Mexican labor, law, infrastructure, NAFTA: Steps to develop or save Mexico manufacturing?

Most politicians in Mexico do not understand how to compete globally. Meanwhile, Mexico is moving away from low value-add manufacturing of products to more complicated products requiring more sophisticated processes.

While Mexico is competing with China’s manufacturing sector in some ways, it makes no sense for Mexico to try and compete against China’s labor costs because of the difference in the way each nation is governed.

VentureOutsource.com speaks with Sergio Garcia de Alba, president at the Institute for Innovation, Competitiveness and Entrepreneurial Development at Tecnológico de Monterrey, (Guadalajara, Mexico), Former Secretary of Economy (2005-06) and Under Secretary of Economy for SMEs (2003-05).

In this exclusive interview, Sr. Garcia de Alba shares his unique perspective on the myriad of challenges Mexico faces and offers insight into the Mexican mindset as he talks about Mexico’s position on the global stage while competing with China; changes he’d like to see in the North American Free Trade Agreement (NAFTA), corruption, and Mexican infrastructure, foreign direct investment and development opportunities, and more.

Transcripts from that discussion follow…

VentureOutsource.com: Once deemed the world’s factory, China is losing some of its allure. China’s export taxes have risen and Chinese manufacturing employees are demanding higher wages. Meanwhile, labor is still more expensive in Mexico than in Asia plus Mexico has high grid energy costs that can quickly erode margins for foreign manufacturers. For North American manufacturers, Mexico is closer but China has more workers plus China has invested in its workforce – the type of skills that build manufacturing capability and sustainability. Taking all of the above into account, what are three (3) challenges you feel Mexico’s manufacturing sector must overcome if it is to regain the position it once held in the 1990’s as the manufacturing destination-of-choice for North American companies?

Garcia de Alba: I first want to point out that Mexico has been undergoing a change of focus, from being heavily dependent on low value add manufacturing, to more products (and increasingly more services) that require more sophisticated processes and more flexible and well prepared human resources.

Mexico shouldn’t try to compete anymore, or try to develop, in traditional high-volume manufacturing projects that require low wages and benefits to be competitive.

The economic slowdown from 2001 to 2003, together with the strong competition from China for investments, were painful for Mexico, but were also an opportunity for Mexico to evolve and attract projects offering better jobs; higher value add, lower volumes, high flexibility, and fast delivery times.

Sergio Garcia de Alba President Institute for Innovation, Competitiveness & Entrepreneurial Development at Tecnológico de Monterrey (Guadalajara), Former Secretary of Economy, Mexico

It is my opinion, Mexico should not step backward and compete for projects primarily seeking low labor, not to mention the working and environmental conditions found in China.

With this perspective in mind, I feel the following three challenges facing Mexico’s manufacturing sector are:

1.) Increase Mexico’s budget allocation for education and training, to develop better qualified human resources (from operators and technicians, to professionals). This will help make Mexico more attractive for the types of projects that can pay higher wages and benefits, even if we are not leaders in volume production.

2.) Improve Mexico’s infrastructure. This is critical. We need to invest a lot more to increase and modernize our sea and air ports; high-ways, rails, logistics centers…create more border crossings and making each more efficient (and safe). We also require more competition between telecommunications providers and broadband connectivity.

One thing most of our politicians do not understand (since they don’t understand what it means to compete globally for markets) is, we need to open electric energy generation; distribution, and commercialization to national and foreign investments – at least in the industrial; commercial, tourism, commerce and services sectors.

The government can concentrate its efforts on providing plenty of sustainable energy for homes.

Energy is increasingly a strategic input for many productive sectors, and a low energy cost is necessary to remain competitive. It is a shame, this lack of vision and structural reforms in this area.

It would be a considerable step in the right direction for the government to allow the complete use of alternative energy and offer Mexico and Mexicans both mid- and long-term benefits.

With respect to infrastructure, it is important to mention that on the Federal level, since Vicente Fox’s government (continuing with President Calderon), ‘Public Private Partnership’ schemes began being used to enable larger investments.

Now, there are pieces of legislation being developed that would permit these schemes on the state and municipal levels (with support from the Inter-American Development Bank. There are also US$110 billion dollars from pension funds in Mexico that could have a significant portion invested in infrastructure projects (this is healthier than to have everything invested in the stock market).

3.) Regulatory framework. This is another, very complex and challenging area where progress is needed (fiscal simplification, and streamlining of various types of lengthy and complex permits that have to be obtained at the Federal, state, and municipal levels).

At the same time, it will be important to fight corruption with innovative strategies and more strict application of Law.

Regulatory improvement should be headed by President Calderón, and requires a strong re-engineering of strategy and Mexico’s governmental regulatory infrastructure, and needs the committed participation of governors and mayors. Regulatory improvement also requires changing of the Administrative Proceedings Law at various government levels, to impose punishments to functionaries that do not comply with the regulatory improvements, or to help combat corruption.

It will also be necessary to improve and strengthen the respect to intellectual property (IP), and the handling of incentives for IP development, in order to attract and develop the type of investments that are best for Mexico and the NAFTA region.

VentureOutsource.com: Many Americans and U.S. business leaders feel the 14-year old North American Free Trade Agreement (NAFTA) needs to be renegotiated, particularly regarding U.S. trade with Mexico. What are two (2) aspects of NAFTA you would you like to see addressed?

Garcia de Alba: In effect, NAFTA has been very positive for Canada, the USA, and Mexico, but it has become insufficient.

With regards to NAFTA’s commercial aspect, there is not much that can be done, except to revise certain sectors and rules of operation with respect to the minimum percentages of origin required to have the tariff benefits of NAFTA.

More work has to be done to improve the chapter on services, which are increasingly important in international trade.

Opportunity areas for NAFTA primarily focus on evolving the free trade agreement into a strategic regional alliance, which should include issues like ‘joint vision’ and ‘collaboration’ on issues such as energy; logistics infrastructure, human development, strengthening of productive chains to successfully compete with Asia and Europe, and could even work on addressing a possible strategy for handling the mobility of human resources in a modern; efficient, controlled, safe, and mutually beneficial way.

The integration of trade among the Europeans and Asians is becoming much more profound and efficient than what we have in North America today, and this has made us in this region loose competitiveness in markets; investments, jobs, and it is also causing damage to all three nations.

We need leaders who understand that competition in the current global economy is not only between countries, but also between regional blocks that are dynamic and are gradually getting stronger.

VentureOutsource.com: Mexico has had a difficult time competing with China in world markets. Many international executives VentureOutsource.com speaks with feel this is partly because the Mexican and Chinese governments have a different approach to economic reform with the Chinese government having a more hands-on approach while Mexico’s approach is more hands-off. What are your thoughts on this?

Garcia de Alba: Democracy always has benefits, and costs.

In Mexico, the actual level of democracy gives us a projected social stability long-term. In fact, in the last two years, a collaboration process has even started among political parties with different visions, yet, these parties are reaching consensus and reforms in some cases, certainly not the ideal ones, but the process is positive.

In China, the government’s style makes it easier for structural reforms, but it will be important to watch the social climate in the future (especially now that the economic crisis is hurting China in a significant way), and this is something that entrepreneurs and global investors cannot ignore when making their decisions.

This does not mean we should not stop pressuring government for better structural reforms in Mexico. International organizations such as the Organisation for Economic Co-Operation and Development (OCDE), the World Bank, and the World Economic Forum have contributed significantly in emphasizing the importance that reforms with respect to labor; energy, education, and taxes,  are necessary for regions and nations to become more competitive.

One area of reform that is particularly important is politics, where more responsible decentralization in favor of a nation’s states and counties can be done with respect to science; education, technology, taxes (with certain requirements); and to help increase professional public careers, and to increase municipal government terms that last, in most states, only three years.

VentureOutsource.com: Finding a balance between productivity and quality can be challenging for even the most sophisticated manufacturing operations. Having a highly-trained workforce and clearly-defined manufacturing process instructions often help toward achieving production throughput goals against set quality standards. However, maintaining production quality and repeatability in the factory can be a daunting task for employers with high employee attrition rates. What do you see the Mexican government doing, or needs to do, to help improve employee retention along Mexico’s border with the U.S.A, an area with a large transient population?

Garcia de Alba: The challenge of training and supporting the development of human resources that perform a quality job in more sophisticated operations is a challenge for all regions in Mexico. However, yes, it is true the problem in the northern border is larger due to the rapid expansion in good times, and the rotation in a dynamic labor market which is also affected by migration to the USA. It’s a challenge.

I feel the biggest effort to solve this issue is being done by the state governments together with business organizations.

Infrastructure and specialized training programs are also being developed where costs are shared with local government (in some cases the Federal government also makes a contribution, although these programs usually work better with a local approach).
 

 
A very interesting example can be found in the state of Nuevo Leon, where an Institute for the Development of Talent has been created to support the development of software (and is expanding to other sectors) and develops programs that are more sophisticated than just, for instance, ‘operator training’ like those in older programs.

The biggest challenge is not just spending more resources on education and training, but also investing such spending in a more decentralized and innovative manner.

Better vocational coaching can also help strengthen technical, scientific, and engineering fields (since careers in law, finance, administrative skills still dominate). The teaching methods also must evolve, making more use of information technologies. Several states are making progress on this front.

VentureOutsource.com: The logistical aspect of manufacturing supply chains for many North American companies resourcing operations / suppliers in Mexico involves a lot of trucking – both ways. Such trucking costs can erode any advantage Mexico offers due to its proximity to the U.S.A.

For example: From a port on the west coast to Texas, and then down to Mexico (which is a predominate route for manufacturing in Monterrey; Juarez, and Guadalajara) trucking can take one full week. The reverse trip (from completion of manufacturing in Guadalajara to delivering the finished goods to a shipping point in the U.S.A., can take another 3 days. Add another 2 days for expedited delivery directly to the customer and you have a total trip lasting another week. By comparison, finished goods shipping to the U.S.A. from Eastern China can travel from the Chinese factory dock to the customer’s location in 3 or 4 days. The point being, transit time costs money.

What is Mexico doing to shorten both of these trips? Do you foresee any plans in the works to expand air transport into manufacturing hubs? What are your thoughts about directly importing sea-born cargo into Mexican ports? What are your thoughts about high speed rail?

Garcia de Alba: To have an adequate and modern infrastructure that enables agile logistics and competition is critical for Mexico.

We have made some progress with the modernization of some airports that are being operated by the private sector. Several other airports are being built, or expanded, especially for cargo terminals.

Mexico’s major ports are being expanded, with a significant contribution from private capital. The Punta Colonet mega port in Baja California will soon be internationally tendered, and will increase capacity, I believe, by roughly 2 million containers.

One area where I consider Mexico to be further behind, and where more consideration should be given in this area by the Secretary of Communications and Transport, is rail infrastructure and the expansion and modernization of the border crossings between Mexico and the USA.

There should be more tendering for rail segments in Mexico, requiring that they be developed with modern technology and equipment (like high-speed trains), and solve interconnection problems in an efficient way.

With respect to expansion and modernization of the logistics infrastructure on the Mexico-USA border, while I was Secretary of Economy under President Vicente Fox (2002 – 2006), we regularly presented proposals, at bilateral meetings with the US, to work on the issues. Unfortunately, our American colleagues were not responsive.

Having said all of this, its important to understand that inefficiencies in the system can create additional costs North American consumers end up paying for and, that profits for several USA companies that produce products in Mexico for export to the US can also be impacted. Therefore, it’s very important, and in everyone’s best interest, to modernize the Mexico-USA border and make it more efficient and safe. Perhaps this can be financed through a Public Private Partnership.

VentureOutsource.com: Mexico currently lacks semiconductor manufacturing; test, and packaging capacity. What do you see the government doing, or needing to do, to attract investment in these areas to help make Mexico more attractive from a technology supply chain perspective?

Garcia de Alba: Coincidentally, I participated in a 1996 effort bring an Intel semiconductor plant to Mexico (Jalisco). In the end, the project went to Cost Rica.

The reason for this wasn’t a lack of capacity or lack of human resources for the manufacturing; testing, or packaging of semiconductors.

The challenge was the size of the incentives (from Federal government, interested states which could be Jalisco, Nuevo León, Baja California, or Chihuahua and, the county) needed to make it interesting enough, given this type of investment can reach US$1,500 to $2,000 billion, and support / incentives that companies seek usually represent 15% to 20% of the investment.

Additionally, I believe there is currently an excess of installed capacity internationally for this sector so, maybe the government incentives might be better invested to attract high technology projects in other sectors like medical or renewable energy, that are currently expanding even during this period of general economic contraction.

Connect directly with Sergio Garcia de Alba in VO GlobalNet.