As maquiladora operators fight a Mexican tax proposal that would raise their taxes, they also are facing changes in the kind of products they manufacture as their customers relocate some work to lower-cost Asian countries.
A slowdown in petroleum revenues drove the administration of Mexican President Felipe CalderÃ³n to issue a June 16 proposal seeking higher business taxes in Mexico's 2008 budget. CalderÃ³n began a six-year term Dec. 1.
Maquiladora backers are making a strong lobbying effort to ward off a possible 500-800 percent rise in their business taxes, said Jesús Calleros, president of the National Council of Maquiladoras in Mexico City. Calleros spoke during a maquiladora industry conference, held Aug. 8-10 in El Paso.
The administration has proposed a flat tax rate, a concept gaining popularity in Europe.
``The new administration tried to copy [the flat-tax concept] from Italy,'' Calleros said. ``They did not do their homework.''
While legislators have heard that the proposal could hurt maquiladoras, the possible increase also engenders uncertainty for investment, Calleros said.
Another consultant agreed. ``The combination of the income tax and the [flat-rate business tax] during the transition period will be very burdensome for companies,'' said Manuel Molano, a consultant with the country's not-for-profit Competitiveness Institute in Mexico City. But, he added that all sectors would benefit long term after the phaseout of the income tax.
Hypothetically, the tax reforms ``would be a disaster for maquiladoras,'' said Carlos Angulo, a principal partner with Baker & McKenzie law firm in Mexico City. The firm is ``forming a coalition of clients and friends'' to encourage legislators to oppose the proposal.
``Countries coming out of the old Soviet Union are establishing this type of tax,'' Angulo said in a presentation. ``Make it simple: Get everyone to pay taxes.''
Angulo also discussed a November 2006 rule known as the Immex Decree (decree for the development of the manufacturing maquiladora and exports services industry), aimed at strengthening the competitiveness of the Mexican export sector.
The decree ``fails to provide a modern and adequate regulatory environment to the Mexican export industry and falls short to be the regulatory body needed to heighten our country's competitiveness,'' Angulo said.
John Christman discussed what maquiladoras need to compete and survive.
``The key is complete elimination or real streamlining of the government jungle of rules and regulations,'' said Christman, director of Global Insight Inc.'s maquiladora econometric service in Mexico City. ``This did not happen in the Immex Decree or the fiscal-reform proposal. Quite the contrary.''
Citing government and financial reports, Christman said 2,783 maquiladora plants employed 1.17 million in 2006, both down from the 2000 peak of 3,703 plants and 1.31 million workers.
For 2007, Christman projected growth of 0.3 percent in plants to 2,819, and 2.1 percent in employment to 1.23 million.
Tijuana, in 2006, had 568 facilities, Ciudad Juarez had 279. With more large-sized facilities, Ciudad Juarez employed 238,300, and Tijuana, 164,900.
A federal exemption for maquiladoras is set to expire Dec. 31. Christman wondered if the exemption would be extended.
Speakers identified weaknesses in Mexico's competitive position.
Local governments in Mexico need to pursue research and development programs aggressively, to allow businesses to remain viable against Asian competitors, said Ramiro Villeda, managing director of Villeda Consulting Group Inc. of El Paso.
``How come after 40 years [there is no R&D] ... in Mexico?'' Villeda asked. ``No R&D - no future'' for maquiladoras.
``You can forget about the federal government in Mexico'' supporting R&D, he said. ``India has done the work locally at the city and state levels.''
Comparing Mexico and China markets, Sergio Ornelas, editor of MexicoNow magazine and Chihuahua economic development director, discussed product-country fit characteristics and industries.
Mexico is best positioned to make products that are customized, involve a high mix/low volume, and deal with short-cycle just-in-time work, he said.
Further, Mexico has advantages through the North American Free Trade Agreement, its ability to protect intellectual property and the availability of the country's domestic market, Ornelas said. Industries with the best fit for Mexico include aerospace, automotive, medical, software development and design and engineering.
China is positioned to handle commodity-type, labor-intensive products with a low cost of logistics, low-mix/high-volume characteristics and suitability for the Chinese domestic market. Industries that fit China include footwear, toys, furniture, textile/apparel and computers and peripherals, Ornelas said.
``China looks like Mexico 20 years ago,'' quipped presenter Jay Jessup, director of worldwide automotive group with New York-based Cushman & Wakefield Inc.
Business units of Fairfield, Conn.-based General Electric Co. are transferring technology and product lines between Mexico and lower-cost production sites, said Alfredo Espino, senior vice president of GE Capital Solutions Mexico.
Among GE products exiting Mexico are plastic commodities, small motors and engines, lighting products and long-term software development projects, Espino said.
Mexico is handling more make-to-order GE Industrial Systems motors and transformers, GE Transportation Systems service and repair shops and GE Aircraft Engines technology.
Espino noted that printer production was moved back to Guadalajara to keep intellectual proprietary products in Mexico. The technology was stolen while production was done in China, he said.
``GE is not comfortable in lending in China yet,'' said Espino, who is located in San Pedro Garza García, Mexico.
In Mexico, a hot area for commercial real estate activities is the six-state Bajío region including the Queretaro, LeÃ³n and San Luis Potosí communities, said Paul Caine, executive managing director of the Mexico operations of NAI Global of Princeton, N.J. The NAI Mexico unit has 10 offices including Caine's location in Tijuana.
Caine outlined a trend in consolidation of automotive original equipment manufacturers with operations in Mexico. There were 51 automotive OEMs there in 1964, 32 in 1980 and 13 in 1999, and there might be six to eight with activity in Mexico by 2010. Caine quoted a 2005 study by management consulting firm Accenture Ltd.
The conference indicated that interest in shelter programs continues. Typically, a program user operates as a department of the provider, and relies on the shelter company for a site, human resources, accounting and environmental compliance.
Chihuahua-based Parque Industrial Internacional Mexicano SA de CV, known as Intermex, currently obtains about $45 million per year from operating shelter programs. Total Intermex sales are about $102 million, said presenter Tres Hendrix, Intermex marketing director.
Intermex originated as an industrial park developer, branched into construction and then, 15 years ago, saw opportunity in the shelter programs.
Border issues abound
While governments lack funding for new border facilities, ``the international bridges are cash cows,'' said Don Michie, president of Nafta Ventures Inc. of El Paso and professor of marketing at the University of Texas at El Paso.
``Commercial crossings are increasing significantly while [crossings of personally owned vehicles] and pedestrians are decreasing, Michie told conference attendees. The City of El Paso collected $14 million from fiscal 2005 tolls and $14.3 million in fiscal 2006.
The city raised fees under a budget effective Sept. 1, expecting $2.4 million in new annual revenues. The toll for commercial vehicles went to $3.50 per axel from $3 and passenger vehicles to $2.25 from $1.65.
Chihuahua-based Servicio Internacional de Informacion SA de CV, publisher of the bimonthly MexicoNow magazine, organized the conference.