The Maquiladora Mexico’s Production Sharing Mosaic

As we approach a half century earmarking Mexico’s Maquiladora Industry and 20 years of NAFTA, one appreciates more the vitality of this industry’s startup and evolution during its formative years, 1965-1974. In essence the catalysts for the startup of the industry included primarily the coincidence of three seemingly unrelated economic initiatives: Economic globalization, Mexico’s National Border Program (Programa Nacional Fronterizo) and the U.S. Bracero Program.

This article traces these and other factors that paved the way for the startup of the maquiladoras and its evolution. The article presents a mosaic created by the different roles and contributions attributed to certain private sector entrepreneurs, government officials, service providers and industry representatives. It provides an overview of the industry’s development taken from a forthcoming book, “The Stalwarts of the Maquila”, written by the authors of this article.

GLOBAL AND MEXICAN BUSINESS ENVIRONMENTS: PRE-1965

World War II served as the catalyst for today’s economic globalization. The economies of Europe and Japan had to rebuild. By 1965, Japan became an economic powerhouse challenging U.S. industry for market share in the U.S. economy. Puerto Rico had developed its production sharing program with the assistance of Arthur D. Little Company. Asia’s “Tigers” including Taiwan rapidly developed as global exporters. Certain U.S. industries including apparel and electronics were being taken over by foreign imports.

Bill Huskins, plant manager, Taylor Instruments, said it best, “The first 400 U.S. – owned maquiladoras came to Mexico for survival. Their total costs of business were no longer competitive in the U.S. Market.”

Mexico’s border economy with the United States was in shambles. Long isolated from Mexico’s internal markets due to distance, discrimination and governmental policies, the border (Frontera) became dependent on the U.S. economy. Mexico’s border economy was dominated by agricultural (cotton) production and pleasure attractions offered by its border communities. Unfortunately, cotton, its staple crop, lost its market due to lower prices and overproduction globally. The industry literally shut down by 1962. Shut down warehouses and storefronts dominated Main Street from Matamoros to Mexicali.

Further, community leaders did not like what had become of their communities. Cd. Juarez and other Mexican border towns became entertainment centers specializing in Mexican divorces, prostitution and gambling. American Airlines’ flight between New York and El Paso was called “The Divorce Flight.” Lastly, the United States had announced the cancellation of its Bracero Program, a temporary agricultural work program for migrant Mexican workers. Suddenly, more than 500,000 Mexican migrant workers would lose their jobs, and many resided in these Mexican-border communities.

At the urging of community leaders including Antonio J. Bermudez, President Adolfo Lopez Mateos in 1961 announced his Programa Nacional Fronterizo (PRONAF). Bermudez, former director of PEMEX became the program’s director general. The program sought to improve the appearance and quality of life of Mexican border communities. Unfortunately, the program did not have sufficient funding.

However, several Mexican business leaders saw an economic opportunity. Richard L. Bolin, director of Arthur D. Little’s Mexico City office, recognized the company’s Puerto Rico Project could be modified to introduce a production sharing based economic development initiative to the PRONAF program. He convinced Director General Bermudez to fund a study for Cd. Juarez. The study would be completed in the fall 1964.

At the time, production sharing was not new to either the world’s economy or to the U.S. and Mexico. Production sharing, “the economic integration by stages of the production process (Drucker 1977),” is really a job creation/export stimulation and total cost of business reduction program. Its principle tenants had been written into the first U.S. trade law, The Tariff Act of 1790. The provision provided for duty-free re-importation of “all articles of the growth, product or manufacture of the United States.” The Trade Act of 1846 stipulated duty-free status only for “U.S. origin articles that had not been altered in any way.” By 1963, this concept was codified as Items 806.2 and 807 of the Tariff Schedules of the United States.

Any foreign producer who integrated U.S. value added into production would pay U.S. duty only on the production’s foreign content value. His U.S. value added component would enter the U.S. duty-free. Britain’s Merchantile System was based on similar principles. As mentioned production sharing based programs in Puerto Rico, Japan and Asia adopted similar principles.

By 1965, Mexico already had two production sharing programs. The Zona Libre (Free Zone) authorized (Article 584, Regulation of Customs Law, April 19, 1939) Mexican joint venture operations located within the zone to integrate foreign materials into their production provided there were no suitable Mexican suppliers. Equipment and materials were imported, processed and exported without a bond required. With a special permit, exports were authorized for sale in non-free zones in Mexico. The Free Zone consisted of Baja California and Sonora, but no farther east.

To the east, Mexico authorized its Regla Octava Program in 1951. This program provided for the temporary importation of equipment, materials and components, in bond, for processing and export. A.C. Nielsen and Transitron (both Nuevo Laredo companies) were among the first U.S. companies to operate under this program. Molduras de Pino (Cd. Juarez) was another one. Due to bureaucratic red tape and operational restrictions neither program was particularly successful. A Regla Octava permit was issued on a case-by-case basis. The program lacked published operational guidelines.

BORDER INDUSTRIALIZATION PROGRAM (BIP) -1966: THE MAQUILADORAS

Asia’s production sharing model was introduced in 1966 to incoming President Diaz Ordaz as a potential solution to Mexico’s economic and quality of life problems along its border with the United States. Bolin later attributed to Director General Bermudez the president’s introduction.

Actually, Mexico’s Regulations of Customs Law already had a production sharing provision. A 1958 accord by Antonio Garrillo Flores, Minister, Finance used the term “Maquiladora” to refer to the temporary importation of production units for export. Given his interest, President Diaz Ordaz sent Mexico’s Octaviano Campo Sales, Minister, Industry and Commerce, to Taiwan and other Asian countries to witness their programs. In addition, entrepreneurs including Fernando Borreguero, a Cd. Juarez businessman, visited Asia and returned extremely impressed by its programs.

Subsequently, Ministers Campo Sales (Industry and Commerce) and Antonio Ortiz Mena, Ministry of Finance (Hacienda) were authorized to publish an inter-secretarial agreement signed June 10, 1966. It built from the 1958 Accord and did not require a presidential decree. In essence, the program was the Regla Octava restricted to operations within the 20-kilometer frontier zone. Molduras de Pino, a Cd. Juarez door and molding company managed by Ignacio Tinoco, Secretary Ortiz Mena’s brother-in-law, became the first company to receive operational authority.

Lack of support infrastructure and published operational procedures caused the Border Industrialization Program (BIP) to get off to a slow start. The first industrial park was the Antonio J. Bermudez Park, Cd. Juarez, 1969. Mexico published the first BIP regulations in 1971, followed by a more comprehensive set in 1973. The first official reference by the U.S. Embassy in Mexico to the BIP becoming Mexico’s In-bond, or Maquiladora Industry came by way of an Airgram Communique in February 1972 to the U.S. Department of State.

U.S.-MEXICAN CUSTOMS INTERFACE

The U.S. 806.3 and 807 Tariff Program and Mexico’s “inbond” program had been independently established by each country. It happened that they meshed well together. Mexico would accept foreign equipment, materials and components, in-bond, for temporary importation and processing. The production was required to be exported out of Mexico. U.S. companies incorporated, or operating under shelter programs, could process their U.S. materials and components, in-bond, in Mexico and return their production to the U.S. with the U.S. content value duty-free.

It sounded simple. However, U.S. Customs’ interpretation of 806.3 and 807 Rules of Origin led to extreme complexity. For example, a landmark court ruling (Rudolph Miles vs. the United States) helped define “what constitutes assembly” under Tariff 807. Rudolph Miles, Sr., an El Paso customs house broker, had filed the lawsuit. The U.S. government’s interpretation of 807 was that the provision dealt with only those processes solely related to the assembly process and which were of a minor nature. On appeal, the court ruled that Miles’ client having only added slots and holes to Z-beams had performed a process that only related to assembly.

While U.S. law dealt with clarifying “what qualified as assembly or were incidental to the assembly process,” Mexico did not provide definitive operational guidelines to the industry until the Presidential Decree of August, 15, 1983. These federal interpretations by both countries encountered further complication in that the rules would be interpreted differently depending on the point of entry/exit of the items.

STALWARTS OF THE MAQUILADORA INDUSTRY

Clearly, the startup of the maquiladora industry faced numerous challenges. A cadre, a mosaic, of visionary leaders who believed in the socio-economic potential associated with this industry took on the challenges. This mosaic integrated government, entrepreneurs, service providers and industry representatives from across U.S.-Mexican border communities, Washington, D.C., Mexico City, Los Angeles and corporate offices globally.

Secretary Campos Sales worked tirelessly to implement and promote the startup industry. Border mayors, notably Dr. Judson Williams (El Paso) and Aureliano Gonzales Vargas (Cd. Juarez), played an active supportive role. The entrepreneurs led the fight. Jaime Bermudez Cuaron (Cd. Juarez) developed the first industrial park. Dick Campbell (Nogales) developed the shelter program. Enrique Mier y Teran (Tijuana) was a plant owner and operator. Roberto Nelson (Mexicali) was an international businessman, an expert on Asia. Sergio Arguelles (Matamoros) joined with General Motors to build industrial parks in Mexico’s interior.

These entrepreneurs promoted the maquiladora concept through trade conferences border wide and into the interior markets of the U.S. and Mexico. They formed industry support groups including the Seven Sisters (Cd. Juarez); Mexico’s Industrial Parks Association (AMPIP), the Maquiladora Association (AMAC), the U.S.-Mexico Border Cities’ Association, and others.

Trade and communication experts such as Dick Bolin (Mexico City) and John Christman (Mexico City) offered support. Dick Shostak (Los Angeles), Bill Outman (Washington, D.C.), Ignacio Guardino (Mexicali), Fernando Cervantes (Tijuana) and Tito Torres (McAllen) provided legal representation. Rudolph Miles, Sr. (El Paso), William Joffroy (Nogales), Porter International (San Diego) handled U.S. Customs’ declarations for clients. Banks in certain communities -for example Laredo (Laredo National Bank, International Bank of Commerce) and Nogales (Valley National Bank) — provided valuable financing.

Excellent management served the industry: Dick Michel (General Electric); Jack Williams (General Motors); Jack Solon (A.C. Nielsen); Bill Huskins (Taylor Instruments); Jim Ebersole (CTS); Gary Sollner (Zenith); Jerry Brochin (Springfield Wire); Duane Boyette (Maquila International); Bob Milo (Molex); Carlos Pinto (Wilson), and John Riley (Controls Research).

It is not possible to recognize the hundreds of contributors to the startup of the maquiladora industry. What has stood out about them is this mosaic of stalwarts, although competitors, joined to represent industry with the Mexican government, to build infrastructure and to promote the program. They were an integral part of what was to become one of the world’s most successful production sharing programs.

PROLOGUE

In the ensuing years, the maquiladora industry and Mexico have engaged serious challenges. The North American Free Trade Agreement (NAFTA) threatened to be the industry’s demise. However, industry adjusted to NAFTA’s operational requirements, its preferential tariffs and has flourished.

China and Mexico’s industrial competitiveness issues would be overcome once business leaders focused on total cost of business, not simply labor costs. Joint initiatives significantly led by industry such as technology training (Research Centers) and sourcing from Mexican suppliers (Automotive and electronic sectors) overcame certain challenges.

More challenges await the maquiladora industry. The emerging Pacific Rim Free Trade Agreement and the North American- European Free Trade Agreement threaten to erode the industry’s competitive advantage enjoyed within the North American market. How the industry responds to this challenge could quite well determine its future.

The lesson to be learned: Mexico and the industry’s leadership ought not to forget the integrated mosaic characteristic of the stalwarts’ generation. It did take a community effort.

Donald A. Michie, Ph.D. President Nafta Ventures, Inc nafta@elp.rr.com Maria E. Barua, Ph.D. School of Management Texas Woman’s University mbarua@twu.edu