WORLD ECONOMIC OUTLOOK CONFERENCE

Transcription

1 WORLD ECONOMIC OUTLOOK CONFERENCE PROSPECTS FOR THE MEXICAN MAQUILADORA INDUSTRY John H. Christman Consultant, Maquiladora Industry Outlook Service Mexico City Park Hyatt Hotel Philadelphia, PA Oct , 2003

2 in Review Operating Plants Employment Value of Production 2 Dec 95 2, % 681, % % Dec 96 2, % 803, % % Dec 97 2, % 938, % % Dec 98 3, % 1,038, % % Dec 99 3, % 1,196, % % Dec % 1,307, % % Dec 01 3, % 1,081, % % Dec 02 3, % 1,084, % % July , % 1,071, % 1 Variation vs. July Billions of U.S. dollars

3 Maquiladora Industry At-A-Glance Number of plants (July 2003) Overall industry growth, real (INEGI) 3, % 3,236 in July (9.2%) 3,751 in July (8.7%) 2003 (January- July) (0.09%) Number of employees (July 2003) Plant location (July 2003) million -25,733 Border cities 1, million in July 02-90,715 Non-border cities in border states million in July ,140 Other states 672 Number of plants closed in 2002 Major players (July 2003) (official, INEGI, net) 202 Plants Empl. (000) In 2003, January-July 66 Electronics, electrical Total maquiladora exports (Jan-Aug. 2003) Automotive parts, components $49.69 billion dollars Textile, apparel $51.15 billion in 2002 (2.8%) % of industry total Peso exchange rate Direct foreign investment average to US$ , annual average , annual average ,985.0 Year 2003 Average (a) Forecast for year (48 hr Interbank Rate) 2 Millions of U.S. dollars, covers only imports of fixed assets by the Maquiladora Industry (a) January-June only Data compiled by Global Insight, Inc. from the following sources: INEGI, Bank of Mexico, SECOFI, SECON

4 Maquiladora Industry Main Economic Indicators % Chg 02/01 % Chg 03 1 /02 Plants 2 3,297 3,590 3,664 3,251 3,259 (11.8) 0.2 Employment 2 (000) 1, , , , ,087.2 (10.0) 1.4 Gross production value Imported raw materials Mexican value-added (2.5) (0.1) Avg. annual peso/dollar Exchange rate (48-hour, interbank) Avg. maquiladora wage Including benefits, Direct Labor only (dollars per hour) (3.5) (9.5) Projection as of Oct Annual averages 3 Billions of U.S. dollars

5 Maquiladora Industry Growth (July of each year) (Thousands) 3,751 3,611 3,310 1,315 3,236 3,182 2,978 1,187 1,157 1,089 1,071 1, Operating plants (LS) Total direct employment (RS) Source: INEGI

6 Maquiladora Industry Monthly Performance Production Exports 1 Production Exports 1 Production Exports 1 January (14.1) (8.4) February (17.5) (3.8) 0.7 (0.2) March (21.4) (6.0) 2.2 (0.8) April (3.7) 12.2 (9.8) 7.8 (0.8) (7.0) May (2.4) (6.8) 1.7 (2.7) (0.6) (6.3) June (6.3) (4.8) July (9.3) (4.2) (4.1) 12.2 (0.3) (7.9) August (12.6) (15.9) (3.2) (1.8) September (11.9) (8.9) (6.7) 8.6 October (18.7) (11.8) (3.2) (0.7) November (18.8) (11.7) December (19.6) (16.4) Percentage comparisons with the same months in 2000, 2001, and 2002 Source: INEGI

7 Maquiladora Industry By Sector Total Plants Total Employment (000) Chg from Chg from July 03 July 03 July 02 July 02 INDUSTRY TOTAL 3,182 (54) 1,071.4 (10.1) Automotive parts, equipment, accesso Textiles, wearing apparel 769 (67) (9.7) Electronic, electrical materials, accessories Assembly of electrical, electronic machinery, equipment, articles 513 (10) (9.2) (0.8) Wooden and metallic furniture, parts 322 (11) 51.8 (2.8) Chemicals 139 (3) 22.1 (1.7) Foodstuffs 58 (9) Toys, sporting goods Assembly, repair of non-electric tools, equipment 66 (2) Footwear, leather goods 36 (6) 6.0 (1.6) Other manufacturing 505 (2) Services (1.8) Source: INEGI

8 Maquiladora Industry By States: (total number of operating plants) Jan 99 Jan 00 Jan 01 Jan 02 July 03 INDUSTRY TOTAL 3,143 3,465 3,713 3,367 3,182 Aguascalientes Baja California 1,090 1,156 1,280 1,133 1,024 Coahuila Chihuahua Durango Federal District (México City) Guanajuato Jalisco México State Nuevo Leon Queretaro n.a Puebla S. Luis Potosi n.a Sinaloa Sonora Tamaulipas Yucatán Zacatecas Other states Note: As of July, there were no registered operating maquiladora plants in Michoacan, Nayarit, Tabasco or Quinrtana Roo. Source: INEGI

9 Maquiladora Industry By States: (Net employment in thousands) Jan 99 Jan 00 Jan 01 Jan 02 July 03 NDUSTRY TOTAL 1, , , , ,071.4 Aguascalientes Baja California Coahuila Chihuahua Durango Federal District (México City) Guanajuato Jalisco México State Nuevo Leon Queretaro n.a Puebla S. Luis Potosi n.a Sinaloa Sonora Tamaulipas Yucatán Zacatecas Other states Source: INEGI

10 Maquiladora Industry Recent Evolution of Direct Employment Month Net Chg Previous Month Month Net Chg Previous Month Month Net Chg Previous Month Month Net Chg Previous Month January 1,213, ,234 1,310,171 +2,189 1,071,710-9,816 1,076,224-8,687 February 1,221,283 +7,678 1,289,799-20,372 1,060,481-11,229 1,090, ,305 March 1,250, ,690 1,279,361-10,438 1,060, ,090, April 1,247,338-3,635 1,264,383-14,978 1,070,020 +9,847 1,086,046-4,501 May 1,287, ,712 1,240,840-23,543 1,085, ,765 1,091,230 +5,184 June 1,301, ,897 1,219, ,461 1,087,079 +1,294 1,081,553-9,677 July 1,315, ,025 1,187,525-31,854 1,088,679 +1,593 1,071,384-10,169 August 1,326, ,243 1,167,183-20,342 1,085,154-3,518 September 1,338, ,091 1,149,073-18,110 1,089,645 +4,491 October 1,338, ,980 1,126,120-22,853 1,097,723 +8,078 November 1,331,719-7,251 1,103,535-22,585 1,098,831 +1,108 December 1,307,982-23,737 1,081,526-22,009 1,084,911-13,920 1 Record high month for Maquiladora employment 2 Record high month for number of operating Maquiladoras 3 Lowest level since Dec 1998 Source: INEGI

11 Net Monthly Change in Operating Maquiladora Plants January February March April May June July August September October November December Source: INEGI, Monthly Statistical Reports

12 Maquiladora Industry (Annual averages, Index: 1994=100) Man Hours Worked Total Wages Paid 3 Total Employment (000) Jan-July only, average 2 Projection, annualized 3 Includes obligatory fringe benefits, in nominal pesos Source: INEGI

13 Direct Foreign Investment in Mexico (a) (in millions of U.S. Dollars) 30,000 3,500 25,000 2,778 2,985 24,754 3,000 20,000 2,110 2,172 2,043 2,500 15,000 10,000 5,000 10, ,366 9,526 1,416 9,186 1,681 12,830 11,933 12,703 14,911 13, ,217 2,000 1,500 1, (a) 0 Total (LS) Maquiladoras (b) (RS) *Preliminary, official. (a) Includes manufacturing, banking and financial services, telecommunications, maquiladoras, self-service and department stores, acquisition of Mexican companies, etc. Includes reinvestment of dividends and inter-company transfers. (b) The National Foreign Investment Registry registers as Maquiladora Industry DFI only the total value of imported fixed assets. (c) January June only Note: Does not include portfolio investments. Source: Bank of Mexico, SECON, SHCP

14 Mexico s Foreign Trade (Millions of U.S. dollars) August 02 Jan- August % Variation 1 August A03 1 /A02 Total Exports 13, ,086 13,383 (2.8) Petroleum Sector 1,368 12,352 1, Agricultural, Livestock 180 3, Mining Manufactures 12,183 91,073 11,598 (5.1) Non-Maquiladora 5,798 41,480 5,292 (8.7) Maquiladora 6,423 49,693 6,306 (1.8) Total Imports 14, ,733 13,818 (3.4) Capital Goods 1,653 12,999 1,647 (0.4) Intermediate Goods 10,869 83,532 10,484 (3.5) Non-Maquiladora 6,045 46,224 5,731 (5.2) Maquiladora 4,824 37,308 4,743 (1.7) Consumer Goods 1,778 13,202 1,687 (5.2) Total Trade Balance (545) (2,647) (434) (19.9) Maquiladora 1,562 12,385 1,551 (0.1) 1 Revised, Official for 2002; Preliminary, official for Jan-August 2003 Source: INEGI, SHCP, and Bank of Mexico

15 The Fox immediate deduction scheme. The Mexican Economy in the Second Semester of 2003: Key Pros Favorable foreign debt profile (best in years) Record level of international reserves Fiscal and monetary discipline, being maintained, carefully monitored, adjusted as necessary, (example: Central Bank renewed Auction policy of reserves) Ortiz to be nominated for another term as Central Bank governor Multiple Free Trade Agreements (43) plus Japan U.S. and Mexican economic acceleration, hopefully better as of the fourth quarter of 2003 after the sustained downturn in No real signs yet! Solid increase in oil export prices in the 9 months Above average Country risk rating Continued low inflation rate (4%)

16 The Mexican Economy in the Second Semester of 2003: Key Cons Fiscal, economic, energy privatization and Labor Law reform delays are stalled, probably indefinitely Continued extreme poverty in many parts of the country (53%) Education, infrastructure and investment gaps (at best mediocre country rankings at international level) Mid-term Congressional elections (Chamber of Deputies) in July 2003 PAN did not get a majority in new Congress. To the contrary Outgoing Congress adjourned April 30, having passed no significant reform legislation

17 Some Challenges to Recovery and then Sustained Growth in the Next 4 Years The Fox Administration must adopt now a pro-active, known, constant rules of the game policy, to facilitate industry long- and short-term strategic planning and greater DFI. What is still lacking is a truly hands on approach with the industry, incentives included, to really increase manufacturing and services global competitiveness. Tax regime must be truly simplified, transparent, uniform. Mexico s educational system and capabilities. Urgent need to upgrade at all levels. The system must be business-oriented, stressing efficiency and state-of-the art management, engineering and assembly line work. Fox must have a new Congress with which be can work, and he must be willing to work it on a consensus basis. Unlikely. Success of new Strategic Bonded Zones scheme. How will it affect existing Industrial Parks?

18 Official Support for a Potential Comeback Federal Govt. on October 13 publishes new, pro-active Maquiladora Industry Decree; makes major promises on fiscal changes Anti-Maquiladora May 12 Decree trashed

19 Highlights of the October 13 Decree: Maquiladora Industry for first time labelled a Priority Sector for the Govt. and the economy Govt. has 15 working days to authorize maquiladora programs, separate bureaucratic procedure with national importers registry no longer required. Rental contracts are for a minimum one year but only first month must be paid upfront Virtually all toxic aspects of May 12 decree expressly eliminated Stated Decree objective: Give Legal Certainty to the Maquiladora Exporting community

20 And the Administration Promises the Following Propose eliminating the controversial 4% salary credit tax (ISCAS) as of January Propose first-year full accelerated depreciation for all new fixed asset investments by maquiladoras A new Decree to fully promote/support industry competitiveness efforts For the Industry: a Breath of Fresh Air

21 The August 8 Second Accord Companies elegible for Service Maquiladoras Authorization Activities: 1. Supply, storage, distribution of inputs, parts, components,* 2. Packaging or repacking, strapping or restrapping, canning, marking or labelling of merchandise,* 3. Classification, inspection, testing, verification of merchandise,* 4. Cutting, adjustment, sand-papering, gluing, polishing, painting or waxing of pieces 5. Repair, maintenance of goods*

22 6. Washing, pressing of apparel* 7. Stamping of apparel 8. Armor plating, modification, adaptation of motor vehicles 9. Design, engineering of products including software 10. Recycling, gathering of scrap *Authorization only if service maquiladora is located in northern border zone Source: Federal Official Daily, August 8, 2003

23 Is a New Model Needed for the Maquiladora Industry to Stay Truly Competitive? The First Three Generations of the Maquiladora Industry Generation #1 The Border Industrialization Program as of Permits 100% foreign-owned companies to operate in the Northern border zone under a special Customs regime. The first customers: low-tech, tabletop, labor intensive assembly/export operations dominated by textiles and apparel. A total of 12 by end 1966, as Mexico entered the world of production-sharing. The real breakthroughs: RCA decides to establish a major TV assembly plant in Juarez (1969) and the government Decree allowing maquiladoras to establish anywhere in the country (1972). The concept of maquiladora industrial parks began, starting in Juarez, Mexicali and Nogales. As of the mid-1970s, the first interior industrial parks (Las Americas in Chihuahua city) were established.

24 Generation #2 The 1982 peso devaluation started a true boom period for the Maquiladora industry. In the period, the number of maquiladoras jumped from 680 to 2,000, helped by new government pro-maquiladora Decrees (as of August 1983) and subsequently Mexico joined GATT. More and more new maquiladoras were in the semi-high tech to higher-tech categories, using automated and semi-automated M&E plus robotics. Strong growth for maquiladoras in the electronics, electrical and auto parts sectors. The border zone is no longer the only spot for maquiladoras. Many plants move at least part of their processes inland, albeit perhaps only to interior cities in northern border states. Examples: General Electric, Packard Electric, RCA, Honeywell. Ormex becomes the first maquiladora to locate far from the border in Yucatan. The industry places much more emphasis on skilled labor, plus better-trained technicians and engineers. But plants remain dependent on technology transfer, equipment and decisions of parent companies.

25 Generation #3 Maquiladoras become much more oriented towards R&D and product design, relying on a highly-skilled, specialized labor force. Maquiladoras gain more local decision-making powers. Emphasis on zero defects and just-in-time delivery to the parent and/or clients. New boom period ( ) begins with NAFTA, the December 1984 peso devaluation, and a strong U.S. economy bringing the number of maquiladora plants up to 3,600 by the year The biggest NAFTA beneficiaries are textile and apparel plants. Sharply increased interest in the industry by Japanese, Korean and Taiwanese companies. Strong pressure for supplier companies to relocate for close proximity to the parent maquiladora plant(s). As of 1998, the Maquiladora Industry becomes Mexico s most important net earner of foreign exchange, outranking the terminal automotive industry, petroleum, migrant remittances and tourism. During the 1990s, the industry becomes by far the largest supplier to the North American market (the U.S., Canada and Mexico) of TV sets and automotive and electrodomestic wire harnesses. That boom period ends as of early 2001.

26 The New Model For Maquiladora Industry Competitivess/Survival Emphasis on attracting/retaining high-tech plants. High complexity plants, tailored to high-end customers, with quick J- I-T response time for customers in volatile markets. Capital intensive investment. Full-fledged efforts at vertical integration of the industry, more valueadded production. Prompt leveraging and taking overnight advantage of new U.S. and global competitive factors. Maquiladoras must have their own business model engineering, R&D at maquiladora level. Key: complete elimination or real streamlining of the government jungle of rules and regulations, to truly help promote the above points with investors.

27 Key Competitive Sectors for Maquiladoras Automotive parts, components Aerospace Electronics (large-size LCD flat screen TVs) Software Metalmechanics Medical/Hospital instruments and supplies Niche market, upscale, J-I-T goods Source: Global Insight

28 Elements for Increasing Maquiladora Competitiveness* 1. Consolidation of Production Lines 2. Build-to-Order programs 3. Lean manufacturing, proximity to suppliers 4. Six Sigma Programs 5. Flexible manufacturing programs 6. Modular assembly 7. Design advances (R&D) 8. Reverse integration 9. Strategic alliances with plants in other maquiladora countries * Assuming no fiscal or other competitive promotional incentives by the Federal government.

29 Maquiladora Industry Gross Value of Production (Billions of U.S. dollars) SECTOR %Variation 08/03 Total Electrical, electronics Automotive parts, components Textiles, Apparel Wooden, metallic furniture, accessories Services Machinery, tools Toys, sporting goods Foodstuffs, processed Footwear, leather goods Other manufacturing industries Projections by Global Insight, October 2003 Source (1998): INEGI, CIEMEX-WEFA

30 Maquiladora Industry Gross Value of Production and Trade Surplus (Billions of current U.S. dollars) 1 Value-added in Mexico 2 Projections by Global Insight, as of Oct., 2003 Source: Banco de Mexico, INEGI Gross Production Value Trade Surplus

31 Maquiladora Industry Growth Projections PRODUCTION BY SECTOR 1 Electric/Electronic (% growth) (5.3) (0.4) 5.3 Transport Eqpt (% growth) Textiles, Apparel (% growth) (3.6) Furniture (% growth) (1.9) Electric/Electronic (% growth) 13.9 (10.8) (17.4) Transport Eqpt (% growth) 13.5 (4.8) Textiles, Apparel (% growth) 13.0 (4.7) (13.7) Furniture (% growth) 11.0 (1.3) (8.6) (0.1) Annual average in billions of U.S. dollars 2 Average annual growth projection, Baseline Forecast, October Annual average in thousands

32 Projected Maquiladora Plant Outlook by Selected States Industry Total Plants Employment (000) Chihuahua Plants Employment Baja California Plants Employment Tamaulipas Plants Employment Sonora Plants Employment Coahuila Plants Employment Nuevo Leon Plants Employment (Annual averages, (As of 12/31) projected as of 15/10/03) ,436 1, , ,703 1, , ,450 1, , ,248 1, , ,350 1, , ,545 1, , ,777 1, ,

33 Maquiladora Industry Labor Costs Average Hourly Wages (U.S. dollars) Average of Direct Labor, Technical, and Administrative Personnel, Obligatory Fringe Benefits included Projections,

34 Prospects for the Maquiladora Industry in Employment: 1.33 million workers (3% above the 2000 level) Number of plants: 3,777 (5% above the 2000 level), including 2,260 (almost 60%) in border cities Gross production value: $112 billion dollars (28% above the 2002 level), this figure is almost equivalent to gross exports 1 Baseline Forecast (probability factor: 50%), most probable scenario as of Oct

35 THANK YOU MUCHAS GRACIAS! John H. Christman Global Insight