Television City : Asian Firms Make Tijuana a Prime-Time Player in TVs

By EVELYN IRITANI and CHRIS KRAUL

May 28, 1995 12 AM PT

TIMES STAFF WRITERS

TIJUANA, Mexico —

While most of Mexico suffers the ill effects of last winter’s peso crash, a far different story is unfolding along the northern border of Mexico’s Baja Peninsula. Asian investors are fueling an industrial explosion that has transformed this border city into the world’s biggest center of television production.

Elsewhere in the beleaguered nation, workers see little reason for hope in the face of 40% to 50% inflation, drastically shrunken paychecks and consumer interest rates that approach triple digits. But here, a different set of forces have converged to offset the nation’s immediate economic crisis and to make the case that free trade, often blamed for current woes, offers longer-term benefits for Mexico.

This largely unheralded influx of Asian funds into the Tijuana region is driven not by the collapse of the peso but by the surge in the strength of the yen and, more important, by the local-production requirements of the North American Free Trade Agreement.

These new NAFTA prerequisites for duty-free access to the world’s biggest consumer market, combined with Japanese companies’ need to reduce their dependence on Japanese-made components whose yen price has skyrocketed, have given a huge boost to Mexico’s hitherto largely unsuccessful efforts to align itself more closely with the fast-growing Asia-Pacific region.

“We have to come here,” explained Young Kwon, 51, president of Samsung Electro-Mechanics America Inc., which operates a Tijuana plant making electronic components for the giant South Korean industrial firm.

This transformation of Tijuana did not happen overnight. Asian electronics companies began setting up shop here in the early 1980s, attracted by cheap labor, proximity to the huge U.S. consumer market and lax regulation. Present now among Tijuana’s 500 foreign-owned plants are Asian makers of everything from ballpoint pens (Scripto) to musical instruments (Casio).

But the past two years have seen a dramatic rise in the local production of components--such as chassis and electronic tuners--heretofore made in Asia and shipped to Tijuana to be assembled into televisions. The Tijuana area now produces more televisions than any city anywhere--about 6 million sets a year.

In the coming months, some of Asia’s biggest corporate names plan to invest hundreds of millions more dollars on new plants or expanded production in maquiladoras , foreign-owned factories that enjoy special U.S. and Mexican government tax breaks that promote investment in Mexico so as to discourage illegal immigration.

Six of the eight largest Japanese TV makers--Sony, Sanyo, Hitachi, JVC, Matsushita and Toshiba--now have major assembly plants or plan to build them along Mexico’s northern border. Just last week, for example, JVC announced it would construct a facility in Tijuana that will employ 500 people.

The Koreans are also bullish on this place.

Over the next year, Samsung is to invest $240 million in a 250-acre industrial park that will house Tijuana’s first television picture tube plant and 2,400 employees, more than double its present Mexican work force. Within a few years, that investment is expected to climb to $500 million.

South Korea’s Daewoo makes televisions in Mexico south of Yuma, Ariz., and Goldstar makes them in nearby Mexicali.

One result of such activity: Prices for industrial real estate on the Mexican side of the border have doubled in two years and now far outstrip those in San Diego.

Joe Smith, a real estate broker with John Burnham & Co. of San Diego, who represents many Japanese companies, said the market has never been so hot. And it’s not just because of Asia’s heavy hitters. At least a dozen smaller Asian TV component suppliers have already come, or are planning to move in the months ahead, to Tijuana.

“There are U.S. companies looking around,” he said, “but the guys leading the show are the Asians--Japanese and Korean.”

Nor is the Asian interest confined to Japanese and Korean electronics companies. Already this year, two delegations of Chinese, eager to boost their presence in the North American free-trade zone, have visited Tijuana industrial parks in search of sites for textile and toy factories.

All this is heady stuff for Mexico, which in recent years has pursued a largely one-sided love affair with the Pacific. In general, Asian investors have preferred to focus their attention on the closer and more familiar low-wage areas of China and Southeast Asia.

Japan, although it has several auto plants in the interior of Mexico in addition to its electronics plants, is Mexico’s second-largest trading partner, but it still lags far behind the United States. And trade with China dropped off sharply last year after the Mexican government imposed stiff tariffs to discourage the import of low-cost Chinese shoes and garments.

Now the rush for people and property has turned Tijuana into a seller’s market. According to broker Smith, prime industrial sites are selling for about $260,000 an acre, compared to about $175,000 in San Diego. Industrial space rents for about 45 cents per square foot--nearly 30% higher than in San Diego. Rapid growth has created an unmet demand for middle managers, forcing companies to look as far away as Mexico City and Guadalajara to recruit qualified people.

All the activity in Tijuana got a boost from the government-ordered devaluation of the peso in December, but Asian investors argue that those benefits will be fleeting and that the peso will eventually make a comeback.

A more lasting influence has been the steep climb of the yen, which has increased nearly 20% in value against the dollar since the beginning of the year. That has boosted prices of Japanese-made TV parts.

But the chief force behind the Asian investment surge is NAFTA. Under the accord, key components such as picture tubes and tuners will have to be produced in North America for a color TV to be sold duty-free in the NAFTA trade zone.

The picture tube and tuner together make up 75% to 80% of a television’s total value. Traditionally, Asian companies have kept such production at home so they could retain control over the technology.

The NAFTA-yen double whammy was behind the decision by Hitachi Home Electronics America Ltd. to begin shifting its chassis manufacturing operation from Malaysia to Tijuana last year. It required a $7.3-million investment in the Tijuana factory and the hiring of 400 additional employees.

With that move, Hitachi was not only able to satisfy NAFTA local-content requirements but also to free up space in Malaysia to begin producing videocassette recorders that were being manufactured in Japan.

Shigemasa Ito, president of Hitachi Consumer Products de Mexico, fears his battle with the yen is not yet over. A further increase in its value, he said, could force him to move to Mexico the production of high-density lenses now imported from a plant in Yokohama.

“When I first came here, the yen was 160 to the dollar; now it is [87],” he said, shaking his head. “How do we resolve this problem?”

Sanyo of North America, which operates seven plants in Tijuana, will start producing tuners here this year, and by doing so will raise the “local content” of its TV sets to nearly 90%. Motoharu Iue, president of Sanyo’s North American operations, said he is seeking nearby sources of additional components such as liquid crystal displays and semiconductors, now made in Japan.

“Japanese industry will not succeed in North America in the long term unless we sink deep roots here,” he said.

The dramatic expansion of “TV City,” as Tijuana’s boosters are calling it, also reflects the Asian manufacturers’ desire to build a single, full-service headquarters for TV production in the Americas.

The pioneer of this idea is Sony Engineering & Manufacturing of America, which opened its first television plant in San Diego in 1972 and has invested $500 million in the San Diego and Tijuana plants that are the company’s manufacturing platform for North and South America.

Such expansions demonstrate the close ties between Tijuana’s and San Diego’s economies.

The Japanese companies like Tijuana’s cheap labor, its proximity to the rich U.S. market and the fact that their executives can live in San Diego, just a 20-minute commute away.

And for San Diego, the benefits go beyond deep-pocket home buyers. Maquiladoras have spawned an entire industry of support companies in San Diego that provide supplies and services to them.

The maquiladoras’ evolution from sweatshops into complex manufacturing operations has prompted companies such as Sony and Matsushita to move design and marketing functions to the United States from Japan. But those kinds of operations are almost always set up next-door in San Diego.

Matsushita, for example, will soon move its Western Hemisphere television headquarters to San Diego from Illinois, bringing 120 jobs and $7 million in payroll--a direct consequence of the company’s growing presence in Tijuana.

Sony offers a prime example of this binational, regional approach to manufacturing in which certain products and functions are assigned to plants on each side of the border.

For example, the company makes more than 1 million high-end Trinitron color televisions and computer monitors at a high-tech San Diego facility that employs 2,200, using some labor-intensive components from its Tijuana operations. In Tijuana, Sony’s Mexican subsidiary, Video Tec de Mexico, employs 4,000 people to produce an additional 2 million smaller televisions and 1 million computer monitors a year.

Sony now has 120 well-paid engineers and designers at its North American headquarters in San Diego. All but three of the 44 TV models Sony is introducing into the U.S. market next month were designed in the United States, not Japan.

J. Luis Zuniga, director general of Video Tec, said having the designers in San Diego and the production on both sides of the border allows the company to react quickly to market shifts, to shorten the length of time between the drawing board and store shelves, and to reduce costs. Ninety percent of Sony North America’s television components are made in the United States, and 50 to 60 trucks a day carry Sony products between plants on the two sides of the border.

“The most sophisticated television takes a lot to get to the store, and it’s a lot quicker if you’re right next-door to the store,” he said.

Now Sony’s North American team is investigating new ways to use its Trinitron technology to bridge the gap between the home electronics industry and computers. One idea would be to use powerful microprocessors to turn computer monitors into a video conferencing system. Success could mean substantial growth for the border operations.

“Here at San Diego and [Video Tec de Mexico], we have the opportunity to redefine Sony’s display products for the Information Age,” said Stephen Burke, Sony’s vice president for business development for North America.

Although most Asian companies have avoided the limelight, a few of their executives have become involved in the region’s development efforts and persuaded other foreign companies to bring their business to San Diego, where most of their executives reside.

The most visible is Sanyo’s Iue, who is on the executive board of the San Diego Economic Development Corp., a nonprofit group promoting job growth in the region. Neil Whitely-Ross, the group’s vice president, says he hopes Sanyo will bring other Asian executives out of the shadows.

“With Sanyo setting a precedent, we expect others to follow,” he said.

Political leaders on both sides of the border are also looking for more concrete help from the Japanese and other foreign investors. The Asian investment boom--as well as the maquiladora phenomenon in general--has overwhelmed Tijuana’s roads and its water, sewage and power systems.

Indeed, Samsung’s decision to build the picture tube manufacturing facility in Tijuana is a mixed blessing: Tube production requires huge quantities of electricity and water.

Samsung officials and Tijuana Mayor Hector Osuna Jaime, who has been a vocal advocate of the maquiladora industry and foreign trade, expressed confidence that the city will be able to supply the plant with whatever it needs. But the political fallout could be great if, as some critics predict, Tijuana’s residents are forced to ration drinking water in order to service a giant foreign firm.

Osuna, who took his first trip to Asia on his honeymoon in 1988, knows his region’s limits. He said Tijuana can become a major Pacific Rim player only if “we as a country do what is needed in terms of infrastructure and look ahead.”

And Osuna last month called on the Asian companies--which have been nearly invisible outside of their businesses--to recycle more of their profits back into projects that upgrade the community.

“Japanese companies are getting a bargain for what they are spending,” he said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Made in Norte America

Of the 26 million television sets sold each year in the United States, about 25% are made in Tijuana and San Diego.

Company: Sony

Employees: 2,200 in San Diego, 3,800 in Tijuana

Investment to date: $400 million in San Diego, $140 million in Tijuana

Investment planned: $50 million in 1995

Annual production rates: 2.9 million sets a year in the region

Company: Hitachi

Employees: 85 in San Diego, 1,100 in Tijuana

Investment to date: $300 million in Tijuana