Mexico’s Maquila Boom Extends Across the Border

May 8, 2014

A maquiladora (sometimes shortened to maquila) is a factory in Mexico, typically owned by a foreign entity, operating under a tax incentive program designed by the Mexican government to attract foreign investment and create jobs. The factory is able to import tools, equipment and raw materials free of duties or tariffs. The operation manufactures or assembles new products, which are then exported, usually back to the United States and Canada.

The maquiladora factories in Mexico date back to the 1960s. The first factories specializing in manufacturing in Mexico were located just across the U.S. border. The operations simply assembled products, which were intended to be sold in the U.S. Workers would sew buttons on shirts and perhaps assemble electronic components that were manufactured in a different country.

The industry grew rapidly, however — 10% per year from 1990 to 2002, and today, the maquiladora industry in Mexico is richly diversified and sophisticated with more than 3,000 factories. The maquiladora industry received $7 billion in foreign capital in 2012, and $13 billion in 2013. Gross exports have increased over 50% in value since 2007. Flat-screen televisions and automobiles are some of the global products most likely to be exported from Mexico. Auto parts, electronics and medical devices are the most popular industries.

Many U.S. manufacturers are shifting away from Asia and focusing on opportunities allowing manufacturing in Mexico. Shipping materials and products to and from Asia is becoming quite costly; cars, refrigerators and large industrial products are especially expensive. Additional pressure arises from the relative strengthening of China’s currency versus the dollar. Shipping to and from Mexico is also drastically quicker — most operations can use trucking and rely on a two-day lead-time. Proximity reduces the need for inbound warehouse space and completed products can be shipped for delivery immediately.

This reverse offshoring — or re-shoring — is spurring the creation of numerous operations along the border in the U.S. These facilities strive to offer various services and goods to complement the cross-border factory work, including raw materials, warehouses, transport, components and pre-processed goods. In fact, 90% of the maquiladora industry’s raw inputs — parts, materials and services — are produced in the United States. The U.S. border economy is deeply intertwined with Mexico. States along the border continue to see increased economic activity due to the maquiladoras.

In the U.S., most trade operations are based in Laredo or El Paso, Texas. However, a hot growth area is Santa Teresa, the second largest city in New Mexico. Directly across the border from Santa Teresa is FoxConn’s electronics operation in Mexico. Additionally, Union Pacific is building a new rail hub — the “biggest thing since the port of entry opened.” In the preceding 15 years, various large companies — such as Georgia Pacific, Menlo Logistics and Northwire — have opened operations here, leading to the creation of more than 2,000 jobs.

Businesses in countries around the world — including Ireland and Israel — are investing in operations in Mexico. They are drawn by the advantages of maquiladora production such as educated labor, English-fluent managers, a standard 48-hour workweek, proximity to the U.S., and lower labor rates. Beyond the well-established border area, many new operations are springing up in Tijuana and Juarez, Mexicali and Guanajuato. It’s an exciting time to consider manufacturing in Mexico.