Topic Category: Manufacturing

After 2 years under NAFTA, North America’s automotive industry is registering strong increases in both production and regional trade growth. NAFTA’s reduction of tariffs and other trade barriers, along with liberalized investment rules and preferential rules of origin, are spurring an expansion of production and sales by the automotive sector throughout North America, and indeed, throughout the hemisphere.

Because of increased global competition, U.S. automaker’s share of the domestic market has declined from 95% to 65% in the past three decades. In order to sustain competitive market share, automotive companies have been forced to rethink their strategies and form regional core networks.

Under NAFTA, automotive producers in the North American region are integrating their production strategies, strengthening their position in the domestic market, and increasing their competitiveness compared to other auto producers located in Asia and Europe.

The results have been clear. Total automotive trade levels within the NAFTA region grew by 17.6% from 1993 to 1995, and in 1995 represented 23.9% of overall trade between Mexico, Canada and the United States. Over the same period, total vehicle production by North American-based auto producers increased by 14.3%.

Although Canada is currently the largest trading partner with U.S. auto producers, it is Mexico which perhaps holds the greatest potential for increasing regional auto industry competitiveness. Trade between the United States and Mexico in this sector has grown substantially in recent years, totaling $25.68 billion in 1995. U.S. auto and automotive parts exports to Mexico totaled $8.64 billion last year, and U.S. automotive imports from Mexico totaled $17.04 billion.

Furthermore, the evidence indicates that rising U.S. imports from Mexico are increasingly replacing imports from other countries in a number of automotive sectors. For example, according to the U.S. Department of Commerce, recent trade data show that Mexico’s share of U.S. imports for small cars increased from 10.7% in 1994 to 15.9% in 1995. At the same time, total U.S. imports of these vehicles from all sources actually declined.

The growth of U.S.-Mexico production sharing in the automotive sector accounts for a large part of this trend. The benefit of this for both countries is confirmed by data from the U.S. International Trade Commission, which shows that U.S. imports from Mexico that result from production sharing contain a much higher share of U.S.-made content than similar imports into the U.S. from Asia.

Two factors are playing a key role in the growing success of U.S.-Mexico production-sharing partnerships. Both NAFTA and Mexico’s close proximity to the United States are yielding reduced costs and economies of scale, substantially increasing the competitiveness of North American-made vehicles vis a vis other global producers.

Automotive production partnerships now account for 34% of all U.S.-Mexico industry production-sharing ventures, and are providing important bi-national growth opportunities in the sector. For example, partnerships between assembly plants in northern Mexico and auto plants in the central U.S. (where final auto assembly takes place), have allowed Mexican firms to gain technological know-how, and U.S. firms have benefited from increased efficiencies in production.

Another significant trend for the success of the region’s auto producers lies in utilizing Mexico as an export base for other Latin American markets. Because of Mexico’s other regional free trade agreements, vehicles and parts produced in Mexico now have preferential treatment in Latin American countries such as Bolivia, Chile and Costa Rica.

In 1995, General Motors (GM) exported 12,000 Cavaliers to Chile from Mexico according to recent reports, and sold a record 130,000 vehicles throughout Latin America in the first quarter of 1996, a 14.4% increase over the previous year.

Navistar International recently announced that it will begin building heavy-and medium-duty trucks in Monterrey, Mexico for export to Chile. By using Mexico as a production base, Navistar avoids the 11% tariff imposed on exports from the United States and is able to export trucks to Chile tariff-free.

The potential for exports from this region is evidenced by the recent record automotive production levels in Mexico, which registered a 37.5% increase in the first half of 1996. Fully 81.7% of the 625,167 units produced in Mexico during this period were marketed as exports.

Although domestic automotive sales in Mexico declined in 1995 during the economic crisis, U.S. producers were able to register a 16% increase in market share in Mexico last year, compared to 11.3% in 1994. With Mexico’s economic recovery underway, sales to its domestic market in the first half of 1996 rose 57% over the same period in 1995, with total sales reaching 140,090 units.

Chrysler, for example, has seen a 10% rise in exports to Mexico in 1996, with its domestic sales in Mexico increasing from 12% to 15%. Recently, Chrysler announced plans to invest $100 million over the next ten years in the construction of a metal stamping plant in Coahuila, Mexico - a further vote of confidence for the long-term potential of NAFTA and the advantages of doing business in Mexico.

This article appeared in The Exporter, September 1996.
Topic: Manufacturing
Comment (1) Hits: 3535



Although the Mexican economy has undergone a severe crisis, economic indicators are continuing to point to better times ahead. And as the economy rebounds, many export and investment opportunities for U.S. firms are becoming more evident -- and can benefit U.S. firms in 1996.

Our list of the top 14 of 26 non-agricultural goods and services projected to be in demand in Mexico throughout 1996 and into the next several years follows:

Automotive Parts and Service Equipment

The Mexican automotive industry has undergone a severe crisis. Sales of new vehicles dropped 60% in 1995. The industry, however, is expected to recover this year.

As a result of a lack of discretionary funds, Mexican automobile owners are keeping their vehicles for a longer period of time. Consequently, the need for replacement parts has increased. With approximately 13 million vehicles on the road in Mexico today, auto replacement parts, maintenance, and service equipment will continue to be in demand.

In an attempt to weather the storm, the Mexican auto parts industry has increased export sales -- which continue to rise. And because at least 60% of the parts sold in Mexico are imported, U.S. exporters of auto parts can benefit.

The demand for the following parts is especially high: connecting rods, fuel injection tracks, valves, automatic transmissions, turbochargers, electronic engine management systems, power steering, anti-lock braking systems, suspension parts, emission equipment, catalytic converters, steering wheels, plastic molded products such as bumpers, panels and gas tanks, auto alarms, auto stereos, luggage racks, headlights, sunroofs, rims, rear-view mirrors, moldings, and hubcaps.

Franchising

Despite Mexico's economic situation, the franchising market is expected to continue its growth, but at a very slow rate. A survey conducted by the Mexican Franchise Association indicates that about one-third of franchises have been negatively affected by the peso devaluation. Their inputs have continued to rise which have necessitated price increases resulting in fewer sales and profits.

In 1994, total sales of franchises represented 1% of the gross domestic product (GDP). The franchising sector is composed of approximately 375 master franchises, representing 18,724 selling locations, employing 133,235 people. In the first quarter of 1995, sales by franchising outlets declined approximately 28%.

Of the total franchises operating in Mexico, 52.7% are national and 47.3% are foreign-owned. There are 69 different types of franchises of which fast-food accounts for 17% of the market, other restaurants account for 11%, and apparel and footwear franchises account for 14%. Those that continue to grow include convenience stores, gas stations and laundries, or provide automotive goods and services, cleaning services, and electronic components.

Pollution Control Equipment

Mexico's environmental programs have presented opportunities for the pollution control equipment industry over last several years. Its has subscribed to environmental policies implemented by developed countries and is continuing to enforce its regulations in all of the regions of the country. Major opportunities projected over the next several years are in the municipal and industrial waste water area, and the solid and hazardous waste equipment and services sector.

The government has indicated that it will continue enforcing regulations regardless of the severity of economic conditions. As a result, both private and public companies will need to continue to install pollution control equipment and use environmental consulting services.

Additionally, states and municipalities are continuing to encourage new private investment to comply with new regulations, and multilateral development banks have indicated that they will continue to provide Mexico with more lines of credit to develop its environmental infrastructure.

Chemical Production Machinery

Investment in chemical production machinery is expected to increase over the next decade in order to make the chemical industry more efficient, globally competitive, and to increase output in order to meet the demands of the domestic market. Mexico's chemical sector includes 400 small, mid-size and big companies.

The big companies, which comprise about 2% of all chemical companies, will continue to invest in modern production machinery and the smaller firms are likely to increase investment in new production machinery as the economy grows. Major investments in machinery will also be needed to build new chemical installations in the country. It is expected that this sector will become more integrated and competitive as it increases its exports.

Telecommunications Equipment

Even though the Mexican peso was devaluated in December, 1994, the telecommunications sector is expected to grow 11%% due to a recently enacted Mexican telecommunications law which opens the telecommunications sector to domestic and foreign competition. This opportunity will likely result in the purchases of U.S. telecommunications equipment and improve telecommunications services.

Building Products

In the past, domestic producers supplied about 88% of building products consumed in Mexico. The devaluation of the currency, however, has forced these producers to raise prices by 30% in order to cover high domestic interest rates and increase their debts paid in dollars. As a result, imports have become more competitive in the Mexican market.

The best prospects include the following items which are not generally produced in Mexico: prefabricated parts for buildings, deluxe finishing products, treated wood, environmentally-friendly drainpipes, plumbing materials, and paint. Mexico does not have extensive forestry resources and little hardwood is produced there. Consequently, there is no domestic substitute for many wood products.

Management Consulting Services

This sector showed a growth rate of 30% from 1992 through 1994. It is estimated to have declined by an average of 4% in 1995 and will likely recover by 2% this year. It is expected that the sector will not reach its 1994 level until 1998.

Small and mid-size management consulting firms, once expected to constitute an important growth segment, are reducing personnel and expenses. As a result, the market will likely be sustained by large companies. Opportunities for U.S. firms working independently are limited. The best strategy is to work with a Mexican partner. The consulting services with best opportunities are those related to Mexican exports.

Apparel

U.S.-made women's and girls' clothing are considered to be of high quality, superior design and competitively priced. Many US exporters offer four seasonal lines in the Mexican market. European manufacturers generally produce only two seasonal product lines, and the variety is limited.

Mexican global imports of men's apparel have increased significantly since the opening of the Mexican market in 1986. These primarily consist of fine designer garments, casual wear, as well as lower priced garments supplied by Asian countries. US apparel imports were anticipated to increase when a 35% import tax for non-NAFTA countries was applied in August 1995.

Imports from the United States increased 91% from $193.8 million in 1992 to $370.4 million in 1994. With the economic slow down, U.S. market share was reduced by 14.7% due to Mexican consumers increasing their purchases of lower priced Asian apparel. The U.S. is a strong supplier of quality and design casual and sport slacks, jackets, shirts and suits.

The main competitors are Italy, Germany and Spain, which supply quality and fashion design garments, and Hong Kong and Taiwan, which supply low-end garments. The United States maintains a 30% import market share; followed by Hong Kong with 16.7%; Italy with 13.5%; Taiwan with 4.6%; Germany with 3.1%; Spain with 2.8%; and France with 1.2%.

Aircraft and Parts

Mexico is highly dependent on imported aircraft and parts. There are approximately 102 commercial, cargo and private airlines operating in Mexico. Approximately 35 of these are international lines, 6 are national lines (with Mexicana, Aeromexico and Taesa being the largest), 13 are regional lines, and 48 are private lines.

For safety reasons, the aviation industry must maintain its fleet in good operating conditions. The economic situation in Mexico and the devaluation of the peso has made major purchases of new aircraft difficult. As a result, major purchases of aircraft are not expected in the near future. However, imports of parts will continue.

The Mexican aviation industry is modernizing. The recovery of the air transport industry in Mexico will be slow. However, the market for airplane parts remains steady with the private and regional lines being the most promising areas.

Electronic Components

The December 1994 devaluation of the Mexican peso resulted in a recession that has reduced the 1995 growth of electronic components to near zero. This situation has limited imports and has increased the competitiveness of locally produced electronic components.

Mexican manufacturers of electronic components have changed many of their product lines, (eliminating some and adding others to adjust to market conditions), reduced staff, and closed some facilities. Manufacturers are focusing on reducing costs. Adjustments in other industrial sectors will affect this industry. As the economy recovers, however, U.S. exports to Mexico are anticipated to increase.

Water Resources Equipment and Services

Mexico's rising demand for drinking and irrigated water have forced the government to implement conservation and recycling programs. However, many municipalities and industries in the country lack the proper equipment to comply with the existing regulations.

Government officials have repeatedly indicated that the best way to solve the water shortage problem is to encourage private investment in new industrial and municipal waste water treatment facilities. The National Water Commission (CNA) is working with multilateral development banks to secure new loans necessary to keep capital flowing. As capital becomes available, U.S. imports of water resources equipment and services will be sought.

Construction Equipment

The concessions program initiated during the Salinas administration made it possible for the private sector to increase investments in roads, schools, hospitals, shopping centers, etc. Although the construction industry has been hurt by the economic crisis, it is expected to rebound this year.

The largest Mexican construction companies have forged strategic alliances with foreign construction firms in an attempt to enhance their strength and participation in this sector. The type of projects planned during the next several years require modern imported equipment, much of which will be come from the United States. Also, Mexican authorities have indicated that construction companies need to source newer technologies to build a greater number of homes at more affordable prices.

Architecture, Construction and Engineering Services

The construction, architecture and engineering industry has been one of the most dynamic sectors in Mexico's economy during the last 20 years. The country has developed very ambitious plans for the next ten years designed to expand and modernize its basic infrastructure.

Concessions granted to the private sector are expected to increase the demand of engineering services in areas such as pipelines for gas, power generation plants, roads, ports, and airports. The demand for engineering services by Mexico's large manufacturing companies for expansion of their present facilities is also expected to rise.

Air Conditioning and Refrigeration Equipment

The Mexican market for air conditioning and refrigeration equipment is principally supplied by domestic production (70%). U.S. imports account for 78% of total imports with a market share of 23%. The commercial market accounts for about 70% of the total purchases.

Due to the economic situation in Mexico, the market for air conditioning and refrigeration equipment decreased by about 10% during 1995. However, it is expected to grow 3% this year.

As the country recovers from the crisis, the demand for air conditioning and refrigeration equipment will certainly increase. Mexican imports of parts will continue. And as the benefits of NAFTA accrue, U.S. import share will increase.

Medical Equipment, Instruments and Disposables

Due to the Mexican economic crisis, coupled with Mexican government agencies delays in publishing bids, imports of medical equipment, instruments and disposables were expected to decline 30% 1995. Imports of syringes, catheters, bandages, gauze and similar products were down by more -- approximately 45% in 1995. However, the Mexican industry as a whole was expected to reveal a decline of 9% last year.

The market, however, is expected to recover more easily than other markets, mainly due to the strong support that President Zedillo promised for those public institutions providing services related to the well-being of the people, including social security and medical services. As a result of this and other factors, the market for medical instruments and equipment is expected to register an average minimal annual growth rate of 5% starting in 1996 and continue well into the future.

The best prospects for 1996 include: X-ray equipment, laser equipment, endoscopy equipment, anesthetic equipment, ultrasound equipment, and instruments for general surgery endoscopy, ophthalmology, laparoscopy, neurosurgery and urology. The most important competitive factors are high technology, quality, service, maintenance, and price.

There should be good opportunities for U.S. firms in the medium term. The United States maintains 55% of the Mexican import market. International competitors in this market include Germany and Japan with 15% and 11% of the import market share respectively.

This article appeared in The Exporter, February 1996.
Topic: Manufacturing
Comment (0) Hits: 1910



According to the U.S. International Trade Commission, Mexico became the United States' fastest-growing supplier of textiles and apparel (by volume) in 1994. Growth, measured by volume, surpassed that of China, Hong Kong, Taiwan, and South Korea. China remained the biggest supplier of textiles and apparel, but the volume of its exports to the United States dropped for the first time since 1988. U.S. imports from Hong Kong, Taiwan and South Korea also dropped. Mexico ranked fifth following South Korea.

Last year, U.S. exporters of textiles and apparel to Mexico performed well. The increase of U.S. textile exports (categorized under SIC code 22) to Mexico from 1993 to 1994, the first full year of Nafta, was 130% more than the increase from 1992 to 1993. The increase of U.S. apparel exports (categorized under SIC code 23) to Mexico from 1993 to 1994 was 17% more than the increase from 1992 to 1993.

U.S.-Mexican Textile and Apparel Co-production to Increase at an Accelerated Pace

Apparel production, which is labor intensive, requires few skills and is difficult to automate, has continually moved to developing countries where labor rates are lower than in the United States. Consequently, U.S. production has declined.

According to a U.S. International Trade Commission report released in January, the U.S. apparel production index declined from its base of 100 in 1987 to a low of 92.2 in 1990. It increased to 95.0 in 1992 before declining slightly in 1993 to 94.9. Over the last 10 years, U.S. imports of apparel grew by 90% to $34 billion.

This trend is not unique to the United States. Stated in the Commission report, from 1980-1993 apparel output decreased by 24% in developed countries but increased by 39% in developing countries. During this period, employment in this sector fell by 19% in developed countries and rose by 110% in developing countries.

The United States is one of the world’s largest and most efficient producers of textile mill products. However, over the years domestic output has dropped. This is primarily due to a reduction in apparel production in the United States -- the single largest market for the textile industry. Thus, East Asian producers of apparel, major suppliers to the United States, source their textiles in East Asia, not in the United States.

In an attempt to sustain remaining domestic market share, U.S. apparel producers have expanded their co-production operations in Mexico and the Caribbean -- benefiting from the lower wages and tariff preferences. This activity also benefits the U.S. textile industry.

Permitted under U.S. tariff classification 9802.00.80, formerly 807 of the old U.S. tariff code, co-production, also known as production sharing, has allowed U.S. textiles sewn and made into apparel in Mexico, or in other foreign countries, to be shipped back to the United States incurring duty only on the non-U.S. material and foreign labor. This has allowed some apparel manufacturing processes to be conducted in Mexico and in other low-cost labor markets.

Under Nafta, a new U.S. tariff code (9802.00.90) now allows U.S. imports of Mexican apparel made with 100% U.S. textile content to enter the United States duty free -- entirely omitting duty once applied to the value associated with Mexican labor.

According to the U.S. International Trade Commission, between 1989 and 1992, U.S. imports of textiles, apparel and footwear under tariff code 9802.00.80 increased by 95%, to almost $5.4 billion. Analysts predict that U.S.-Mexican apparel co-production will increase at a faster rate as a result of the Mexican peso devaluation and use of the new tariff code 9802.00.90. This will benefit both countries as North America becomes more globally competitive with East Asia and other regions of the world.

Approximately 80% of Mexican exports of apparel to the United States is produced in Mexico's roughly 300 maquiladora plants employing about 45,000 workers. Of all countries exporting textile and apparel to the United States under 9802.00.80, Mexico and the Caribbean account for almost all activity.

Some of the new maquiladora production anticipated is expected to result from a shift in existing manufacturing from East Asia to Mexico. And because Mexican maquiladoras utilize about twice as much U.S. material in their finished products as do producers in Asia's newly industrialized countries, U.S. producers of textiles will benefit.

Reportedly, rising labor costs in the Far East helped initiate the shift of apparel production to the Caribbean region about four years ago. Nafta has further influenced this shift away from the Far East to Mexico. Note that the United States Congress is considering legislation that would give the Caribbean region the same duty treatment now given to Mexico under Nafta.

Mexico Raises Textile and Apparel Duties on Non-Nafta Countries

In March, the Mexican Government formally notified the World Trade Organization that it would increase tariffs to protect its apparel industry. The announced tariff increase, from an average of about 20% to 35%, will apply to apparel imports from non-Nafta countries.

Since Mexico significantly reduced its trade barriers as a result of joining GATT in 1986, it has experienced much difficulty in competing with Asian apparel imports. Thus, in 1985 Mexico's tariffs on apparel averaged nearly 50% and all imports were subject to import licenses. By the end of 1987, Mexico's average tariff on apparel dropped to 20% and import licenses were eliminated.

As a result of the steep tariff decline, Mexican imports of apparel increased 74% from 1991 to 1993. During the same period Mexican domestic production grew just 3% in volume, not keeping pace with growing demands for higher volume, better quality and lower prices.

U.S. retailers operating in Mexico, whose inventories include Asian imports, have reportedly criticized the tariff increase. U.S.-based apparel importers who re-export a portion of their inventory to Mexico also predict they will be hurt by the Mexican move. U.S. producers of inexpensive apparel may be able to take advantage of the market void left by Asian apparel imports whose prices are made more expensive by the higher tariffs.

Industry Projections

The U.S. textile industry was expected to benefit with the passage of Nafta. Mexico's economic crisis, which began last December, will temporarily reduce these benefits until Mexican consumer spending increases.

Due to origin requirements under Nafta, it is likely that almost all Mexican apparel will be made from yarn and textiles that are produced in the United States. And if importing under 9802.00.90, all textiles must be sourced from the United States in order to comply with the new ruling.

Under Nafta, U.S. apparel producers of long-run standard commodities were anticipated to be hurt, but less so for U.S. producers of fashion-sensitive garments. Post-crisis projections remain the same. Mexican apparel producers of long-run standard commodities, especially the maquiladoras, will benefit the most -- and more so due to the lower-valued peso and the use of 9802.00.90. As noted above, U.S. textile producers and jobs will benefit from this.

As U.S. and Mexican firms team-up in the co-production of textiles and apparel, North America will become more competitive internationally benefiting North American firms and workers.

This article appeared in The Exporter, August 1995.
Topic: Manufacturing
Comment (1) Hits: 5144



While the dramatic drop of the peso and the ensuing financial turbulence in Mexico has shaken investor confidence, the devaluation is also laying an important foundation for long-term growth in Mexico's economy. Expanded "production sharing" is a cornerstone of that foundation.

An increasingly prevalent strategy for improving business competitiveness, production sharing has permitted U.S. materials assembled, processed or improved abroad to be shipped back to the United States incurring duty only on the foreign added value. This has allowed some low-skill, labor intensive manufacturing processes to be conducted in lower-wage countries, while the high-skill, capital intensive processes are retained in the United States. U.S.-Mexican production sharing is expected to increase as a result of the Mexican peso devaluation -- and that will benefit both countries.

The production sharing program has been an important part of the global competitiveness strategy for many U.S. manufacturing firms and has been responsible for generating new jobs. According to the U.S. International Trade Commission, it also has been responsible for retaining jobs that would have been lost due to intense foreign competition.

The program is provided for under U.S. tariff classifications 9802.00.60 and 9802.00.80. The former classification includes products made of metal. In 1992, leading imports under this provision included aircraft parts and wrought aluminum, principally sheet used in beverage containers and foil used for consumer packaging. U.S. imports under the latter classification include all non-metal products and is a much larger share, accounting for 98% of both provisions.

The benefits derived from U.S. production sharing have been enhanced when used in conjunction with Mexico's Border Industrialization Program, now commonly known as the maquiladora program. Mexico's maquiladora law allows the Government to grant licenses permitting companies to import components and machinery free of duty under bond. The components are assembled, processed or improved and eventually exported (a small percentage is sold in Mexico after import duties are paid). Most of the finished goods are exported to the United States. Because these goods incur no duty in either country and are subject to low-cost labor, their costs are more competitive internationally.

This, combined with other factors, has resulted in Mexico becoming the United States' largest production sharing partner, accounting for 33% of total U.S. imports under 9802.00.80 in 1993. From 1991 to 1994, Mexican production sharing exports to the United States increased more than 60% and accounted for almost half of all Mexican exports to the United States.

Of all the countries currently participating in the U.S. production sharing program, Mexico, by far, utilizes more U.S. components in the finished products. U.S.-made components account for over half the value of U.S. imports from Mexico under 9802.00.80; U.S. parts typically account for only 25% of the value of such imports from Asian newly industrialized countries. Because of this, U.S. industry and labor benefit more from greater co-production of goods with Mexico, compared with goods co-produced elsewhere.

Steve Jenner, principal of Jenner and Associates, a San Diego-based management consulting firm whose clients include U.S., European and East Asian-owned manufacturing facilities in Mexico, believes Mexican production sharing will continue to increase, and more rapidly since the peso devaluation occurred. According to Jenner, "As a result of Nafta, more and more U.S. and foreign-owned companies are establishing production sharing facilities in Mexico. The recent devaluation of the Mexican peso will accelerate the trend."

Zenith Electronics Corporation has announced plans to discontinue sourcing their picture tubes for projection television sets in the Far East and begin manufacturing them in Mexico. They are not alone. Ralph Watkins, Chief of Miscellaneous Manufactures Branch of the U.S. International Trade Commission, the division that handles production sharing, has begun to research the emerging shift in production from East Asia to Mexico. Watkins says this relocation from East Asia to Mexico -- which began with the Nafta and is likely to accelerate as a result of the peso devaluation -- is "very real."

As more non-North American and U.S. producers shift production from East Asia to Mexico, they will also source more of their components and materials in the United States. This will boost jobs in the United States. According to the U.S. International Trade Commission, existing Japanese and Korean-owned maquiladoras, particularly those assembling televisions in Tijuana, will be placed at a competitive disadvantage unless they source more of their components from the United States.

The rules of origin established under Nafta favor television manufacturers like Zenith, RCA and Magnavox because their televisions embody a greater number of U.S. components. Under the trade pact, a minimum component requirement is necessary in order to classify the goods as North American, allowing them to enter any North American country at a reduced duty rate or duty-free depending on the Nafta duty phase-out schedule.

The Commission predicts that Asian television manufacturers will either open plants in North America to produce picture tubes and other key parts, insist that important parts suppliers move production to North America, or shift sourcing to existing U.S. parts suppliers.

In light of recent U.S. assistance to Mexico to help end the economic crisis, Jenner says that foreign investors have come to believe that the United States is deeply committed to ensuring Mexico's economic and political stability. This, he adds, is generating renewed post-crisis confidence and will ultimately promote greater investment in Mexico.

While some of the new production anticipated in Mexico will replace existing manufacturing in East Asia, a significant portion will be new production intended to fill rising North American and world demand. Donald Michie, Vice President of the El Paso-based Nafta Ventures Inc., a firm that assists companies to establish production facilities in Mexico, understands this very well. He says Far Eastern suppliers of electronic components, for example, have put a quota limit on their shipments to North American customers in an attempt to better satisfy the growing demand for these components in East Asia. Consequently, Michie projects that more production of these parts by North American-owned plants is likely to fill the void left by Far Eastern suppliers and take place in Mexico.

Nike currently maintains production facilities in South Korea, China, Indonesia, Taiwan and Thailand. Keith Peters, Director of Public Relations for Nike, Inc., says that his company began considering establishing a plant in Mexico back in mid to late 1994 in order to fill fast growing demand for its footwear products. Third quarter earnings of last year were up 37% and second quarter earnings rose 34%, indicating a healthy demand for its products.

A new plant in Mexico, Peters notes, may be used to fill demand in Mexico and the United States. Currently, Nike sources its materials from five countries. Supplies for a new Mexican plant may be sourced in North America, Peters says.

It is noteworthy that relatively few Mexican exports to the United States compete directly with U.S. goods. Instead, they compete more with non-Nafta countries. As a result, an increase in Mexican exports to the United States is expected to displace East Asian exports -- reducing the U.S. trade deficit with that region of the world.

Under Nafta, all duties on North American goods traveling between the United States, Mexico and Canada will be phased out. This will negate the duty elimination benefits derived from tariff classification 9802 -- but spread the benefits of production sharing throughout all of North America. Consequently, Mexico's maquiladora program will become unnecessary and is slated for termination on January 1, 2001.

Since Nafta was implemented, there has been a proliferation of joint ventures and strategic alliances between U.S. and Mexican companies. This cooperation should only accelerate with the peso devaluation. The benefits derived from this teamwork will continue to make the United States, Canada and Mexico more globally competitive -- at a time when regional trade alliances are becoming increasingly important in the world economy.

This article appeared in Mexico Business, June 1995.
Topic: Manufacturing
Comment (0) Hits: 3073



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