Mexico's Factories Shift Gears to Survive

Times Staff Writers

Driving along the gritty streets here, Kunio Marukawa used to cringe when a souped-up car blaring loud music pulled up next to him.

Nowadays, the Japanese executive looks approvingly at those drivers and offers a silent prayer of thanks.

"Those crazy guys are our best customers," said the San Diego-based vice president of Pioneer Corp.'s Pioneer Speaker Systems. In fact, at this week's big consumer electronics trade show in Las Vegas, Pioneer will be showcasing its Tijuana-made speakers: a new line of 10- and 12-inch models that are aimed at young hot-rodders.

Pioneer is struggling mightily to keep its Tijuana factory complex open in the face of fierce competition from China, which has undercut Mexico as a cut-rate producer. The Japanese electronics company already has slashed 900 jobs at its three plants here, moving the manufacturing of smaller speakers to Shanghai, where they can be churned out for as little as $3 each -- half of what they cost to make in Mexico.

"China's cost competitiveness is very strong," said Hirokazu Tsujimoto, another Pioneer executive who makes his home in nearby San Diego.

Now, the fate of the Tijuana operation and its remaining 1,500 jobs rests on the plant's new focus: producing large, customized car speakers -- some weighing as much as 26 pounds -- that are too bulky to ship cheaply across the Pacific.

Pioneer's shift reflects a painful, pivotal adjustment for Mexico's export-oriented factories, known as maquiladoras, especially along the U.S. border.

Since 2000, the Mexican government estimates, the maquiladora industry has lost nearly 250,000 jobs and seen its roster of plants shrink to about 3,200 from a high of more than 3,700. Among those that have shuttered operations are Hasbro Inc., Sanyo Electric Co. and Canon Inc. Landing another good position "will be very difficult," said 50-year-old Victor Hernandez, an engineer from Monterrey who was a manager at Canon's printer plant here.

Besides electronics, the exodus to Asia has been led by makers of apparel and furniture, as well as telecommunications and recording equipment. Although some industrial units here recently have added workers as the U.S. economy has improved a bit, there is concern that more foreign-owned factories are planning to leave for cheaper labor markets in China, Vietnam and elsewhere.

"What's got a lot of people unnerved is the degree of uncertainty," said James Gerber, an economics professor at San Diego State University. "How many firms are likely to go? Which industries are likely to be affected?"

New Strategy

To try to remain competitive, Mexico's factories have started to retool. For example, Mexican officials are targeting industries such as autos that depend on delivery of supplies on short notice for U.S. assembly lines or require components so heavy that it's prohibitive to ship them long distances.

Some factories here are investing in technology so that they can produce more sophisticated goods that require a high degree of quality control, such as medical instruments and military hardware. This sort of precision work can't be matched so easily in Asia, the thinking goes.

"If we want to pass from the Third World to the First, we need more technology, more productivity," said Manuel Garcia, a former manager for Sanyo, which has closed several plants and laid off 3,000 workers in Tijuana over the last two years.

The transition could have lasting benefits, Garcia believes. "It's like one winter you lose your crops, but all the pests go with them," he said. "Or a volcano erupts and burns so many thousands of acres, but the ash makes the soil richer."

Of course, getting from here to there can be taxing, as Eiji Tanaka has discovered.

Tanaka manages a twin-plant operation that straddles San Diego and Tijuana for Kyocera America, the U.S. subsidiary of giant Japanese ceramics firm Kyocera Corp.

The company manufactures customized packaging for components used in the semiconductor and telecommunications industries. Tanaka's plan has been to slowly move production from the company's San Diego facility across the border, keeping the assembly lines close to the research and design center.

But the transfer has been tedious and expensive, he said. Because of the complex production process, the company requires a high level of skill that has been difficult to obtain in Mexico. Some of the company's U.S. customers have refused to have their products made in Mexico, fearing the quality would go down.

"Our product is not easily transferred to other locations without technical know-how," Tanaka said. When the telecom market crashed, Kyocera's orders fell, and the company was forced to slash its Tijuana workforce by more than half, leaving about 800 workers.

Still, Tanaka is committed to cranking back up his production in Mexico once the telecom market recovers -- and he has been training his Tijuana employees in anticipation of the ramp-up.

"It may be difficult competing in the future" with Asian manufacturers, he said. "But our product is kind of unique. It makes sense logistically" to produce it from Mexico "even though the cost of labor may not be totally competitive with China."

Over the years, Mexico's competitive advantages have indeed eroded substantially. Under the 1994 North American Free Trade Agreement, which lowered trade barriers among the U.S., Mexico and Canada, Mexico got a jump on other countries trying to supply the lucrative U.S. market.

As part of that agreement, Mexico agreed that imports from non-NAFTA countries would lose their duty-free status beginning in January 2002. That has been particularly costly for maquiladoras that depend on raw materials or specialized parts from Asia that are difficult to obtain in Mexico.

Mexico also has come under more pressure from lower-cost rivals that over time have gained easier entry to the U.S. market with the lowering of global trade barriers, technological improvements such as the Internet and a more efficient shipping network. Meanwhile, the strengthening of the Mexican peso in recent years has made that country's exports more expensive.

Huge Workforce

Looming largest is the challenge from China. Mexican factory workers earn an average of $1.47 an hour, and many live in shantytowns because they can't afford to rent housing. Still, those earnings are extravagant compared with those in China, whose 1.3 billion people include a huge pool of impoverished peasants willing to work for just one-third of the wages in Mexico, according to Mexico's Ministry of Economy.

Lower wages aren't the only draw to China, however. Aided by foreign firms eager to gain a foothold in China's huge domestic market, that country has built up a modern manufacturing base and has invested more heavily than Mexico in education, roads, ports and industrial parks. Foreign investors, attracted by tax breaks and cheap land and energy costs, were expected to pour a record $50 billion into China in 2002, more than double what Mexico received last year.

As foreign-backed factories have driven China's export boom, Mexico's share of shipments to the U.S. market has shriveled. Merrill Lynch said in a December report that Mexico's exports to the U.S. rose 1.2% last year, while China's jumped 19%. At that rate, China is likely to overtake Japan soon and then Mexico to become the United States' No. 2 trading partner, the report said. Canada has the top position.

"We cannot export $6 jeans," said Maria del Rocio Ruiz, Mexico's undersecretary of commerce. "This market belongs to China now."

So, Mexico finds itself trying to court other types of factories, playing up what advantages it does have. Chief among them: proximity to the United States.

Last year, Toyota Motor Corp. announced plans to invest $140 million to build facilities in Tijuana to make small Tacoma pickup trucks and truck beds. Beginning in 2004, the Mexican-made truck beds will be delivered to Toyota's assembly factory in Fremont, Calif., operated jointly with General Motors Corp. Then in 2005, the Tijuana plant will churn out Tacomas, which are expected to be sold mainly in California and Arizona.

"It doesn't make sense to manufacture auto parts in Asia, put them on a ship and have them 30 days on the water," said Richard Sinkin, whose San Diego company has invested in an engine assembly plant in the Mexican sate of Durango. "If you have just-in-time retailing customers, you either have to have a huge inventory in the U.S. or you have to have manufacturing nearby."

As for Pioneer's Tijuana factory, it is undertaking a number of strategies to hang on.

At the company's complex in the Otay Mesa industrial zone, just a few miles south of the border, executives are looking for ways to cut costs and expand their business to make up for production that is moving to China. Tsujimoto, who oversees the company's finances, said Pioneer has begun consolidating its three Tijuana plants to eliminate unnecessary overlap and is searching for outside jobs to keep its metal-working facility busy.

In one part of the half-empty factory, uniformed employees are building chassis for electronic components carrying the Nokia brand. Pioneer also has set up a metal-coating assembly line, a process it used to farm out to a subcontractor, and is renting out its high-tech acoustic testing lab.

But above all, Pioneer is banking on sales of large car speakers, which retail in the United States for as much as $250 per set. "This is the first time we're getting into the market" for big, customized speakers, said Lyle MacBeth, brand manager for the mobile division of Pioneer Electronics in Long Beach. "It's a small segment, but it's been growing significantly over the last few years. It's popular among the young kids."

For Tsujimoto, it's at least enough to give him some hope. "We must grow to survive," he said.

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Where the factories went

Scores of foreign companies have closed or cut back their factories in Mexico since 2000, with many of them shifting operations to lower-cost plants in Asia. A sampling:

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Company: Canon

Location: Tijuana

Produced: Printers

Closed: 2002

Employees: 1,200

Moved to: Vietnam

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Company: Hanes

Location: Monterrey

Produced: Apparel

Closed: 2002

Employees: 650

Moved to: Dominican Republic or Haiti

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Company: ON Semiconductors

Location: Guadalajara

Produced: Semiconductors

Closed: 2002

Employees: 1,500

Moved to: Philippines and Phoenix

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Company: Sanyo Electric

Location: Tijuana

Produced: Electronics

Closed: 2001/2002

Employees: 3,000

Moved to: China

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Company: VTech

Location: Guadalajara

Produced: Circuit boards

Closed: 2001/2002

Employees: 6,952

Moved to: Shifted some production to China

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Company: Aldila

Location: Tijuana

Produced: Golf clubs

Closed: 2001

Employees: 383

Moved to: China

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Company: Hasbro

Location: Tijuana

Produced: Toys

Closed: 2001

Employees: 1,450

Moved to: China

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Sources: Canon; Sanyo; Hasbro; Aldila; Intelamex; Supply Chain Electronics Civil Assn. (CADELEC); Jalisco, Mexico's Center of the Secretary for Economical Promotion

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Cheaper labor

China's low wages have made it tougher for Mexico and other countries to compete on labor costs.

Average hourly wage:

China -- $0.47

Malaysia -- $1.39

Mexico -- $1.47

Hungary -- $1.60

California -- $16.60

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Source: Mexico Ministry of Economy

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Iritani reported from Tijuana, Boudreaux from Mexico City.

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