23 November 2007

Mexico's Maquiladoras Fail The Dream

Wikipedia: A maquiladora or maquila is a factory that imports materials and equipment on a duty-free and tariff-free basis for assembly or manufacturing and then re-exports the assembled product, usually back to the originating country. "Maquiladora" is primarily used to refer to factories in Mexican towns along the United States–Mexico border, but increasingly is used to refer to factories all over Latin America. The term "maquiladora", in the Spanish language, refers to the practice of millers charging a "maquila", or "miller's portion" for processing other people's grain.

Alejandro Nadal

At times, an academic report has the flavour of a mystery novel. That is the case with a recent study about the maquiladora (assembling) industry in Mexico and the global strategy of the transnational electronic industries. The sold investigation of Kevin Gallagher and Lyuba Zarsky, researchers of Boston University and Monterrey Institute respectively, explains why the model to move on from maquiladora assemblages to an industrial complex with high value added national exports has failed.

A little history is necessary to understand the report’s context. Probably the most important objective of the North American Free Trade Agreement was to attract a massive dose of foreign direct investment (FDI). It was thought that this would allow leaving behind stagnation and, via exports, the chronic deficit in the trade balance.

The low cost of Mexican labour favoured the flourishing of the maquiladora industry: for the year 2000 more than 50% of the manufacturing exports originated in this activity. But the delinking of the maquiladoras from the rest of the productive apparatus always constituted a worrying matter. Despite everything, the maquiladora rests on a modus operandi that does not have the effect of bringing along the entire economy to promote growth: importing inputs, assembling them and returning them back to the head office is synonymous with exporting cheap labour.

Faced with criticisms of the maquiladora model, an optimistic hypothesis developed about the evolution of this branch of industry. The reasoning was that the maquiladoras would gradually evolve towards an important growth in the aggregate value of exports owing to technological assimilation and greater linkages among industries. A second and even a third generation maquiladora industry was spoken about.

But the dream did not materialise. The aforementioned reports concentrated on electronics because it was thought the process of industrial development would be the most rapid in it. Their studies were located around Guadalajara, region in which this industry quintupled between 1994 and 2000 and exports grew by 400%. The emblematic electronic industries settled in the area (Hewlett Packard, IBM, Intel, Lucent, NEC) and were followed by a second pack of U.S. contractor businesses (like Flextronics, Solectron, Jabil Circuit and SCI-Sanmina). By 1998, the electronic industry of Guadalajara was exporting more than $8 million and that started the talk of Guadalajara as the new ‘Silicon Valley.

But later came the crisis of 2002-2003 and almost all the large transnational industries closed their production plants of computers and peripheral equipment in Guadalajara, relocating their operations to China and other Asian countries. Exports slumped by 60%, FDI suffered a 123% cut and 20,00 employees lost their jobs overnight. Gallagher and Zarsky explain how the only ones that survived were the ensemble of U.S. contractors who had been able to diversify their maquiladora lines of production.

The electronic maquiladora industry did not recover and achieve the dream of constructing an industrial complex with endogenous technological capacity. The interviews in the report reveal that the large transnational businesses adopted a strategy of subcontracting their manufacturing operations from the start of the Nineties and reconfiguring an industry at three levels. At the very top are the large conglomerates (like Hewlett, Dell, IBM) that possess the capacity of design, brands and marketing on an international scale. At the second level are the manufacturing contractors who assemble components to manufacture various electronic goods under contract with the first group. The third level houses business providers of components which is what they sell as inputs to the contractors. These providers are units of all sizes and, in general, survive on very slim profit margins.

In their global strategy, the transnationals preferred the manufacturing contractors with their base in California who, in turn, constitute large conglomerates with a very flexible global supply chain. These contractors ignored the incipient component industry in Guadalajara and in 2004 some 37 local businesses went bankrupt. Today more than 95% of the components utilised by the businesses in the first two levels are imported. The transition from assembling activities based on low wages to an industrial complex strong in knowledge of design and production has not materialised.

This does not seem to worry the Mexican government and, well, some time ago it abandoned the idea of having an industrial policy. It naively preferred to play a game the rules of which it did not understand and the results of which started to surprise it. The main lesson of this important study by Gallagher and Zarsky is that entering the game of “globalisation” without protective gear can be dangerous.
Published in La Jornada, Mexico City, November 14, 2007 Link:

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