Asian Crisis Pinches Maquiladoras

Sprawled across a hillside on Tijuana’s outskirts, Samsung’s state-of-the-art manufacturing complex is a hive of activity--except for the cavernous blue-and-beige building on the eastern edge of the campus.

Built as part of a planned $400-million expansion into microwave-oven manufacturing, the empty building serves mostly as a reminder of the long reach of the Asian financial crisis.

Samsung put the project on indefinite hold earlier this year as the South Korean company struggled with the economic turmoil in Asia and other parts of the world.

In the bustling industrial zone along the U.S.-Mexico border, executives at some Asian-owned factories are postponing expansion plans or slowing operations as the economic crisis dries up investment capital and creates political pressure to keep more jobs at home.

South Koreans have been among the hardest hit, but companies based in other Asian countries also are taking a longer look at expanding operations outside their home countries, analysts said.

“I have seen nothing that shows any more Korean investment in the maquiladoras at this point,” said Martin Kenny, a UC Davis economist who follows the maquiladora industry. “I would say basically the Koreans are dead in the water. Korea’s in deep trouble.”

The slowdown among Asian companies appears to represent only a tiny dent in a border boom that began during the 1960s, when Mexico enacted laws granting liberal tax breaks for maquiladoras, foreign-owned factories that assemble goods for quick export.

Overall, maquiladoras remain the most dynamic sector of a Mexican economy squeezed by successive currency devaluations. The peso is worth about 10 cents in U.S. currency after losing nearly a third of its value so far this year.

Since 1966, the number of maquiladoras has grown to more than 3,000, with about 1 million employees.

Production expanded under the North American Free Trade Agreement, which took effect in 1994 and eliminated or reduced tariffs on most goods traded among the United States, Mexico and Canada. In 1998, maquiladoras will produce goods valued at $62 billion, a number expected to increase to $100 billion by 2002.

Those figures actually may increase because of the crisis in Asia, said John H. Christman, who directs maquiladora analysis for Ciemex-Wefa Inc. in Mexico City.

“We feel we’re seeing much more investment coming into the maquiladora industry in Mexico because of the stability factor,” he said. “Companies are saying, should I invest now in Indonesia, or should I invest now in Thailand? There is a political factor there of perceived uncertainty, whereas the maquiladora industry continues to be very successful.”

Only about 170 maquiladoras are Asian owned, but the Asian plants are among the largest and most sophisticated because they focus primarily on televisions, computers and other consumer electronics.

The peso devaluation actually has been a boon to the maquiladoras, since they typically pay for labor and other expenses in pesos and sell their goods for dollars. As long as Americans are buying the toys, clothes and appliances the maquiladoras produce, the industry will remain healthy and continue to grow.

For Asian maquiladora operators, there is more to worry about. Because of rising unemployment across Asia, companies are reluctant to export jobs to Mexico. And in some countries such as Korea, investment capital is scarce and currency devaluations have made it cheaper to produce at home.

Both reasons played into Samsung’s decision to suspend plans for the microwave plant, which would have created several thousand jobs for Mexican managers, engineers and laborers.

“Costwise it is more competitive to produce things in Korea rather than produce them here, so the mother company wants to reduce the outside operation,” said Young Kwon, president of Samsung Electro-Mechanics of Mexico.

Each year at Samsung’s Tijuana complex, some 4,000 employees manufacture about $700 million worth of color television sets and computer monitors, mostly for the U.S. market. In five buildings, workers manufacture key components, such as tuners, which are assembled in a sixth plant within the complex.

In a joint venture with Corning Inc. of the United States and Japan-based Asahi Glass Co., the company is constructing another building to make glass for picture tubes. That project was temporarily suspended after the Asian crisis began last year, but now is back on schedule, Kwon said.

Samsung isn’t the only company to gear down. Last month another Korean corporation, Gumsung Plastics, sold a small plant in Mexicali, about 80 miles east of Tijuana, to Compass Plastics & Technologies Inc. of Gardena, Calif. Gumsung had built the plant to supply plastic for television manufacturers, including Acer, Sony, Samsung and Daewoo. The plan unraveled when South Korea’s economy began to falter.

Others have had problems, said Kwon, who also is president of the Korean Maquiladora Assn.

“Some of them, because of the tight financial situation, they couldn’t expand as scheduled. Some others cut back to keep jobs at home,” he said.

Japanese and Taiwanese companies generally have fared better because their home countries have been hurt less by the turmoil in Asia. But most also have become reluctant to expand in Mexico, Kenny said.

Acer, the Taiwan-based computer maker, opened a 200-employee monitor factory last year in Mexicali. The company is waiting to see if the market will support a proposed expansion, said David Peng, the plant’s managing director.

Sony Corp. was on an expansion binge until about six months ago, adding a cellular telephone production operation and a new engineering unit to its Tijuana electronics plant. Now the company, which expects pretax profits to fall 62% this year, is watching the U.S. economy to see if the market will sustain the growth.

“Sony has grown tremendously in the San Diego-Baja region over the past few years,” Sony spokeswoman Irene Balli-Dumas said in a written statement. “However, due to the current volatile global economic situation, we are monitoring market conditions very carefully.”

The incentive to stay in Mexico is strong. Even though it is cheaper to manufacture in China and Southeast Asia, where labor costs are lower, Mexico is close to the all-important U.S. market. Being close saves shipping costs. More important, it enables manufacturers to quickly respond to retailers who don’t want to maintain large inventories of goods, Kenny said.

“If you’re a major manufacturer anywhere in the world and you believe this tendency will continue, it really doesn’t make sense for you to try to switch a lot of this production back to Asia because you’re going to get a price break on labor,” Kenny said. “The long-term tendency seems to be, incontrovertibly, Mexico.”