Value from integration: Regional relationships are key to manufacturing’s future health

As in many other sectors, proximity to US markets has been a strong driver of Mexican manufacturing, and Baja California (BC) has developed important infrastructure for the simplification and efficiency of international commerce. Many examples exist, including border crossings, railroad, highways, seaports and airports, which make commercial exchange easier not only with US markets, but also with those in Canada, Latin America and Asia. Additionally, regional integration with neighbouring areas, like San Diego and Imperial County, have created commercial and knowledge exchange opportunities in electronics, medical devices and aerospace. However, fiscal reforms are bringing shorter-term uncertainty to some parts of the sector.

ELECTRONICS: In the past 30 years, BC has become one of the most important regions in the world for manufacturing electronic products. The sector consists of more than 200 companies that manufacture a vast array of products, from microchips and semi-conductors to home appliances and musical instruments. The electronics industry is one of the fastest-growing, with a reported $177m in foreign direct investment (FDI) as reported by the investment promotion agency ProMé xico in 2012, which represents more than 30% of the total FDI in the state. Of the companies that make up this cluster, around 60% are located in the city of Tijuana, while Mexicali is host to a further 21%. The workforce numbers around 92,000 workers, according to a 2013 study by the Universidad Tecnológica de Tijuana, making the sector an important source of employment. One of the markets with the most potential, semiconductor production, has a history in BC. Skyworks’ Mexicali plant, which has been operating since 1969, employs more than 2800 people and specialises in semiconductor module assembly and electrical testing.

In the consumer electronics sector, BC is considered a TV manufacturing giant, producing more than 19m sets per year. Foxconn’s Tijuana EMS plant has more than 3800 permanent employees. The Taiwanese company is also planning to strengthen its product design operations in the state. In an interview with OBG, Edgardo Blanchet, Foxconn’s vice-president of business planning and logistics operations, said, “The company is committed to strengthening the local design operation, with more than 80 Mexican engineers designing products, given that Foxconn has noticed not only the current tendencies, but also the stability that exists in the region. If we had not seen such stability the company would not be searching for further local integration.” Currently Foxconn uses BC suppliers for many of its plastics, metals and paper/cardboard needs but is looking to further expand its local supplier base.

MEDICAL DEVICES: Another long-established manufacturing industry is medical devices, which has been present in the state for more than 20 years. Its recent growth has been close to a steady 8% annually, as reported by the Medical Products Industry Cluster (MPIC). The industry comprises some 130 companies in the country, with BC hosting more than half of them: 67 companies in total. The sector has seen solid growth in employment generation from 27,000 jobs in 2004 to 45,000 in 2013 just for BC. The industry in BC covers more than 100 product families and has an import-export balance of $1.5bn and $4.9bn, respectively.

Local integration and supplier development could offer investment opportunities in the near future. However, a possible deterrent could be the pace of the sector, as Angel de la Campa, president of the MPIC, told OBG. “One of the particularities of the medical industry is that it has specific complexity and timing,” he said. “It is a sector with a lot of quality regulations and fulfilling all the requirements may take time, because any change in suppliers or raw material requires a validation protocol, which can take time to develop depending on the component’s criticality. So, procurement development is not simple, especially for suppliers lacking previous medical device manufacturing experience.”

AUTOMOTIVE: With over 50 companies producing a complete range of light vehicles, heavy vehicles and auto parts, BC is a strong competitor in the overall Mexican auto industry (see Industry chapter). Companies such as Toyota and Kenworth have been key participants, manufacturing complete vehicles in the state. Other examples include parts companies like Prime Wheels, which received incentives in the form of tax reductions for 2012-13 totalling more than MXN1.6m ($124,000) for its $100m investment, and most recently Hyundai, which has announced the opening of a second plant in the state with an investment of $130m. Hyundai’s Aluminium Die Cast Centre will play a part in a sector that employs more than 30,000 in the state with its main markets being the US, Canada and Mexico.

SHIFTING BUSINESS MODELS: Outsourced manufacturing, the generation of labour-intensive employment and the import of raw materials and components for their assembly and export back to the US have been the backbone of BC’s manufacturing. Tijuana’s Economic Development Corporation estimates that more than 500 such production units exist just in the city alone and BC’s Secretariat for Economic Development ( Secretaría de Desarrollo Económico, SEDECO) said there are more than 900 in the state. In 2006 the Mexican government published a Decree for the Promotion of the Manufacturing, Maquila and Export Service Industry (IMMEX). IMMEX lets beneficiaries temporarily import goods for an industrial process or service, without import duties and value-added tax. The goods must be used to produce, transform or repair foreign goods for export, and include raw materials, parts and components, shipping containers, machinery and other equipment. Other offshoring approaches include the shelter model and contract manufacturing.

The beginning of 2014 saw a step back in the IMMEX programme, when President Enrique Peña Nieto’s fiscal reform was applied. In addition to raising value-added tax (impuesto al valor agregado, IVA) from 11% to 16% for the border zone, the reform addressed import duties and IVA exemptions that apply to IMMEX companies. The first change converted tax exemptions to tax refunds. To obtain the refunds stricter rules regarding requirements and procedures have been proposed. Although the reform has been in effect since January 2014, the lack of complete procedure and infrastructure has slowed the application of the full extent of the IMMEX modifications. Nevertheless, they should be in effect by October 2014, according to an announcement by the Tributary Administration Service.

RESHORING: The financial and economic crisis of 2009 onwards brought unemployment numbers in the US to high levels. The US state of California reports an overall 7.9% unemployment rate, and some of its counties, like Imperial, post figures over 22%, according to 2013 figures from the US Bureau of Labour Statistics. This combined with technological advances, a reduction in labour-intensiveness and other factors has brought talk of re-shoring manufacturing operations from its overseas locations, primarily China or India. Some regions in the US like Texas or Georgia have made significant efforts to offer companies incentives to reshore. However, the process has not been seen solely a US effort. Bi-national economic regions have also been considered. Among the examples of such a region is the Calibaja Region, of which BC is a part. The proposed project endeavours to bring together San Diego County, Imperial County and the state of Baja California, with the idea of creating a more competitive region overall. Each of the three parts contributes different assets. In terms of numbers, the Calibaja region has a population of almost 7m, with a labour force of more than 3m and a total GDP in excess of $200bn.

The access to US, Latin America and Asian consumer markets makes the project an interesting opportunity for the manufacturing sector and a definite candidate for re-shoring of operations. Nevertheless, much needs to be done to fully integrate the three areas in order to place them as a prime candidate for both new and returning manufacturing operations including simplification of migration processes and further integration of infrastructure and educational systems.

In the immediate future, the sector will probably hit a bump due to the current fiscal reform. However, in the medium term, manufacturing shows two strong tendencies that should set the industry’s direction. The first is the need to develop reliable, locally integrated supply chains, which brings the possibility of direct investment in procurement and the possibility of more companies investing in the area. If this development circle gains momentum, the state and the Calibaja region could see significant investments in the coming years, particularly as a reshoring destination. The second is knowledge integration. Many companies are looking to have their research and development centres close to their advanced manufacturing centres. This aligns with BC’s development, since the state’s public and private sectors have focused on advancing the workforce and the development of strong cross-border relations with California, where many current research and development centres lie. If knowledge integration continues as it is, BC could accelerate its development towards more advanced manufacturing, design, engineering and integrated production of goods.