When Ralph Girton started a management consulting company 27 years ago to help U.S. companies set up factories along the U.S.-Mexico border, some friends told him that he would be lucky to be in business in five years.
The year was 1964, and most U.S. manufacturers eager to tap cheap labor sources were turning to the Far East--to Taiwan, Hong Kong and Singapore--to set up assembly operations.
But Girton couldn’t see the logic of making products half a world away and then paying to ship the finished goods back to the United States. He was convinced that U.S. companies eventually would recognize the advantages of manufacturing in Mexico.
Though it took awhile, he eventually proved his friends wrong.
By the mid-1970s, higher fuel prices and shipping costs and rising wages in the Far East were making it less attractive for U.S. companies to assemble their products in Asia. Some manufacturers began to look south of the border.
The Mexican government started a program called the Industrialization of the Northern Frontier of Mexico in 1965 to encourage U.S. investments in the rural towns near the U.S.-Mexico border. Girton saw this as an opportunity to encourage Southern California companies to shift production to Mexico’s border towns, where labor is cheap and plentiful.
Today, the prospect of a U.S.-Mexico free-trade agreement promises to give Girton’s company, Cal Pacifico of California, its biggest boost yet. Proponents of the free-trade pact believe that it will prompt more companies to locate production facilities in Mexico, especially along the border.
But the outlook isn’t entirely bright. Girton said that a free-trade deal, if completed, would not only create new business opportunities, but also bring more competition for his company.
Cal Pacifico is what the maquiladora industry refers to as a “shelter company"--one that helps foreign-owned companies set up assembly plants along the U.S.-Mexican border and then manages the operations. While the manufacturers provide the technical know-how, raw materials, parts and production equipment, Cal Pacifico manages the daily operations--bookkeeping, personnel, transportation and so on.
These shelter companies can be particularly helpful to foreign companies that are unfamiliar with doing business in Mexico, with the language, labor practices and culture.
Cal Pacifico’s revenue has grown from $5 million in 1970 to nearly $17 million last year. In the first five months of 1991, revenue reached $9.3 million, and Girton is projecting sales of $22 million for the year.
There are about 2,100 companies--mostly U.S. firms--operating maquiladoras , said Tony Ramirez, a director of the National Maquiladora Assn. in Mexico City.
Although only 32 Japanese and a handful of South Korean companies operate maquiladoras, they and other manufacturers from the Far East represent the fastest-growing segment of plant operators.
“We also see a lot of interest from companies in Taiwan, Hong Kong and China,” said Ramirez, who is also executive vice president of Made in Mexico Inc., a Chula Vista shelter company.
Cal Pacifico said it pays Mexican workers the official minimum hourly wage of about $1.29. This is less than a third of the U.S. minimum wage of $4.25 an hour. While the wage gap is big, Girton explains that it is still far better than Mexico’s minimum wage of about 50 cents an hour.
According to Henry Esparza, founder of Chula Vista-based Assemble in Mexico, shelter companies are often used by foreign-owned firms new to maquiladoras or those unable to afford a large capital investment. His company was started in 1979 by a group of former Cal Pacifico employees and now operates 30 plants in Tijuana, Tecate and Juarez.
One risk that shelter companies face is that their clients will outgrow their services once they gain experience operating a maquiladora, Girton said.
In recent years, about 40% of the companies that have set up maquiladoras have later closed them, Ramirez said. Those failures are mostly due to inexperience and lack of capital in doing business in Mexico, he said.
Made in Mexico has formed a division to look into new businesses that may result from a free-trade pact. The new unit will provide a legal and accounting services intended to help U.S. and Mexican companies form joint ventures.
Ramirez, of the National Maquiladora Assn., predicts that the trade agreement, if completed, will prompt U.S. companies in the insurance, banking, fast-food and warehouse fields to start operations in Mexico.
Because many Fortune 500 companies already operate in Mexico, the next group of U.S. firms to start maquiladoras will probably be medium-size companies that are expanding into international markets, he said.
“I think the maquiladora program will continue a moderate growth under a free-trade agreement,” Ramirez said. “I don’t think the growth will be as tremendous as many people expect it to be.”
But Girton disagrees, predicting a boom in foreign-owned assembly operations.
“I expect a new breed of entrepreneurs to emerge from this free-trade agreement,” he said. “But I don’t think the free trade will hurt us because we can always adapt to changes like we’ve done in the past.”
Cal Pacifico’s Revenues As more firms began investigating the advantages of manufacturing in Mexico, Cal Pacifico’s total sales soared. (In millions of dollars) 1966: $0.1 ’70: $5.0 ’75: $3.1 ’80: $10.5 ’85: $16.8 ’90: $16.7 ’91: $9.3* *Jan-May Source: Cal Pacifico
Some Clients of Cal Pacifico
Cal Pacifico of California Inc. operates maquiladora plants in Tijuana for 14 U.S. companies, most of them from Southern California. Below are clients who have agreed to be identified.
Company: Lipps Inc. Plant Size (sq. ft.): 20,000 Employees: 150 Products: magnetic tape heads for audio equipment Company: Sunward Technologies Plant Size (sq. ft.): 25,000 Employees: 125 Products: magnetic tape heads for computers Company: Miles Inc. Plant Size (sq. ft.): 60,000 Employees: 300 Products: disposable medical devices Company: Teledyne Corp. division Plant Size (sq. ft.): 25,000 Employees: 200 Products: printed circuit boards Company: Imed Corp. Plant Size (sq. ft.): 30,000 Employees: 175 Products: disposable medical devices Company: Universal Paper Goods Plant Size (sq. ft.): 25,000 Employees: 250 Products: office supplies Source: Cal Pacifico of California Inc.