Maquiladora Industry Prospects for 2013

Mexico's Maquiladora Industry, an increasingly hi-tech sector of the country's manufacturing network, is expected to have at least average overall growth this year-- somewhere between 5% and 8%. That percentile tracks export growth.

There should be a new run-up in exports and employment and further forward strides in sophistication. This would be on top of the apparent 2012 export growth of close to 8%.

The core of industry growth will continue to be via auto parts, consumer and industrial electronics (including computerrelated), household appliances and medical equipment and supplies, plus aerospace parts and components.

The Maquiladora Industry, now in its sixth decade, also should register considerable new investment, with both new to market companies and plant expansions by existing plants. This should be true for manufacturing/assembly maquiladoras as well as those in the service sector.

However, if extreme economic problems surface in the U.S. all growth bets must be hedged.

Economic and political threats in the U.S. could well prove to be a deterrent to strong maquiladora growth early in 2013. But for the full year, "growth should be very similar to that of 2012", comments Salomon Noble, managing director and CEO of the Chihuahua-based Intermex Industrial Parks Group.

Noble expects particularly good showings for auto parts and aerospace components.

Unfortunately, there is no longer a precise set of statistics to measure Maquiladora Industry growth. All maquiladoras, including service maquiladoras, have since 2007 been lumped together in the IMMEX (Manufactures and Maquiladora Export Industries) program.

However, maquiladoras remain an integral, cutting edge part of Mexico's improved and much more sophisticated export effort. New plant and plant expansion announcements and/or inaugurations were solid in 2012 (see table for just a sampling of these). These projects alone, when operating at capacity will mean a total of some 9,800 jobs. And those jobs are increasingly high or higher technology oriented, in tune with international market demands.

As concerns overall IMMEX statistics, at end-September 2012 (the latest month for which offi cial fi gures exist), there were 5,125 plants in operation, employing 1.99 million persons. In addition, there were 1,189 plants in the non-manufacturing IMMEX segment, which includes a bevy of service maquiladoras, probably close to 360. These non-manufacturing companies/ plants employed an additional 231,700 persons. Both categories enjoyed good growth in the 12-month period ending in September.

Between September 2011 and the same month one year later, the number of IMMEX manufactures exporters rose by 80, with a net employment gain of 112,280 (5.9%). Very healthy indeed. Employment was at its best monthly level ever in September.

Back in December 2006, the last month for which just Maquiladora Industry statistics exist, there were 2,783 plants (including 300 service maquiladoras) and total employment of 1.17 million persons.

At the beginning of 2007, it was forecast in the Global Insight econometric projection that by the year 2012 there would be 2,891 operating maquiladoras with net employment totaling 1.46 million. That forecast came before the 2008-2009 deep recession in the U.S. and global economies, a recession which subsequently became double dip for many of these economies.

Evidence suggests that 2007 forecast wasn't far off the current Maquiladora Industry, even though full-fl edged statistics just don't exist any more. The number of operating maquiladora plants is probably very close to 2,800. Overall employment appears to be in the 1.45 million to 1.50 million jobs range. Both fi gures would include service maquiladoras.

President Enrique Peña Nieto, during his campaign, on a number of occasions expressed his support of the Maquiladora Industry concept.

He also appears to be fi rmly in favor of a still freer foreign trade policy for Mexico. This is translated into Mexico's presence in the Trans-Pacifi c Strategic Economic Partnership (TPP) negotiations, expressions of interest in expanding the scope of the North American Free Trade Agreement and a new round of unilateral reductions in tariff schedules.

One possible indicator of the President's freer trade interest is the decision to rename Undersecretary of Economy for Foreign Trade Francisco de Rosenzweig in the previous Administration to the same post in his government.

The incoming Secretary of Economy, economist Ildefonso Guajardo, stated in early December that the current Administration will work on putting together an industrial policy with an export competitiveness emphasis. "The theme is to design an integral industrial policy that will not represent a backsliding in the model of an effi cient integration to globalization", Guajardo stated.

That concept would of necessity incorporate the Maquiladora Industry, long a pacesetter in proving that Mexico could be internationally competitive.

In the tariffs area, it was announced in early December that Mexico this year will reduce duties on an additional 144 tariff fractions (from 25% to 20%). Once that is done, Mexico as of 2008 will have cut its average duty rate to 5.9%.

CNIMME - INDEX

The key spokesgroup for the Maquiladora Industry is the National Maquiladora and Manufactures Industry Council, the CNIMME or INDEX (the Spanish acronym for National Export Industry).

CNIMME/Index in recent years has mounted a strong lobbying effort for key industry issues. And it was very active in last year's transition period and since the new Administration took offi ce this past December 1.

"The new Administration looks at the Maquiladora Industry sector as a very, very good option to generate the (export) opportunities and the employment… they are looking for", states Luis Aguirre, president of the Council.

As one parte of the above mentioned CNIMME/Index lobbying activities, there is now a specific maquiladora issues sub-commission in the Federal Chamber of Deputies.

Aguirre recently re-emphasized a six point Council public policy program for Mexico, national economic development and maquiladoras. Those six points are:

• Consider maquiladoras and all IMMEX companies as a strategic (economic) sector,
• Strengthen national productive chains by and for IMMEX companies,
• Continue and maximize the country's trade opening process,
• Implement and strengthen the logistics system, as a public service essential to exports development,
• Greater Federal incentives and investment in training programs for exporting companies ("we are always subject to international competition"), and
• Boost foreign direct investment in Mexico, sustained by a competitive and long-term fi scal regimen for IMMEX companies, "to facilitate promoting the country as a safe destination for multinational (manufacturing) investments".

There were modifi cations in November to the Customs decree as concerns foreign trade (exports). These can directly affect maquiladoras – positively.

The modifications apply to issuing "authorized exporter" status to companies exporting to European Union countries, providing they have an IMMEX registry and have exported at least $250,000 dollars in goods (including perishable goods and handcrafts) in the 12 month period immediately prior to requesting this status.

Customs also published modifi cations to rules covering electronic value reporting (COVE). These particularly refer to obligatory document digitalization requirements in the Single Window export system.

There are few concrete forecasts as yet for maquiladora export and investment performance in 2013, although the general feeling seems to be one of cautious optimism. Growth however is not likely to be double digit.

One forecast, dealing only with employment prospects, comes from the University of Texas at El Paso's Borderplex Economic Outlook. The Outlook does deal with two major maquiladora cities, Ciudad Juarez and Chihuahua.

According to economist Dr. Thomas Fullerton, a veteran econometrician, manufacturing employment growth in Juarez should be 3.0% this year. That would be almost entirely in maquiladoras. For Chihuahua, where the maquiladora presence is strong but not totally dominant, the manufactures jobs upturn is seen at 1.9%. The comparison 2011 and 2012 growth fi gures were Ciudad Juarez 2.8% and 3.8% respectively and in Chihuahua 8.8% and 1.75%.

Fullerton, who heads up the Borderplex Project, comments "The reasons that the manufacturing (IMMEX) sectors (very much including maquiladoras) should continue to expand are relatively straightforward. Both cities have trained, experienced, and productive workforces in product lines that are principally destined for export markets. Both cities are located within short driving distances of multiple ports of entry into the United States. That translates into very low transportation costs. And wage infl ation in China has eroded much of the cost of labor gap that previously existed between Mexico and that country."

Fullerton goes on to add that "the new Labor Law in Mexico should encourage both domestic and international companies to increase payrolls in cost effective manners similar to what is observed in other OECD countries."

Noble of the Intermex Group is particularly optimistic for growth for automotive and aerospace related maquiladoras in such zones as the Leon-Silao-Queretaro industrial corridor, Sonora state (in and around Hermosillo and Guaymas/Empalme) Mexicali and Chihuahua. And he is armed with loads of statistic to prove his point.

The Intermex Group –fi rst established in Ciudad Juarez and Chihuahua back in the 1970s– now operates full-service industrial parks and/or provides maquiladora shelter services in 8 cities in northern and central Mexico.

A bright spot for Juarez recently announced was the decision by maquiladora giant Delphi to reactivate one of its Juarez plants. That alone will mean initially 500 jobs.

For the full year 2013, according to CNIMME/Index projections, foreign direct investment in Mexico's manufacturing sector, maquiladoras included, should reach at least $9.28 billion dollars, vs. a projected full year 2012 total of $8.80 billion, a 5% overall gain.

THE NEW LABOR LAW

One of the final acts of the outgoing Presidential administration was promulgation of the new Federal Labor Law.

The new Law, for which the regulations have yet to be published, was generally hailed as being a stimulant to added employment in Mexican industry. The idea of sweeping reforms to the previous Labor Law has been generally applauded, except by Mexico's long-entrenched labor centrals.

Changed considerably were contractual conditions for new and existing hires which apparently have been made more fl exible, and Labor Law rules covering outsourcing and subcontracting. All of the changes should prove amenable to manufacturing investment and expansion, maquiladoras included. But the changes –including the regulations– need to be carefully studied prior to implementation.

In any event, the new Labor Law should mean an additional 300,000 formal sector jobs in the Mexican economy by year's end, according to Labor Secretary Alfonso Navarrete. These would be jobs registered with the Mexican Social Security Institute (IMSS). Navarrete also forecst that the new Law "will help us diversify our exports."

TAXES STAY THE SAME

The Federal tax status for maquiladoras in 2013 remained basically unchanged, pending a promised full scale fi scal reform for 2014.

This was disappointing to many Maquiladora Industry specialists who had hoped that for 2013 a number of the special tax treatments for maquiladoras would become codifi ed in the Mexican tax laws, rather than simply approved for one more year. As one observer noted, "all they did was give that issue another aspirin."

Full-fl edged extension, meaning permanence in the tax laws, had been a major lobbying petition by the CNIMME/Index.

However, the transitory regimes will remain in effect in 2013. This covers primarily exemption from the corporate fl at tax (IETU) concept and tax treatment for foreign companies which establish a Mexican maquiladora under the shelter umbrella.

One tax issue affecting maquiladoras in the state of Nuevo Leon was still up in the air as of mid-December. That was the state government's plan to increase the payroll tax rate by 50%. This idea, if put into effect, could be detrimental to new investment and employment by maquiladoras. Or any other company for that matter. If it becomes law, Nuevo Leon's payroll tax rate would be upped from 2% to 3%.

Normally, states with a payroll tax grant exemption to new industries for the fi rst several years of operation.

THE MINIMUM WAGE

In mid-December, the National Minimum Wage Commission approved the new minimum wage for 2013.

Usually, the annual increase in the minimum is a percentage boost just a bit higher than the annual rate of retail infl ation, which for the full year 2012 probably will have been an even 4%. A slightly lower rate, in the 3.6% to 3.8% range, is now expected for this year.

The new minimum wages for 2013 for Zones "A" and "B" will be 64.76 pesos per day and 61.38 pesos/day respectively, in each case an increase of 3.9%. Most major maquiladora cities –including almost all northern border cities plus the Monterrey and Guadalajara metropolitan areas– are in Zone "A".

Only a minimal number of Maquiladora Industry workers earn at the minimum wage, probably no more than 5% currently. The annual increases however do serve as a benchmark in determining the base percentage to be used in annual wage adjustments for factory personnel.

What did take many observers by surprise was the decision by the Commission in late November to merge minimum wage zones "B" and "C", thus eliminating the latter.

This impacts, albeit rather marginally, on maquiladoras operating in such traditional zone "C" cities as Chihuahua, Agua Prieta, Acuña, Piedras Negras and Merida. Cities in zone "B" up until November remained in zone "B". Actually, the tripartite Commission for the past several decades has been tinkering with the notion of unifying the different minimum wages (by zone and by profession). Its November action, which apparently hadn't been anticipated (except behind closed Commission doors), could pave the way for full unification within the next few years.