Operating Concepts in Maquilas

NAFTIA* & Maquilas

Van V. Millerpresented at

Central Michigan University9 February 05

*Nafta = Naptha

Operating Concepts in Maquilas

• Profits = Revenues – Costs

• Revenues can be from sales or set.

• Costs are: – Production (labor + materials) – Transaction (tariffs + transportation +

taxes)

A NAFTIA GOAL

Preamble-

“Create new employment opportunities and improve working conditions and living standards in their respective territories”

This Goal Is about Economic Development in Mexico

In 2003,Canada $29,740Mexico $8,950USA $37,500

World Bank data for GNI per capita on a PPP basis

Mexican Maquiladora Program

Past year-• 2800+ Plants• 1.15 million Employees

This week-

Number of Plants 2,815

Employment 1,140,153

Direct Labor Wage  $ 1.88-Hour

Technicians Wage $ 5.19-Hour

Gross Production $ 91.64 billion(www.maquilaportal.com)

Major Maquiladora Cities

• Tijuana—most plants, approximately 750

• Juarez—most employees, maybe 300,000

U.S. Trade Act of 1931

• Free Trade Zones (FTZ) An FTZ is a legal-geographical entity for reducing

tariffs

• Tijuana (on the border)

• Costs– Production (unskilled labor)– Transaction (tariffs + transportation)

Bracero Program 1942-1964

• Migration to the U.S.

• U.S. Costs– Production ( unskilled labor)

PRONAF 1961

• Mexican Border Operations

• Mexican Profits = Sales Revenues - Costs

“PRONAF”/BIP (FTZ) 1965-1982

• U.S. Operations on the Mexican Border

• Mexican Costs– Production (unskilled labor)– Transaction (tariffs + transportation +

taxes)

• 1971—Reduction of Ownership Risk

First Generation Maquila(located along the border)

Materials Components

Labor

A

Twin-Plant/Maquila (FTZ) 1983-1994

• Foreign Operations in Mexico

• Mexican Costs– Production (labor: un- & semi-)– Transaction (tariffs + transportation +

taxes)

Second Generation Maquila(spreading into the country)

Labor Materials

A M

Materials Components

NAFTA Ending the Maquiladora Program

• There is no need for an FTZ in an FTA.

Maquila (TLC) 1994-2000

• Maquiladora Operations in Mexico

• Mexican Costs– Production (labor: un- & semi- & skilled)– Transaction (tariffs + transportation +

taxes)

• Elimination of Ownership Risk

Third Generation Maquila(located around the country)

M DEA

Materials Components

Materials Labor

Components

“Maquila” 2001-2007-Permanent

• Economic Development Need Continues• Vertical Relationships in Mexico• Sales Revenues from Mexican Customers• Future Costs

• Materials—more sought from Mexican suppliers• Labor—increasing skills but the P/$ to Yuan/$ FX

rate matters• Transportation— improving and JIT possible• Tariffs—not an issue• Taxes—now ‘determined’

Current and Future Issues

• Gaining and Losing Industries

• Labor

• NAFTA Side Accords and Reporting– The politics of getting the Agreement ratified in the USA required

two side agreements—one on labor and the other on the environment. These two issues are always contentious (note the pending CAFTA) and should be remembered because they can strike at the heart of NAFTA’s legitimacy.

Gaining and Losing Industries(automotive, electronics & electrical, textile/apparel

• NAFTA caused trade diversion, esp., in textile and apparel with fiber-forward rule. The industry will be a big loser in most cases if MFA stays abolished.

• In other industries, the tension is between the labor rates (Mexico vs. others) and the transportation factor (cost & delivery of Mexico vs. others).

• The motor vehicle industry should be a gainer and electronics & electrical will depend on the nature of the product, e.g. big screen TVs.

The Labor Issue

• Turnover—a study of eight maquiladora cities in northern Mexico.

Wages and Turnover

The Relationship between Turnover and Compensation in Lower-Generation Maquilas

Starting Wage Wage Change Average Wage

High Low High Low High Low

Turnover High 7 9 5 11 7 9

Rate Low 10 3 7 6 9 4

Hildebrand’s .32 at p < .03 .22 at p < .11 .25 at p < .08

del

Generation and Wages

The Relationship between Turnover and Generations in Maquilas

Turnover Rate N

First Generation 65% 12

Second Generation 65% 16

Third Generation 48% 5

‘True’ Third Generation 11%* 3

*Significant at p<.01

The Environmental Issue

• A study of the Top 25 Maquilas– www.maquilaportal.com

NAFTA Side Accords and Reporting

Types of Voluntary Reporting Statements for the Top 25 TNC Maquilas

Policies Codes Performance

• Labor 3+(6 safety only) 1 0

• Environment 7 11 3

• Quality 6 18 NA

Northern Maquiladora Cities

• Along the Mexico-Texas Border– Matamoros– Reynosa– Nuevo Laredo– Piedras Negras– Ciudad Acuna– Ciudad Juarez