O.C. Businesses Learn Hard Lessons in Mexico : Markets: Failure rate of <i> maquiladoras </i> is an object lesson amid hoopla of the free trade pact.

Tom Fairfax was seduced south of the border.

Back in the mid-1980s, the Tustin business consultant thought Mexico was the Promised Land. He advised hundreds of Orange County business leaders they’d be loco not to open a maquiladora plant there. The peso was at a record low against the dollar, Mexican labor cost next to nothing, and the maquiladoras didn’t have to pay normal U.S. import duties on the goods they produced.

Nowadays, Fairfax is speaking another language. Though a few of his clients are still happy and successful in Mexico, others encountered so many border delays, unanticipated expenses and cultural mix-ups that they closed up shop and came running back to Orange County. Fairfax’s memories of Mexico are so bad that he doesn’t even want to vacation there.

“I have absolutely no intention to ever do work in Mexico again. There aren’t enough rewards for the aggravation,” Fairfax said.

Fairfax’s complaint--common among some Orange County businessmen with experience there--cuts through the rising din surrounding Wednesday’s debut of the North American Free Trade Agreement by the United States, Mexico and Canada.

In a survey of maquiladora plants with Orange County roots, The Times has found that nearly one in four has closed, declared bankruptcy or simply vanished in the last 18 months alone.

“Mexico is no panacea,” Fairfax said.

While it may not produce a speedy cure for this region’s lingering recession, the trade agreement at least is not seen here as the threat it may be to economic recovery in the Northeast and the Rust Belt, where high-paying factory jobs are vulnerable to the pull of Mexico’s low wages.

The pact, still subject to legislative ratification in all three countries, would create the world’s largest free trade zone of about 370 million consumers, allowing Canada, Mexico and the United States to move goods and services across each other’s borders without tariffs and other impediments. It’s the United States’ answer to--and a rival of--the European Common Market.

Although tariffs on both sides of the U.S.-Mexican border have fallen dramatically in recent years, they are still big enough to create marketing problems for any business.

Western Digital Corp. in Irvine, for instance, has been forced to charge Mexican customers $356 for an 80-megabyte computer hard drive that sells for only $294 in the United States.

Higher prices in a country that can ill afford them means that Western Digital doesn’t sell too many computers in Mexico.

The free trade agreement would change that, and much else besides.

Proponents of the agreement think it’s better than sunken treasure from a Spanish galleon. The booty: about 88 million up-and-coming Mexican consumers who are hungry for duty-free Orange County surfwear, pharmaceuticals--even Taco Bell burritos.

“Made in the U.S.A. has tremendous cachet,” said Rep. Christopher Cox (R-Newport Beach), who led an Orange County trade mission to Mexico earlier this year.

Some of the trade agreement’s backers claim that the agreement will also slow the rate of illegal immigration into California by raising living standards in Mexico.

Enemies of the trade agreement say the act is economic suicide. For starters, they’re worried that the biggest export to Mexico will be American jobs. One of the chief advantages of the trade agreement--lower prices on consumer goods--won’t matter if unemployed or underemployed U.S. workers can’t afford to buy them, opponents point out.

The trade agreement, they further contend, simply makes Mexico a safe haven for U.S. companies that want to pollute the air or exploit disadvantaged workers.

The chasm between Tom Fairfax’s experience in Mexico and Western Digital’s dreams of doing business there demonstrates that the trade agreement’s effect on Orange County won’t be quite as simple as either side would have you believe.

Orange County is at the hub of one of the nation’s largest exporting regions, and it’s expected to thrive under the trade agreement. That doesn’t mean a few people won’t get hurt along the way.

The Bush Administration insists that the trade agreement is essential if U.S. companies are to compete in the new world order. Japan and other industrial nations often use labor in less developed countries to undercut American-made goods.

Developer Brandon Birtcher equates the trade agreement to a boxing match that has been heavily weighted in Orange County’s favor. To stay on top, Orange County’s businesses and employees just have to keep on their toes and be a little flexible.

“It’s what a boxer learns: Roll with the punch. If he holds his chin stiff, he is going to get it busted. . . . But if he rolls with the punch, he can get through the hit,” said Birtcher, managing director of Birtcher Real Estate Development in Laguna Niguel.

“The hit that is coming is the (integration) of North America,” he said. “If you want to resist this, you’re going to get punched out. If you want to roll with it, then you can find opportunity and probably win the fight, even as an individual employee.”

Orange County actually stepped into the ring more than 25 years ago when some of its corporate entities began participating in the maquiladora program, a Mexican government plan to allow U.S. firms to manufacture goods in Mexico, with Mexican labor, and to import them almost duty free into the United States.

Nothing foretells more about U.S. plant relocations under the trade agreement perhaps than a detailed look at what has already occurred among Orange County maquiladoras.

Some of Orange County’s biggest corporations have quietly owned maquiladoras for decades. Hughes Aircraft Co., Rockwell International Corp. and ITT Cannon employ thousands of Mexican workers who mostly do electronic assembly work.

Nevertheless, a Times survey in Mexico found that only 87 of Orange County’s 5,500 manufacturing firms were listed as having maquiladoras in 1991.

Those maquiladoras employed fewer than 10,000 people at the time, not even 5% of the 226,000-member manufacturing work force in Orange County.

“People have unfairly turned Mexico into a metaphor for job loss,” said Raul Hinojosa, professor of urban regional planning at UCLA.

Raw materials are shipped into Mexico without tariffs or duties and then fashioned into finished products for export to and sale in the United States. Tariffs and taxes are only paid on the value of factory work done in Mexico.

The maquiladora isn’t a sure-fire money maker. In fact, The Times survey in Mexico found that a maquiladora is often a sinking business’ last gasp.

Of the 87 maquiladoras with Orange County roots listed in 1991, 23 are no longer in operation.

They made a range of products: plastic lamps, coupons, underwear packaging, hangers, circuit boards and swimsuits make up just a partial list.

“A lot of them went for the wrong reasons. Only 25% of them should have gone,” Fairfax said. “They paid the price.”

So has Mexico’s environment.

The American Medical Assn., in a 1990 report, said the 2,000-mile U.S.-Mexico border is “a virtual cesspool” of waste and pollutants.

The medical association pinned part of the blame on U.S. industry south of the border.

Fairfax said he was routinely approached by companies wishing to move to Mexico just so they could avoid stringent environmental regulations back home.

“Their sole purpose in going to Mexico was they had something that was very polluting,” Fairfax said. “I told them, ‘We’re in Mexico to make money, not to kill Mexicans.’ ”

The United States and Mexican governments have allocated more than a half a billion dollars in cleanup funds for the border region over the next two years, but environmentalists say it’s not enough.

One Orange County company that must deal with environmental regulations all the time realized during the current recession that either its maquiladora or its Anaheim manufacturing plant would have to go.

The maquiladora got the ax.

For two years, Innovation Fiberglass Product’s La Mesa maquiladora made dock boxes and other boating products.

Deciding to shut it down and lay off 35 Mexican workers wasn’t a tough call for IFP’s management, according to General Manager Mark Howison.

From IFP’s perspective, the company was just choosing the lesser of two evils--dealing with the U.S. Customs Service, or putting up with Orange County’s environmental regulations.

Howison said customs often delayed IFP trucks at the U.S.-Mexican border for two days or more. Sometimes, drivers were told to unload an entire truckload of merchandise.

“I’d rather keep a plant going in AQMD-friendly Southern California than to fight with U.S. Customs,” Howison said, referring to the Air Quality Management District, whose anti-pollution regulations are generally criticized and dreaded by most business owners.

Having done business there, Howison scoffs at the notion that Mexico is a magnet for Orange County jobs.

“We have to go down there and figure out what those people want to buy and sell it to them,” Howison explained. “They desperately need things. . . . That is where we are going to make money, not by hiring cheap labor.”

Howison thinks 30% of a company’s costs must be in labor charges before it can even consider moving to Mexico.

IFP’s labor is only about 15% of its total manufacturing bill. By the time Howison figured in related charges--such as trucking fees and a broker’s commission--it was clear that Mexico was a mistake as a manufacturing site.

Some Orange County companies are, however, thinking about moving their plants in Europe or Asia to Mexico instead.

Varco International’s oil tools division in Orange, for instance, has already begun transferring work from a factory in the Netherlands to an operation it has in Mexico.

Western Digital, on the other hand, said it doesn’t need a plant in Mexico and is happy with its operations in Korea, Malaysia and Singapore.

“I could get labor for free and it wouldn’t pay me to put a plant down there,” said Western Digital Chairman Roger Johnson.

Another reason that more Orange County companies won’t move their U.S. operations to Mexico is because of the cheap labor pool available here at home.

Orange County’s low-wage industries are already relying on inexpensive immigrant labor to compete in world markets.

For instance, thousands of drywall workers in Orange County have gone on strike to protest what they say are deplorable work conditions, including wages of only $300 for a 60-hour workweek.

One estimate of garment industry wages indicates that more than 35% of sewing shop workers in Southern California are paid less than the minimum wage of $4.25 an hour.

“Why does that industry stay here? Because they are able to simulate a maquiladora- type environment within the city of L.A.,” said Edward Lawler, professor of management and organization at USC.

UCLA’s Hinojosa said Latinos in Southern California will be hurt more by the trade agreement than any other group.

“Latinos account for about 58% of those who will lose their jobs, even though they are less than one-third of the work force,” he said. “They are in low-paying jobs, and they are in import-intensive industries . . . such as furniture, apparel and food processing.”

Mexico is rapidly trying to catch up to the United States in part so its citizens don’t feel they need to leave in order to make a living.

Even so, the country’s infrastructure and corruption problems are far from licked.

The phone system is still unreliable despite privatization. Routine business calls can become mission impossible.

Then there is the mordida to worry about.

Translated as “a bite,” mordida is Spanish lingo for bribe. Mexican President Carlos Salinas de Gortari is picking away at the problem with some success.

“ Mordida has a long history in Mexico,” said Norman Gritsch, an Irvine attorney specializing in international law. “Corruption is being fought at all levels and is dramatically going down.”

These problems aside, Orange County business leaders will have other hurdles to overcome.

Spanish for instance.

Pacific Sacon Constructors in San Juan Capistrano recently discovered that its name sounds like ‘slimy’ in Spanish.

“We’re now thinking of a different name,” said a chagrined David Tuttle, Sacon’s project partner.

On a more serious level, cultural differences will change the way some Orange County companies do business. Nowhere is this more apparent than in the home-building industry.

Birtcher, for one, says too many developers think they can just pick up their bulldozers, head south and then build pseudo-Orange County subdivisions. But Mexican culture puts a premium on concrete-made homes.

“This is where the foreigners will find themselves having some tremendous difficulty,” said Birtcher, who has already formed several joint ventures with Mexican partners.

Orange County and the rest of the United States, Birtcher concluded, must invest in Mexico-- regardless of what happens to the trade agreement--and be up for the challenges that lie ahead.

“This is our last pit stop in order to stay in the race,” said Birtcher, adding that U.S. industry will become increasingly vulnerable to foreign competition if it fails to expand into new markets. “We either pull in and retool or call it a day.”

Doing Business in Mexico

Long before there was the new North American Free Trade Agreement, there was the maquiladora. The term is Spanish for foreign-owned manufacturing plant. Relatively few of Orange County’s corporate entities have maquiladoras , but some big names have been doing business in Mexico for more than two decades. A profile of how the county’s maquiladora factories have fared:

Who’s Still in Businesses

Orange County-based companies accounted for 87 maquiladoras at the outset of 1991. Most are still in business.

Parent company out of business: 19

Parent in business but closed maquiladora : 4

Parent moved out of Orange County: 4

Still in business: 60

Where They’re Located

The 60 maquiladora factories affiliated with Orange County companies are mostly located directly across the border.

Tijuana: 37

Tecate: 7

Mexicali: 8

Ensenada: 5

Hermosillo: 1

Pitiquito: 1

Nogales: 1

Export License Applications

Export license requests for the Orange County region and their dollar values declined dramatically in 1991. License requirements revolve around the product and its destination; sensitive products or destinations require a license. However, with Europe’s changing politics, the federal government has removed restrictions on some exports to countries such as Germany and the Soviet Union.

1991 1990 1989 1988 1987 License requests 841 1,854 3,294 3,275 2,910 Value (in millions) $711.9 $2,037.6 $6,196.6 $3,719.1 $2,026.8

* From the Orange County region, which includes parts of Riverside and San Bernardino counties

Taxing U.S. Goods

Once the free trade agreement is fully implemented, tariffs on Orange County goods shipped to Mexico and Canada will fall. The repeal of these tariffs will increase the opportunities for other local companies to export to Mexico and reduce prices as well. A comparison of retail prices of some Orange County-based products that are available in Mexico and how tariffs affect the price:

Retail Price In U.S. In Mexico Carl’s Jr. Western Bacon Cheeseburger $2.49 $2.99 Cig-Arrest Smoking cessation program $19.95 $21.95 Western Digital 80-megabyte computer drive $294.00 $356.00

% Increase In Mexico Carl’s Jr. 20% Cig-Arrest 10% Western Digital 21%

Sources: Mexican secretary of industrial commerce; Maquila magazine; San Diego Economic Development Corp.; U.S. Department of Commerce, Bureau Export Administration; PC magazine; individual companies

Researched by GREG CROUCH and APRIL JACKSON / Los Angeles Times

Top 10 Orange County Maquiladoras

The top Mexican companies affiliated with Orange County companies lean heavily to electronic components assembly. Companies ranked by number of Mexican employees:

* Rockwell International, Newport Beach Orange County employees: 1,331 Maquiladora/location: Rockwell Autonetica, Mexicali Maquiladora employees: 1,070 Product: Semiconductor devices * Beckman Industrial, Fullerton Orange County employees: 305 Maquiladora/location: BICOMP, Mexicali Maquiladora employees: 573 Product: Electronic components and microcircuits * Hughes Aircraft, Interconnect Systems Division, Irvine Orange County employees: 392 Maquiladora/location: Interaz S.A. De C.V., Tijuana Maquiladora employees: 400 Product: Electronics assembly * Ram-Kore Associates, Laguna Hills Orange County employees: 3 Maquiladora/location: Fase de Baja California, Mexicali Maquiladora employees: 300-400 Product: Electronics assemblies * A&E; Products Group, Santa Ana Orange County employees: 25-30 Maquiladora/location: Plastico Gajacal, Tijuana Maquiladora employees: 383 Product: Plastic hangers * Hitachi Consumer Products of America, Anaheim Orange County employees: 150-200 Maquiladora/location: Hitachi Consumer Products de Mexico, Tijuana Maquiladora employees: 315 Product: Televisions and VCRs * ITT Cannon, Santa Ana Orange County employees: 1,500 Maquiladora/location: Sonitrones, Nogales Maquiladora employees: 300 Product: Electronic components * Kuron U.S.A., Cypress Orange County employees: 1,446 Maquiladora/location: Kuron Mexicana, Mexicali Maquiladora employees: 300 Product: Electronic assemblies * Glenn of California Inc., Huntington Beach Orange County employees: 5 Maquiladora/location: Glenn de B.C., Tijuana Maquiladora employees: 261 Product: Custom hotel furniture * Sunday Samples, Costa Mesa Orange County employees: 18 Maquiladora/location: Concepto de Empaque Internacional, Tijuana Maquiladora employees: 200 Product: Carpet-sample books, decorative boxes, binders Sources: Mexican secretary of industrial commerce; Maquila magazine; San Diego Economic Development Corp.; U.S. Department of Commerce, Bureau Export Administration; PC magazine; individual companies Researched by GREG CROUCH and JANICE L. JONES / Los Angeles Times