More Companies Relocate Plants South of the Border

Drawn by low labor costs that have declined along with the value of the Mexican peso, foreign manufacturers set up a record 79 manufacturing plants, or maquiladoras , here last year, a 40% single-year increase.

The year was notable also for the increased commitments of giant Japanese electronics companies to expand or relocate operations here, said Miguel Velasco Bustamante, the Baja California delegate of the federal Secretary of Commerce and Industrial Development responsible for issuing maquiladora permits.

Although Japanese firms accounted for only 7 of the 79 maquiladora permits issued in 1986, companies such as Sony Corp. of America and Hitachi Consumer Products are building much larger plants than other foreign companies are, Velasco Bustamente said in an interview recently.

Sony, for example, last year bought a 20-acre site in the El Lago industrial park that can accommodate up to 800,000 square feet of plant space. Sony’s first phase, a 260,000-square-foot building for color television sub-assemblies, will be completed by July.

Sanyo E&E; Corp. received permission to expand the 200,000-square-foot plant it owns in the Mesa de Otay section of Tijuana by another 200,000 square feet. Sanyo builds fans and refrigerators here.

Hitachi moved into its new 130,000-square-foot plant in December but controls enough adjacent land to triple its size, company officials said. Hitachi is now making wood cabinets for its larger color television models, but may expand to making sub-assemblies as well, company officials have said.

More than 15 delegations of Japanese, Taiwanese and South Korean businessmen and government officials trooped through Tijuana over the past year to assess the area, Velasco Bustamante said, leading him to believe that larger numbers of Asian manufacturers will relocate to Baja California in 1987.

“Given the number of seminars sponsored by banks and accountant firms to promote the idea, the level of construction in Tijuana and the continuing drop in the peso versus the yen, I have to think the number coming to Tijuana will be the same this year if not more,” said Felipe Muzquiz, a partner in Muzquiz Group, the Tijuana development firm that sold Sony Corp. its 20-acre site.

One developer who asked not to be identified said South Korean electronics conglomerates Gold Star and Samsung are both in negotiations to buy plant sites here. Samsung’s requirement is for a site that can accommodate at least 200,000 square feet of building space, the source said.

“The Koreans have been very visible here for the last six months,” said Eduardo Bustamante, a Tijuana attorney with several developer clients.

Maquiladoras, which totaled 273 in Tijuana at the end of last year, increased significantly all along the Mexican border in 1986, Velasco Bustamente said. “About 1,000” of the plants are now in operation in Mexican border cities, 30% more than the total at the end of 1985. Maquiladoras now employ 29,900 people in Tijuana and 300,000 throughout Mexico, he said.

But the prime focus in maquiladoras seems to be on Tijuana, perhaps because of Asian manufacturers’ appreciation of the dynamic, affluent California market, Velasco Bustamante said. Eighty percent to 90% of the goods made in Tijuana maquiladoras end up being sold in California, he said.

Japanese firms prefer to buy, not lease, facilities and tie up additional land for future expansion, he said. American companies, by far the largest contingent of maquiladora operators in Tijuana, have taken a more cautious approach, he said, usually subleasing buildings, employees and equipment from intermediary plant operators.

Geography aside, Mexico’s appeal to foreign manufacturers is a matter of dollars and cents. The decline in the peso’s value has lowered manufacturing costs--direct labor plus factory overhead--in some Tijuana plants to about $2.10 per employee hour, compared to $33 per employee hour in comparable plants in Orange County, said A.M. Ramirez, president of Rancho Bernardo-based Estec International, a firm that assists American companies moving to Mexico.

Increasing numbers of U.S. companies are finding those kinds of cost savings hard to resist, despite the opposition from some labor groups and government officials to a trend they say costs American jobs. Parker Hannifin Corp., Johnson & Johnson, Topaz Inc., Eastman Kodak and Douglas Furniture Corp. are just a few of the U.S.-based companies that received permits last year to open Tijuana maquiladoras.

“This thing is too far advanced for a bunch of congressmen to hold it back,” Ramirez said.

Although maquiladoras help reduce unemployment, Velasco Bustamente said their primary value to Mexico’s economy last year was as a generator of $2 billion in foreign currency--making them the country’s second-largest source of foreign currency after petroleum sales.

To maximize those benefits, the Mexican government is going out of its way to accommodate foreigners, Velasco Bustamente said. The maquiladora permit process has been simplified and decentralized over the last three years to the point that approvals can be had in two to four weeks. Three years ago, the wait was six months. Mexican President Miguel de la Madrid has sent a very clear message to the Mexican bureaucracy that it expedite the entry of foreign manufacturers, he added.

Government officials “are in a good mood to help,” said Eduardo Serrano, a Tijuana developer who has built 900,000 square feet of plant space in Mesa de Otay.