF THE PESO? WHAT DO YOU SEE GOING FORWARD AND ITS EFFECT ON THE TOTAL COST OF BUSINESS FOR THE MAQUILADORAS?

Christman: The exchange rate of the peso is obviously very important and needs to be watched very carefully. My own feeling is a correct rate probably would be around between 12.60 and 12.80 pesos to US$1.00. This would be a target to shoot at. We’re a little bit above that right now and the peso has taken some wild swings just in the last month due to economic considerations outside of Mexico. Some of that responsibility lies with the U.S. Federal Reserve Bank.

I think in that respect also, Mexico’s Central Bank – Banco de Mexico — has done a careful job in peso handling. But I think for example they allowed the peso to get down to almost 12 to 1, and I think that’s not a realistic exchange rate. I don’t think way up into 14 would be a realistic exchange rate either.

SOME PEOPLE FEEL THE RECESSION NEVER ENDED. TAKING A LOOK AT ALL THE DATA ABOUT THE MAQUILADORAS WHEN DO YOU EXPECT THE NUMBERS TO BE BACK AT PRERECESSION LEVELS?

Christman: The Mexican economy right now is in a tough mode but I don’t expect this to last.

Not much of the down turn however is really noticeable in the maquiladoras, since most signs in the U.S. economy are pointing upwards right now, at least if we look at the recent data, things like new car sales, retail sales in general, new durable goods orders, overall industrial output, housing starts, personal income, so on and so forth. All these will be reflected in the Mexican economy in the second semester along with the promised, intensified level of government infrastructure spending.

The jobs total in March was up 98,216 net from March one year ago, and was at a record high level of 2.03 million for the maquiladoras and other Mexican exporters.

THE MAQUILADORA CONCEPT IS NEARLY 50 YEARS OLD. WE HAVE SEEN AUTO DO WELL, ELECTRONICS DO WELL, ELECTRICAL, MEDICAL AND AEROSPACE KICKING IN. WHICH SECTORS DO YOU SEE AS LAGGING AND NOT TAKING ADVANTAGE OF THE MAQUILADORA PROGRAM AND THE INTERNATIONAL TRADE AGREEMENTS?

Christman: Actually, most sectors are doing well and there are sectors worth mentioning that are doing well. That includes electronic equipment and supplies, hospital and medical equipment and supplies. Those are two very strong areas. The service sector for rebuilding and repair of equipment and machinery is another good area.

I say if there is a weak area and we can use the term weak, because there are some standout players in this sector, ironically, that would be textiles and apparel which continues to be pretty flat, frankly, flat to maybe a little bit less than flat.

LET’S TAKE A LOOK AT EXPORT VALUES. WHAT ARE YOU SEEING?

Christman: The value went up in the first quarter compared to the first quarter of last year. Exports were up about 32 billion pesos or about $2.5 billion in U.S. currency.

Manufacturers’ exports did not increase dramatically in the first five months of this year but they did increase: automotive sector, electrical/ electronic, domestic appliances, aerospace, IT components and accessories, even certain garment sub-sectors. It has to be remembered that manufactured exports month in and month out are already at a near record level.

The ill-conceived and insulting “Berlin Wall” on the border idea should not affect bi-lateral trade of manufactured goods. Despite that wall between 75 and 80 percent of Mexico’s exports will still go to the U.S. The ratio so far this year has been 79.3%. This trend should continue, I don’t see any particular indication that there will be any change.

It will stay pretty much the same even with the key TPP, Trans-Pacifi c Strategic Economic Partnership and any kind of a European Union Free Trade Accord.

Plants and industrial parks now account for 80 percent of manufacturers exports. The bulk of these plants are maquiladoras or quasi maquiladoras.

VIOLENCE IN MEXICO; TO WHAT EXTENT DO YOU THINK IT HAS AFFECTED FOREIGN DIRECT INVESTMENT INTO THE MAQUILADORA AND EXPORT INDUSTRY?

Christman:

There has to be more done to change the perception. Mexico certainly has had a period of violence — no doubt about that. Take a look at northern Mexico where most of the violence has been centered in recent years. The recent violent crime rate there has been less by far than the violent crime rate let’s say in Washington D.C. or Detroit or New Orleans. That’s based on official figures on both sides of the border. Reality and perception are both important here.

What I think what is interesting when we talk about foreign investment, according to a recent survey by the A. T. Kearney Consulting fi rm. Mexico is in ninth place this year. The most relevant destination for FDI in 2013, of the top 25 countries destinations for foreign investment Mexico’s ranked ninth. Last year they didn’t rank anywhere which shows that there’s been an improvement in perception, plus there’s been an improvement in statistics in terms of violent crime.

I think both are very, very important. I think it is important the government addresses this issue realistically and works hard to make sure this perception of improvement continues.

MEXICO HAS MORE THAN 40 INTERNATIONAL TRADE AGREEMENTS. THE U.S. AUDIENCE SO OFTEN HAS TROUBLE THINKING BEYOND NAFTA, JUST ONE INTERNATIONAL TRADE AGREEMENT. TO WHAT EXTENT DOES NAFTA REMAIN RELEVANT IN TERMS OF THE MAQUILADORA INDUSTRY?

Christman:

NAFTA will remain relevant for many, many years. It is the U.S. who’s really pushing behind the Trans-Pacific Strategic Partnership Agreement. Mexico is definitely involved in those negotiations and on balance should benefit from it.

I think the maquiladora industry because of its very nature and because of its location is going to be primarily U.S. oriented for a long time to come. Right now 81.5 percent of Mexico’s exports are manufactured goods. A large percentage of that, with the exception of the OEMs in the automotive industry, comes from maquiladora plants. Those are exports that are going to the United States and that is going to continue and I think that where the Trans-Pacific accord and a similar accord with the European Union are very important for the U.S. and at the same time for Mexico. I think NAFTA will continue to be the over-riding cornerstone to all of Mexico’s free international trade.

TO WHAT EXTENT DO YOU FEEL THE NEW REFORMS IN MEXICO REFORMS HAVE BEEN EFFECTIVE IN REDUCING THE TOTAL COST OF DOING BUSINESS?

Christman: I think it’s premature to say, frankly. I think the labor law reforms are potentially important but I think to date we are not seeing much of a fall out from the labor law reforms. That doesn’t mean they’re not going to happen but I think a lot of the labor law has to be explained and digested and the general economic environment has to improve substantially for the labor law reforms to be really appreciated or really be effective. I think Mexico’s economy right now is not oriented toward generating jobs. The economy is a little bit in the trench right now and the first quarter of the year Gross National Product went up just eight-tenths of one percent. I don’t think the second quarter is going to be much of an improvement over that and may not be even that good in terms of year-on-year growth. May’s employment total was a meager increase; unemployment is still close to 5 percent. The labor law, I don’t think the labor law has really kicked yet and I think a lot of people still don’t really understand the labor law completely and how it could impact investment plans and hiring plans for the near and longer term. Some of the other reforms still remain to be seen just what’s going to happen with them and how they’re going to be implemented, what are their regulations, how are they going to work in practice.

YOU DEALT WITH MANY INTERESTING PEOPLE IN THE MAQUILADORA SECTOR AND YOU TALKED ABOUT SUCCESS. WHERE DOES CREDIT REALLY NEED TO GO?

Christman: I would say one group of people often overlooked and doesn’t get enough credit are the original developers of industrial parks up in the northern part of the country. This was true particularly in Juarez and Mexicali, Nogales, Chihuahua and later on in Matamoros. These were really pioneers. They took a fly on program that remained to be seen how they would work out. Over time they really would grow to be world class industrial parks for manufacturing facilities. They were also in the forefront of promotion of the maquiladora industry. These were people – I really take my hat off to them — that were major factors in the development, the successful development of the maquiladora industry.

WITH THE MAQUILADORA INDUSTRY SOON TO ACHIEVE 50 YEARS, WHAT WOULD YOU SAY WERE THE MOST MEMORABLE EVENTS, PERSONAL, INSTITUTIONAL OR BUSINESS SIDE THAT INFLUENCED THE CAREER OF JOHN CHRISTMAN?

Christman: I think that as far as the beginnings of the maquiladora industry is concerned for me something very, very important was getting in on the ground floor in terms of being asked for opinions; sitting in on meetings, discussions, being in the loop. And being able to continue after that, being able to continue for more than 40 years in areas that were always in some way or another related to maquiladora industry, whether it was publications, general information, public speaking, participation in conferences and meetings, promoting the maquiladora industry directly. Also personally and professionally, I’ve had the opportunity to work with and interact with a bevy of top flight economists, industrial development gurus and foreign trade experts from Mexico and many other countries.