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back to index backLATINtalk May,  2005

Mexico: Gateway to free trade

For years, multinational corporations enjoyed the cost benefits of Mexico's maquiladoras - assembly plants that provided them with low-cost labor and manufacturing. As more and more companies took advantage of the maquila program, competition increased, opening the door for China to become the next great provider of low-cost labor. International management consultant and Thunderbird alumnus Perry Melton '66 discusses the popularity decline of Mexico's maquila industry and the country's anticipated comeback as the world's global gateway to free trade.

Q: How have China's low labor costs influenced Mexico's maquila industry?

Melton: In one year, Mexico lost more than a million direct labor jobs to China. Companies originally established operations in Mexico to reduce costs and gain an edge on the market, but as soon as the competition arrived, they had to get smarter – by increasing technology and marrying it with manual operations. Many companies took their businesses to China, where labor costs are now approximately one-fourth those in Mexico.

Q: Is there still a benefit for multinational corporations to move operations to Mexico?

Melton: Absolutely. By making products in Mexico, multinational manufacturers can take advantage of Mexico's myriad global free trade agreements, exporting products to any number of countries duty free. The maquila industry's evolution from a manual labor force to a more technical labor force presents Mexico-based opportunities for multinational companies with more sophisticated products. A foreign organization with high-tech products, for example, could open operations in Mexico, create a product that is officially made in Mexico, and sell it duty free to Spain, France, Italy or even the United States. Suddenly corporations can penetrate all of those markets at once. Additionally, Mexico offers logistical savings over China, having shorter port distances and freight costs.

Q: How many free trade agreements does Mexico have, and with what countries?

Melton: During the ‘90s, Mexico began establishing free trade agreements with Chile, the United States and Canada (NAFTA), Bolivia, Costa Rica, Venezuela, Colombia, Nicaragua and the European Union. In 2000, Israel and Singapore were added, as well as member states of the European Free Trade Association: Iceland, Liechtenstein, Norway and Switzerland.   Additional agreements were established in 2001, adding El Salvador, Guatemala and Honduras to the growing list. Most recently Mexico established free trade agreements with Uruguay (2003) and Japan (2004) and is negotiating additional free trade expansions with Brazil and Peru. Mexico is now in the privileged position to access free trade with the most populous countries of the world.

Q: What types of businesses will fare well, moving operations to Mexico?

Melton: Almost all industries and products would do well. Plastics, injection molding, metal stamping, computer casing, disposable medical products, high-tech items – they could all benefit. Any company that can do value-added third-party logistics – a company with an MRO (maintenance, repair and operations) environment will thrive.

Q: How can companies assess whether Mexico is a good option for them?

Melton: Ask yourself: could your company benefit from a just-as-needed or a just-in-time supply chain model? Corporations could bring raw materials into Mexico, take them to a sub-assembly stage and store inventory in Mexico, only supplying when needed, taking advantage of duty free export fees. It is also important to understand how much of your market share is supported by Europe, the United States or South America. An analysis of your market and its potential penetration within Mexico's free trade partner countries is important.

Q: When do you anticipate the global marketplace taking advantage of Mexico's free trade gateway?

Melton: When the saturation point takes place in China – maybe in five to 10 years  – companies will consider Mexico as a viable option for business operations. But they would be well advised to consider the benefits now. The development of a Mexican-based operation would provide a hedge for operations in China, should they be interrupted for any reason. Those companies with the type of product and the vision to look and expand into Central and South America and Europe could benefit greatly by establishing an operation in Mexico.

Perry Melton began his international career with Firestone International and General Tire International, serving in management positions in Argentina, Kenya, Portugal and Mexico. As an international management consultant since 1989, he has assisted multinational corporations with operations in Mexico, South America, Africa, Europe, Taiwan and China. He specializes in assisting companies wishing to enter U.S. and Mexican markets.

Source: Global Vista newsletter from Thunderbird Executive Education

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Other articles from the same issue (May,  2005).

Beyond Total Cost of Ownership (TCO)
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Mexico's Economy Is Vrooming
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Brazilian automakers are betting on the growth of the Arab market to leverage car, bus and truck exports
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Ten Reasons to Provide Language Training
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More Americans Move to Mexico
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