Fabricating and stamping industries emerge south of the border

By Sue Roberts

"To sum up the Mexican market, business is fairly good," reports Ron Palick, vice president of sales for Western USA, South America and Mexico for Finn-Power, a manufacturer of sheet-metal fabricating equipment found worldwide. "We're certainly seeing a lot of activity at this point." The business climate appears to have improved after a slowdown that occurred before the presidential election was decided in Felipe Calderon's favor in September 2006.

Calderon, still in the honeymoon phase of his term, is viewed as pro-business, willing to take steps that bring more manufacturing across Mexican borders. When inaugurated as president on Dec. 1, 2006, he inherited a stable, growing economy tightly linked to U.S. economic cycles.

From January 2006 to January 2007, trade between the United States and Mexico increased 25 percent according to the Mexican Department of Commerce. Trade exchange between the two countries, as reported in the Maquila Portal, was $26.072 billion last January, a 24.8 percent increase from $20.889 billion in the first month of 2006. The Ministry of the Treasury in Mexico, however, reported a 0.69 percent drop in industrial production mainly meant for export to the United States from December 2006 to January 2007.

Mexican imports to the United States totaled over $120 billion in 2005, with petroleum, cars and electronic equipment as the top exports. U.S. exports to Mexico from January through October 2006 were $112.3 billion, up 13.3 percent over the same period in 2005. Top U.S. exports to Mexico included electronic equipment, motor vehicle parts and chemicals. Since implementation of the North American Free Trade Agreement (NAFTA) in 1994, U.S.-Mexico bilateral trade has increased 232 percent, from $88 billion in 1993 to $292 billion in 2006. At the end of 2006, China surpassed Mexico as the United States' second largest trade partner. Canada remains in the top position.

Mexico's Ministry of Economy puts foreign direct investment (FDI) in Mexico for 2005 at $18.8 billion, down slightly from 2004. The U.S. was the largest foreign investor, accounting for 66 percent of reported FDI. Numbers released for January through June 2006 report FDI at $8.7 billion.

Growing technologies
Manufacturers based in Mexico face many of the same challenges as those in the United States. Some foreign manufacturers with plants in Mexico see a benefit to pursuing low-cost labor in undeveloped countries. In many cases that trend is being countered by the addition of new technology in Mexican plants, supported by equipment manufacturers partnering with distributors within the country.

Ron Demonet, vice president of systems sales at Atlas Technologies, which designs and builds pressroom automation, says, "Some of the industries that depended on very cheap labor went to Mexico. Now they tend to be going to either China or India.

"I speculate that Mexico is like any industrialized country. As it has grown up, the skill level has gotten higher and the wages and everything else tend to follow," Demonet adds, "You can look at Japan as a good example of that. In the early days Japanese labor was cheap. That is no longer the case. Now you're getting into some of the under-developed countries. That labor pool is huge and the hourly rates are very low."

Palick, with experience in both China and Mexico, agrees that if moving jobs from Mexico to China makes financial sense, that's what a company will do. He does point out, however, that there can be drawbacks. "While Chinese labor may be a little cheaper, you have a problem of skill level," he says. "And for an American company, there are some cultural changes in dealing with Mexico, but they're not as stark as when you go to Asia.

"When it comes to monitoring quality," he continues, "Mexico is certainly preferable. They don't have the month's ocean voyage to ship something back. So perhaps the labor isn't quite what it is in China, but then I don't have the shipping costs."

Increases and opportunities
Mexico's economy grew by 4.5 percent in 2006, the largest increase since 2000. For 2007, the Treasury predicts growth slowing to 3.6 percent due to slowdowns in U.S. growth and Mexican industrial production.

Gross exports from foreign-owned, Mexico-based maquiladoras set a new annual record of $111.88 million in 2006, accounting for 44.7 percent of Mexico's total exports. A maquiladora is an export company set up in Mexico by the United States, Japan, or European or other countries, usually along the U.S.-Mexico border. A high percentage of goods produced by these companies are sent to the United States.

With more than 3,000 facilities, 61.7 percent near the U.S.-Mexico border, the maquiladora industry continues to offer substantial opportunities within a full spectrum of industries. Key competitive sectors include automotive parts and components, aerospace, airport and ground service equipment, electronics, medical/hospital instruments, and a variety of equipment serving defense, environmental technologies, hotels and restaurants, housing and construction, security and safety, telecommunications and transportation infrastructure. Further development of fabricating and stamping companies is seen as an integral element in continuing industry expansion.

Growth in the automotive sector is one factor demanding additional metal fabricating and stamping suppliers. John Christman, industry analyst at Global Insight Inc., reports, "Mexico is exporting more than one million units a year, primarily to the United States. Because of the build-up of the automotive industry, there has been more and more demand for metal fabrication and stamping.

"The major automotive plants, which are primarily in the north, except for the Volkswagon plant in Puebla, are looking for local suppliers and telling their foreign suppliers, "We want you next door.' "

Christman says they still have a long way to go to get the facilities they want located within the supplier parks of the existing assembly plants, but where that relocation has already happened, they are seeing the benefits. Both maquiladoras and national companies are working to fill the need with some of the larger steel companies expanding into the fabricating and stamping areas.

Emerging industries
Aerospace is another front-runner driving the need for more fabricating and stamping. Christman and the Mexican Industrial Development Ministry agree that Chihuahua City is currently the center of aerospace activity. Infrastructure and quality of labor contribute to the choice of location.

Aerospace companies are also putting pressure on suppliers to relocate fabrication plants close to their facilities. Christman says, "In the last couple of years aerospace has really taken off. For example, we have the huge Bombardier complex going up in Querataro and the new Cessna facilities that are going up in Chihuahua City."

He continues, "I would call it an emerging industry in Mexico because up until about 10 or 15 years ago, you didn't hear anything about it other than the fact that Mexico needed fabricators and stampers. I would say we started to see the trend in the early 1990s."

Demonet echoes the need. "We've found that in Mexico, they don't necessarily have the machine shop and support companies that you might find in other countries. We've thought from time to time that it might make sense to do some fabrications there, but we can't find these independent companies."

Palick says they're putting "a good bit" of equipment into plants in Mexico. Most of the purchases are made outside the country by decision-makers in the United States or Canada.

"I used to monitor the number of turrets being sold in the United States. From the late 1980s to now it has fallen precipitously. What's happened to it? In most cases it has gone offshore or gone to another country such as South America or Mexico. And you can understand it. People walk into an electronics store or appliance store and want the best deal they can get. It all comes down to economics."

Palick continues, "There are a lot of U.S. companies that take advantage of the labor situation and a whole host of different advantages in Mexico. Obviously, at the end of the day, the goal is to keep costs lower."

IMMEX decree
Global Insights provided clarification of the IMMEX (Decree to Foster Manufacturing Industry, Maquiladora and Service Exports) that merges the prior Maquiladora and PITEX decrees. (PITEX establishes a temporary importation program for the production of articles for export.) IMMEX, enacted November 2006, was designed to assist Mexican companies.

IMMEX provides for "equal treatment" for companies with registered maquiladora, PITEX or other exporting programs in areas such as corporate taxes, faster customs treatment for certified companies and VAT refunds.

The program includes shelter operations, sub-maquiladora, and outsourcing to third parties by companies with maquiladora or PITEX registry, if they are also registered. It also makes it easier for the government to suspend or cancel a program for at least five years.

Christman is concerned that maquiladora activity will no longer be tracked. This information has been reported monthly by the INEGI (National Institute of Statistics, Geography and Informatica) since 1980. A new INEGI area will absorb the maquiladora export department and report monthly numbers on Mexico's combined manufacturing exports, but not before 2009.

He believes that refining and streamlining IMMEX to reduce governmental regulations and paperwork for maquiladoras still is essential before the decree can stimulate further investment.

Brazil: Work within the country
Like Mexico, Brazil does a substantial amount of business with the United States, its largest trading partner. Brazil's imports and exports both increased in 2005. From January to November 2005, U.S. exports to Brazil were $13.79 billion, $1 billion more than the same period in 2004. Brazilian exports to the United States were $22.27 billion, up roughly $3.1 billion from the same period in 2004.

While trade between the United States and Brazil has increased, foreign direct investment from the United States has decreased.

U.S. foreign direct investment for 2005 was an estimated $15 billion, down from the $17 billion reported for 2004. Governmental red tape is cited for holding up an additional $16 billion of U.S. investments. Despite recent downturns, the United States remains the largest foreign investor in Brazil.

Industrial economic activity includes automobiles, steel, petrochemical, computers and steel, predominantly located in southeastern states. Exports to the United States include aircraft, iron, steel, nuclear boilers, vehicles and electric machinery. U.S. exports to Brazil focus on high-ticket capital goods and a variety of specialized parts and components such as aircraft parts, control panels, heavy machinery for industrial production and construction, aluminum frames, and signaling equipment for railroads, ports and airports.

U.S. companies encounter tariff barriers, a difficult customs system, heavy and unpredictable taxes, and a difficult legal system. On the positive side, the government has curbed inflation through federal discount rates as high as 18 percent. Palick sees the duties on importing as a substantial deterrent to industrial growth in Brazil. "Anybody importing a machine to be sold in Brazil has to deal with a 26 percent duty," he says. "Tooling has a 69 percent duty on it. Certainly they're doing this to encourage manufacturing in the country, and I understand that, but unless it would be government sponsored, a national company just doesn't have enough money to put into research, development and then manufacturing. So (the taxation) ends up penalizing their own companies and their competitiveness."

Demonet agrees. "Duties of bringing equipment into Brazil from the United States are prohibitive. That's why we established an office and a small manufacturing plant there."

Demonet says that Atlas Technologies imports as little as possible to its Sal Paulo facility, sourcing components and fabrications for die handling equipment and washers and oilers for sheet metal blanks from local companies. Using local supplies helps them remain competitive.

"We did work there over 10 years ago, but we knew if it was going to be long term, we would have to establish manufacturing there because of the import duty," he says. "We've probably had manufacturing there for five years.

"The Brazilian economy has been somewhat volatile over the years, but in the past five years it has been as stable as we've ever seen it." FFJ


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