Guadalajara Struggling in Tech Slump

Dubbed Silicon Valley South for its flowering of high-technology companies in the 1990s, Guadalajara is drooping these days, having lost 18,000 jobs, several marquee companies and hundreds of millions in investment over the last two years.

The region is struggling mightily to reinvent itself, with private industry and the state government of Jalisco teaming up to try to attract “value-added” systems design and software companies to replace the scores of vanished assembly operations.

There have even been scattered successes, including IBM Corp.’s recent decision to double its staffing here to 1,200 by 2004 and Intel Corp.’s commitment to upgrade its Guadalajara office as a stand-alone research and development center where its current staff of 50 could multiply 10 times in the next several years.

But economists warn it will take years to recapture the jobs and critical mass of companies that were abundant here as recently as 1999.

What’s clobbered Jalisco are the same factors that have hit computer, Internet and telecommunications firms around the world: overcapacity and a recession in the United States and other countries that has severely dampened consumers’ and businesses’ appetite for new gear and services.

Among the companies that have fled or downsized are Hewlett-Packard Co., NEC Corp., Lucent Technologies Inc., Solectron Corp., Flextronics International Ltd. and VTech Holdings Ltd. The latter two are so-called contract manufacturers that assemble products or components for larger name brands. Guadalajara became a center for such operations in the late 1990s.

The exodus is a sharp reversal of economic fortune for Guadalajara. The city in southwestern Mexico, with the population of 8 million, slowly had been building a high-technology base since the 1970s, when Eastman Kodak Co., Burroughs Corp. and Motorola Inc. arrived. Prodded by federal law, the companies increasingly turned to local suppliers and technical workers to get their jobs done.

The base expanded with the North American Free Trade Agreement and the devaluation of the peso in 1994, which made Guadalajara more attractive to high-tech companies that not only relocated big operations here but brought suppliers with them, said Carlos Alba, a sociologist at Colegio de Mexico in Mexico City.

Companies grew so fast that labor became scarce. Just two years ago, employers were sending buses 70 miles outside of town to fetch prospective workers. Industrial space was being snapped up as it was built.

Now there is a glut of real estate, labor is plentiful and service companies such as customs and transportation firms are struggling to survive.

High tech hasn’t completely vanished. Guadalajara still is responsible for some highly recognized products. IBM makes laptop computers here and Flextronics assembles Microsoft Corp.’s Xbox. The value of the region’s exports last year, at $10.5 billion, was about the same as the previous year.

But the situation in the trenches is grimmer than the figures suggest. Current high-tech employment of 64,000 is off 21% from the peak.

Perhaps the most alarming statistic apart from the job losses is the sharp reduction in business investment in Jalisco, which dropped from a peak of $742 million in 1998 to $179.9 million last year.

“The damage from the slump is being shared by all the support industries, from injection-mold plastics to metal stamping, all the companies that are directly related to the production at these plants,” said Juan Jose Palacios, an economist at the University of Guadalajara.

At the same time as the region is coping with a global tech slowdown, it is being forced to compete against other, lower-cost labor centers for manufacturing jobs. Mexico has been hurt by the relative strength of the peso, which has worked to make its labor increasingly expensive.

Thousands of the jobs that Guadalajara has lost in the last three years have fled to China, Malaysia, the Dominican Republic, Brazil and other developing nations boasting lower labor costs and higher productivity, government officials here acknowledge.

Especially hard hit have been the companies in Guadalajara that assembled consumer products such as cell phones, pagers, printers and electronic pocket organizers.

Alejandro Delgado Ayala, Jalisco’s deputy secretary for economic development and an entrepreneur with a Stanford graduate degree, says he has no illusions about the chances of those assembly jobs coming back to Mexico.

“What’s happening in Asia is making it necessary for us to transform ourselves from a low-cost center to a value-added center of manufacturing,” Delgado Ayala said. “We hope to see the exit of operations like the assembly of telephones and pagers replaced by much more sophisticated design software and specialized labor.”

To make Guadalajara and environs a more attractive place for those sorts of companies, the state is pushing technical education and promoting communication among the companies that remain to improve local outsourcing. The area has more than 30 universities and technical schools and a solid infrastructure.

But in trying to capture software designing and engineering jobs, the region has a different set of competitors, including Ireland and Scotland, that offer infrastructure and language advantages.

“The efforts of the state government are well-intentioned but are subject to the reality that 95% of the capital invested in Jalisco is foreign,” Palacios said. “Virtually every plant forms part of a multinational company. And the strategies on a corporate level are subject to influences much stronger than the economic development policies of the state.”