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Mar 27, 2013 | 18:32 GMT

In Mexico, a New Manufacturing Heartland?

In Mexico, a New Manufacturing Heartland?
Demian CHAVEZ/AFP/Getty Images
Summary

Mexico's manufacturing sector has grown more sophisticated under the North American Free Trade Agreement. Manufacturers now produce higher value-added products, such as automotive, aeronautical and electronic products, and they are doing so in factories outside their traditional production region: the U.S.-Mexico border. As the country's economy has grown, a secondary manufacturing core has emerged in the central lowlands, also known as the Bajio. Located near the bulk of Mexico's educated workforce, the Bajio is safer than many border towns and is now connected more efficiently to suppliers in the United States and Asia and consumers in the United States and Canada. The manufacturing sector in this region will grow in importance in the years to come, though it will not replace the border region entirely.

In the late 1980s and early 1990s, Mexico underwent a profound economic and political reorganization. The economy liberalized, culminating in NAFTA, and major state-owned companies privatized, transforming Mexico from a closed economic and political system into an export-oriented industrial economy.

As a result, trade increased between Mexico and the United States and a manufacturing belt sprung up at the countries' shared border. From 1990 to 2000, Mexican trade became even more closely tied to the United States. In 1990, the United States accounted for 69 percent of all Mexican trade; by 2000, it accounted for nearly 80 percent. Low-end factories, known as maquilas, sprang up in the border states of Baja California, Sonora, Chihuahua, Coahuila, Nuevo Leon and Tamaulipas. These provided manufacturers with an abundant supply of low-wage labor, most of which came from elsewhere in Mexico.

 

But at the turn of the century, China's special economic zones became cost-competitive alternatives to Mexican factories. Mexico responded by making more valuable products. So even though clothing exports dropped 43 percent (from $7.6 billion to $4.3 billion) between 2002 and 2012, automotive exports increased by 152 percent ($27.9 billion to $70.3 billion) and electronic exports increased by 73 percent ($43.3 billion to $74.9 billion) over the same period. Asian alternatives notwithstanding, these Mexican products remained cost-competitive because of NAFTA.

A Systemic Shift

Mexico's central lowlands, which include Aguascalientes, Guanajuato, Queretaro and San Luis Potosi states, provide relative isolation from the endemic violence of the border, a large pool of qualified workers and incentives schemes to lure foreign direct investment.

To attract foreign investment, Bajio state governments in 2006 began building infrastructure and training facilities, selling real estate and providing a wide range of other benefits. Foreign multinational companies responded enthusiastically. Nissan has invested roughly $2 billion to build a new automotive plant in Aguascalientes state. Volkswagen, GM, Honda and Mazda have invested $550 million, $200 million, $800 million and $500 million, respectively, in their plants in Guanajuato state. Bombardier has invested $500 million and Eurocopter has pledged $550 million in operations in Queretaro state.

These numbers represent a systemic shift. In Baja California, Coahuila, Chihuahua, Sonora, Nuevo Leon and Tamaulipas states, there were 4 percent fewer factories in 2011 than there were in 2007. Farther south, in Aguascalientes, Guanajuato, Queretaro, San Luis Potosi and Jalisco states, there were roughly 12 percent more factories.

Investment has followed a similar trend. Total foreign direct investment in the Bajio increased from $7.2 billion in 1993-2002 to $16.3 billion in 2003-2012. By comparison, foreign direct investment in the border states over the same period increased from $32.9 billion to $55.2 billion. That is not to say factories are relocating from the border to the Bajio — it is not a zero-sum game. Rather, new firms looking to enter the North American market, especially European and Asian automakers, increasingly are setting up in the Bajio.

Notably, the overall amount of manufactured exports from the Bajio is far lower than that of the border. However, the number of manufacturing firms and the amount of foreign direct investment are increasing at a faster rate in the Bajio than in the border states.

Developing the Bajio

The Bajio only became attractive to manufacturers after Mexico overhauled its transportation infrastructure. More and more raw materials are coming from Asia, and the majority of automobile exports are moved by rail. Thus, Mexico had to expand its Pacific ports and connect them by rail to the industrial base and to consumer markets.

 

The Pacific ports of Manzanillo and Lazaro Cardenas are booming accordingly. Lazaro Cardenas, the only port in Mexico that can accommodate post-Panamax ships, is the fastest growing port in North America.

In addition, the railways connecting these ports to the United States have become much more efficient since being privatized in 1995. The entire length of the country's railway network has remained at approximately 26,700 kilometers (16,600 miles), but the amount of freight transported has doubled from 52.5 million tons to 108.8 million tons per year. Moreover, companies have moved more freight with far fewer employees.

Unlike the border states, the central lowland region is a part of Mexico's economic and political heartland. It hosts a large, educated population and its climate is the most temperate in the country. It is centrally located, with relatively easy access to ports on both coasts, the United States to the north and Mexico City in the south.

Geography has benefited the Bajio, as have improved transportation infrastructure, comparatively better security and efforts to attract investment. More manufacturing investment and output will bring Mexico's industrial core closer to Mexico City and populations in need of jobs. Bajio manufacturing will not replace manufacturing activity along the border, but it gives Mexico an opportunity to develop more evenly and sustainably. 

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