U.S. Firms Open Plants Across Mexican Line to Save on Labor Costs (reprint)

September 25, 2007

NUEVO LAREDO, Mexico - American manufacturers are eagerly joining a new kind of "bracero" program that uses cheap Mexican labor to assemble U.S. products for the American market.

Unlike the farm program, under which Mexican laborers entered the U.S. until such border crossings were banned in 1965, Yankee manufacturers are bringing their work to Mexican soil-more precisely to the part of Mexico that lies close to the 2,000-mile common border with the U.S.

The border industrialization drive seems certain to draw criticism from American labor unions and already is engaging the attention of top political leaders in both countries. Meanwhile, the quiet start already made in such manufacturing heartens some companies in search of ways to cut costs in making products ranging from electronic parts to clothing and furniture. And it promises relief for an oppressive Mexican unemployment problem that was aggravated by the end of the bracero farm program.

Here in this dusty, bustling border town south of San Antonio, the biggest of the new border plants is just getting finishing touches. It's an ultramodern $1.5 million air-conditioned plant for Transitron Electronic Corp. of Wakefield, Mass. When it starts up early next year, 1,500 or more workers will assemble U.S.-made electronic parts into more complex components for shipment back to the U.S.

Tuners for GE A few blocks away in a small, white-washed concrete building is a more typical operation. Here some 50 Mexican girls solder and crimp wires on American-made television tuners for Sarkes Tarzian Inc., a big Bloomington, Ind., concern. The assembled tuners-1,000 a day- have been moving northward since March last year, destined for General Electric Co. TV sets.

Sarkes Tarzian and Transitron are among more than a score of U.S.-affiliated companies that have rushed to set up plants along the border since the Mexican government without fanfare began encouraging such ventures a year or so ago. Among other well-known manufacturers that have started operations just over the border are Litton Industries Inc., Fairchild Camera & Instrument Corp., Raytheon Co., Hughes Aircraft Co. and Catalina division of Kayser-Roth Corp.

Nearly all these companies ship their electronic components, textiles or other raw materials and semi-finished goods to their border operations under a special exemption from all import duties. They pay as little as $2 daily per worker for tasks such as soldering or sewing that require extensive hand work. The output then is returned to the U.S. for finishing and sale, with the manufacturer usually paying only a nominal U.S. tariff.

Big Growth Expected Output thus far is small-probably totaling no more than a few million dollars worth of exports to the U.S. annually. But most American businessmen and Mexican government officials predict a sizable impact within five years. "By then, production should total at least in the tens of millions of dollars annually," says one company president.

Some U.S. business leaders are cautious. "This is a new thing for Mexico, and it could go either way," says David Bakalar, president of Transitron. But others have fewer doubts. "I'm convinced that the potential of cheap labor makes a border operation a natural for any labor-intensive manufacturing," says Eli R. Rush, a lanky New Englander who directs a transformer plant on the border, plans a management consulting service in Ciudad Juarez, located opposite El Paso, Texas, to aid new border companies and heads a Mexico City electronics concern.

The duty exemption on imports into Mexico of raw materials, components and machinery is being granted by the Mexican government on an individual plant basis. But few firms are encountering any troubles, and the government is taking pains to make clear its commitment to the program.

"Our idea is to offer an alternative to Hong Kong, Japan and Puerto Rico for free enterprise," Octaviano Campos Salas, secretary of industry and commerce in the federal government, says in Mexico City. "Such industrial programs have to be long-term programs."

The U.S. Government hasn't done anything officially to encourage or discourage border manufacturing. Under well-established customs rules, a U.S. company can send its components to Mexico under a temporary export license and then bring them back without paying any duty on the material, as long as customs men are satisfied the product hasn't been altered beyond identification. The only duty paid is on value added, meaning the value of the low-cost Mexican labor.

A Need for Jobs Mexican backing for border industry picked up noticeably after the U.S. closed its borders to farm workers. Unemployment now totals one-third of the work force in cities like Juarez, a community of 300,000, one study indicates. "There's a need for us to find an outlet for workers with no jobs," stresses Mr. Campos Salas.

The high joblessness makes hiring easy in the border towns, companies say. Transitron started building its plant in May last year; within four months, without any publicity, it had 1,500 applications, and it now has 2,500. Its only hiring so far has been 34 girls (at $2.08 daily) to train to become assembly line supervisors.

President Johnson and Mexican President Diaz Ordaz have taken a personal interest in solving border unemployment. U.S. Ambassador Harry Turkal recently made a confidential report to the White House urging creation of fenced-in industrial parks straddling the border' He envisioned such parks as vastly simplifying the customs inspection of goods produced with Mexican labor for the U.S. market.

A more formal study of border manufacturing is due to be presented to the heads of both governments shortly, perhaps this month. The U.S. leader of this joint border commission is Raymond Telles, former El Paso mayor.

It's expected that the commission's recommendations will be considered when Mr. Diaz Ordaz visits Washington this fall.

The big hurdle confronting any plans for a large-scale "Hong Kong" on the border may well be U.S. labor opposition. "Our problem," confides one high Administration official sympathetic to border manufacturing, "is to pacify or mollify U.S. labor unions."

The AFL-CIO appears to be uncertain about its attitude, partly because the exodus of U.S. companies to the border has happened so quickly and quietly. "We've been following it with some concern," says Nat Goldfinger, drector of research for the union headquarters. "But frankly we have a paucity of information now about this." The big question, he says, is "whether we are exporting U.S. jobs."

Saving U.S. Jobs? Manufacturers and some Mexican and American government officials argue that the border movement may actually save U.S. jobs by winning back markets now lost to goods made entirely in the Far East. In essence, they argue, it's better to produce something partly in the U.S. and partly in Mexico than to allow a totally foreign product to enter the U.S. market.

"This may be hokum, but we can't rule it out," says Mr. Goldfinger of the AFL-CIO.

The paucity of information about which the union complains is due partly to the tight-lipped policies of many companies operating on the border. "The less our competitors know, the better we feel," snaps the president of an American company now expanding its initial border operation.

But most border companies will reveal enough of their operations to suggest that they are happy with their decision to locate here on the border. Most say productivity is equal to that of U.S. workers in similar jobs, while labor costs, including fringe benefits, are one-third to one-fourth the U.S. level.

Litton says its two Tijuana plants, started last year, are "quite successful." A spokesman adds: "We favor plants in the border areas of Mexico over Hong Kong. The immediacy of supervision and technical coordination when necessary are a psychological and economic advantage that's hard to beat."

Litton started up a 3,000-square-foot plant in September to make magnetic memory cores for U.S. computers. It's now expanding that plant, which employs 110 workers, to five times its original size. The other Litton border plant employs 50 workers to make transformers. "We're able to compete effectively in markets in which we previously couldn't compete- namely products coming from the Far East," says the spokesman.

Fairchild to Increase Employment Fairchild Camera, which also operates in Tijuana, started last July assembling relatively heavy electronic components from U.S.-made parts. "We have 150 employees now, and we're still hiring, shooting for 400 by the end of the year," says one official.

Fairchild is in an especially good position to judge the competitive costs of the Mexican border. It has similar electronic plants in Hong Kong, Korea and other foreign low-wage areas. Far Eastern wages are less than two-thirds the level in Tijuana, says the Fairchild official. "But on heavier components where freight cost is important, the higher Mexican wage is offset by low freight charges, so that the advantage is with Tijuana," he says.

THE WALL STREET JOURNAL, Thursday, May 25, 1967 Border Action: Kayser-Roth's Catalina division has had a similar chance to compare its operation in Mexicali with its plants in the Far East and Puerto Rico. "The cost advantages depend entirely on the type of product," says Norman Hinerfeld, senior vice president. On certain types of clothing whose value is almost entirely in labor, such as a hand-embroidered cotton blouse, "we're better off in Hong Kong, despite the full duty that must be paid when the blouse enters the U.S., he says. "But on a coat made with $5-a-yard fabric in which labor is only 20% of the total value, we're better off sewing it in Mexico" because a U.S. duty is paid only on the labor added. The expensive fabric itself enters Mexico from the U.S. and returns to the U.S. duty-free.

The Southern California sportswear maker set up its Mexicali plant in early 1966 and now has 225 workers sewing garments there. "We'd been watching the situation for several years until we felt the political climate was right in Mexico," says Mr. Hinerfeld. "The end of the bracero farm program helped bring the U.S. and Mexico together on this. The potential is there for a massive industrial program."

Getting Along With Customs Whether that potential is realized depends on a good many things, including the attitude of U.S. and Mexican government officials. "The toughest part of operating on the Mexican border now is satisfying U.S. Customs officials that what you are shipping back into the U.S. is what you brought over," says Mr. Rush in Mexico City.

Catalina echoes this view. "You can sew a seam in Mexico, but if you sew a buttonhole, you've altered the nature of the article, and its entire value becomes subject to U.S. duty," says Mr. Hinerfeld.

Mexican red tape still harasses many Yankee businessmen setting up border operations. Applications for duty exemptions have to win approval from two cabinet-level ministries in Mexico City, and there must be elaborate coordination of all plans between state and federal officials, say businessmen.

Sarkes Tarzian Inc. in Nuevo Laredo ran into such a paperwork blizzard, says its president, Sarkes Tarzian. "It took a lot of hard work and a year unraveling red tape to get under way," he recalls. But plant officials say it was worth it. The single TV tuner assembly line will soon become three or four lines with perhaps 200 workers at a time when Sarkes Tarzian and other television component manfacturers are laying off some employes in the U.S. due to slack demand.

Even top Mexican officials concede that border manufacturing is hampered by government clearance procedures. "Due to certain legal barriers and to the diversity of government offices which are connected with the operation of this program, we have not been able yet to establish a flexible and prompt procedure which would permit a quick decision on applications," Rodolfo Villarreal Cardenas of the Industry and Commerce Ministry said recently.

But there are signs of improvement. An American Chamber of Commerce official in Mexico City remarks: "I'd say things have begun to go more smoothly on the border in the past six months, in terms of government machinery being simplified."

Whatever the problems, the lure of cheaper labor is sending many more companies to the border to explore opportunities. Hughes Aircraft Co.'s electronics division recently set up what a spokesman calls a "pilot plant" in Mexicali to assemble semiconductors. It has only 50 people, and the company stresses that costs aren't known yet. "But we wouldn't be there if there wasn't a possible competitive advantage," says the spokesman. Lockheed Aircraft Co.'s electronics division also is studying the possibility of a border operation, possibly in Tijuana, according to a U.S. Government official, though a Lockheed spokesman says that "at this point in time we have no plans for any plants along the Mexican border." Mattel Toys Inc., the big California toy maker, also has been exploring the area south of California. Reprinted with permission by The Wall Street Journal

One Firm Goes to Mexico To Sort Grocery Coupons By a WALL STREET JOURNAL Staff Reporter NUEVO LAREDO, Mexico-A. C. Nielsen Co., the big television rating and marketing services firm, believes that service industries as well as manufacturers can profit from cheap labor on the U.S.-Mexican border.

Nielsen set up a plant here in 1962 to tabulate promotional coupons that U.S. food and other manufacturers issued to supermarket shoppers. The coupons-which typically give the customer 10 cents off on a product-have to be returned for credit by the grocery chain to the dozens of manufacturers who issue them.

"We act as redemption agent, doing the counting, sorting and preparing of invoices," says a Nielsen spokesman. "It's a sort of clearing house." The coupons are mailed to Mexico by grocery chains, and invoices are returned to the U.S. manufacturers for payment.

Much of the sorting is hand labor. About 300 workers are employed by Nielsen here and at a new plant opened last year in Juarez. "We hope to have about 450 within a year," says the spokesman, adding: "Obviously, the low wage rate here has something to do with our being here." Nuevo Laredo's minimum wage is 23.50 pesos daily, or $1.88.

Tags: US-Mexico Border, industrialization

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