Banner
Global Economic Report

Ties that bind

By Lisa Rummler

May 2009 - The face of trade has evolved over the years, all around the world. From Via Maris to the Silk Road, the transport of goods has opened up countries and changed the definition of "global economy."

Today, no one can deny the interconnectedness of worldwide markets. A prime example is Mexico and the United States, especially as it relates to manufacturing and capital goods. This dynamic has grown steadily since the North American Trade Agreement was enacted in 1994. NAFTA has not been without its critics over the years, but today, many experts say it has benefited Canada, Mexico and the United States--and will continue to do so.

This sentiment particularly applies to the manufacturing industry in the three countries, according to Aureliano González-Baz, a partner at Bryan, González Vargas & González Baz, a law firm based in Mexico City with offices throughout Mexico and in New York that exclusively services foreign investors in Mexico (90 percent of its clients are manufacturers).

"I think NAFTA, regardless of what the politicians say, has proven to be a wonderful tool for keeping costs of products down and competitive," he says. "NAFTA is a wonderful whipping boy, but the truth is it’s been great for all three countries. We are truly one integrated region. What affects one [country] affects the others, unavoidably."

By the numbers
Arturo Dessommes, trade specialist for the Mexico City branch of the U.S. Commercial Service, the trade promotion unit of the Commerce Department’s International Trade Administration, describes NAFTA as "the most outstanding feature" of the bilateral commercial relationship between Mexico and the United States.

"Since the implementation of NAFTA, Mexican imports from the United States have increased exponentially," he says. "In 2007, two-way U.S.-Mexico trade (goods and services) exceeded $1 billion per day. U.S.-Mexico bilateral trade has increased 377 percent, from $88 billion in 1993 to $347 billion in 2007."

As it relates to manufacturing, Dessommes says Mexico and the United States enjoy a good relationship that will likely strengthen over time--perhaps sooner rather than later.

"Given the economic challenges facing U.S. companies in 2009, the proximity of the U.S.-Mexico border offers a cost-effective market entry opportunity, particularly for new-to-export and new-to-market companies," he says. "The U.S.-Canada and U.S.-Mexico borders are often the first step for companies breaking into the international market, given the accessibility and proximity the border economy provides."

In regard to specific economic challenges in the region, Dessommes cites an April 14 Reuters article, which stated that Mexico’s exports declined 30 percent in February because of the U.S. recession.

According to Dessommes, Mexico’s maquiladora, or manufacturing plant, industry is the country’s largest source of income from foreign currency, and the United States has played a significant role in supporting it.

"In 2007, the United States provided an estimated 47 percent of all inputs to the maquiladoras, valued conservatively at $41 billion," he says. "As the U.S. and Mexican economies experience further integration, the more than 2,800 plants throughout Mexico--of which 60 percent are located along the U.S. border--will have an ongoing need to source quality inputs, equipment and services from U.S. industry."

Star player
Jesus Canas, associate economist at the El Paso, Texas, branch of the Federal Reserve Bank of Dallas, says maquiladoras have evolved from what they were in the 1960s.

"It’s kind of hard to define a maquiladora because there have been a lot of changes in the legal status of the maquiladora industry," he says. "In its simplest form, a maquiladora plant imports inputs from a foreign country, processes these inputs and ships them back to the country of origin. The advantage of maquiladoras is their ability to import capital and raw materials duty-free (from within NAFTA). When exporting back to the United States, as most maquiladoras do, tariffs are applied only to the value-added portion of the final product or service."

Canas also says maquiladoras depend on the U.S. industrial production industry and that they can complement American companies’ manufacturing processes.

Along those lines, the largest U.S. manufacturing companies that do business in Mexico are complementary and intra-industry, says Adalberto Gonzalez, general director for heavy and high-technology industries for the Secretaria de Economia. He also says Mexico offers foreign investors benefits the rest of Latin America cannot.

"Although other countries have signed free-trade agreements with the United States, the business integration processes have been [stronger] in businesses that are highly intensive in unskilled labor, such as clothing, while in Mexico, there’s a strong business link in almost all sectors, such as aerospace and automotive," says Gonzalez. "[Economic conditions here] are highly favorable for doing business, but progress is needed on issues of competitiveness."

Setting up shop
Although challenges exist, from a purely business standpoint, many experts say Mexico remains a viable and attractive place for U.S. manufacturing companies to open facilities or otherwise work.

"On the economic environment, our advice to corporations crossing the border is an optimistic one, in the sense that we believe labor costs are to remain at relatively low levels," says Rafael Amiel, Ph.D., regional managing director for Latin America at Lexington, Mass.-based IHS Global Insight. "And in terms of the supply of other inputs, it’s guaranteed in Mexico."

But security and safety have been concerns, according to Amiel, especially given the myriad cases of drug-related violence earlier this year in Mexico. He says this shouldn’t necessarily deter foreign companies from doing business in or with the country, however.

"Lately, the security issue in Mexico is raising red flags, and on that, our expectation is that the government, with the aid of the United States, should be able to control the problem," says Amiel. "Other than the security issue, talking about Mexico, I don’t think there are many other hurdles because it’s not difficult to find qualified people."

This sentiment is echoed by Juan Francisco Garza and Eduardo Garza, co-owners, directors and partners at MLT International Consultants, Brownsville, Texas. The firm also has offices throughout Mexico, and its focus is to promote foreign investment of manufacturing operations in Mexico.

In the last 10 years, they say they’ve seen growing interest in Mexico from international investors--and not just from the United States.

"Mexico has free-trade agreements with close to 40 countries, so companies can use Mexico as a springboard to supply [those] countries," says Eduardo Garza. "That’s what European companies are doing nowadays. They’re coming to Mexico and supplying, from Mexico, to the United States and Canada. What’s the advantage to the United States in that scenario? The advantage is that because of distance, the European companies have to buy U.S. materials."

Youth movement
Juan Francisco Garza and Eduardo Garza say there are many other advantages to doing business in Mexico, including legal certainty, a large and growing market to supply companies and strategic location or proximity. But one of the biggest benefits is Mexico’s large, young workforce.

"I’d say the average age of a person coming into the industry is about 20 to 22 years old," says Juan Francisco Garza. "They’re young, and they want to progress. They don’t want to be just the laborer--they want to be the supervisors in a couple of years, and after that, they want to have managership. And that really gives you a better workforce."

Mexico struggles to provide quality education, however, according to Juan Francisco Garza and Eduardo Garza. And although things are improving, they say international companies must expect to devote a great deal of time training employees in Mexico.

And like many countries, government bureaucracy and red tape can present challenges to foreign manufacturing startups. MLT International Consultants has found these conditions to be improving, as well, in no small part because of the Secretaria de Economia.

"They promote investment, and they’re our big allies," says Eduardo Garza. "Those guys understand what we go through."

Indirect approach
For companies without the means or inclination to physically set up showrooms in Mexico, a common way to do business there is by distributing equipment using a Mexican company, such as Hi-Tec de Mexico. The company has been in operation since 1992 and has two divisions for capital equipment: chip-making and fabrication.

In regard to the former, Hi-Tec de Mexico represents Haas and Mori Seiki equipment. On the fabrication side, it mainly distributes Toyokoki press brakes and Mitsubishi lasers and waterjets. According to Andreas le Noir, vice president, lasers and waterjets are the top-priority capital equipment today.

He also says U.S. OEMs should keep a few things in mind in regard to distributing capital equipment in Mexico: Have a distributor with good market penetration and also with strong service capability in Mexico and offer some kind of credit.

Depending on the product line, it can be difficult to find a strong distributor, le Noir says, but this can be overcome.

"I think what you have to look for is if your product line fits and has some synergy with a product line the distributor already carries," he says. "In our experience, if there’s enough profitability on the product, you’ll see salespeople push [it] and be able to make it a profitable business."

He also says the top three financing options available are manufacturer financing, any in which the manufacturer is willing to participate with a local or international financing company and the Export-Import Bank for U.S.-made machines.

Arnold Huerta, director of global business development for Latin America at the Association of Equipment Manufacturers, Milwaukee, says local distributors are the main means through which AEM’s member companies do business in the region.

"Mexico and Latin America are important markets for many of our member companies," Huerta says. "A key advantage now to doing business in Mexico is that there has been more infrastructure investment. This helps our industry since we supply equipment, and for commerce in general."

Huerta and others acknowledge that Mexico--like the rest of the world--is struggling with less-than-ideal business conditions because of the global economic crisis. But many express confidence that Mexico’s manufacturing industry will continue to expand, mature and offer benefits to foreign investors.

"In general terms, Mexico is a growing country with a young population," says Eduardo Garza. "I’m sure we’re on the right track." FFJ

Banner

Company Profiles

AIR FILTRATION

IRONWORKERS

NESTING SOFTWARE

SERVICE CENTERS

Camfil APC - Equipment Trilogy Machinery Inc. Metamation Inc. Admiral Steel
Camfil APC - Replacement Filters

LASER TECHNOLOGY

PLASMA TECHNOLOGY

Alliance Steel
Donaldson Company Inc. AMADA AMERICA, INC. Messer Cutting Systems Inc.

SOFTWARE

BENDING/FOLDING

Mazak Optonics Corp.

PLATE

Enmark Systems Inc.
MetalForming Inc. MC Machinery Systems Inc. Peddinghaus Lantek Systems Inc.
RAS Systems LLC Murata Machinery, USA, Inc.

PLATE & ANGLE ROLLS

SecturaSOFT

BEVELING

TRUMPF Inc. Davi Inc. SigmaTEK Systems LLC
Steelmax Tools LLC

LINEAR POSITION SENSORS

Trilogy Machinery Inc. Striker Systems

COIL PROCESSING

MTS Sensors

PRESS BRAKE TOOLING

STAMPING/PRESSES

Bradbury Group

MATERIAL HANDLING

Mate Precision Tooling AIDA-America Corp.
Burghardt + Schmidt Group EMH Crane Rolleri USA Nidec Press & Automation
Butech Bliss Fehr Warehouse Solutions Inc.

PRESS BRAKES

STEEL

Red Bud Industries UFP Industrial AMADA AMERICA, INC. Alliance Steel
Tishken

MEASUREMENT & QUALITY CONTROL

Automec Inc.

TUBE & PIPE

CONVEYOR SYSTEMS

Advanced Gauging Technologies MC Machinery Systems Inc. BLM Group
Mayfran International

METAL FABRICATION MACHINERY

SafanDarley HGG Profiling Equipment Inc.

DEBURRING/FINISHING

Cincinnati Inc.

PUNCHING

Prudential Stainless & Alloys
ATI Industrial Automation LVD Strippit Hougen Manufacturing

WATERJET

Lissmac Corp. Scotchman Industries Inc.

SAWING

Barton International
Osborn Trilogy Machinery Inc. Behringer Saws Inc. Jet Edge Waterjet Systems
SuperMax Tools

METAL FORMING

Cosen Saws Omax Corp.
Timesavers FAGOR Arrasate USA Inc. DoALL Sawing

WELDING

HYDRAULIC PRESSES

MetalForming Inc. HE&M Saw American Weldquip
Beckwood Press Co.

MICROFINISHING TOOLS

Savage Saws Strong Hand Tools
Triform Titan Tool Supply Inc.

 

T. J. Snow Company

TPMG2022 Brands


BPA_WW_MASTER.jpg