The Mexican city is dangerous and drug-infested, but manufacturers like the wages, freight costs, and location

By Christopher Power

Mexico’s Ciudad Juárez is one of the most violent places on earth. Drug gangs fight endless battles with each other and police in the streets and alleys of Juárez’ poorest neighborhoods. In the past 28 months this city of 1.5 million, across the Rio Grande from El Paso, has recorded 5,200 murders.

Even though Juárez is the center of Mexico’s war on drug dealers, it’s holding its own as the center of maquiladoras, the special zones Mexico developed 30 years ago to attract investment. “It’s a dual reality,” explains Bob Cook, president of the El Paso Regional Economic Development Corp., a group that encourages multinationals to invest on both sides of the border.

In return for building factories in the maquiladoras, multinationals get favorable tax treatment, pay low wages (sometimes as low as $4.21 a day), and take advantage of worker training sponsored by the local government. After mass layoffs during the recession, Juárez factories have added 27,000 workers in the past 10 months. Blue chips like Johnson & Johnson (JNJ), Delphi Automotive, and Scientific Atlanta show no signs of leaving. El Diario, the local daily, is filled with help-wanted ads from Lear (LEA), Delphi, Siemens (SIE), and other companies. Through April, nine companies had obtained permits to operate in Juárez, about the same as last year. K. Alan Russell, who runs industrial parks in Juárez for dozens of corporate clients, mostly American, says he has landed more business in 2010 than all of last year.

Proximity to the U.S. is a big reason for Juárez’ staying power as a place to invest, though drug gangs like their proximity to their American customers, too. Companies have direct access to the U.S. market, and freight trucks can go easily from a Juárez factory to U.S. Interstate 10. “From taking the order to delivery, our Juárez plant can get the job done in three to four weeks,” says Derek Johnson, chief executive of a Denver-based maker of store mannequins. “When you throw in ocean shipping, it sometimes takes our China plant 10 weeks to fulfill an order.” Johnson’s experience reflects recent studies that rank Mexican competitiveness right up with China’s, thanks to cheaper freight costs, a relatively skilled workforce, and those low wages.

The violence never ceases, however. Part of Cook’s PowerPoint pitch for investing in Juárez includes color-coded maps showing which cartels operate where in Mexico. The restaurant industry has been hurt by the violence: Many in Juárez don’t go out at night. “It will take a miracle to solve this,” says Cook.

Yet Francisco Uranga, Foxconn’s chief business operations officer for Latin America, can only recall one murder of a maquila employee that seemed cartel-related. The gangs, it seems, prey mostly on each other. “They don’t bother us. We don’t bother them,” says Uranga. The maquilas operate in closely guarded areas, often on the city’s outskirts and a stone’s throw from the big bridges to the U.S. This year, bridge traffic is up sharply. “We follow the cycle of the U.S. economy,” says Russell, “not the political instability.”

The bottom line: Low wages and freight costs, tax breaks, and location are all persuading companies to stay in Juárez.

Power is an assistant managing editor at BusinessWeek, responsible for international coverage.  

Manufacturers take steps to protect workers and expatriates from potential dangers.

 By:  Jonathan Katz

April 30, 2010 

Drug cartels responsible for as many as 22,000 reported deaths in Mexico over the past three years have put manufacturing plants along the border on notice but have not impeded business activity, say economic-development and plant officials.

The violence has not affected any U.S. citizens visiting the plants, known as maquiladoras, and is primarily targeted at individuals involved in the drug trade, says K. Alan Russell, whose El Paso, Texas, company The Tecma Group operates maquilas throughout Mexico.

“It is certainly a very dangerous environment if you’re in the wrong business, but the data tells us we’re not the ones being targeted,” says Russell, Tecma’s co-founder and president. “There’s certainly the possibility of a random carjacking or getting caught in the crossfire of these violent acts that we hear about; however, I’ve said a number of times it’s probably on the same level as being struck by lightning.” 

Russell says none of his clients have closed plants or left the area because of drug-related violence, though he says it’s difficult to determine whether the company has lost potential business because of the situation. In fact, The El Paso Regional Economic Development Corp., or Redco, has completed 11 deals for new operations in Juarez in the past 11 months, according to Redco President Bob Cook. 

Russell and Cook say most plants in the region that have closed or moved have done so because of economic conditions. 

Maquila Workers Face Dangers

Cook characterizes the rare instances of crime in the manufacturing community as “opportunistic” incidents conducted mainly by small-time criminals who are taking advantage of the Mexican government’s focus on corruption.

 ”What’s happened is with all the focus on these organized-crime elements and the fact that the government at the local level has made an effort to get rid of corruption, it’s created an environment where opportunistic criminals have tried to undertake their criminal activity when law enforcement is elsewhere,” Cook says.

Despite reports that the violence has had little, if any impact, on U.S. business travelers, maquila workers have been directly and indirectly impacted by the increased criminal activity. Gunmen made off with uniforms and at least five trucks on April 11 from an operation owned by oilfield services company Schlumberger Ltd. in Reynosa, Mexico, which borders McAllen, Texas., according to a report in The (McAllen) Monitor. IndustryWeek could not reach a Schlumberger representative for comment. 

An employee at a General Cable Corp. plant in Piedras Negras, Mexico, lost his brother-in-law who was caught in crossfire, says German Zavala, plant manager. The plant hasn’t taken many formal actions to increase security but has advised employees to keep a low profile. 

“We’re basically spreading the word to not stay out too late at night, don’t go around bar hopping — stuff like that,” Zavala says. “We’re not taking out-of-the-way measures to keep everyone safe. If you stay in your own business, you should be safe.”

The plant also has cut back on training seminars and courses in Mexico to protect employees and limited travel from Mexico. “We used to fly out of Laredo, Mexico, or Monterrey, but now most people are driving up to San Antonio, Texas, and flying out of there,” Zavala says. 

Ensuring Worker Safety

The safest plants provide transportation for late-shift workers, says Garrett Brown, network coordinator for the Maquiladora Health & Safety Support Network based in Berkley, Calif. The organization comprises more than 400 volunteer occupational health and safety professionals who work as advocates for maquila worker safety.

“The better employers have had in place for some time a system of buses that are employer funded or subsidized, which take people on routes from the plant to their home,” he says. 

Tecma’s Russell says that’s been the standard at his plants for years and typical for most maquilas. But Brown says female employees could be hesitant to take the buses because some of the suspects associated with a series of rapes and murders between 1993 and 2003 in Juarez were maquila bus drivers. 

“Part of the reason these young women have been victims is that the maquilas often work two or three shifts, so oftentimes women who work the second shift get off at 11 or 12 at night, at which point no public buses are operating,” Brown says. “Since maquila workers are paid so little, it means they can’t afford cars and they’re walking through industrial areas at 11 or 12 at night, which is very unsafe.”

TECMA: NAFTA in Motion Since 1986

Interview with K. Alan Russell By Arturo Chretín – Juarez-El Paso Now Magazine.  January 2010

Tecma provides virtually everything a company in Mexico needs when looking to outsource or manufacture off-shore without the inherent hurdles and hassles. This is done at tremendous savings with 100% control in the client’s hands – guaranteed.

K. Alan Russell is Co-Founder and President of The TECMA Group headquartered in El Paso, Tex. The firm has a subsidiary in Mexico with locations in Ciudad Juarez, Camargo, Chihuahua, Torreon, Coahuila and Leon, Guanajuato. He was interviewed by Juarez El Paso NOW.

 “What sets Tecma apart from its competitors” he explained, “…was that it began more than 15 years ago and was the result of the industrial real estate industry. The market for industrial buildings at that time,” he continued, “was for the most part built to suit. In other words there were no spec-buildings being built and very little available vacancy.” 

 During this time, according to Mr. Russell, Tecma did not have the ability to develop industrial sites or construct facilities for their clients.  “In order to compete,” he explained, “our Sheltered Services had to be much better than the advantaged builders and developers that also offered shelter services.” 

 In today’s market with a large amount of real estate to choose from, Tecma has the advantage. 

 The Company has grown since its conception over 20 years ago and so has the Tecma philosophy. As co-founder of the Company, Russell sees it and explains: “Experience is always the best teacher. We have learned that our true competition is not China, it is not another region or another Shelter Provider.” 

“Our real competition” Mr. Russell continues, “is a company coming to Mexico and doing their own Integration into the country and then running Stand-Alone without us.”  

Tecma accepts all operational liability in Mexico for its clients; they can facilitate the lowest employee turnover. The Company can also put 25 years of experience on the table in all disciplines.  This is what is expected of them. “The real test is that we can do this,” said Russell, “at a cost that is competitive to what a client, any client, can do for themselves. And we understand this at Tecma and use our economies of scale to bring this advantage to our clients.”

Tecma is really not diverse at all. They are extremely focused on their core competency. Even though their clients range in industries from textiles, automotive, electronics, plastics, magnetics, fiber optics, pet products and even fire arms, Tecma’s product quality remains the same and Tecma’s clients are able to see the border as an opportunity rather than a barrier.

What does it mean to operate under the Tecma Umbrella? It means that the Company’s professional services facilitate working in Mexico while boosting their clients’ productivity and profitability. K. Alan Russell pointed this out: “First, there are the integration services. This is the step where we help our client pick the correct region, the correct city and then the correct site within the city decided on. We assist with cost analyses, budgeting, construction or lease negotiations and other front-end requirements which all business transfers require.” 

“Once established,” Russell said as he elaborated on the Tecma Umbrella, “then the sheltered services begin. This is where the symbol of the Umbrella becomes significant. The Umbrella represents the shelter which protects our clients from the many complexities and distractions of operating a manufacturing plant in Mexico. Tecma also provides independent cafeteria, payroll and Mexican accounting services for clients in their own stand-alone operations.”

Tecma is a Company that bases their success on their qualified labor force. In this way, K. Alan Russell, who is the President of the Company commented: “We believe that all companies are valued by the stability, loyalty and quality of their labor force. It just so happens that these core principles are the foundation of Tecma´s services. Training alone will not do it. You must really care a lot and take the culture, emotions and opinions of your workforce into account.” 

The year 2010 is just beginning and the expectations for the industry as well as for Tecma are relying on the improvement over the situation we just lived through in 2009.

Mr. Russell also had this to say: “The unfortunate part of the down-turn was the required lay-offs of some of our loyal and valued family members. However, if the past 60 days is a good indicator of what 2010 will be like, we are going to need these people back.  We believe that with a waiting list of good people ready to return to work, that Tecma has the experienced surge capacity to seize the moment as the economy turns around.  We will emerge stronger at the end of 2010 than ever before.”

“Never in our recent history,” according to Russell, “have all the cards been stacked so much in favor of manufacturing in Mexico.” The Co-Founder and CEO of The TECMA Group concluded: “As the market turns, the Mexico plants will be the first to deliver on that demand. Mexico has the facilities available and an experienced workforce to address this demand. Those individuals and companies with experience in the Maquila Industry will see the greatest opportunities of our carriers unfold over the next five years.”

This voluntary program was started by Tecma’s Environmental Engineering Department in an effort to implement a series of parameters that would assist its Management in measuring the effectiveness of the department, as well as the level of overall corporate commitment to comply with and exceed all environmental requirements of the Mexican Government aimed at maintaining a safe environment for the community.

“This voluntary undertaking is one more step in our corporate self-improvement programs. We are honored by this Recognition by the Mexican Ministry and we maintain our commitment to the highest environmental standards for our clients, employees and our community.” K. Alan Russell, Tecma’s President said.

For additional information contact Oscar Parra at Oscar @ Tecma.com

EL PASO — Though the maquila industry and border trade in the El Paso-Juárez region has been hard hit by the global recession, the peso’s devaluation and drug-cartel violence, industry and economic experts said Tuesday that the border has seen tougher times and the industry is well positioned when the economy rebounds.

Experts gave a tempered, yet optimistic assessment of cross-border manufacturing at the State of the El Paso Economy, a joint presentation by the El Paso Chamber of Commerce and the University of Texas at El Paso that emphasized that this, too, shall pass.

The devalued peso and fears among U.S. businesses about violence across the border has caused a ripple effect in El Paso, where business people in sectors such as real estate and manufacturing are keenly aware of the intertwined economies of El Paso and Juárez.

“I think they’re too optimistic, but there’s light at the end of the tunnel, I know,” Angelica Zweig, a Realtor at ReMax, said about Tuesday’s economic forecasts. “I see a lot of people who want to get out of the violence and come here, but there’s no financing for foreigners.”

The bad news includes the loss of about 42,000 manufacturing jobs in Juárez in the past year; the peso falling to 15.33 on the dollar after it peaked at about 10-1 last year; and 1,600 people slain in Juárez last year, mostly the result of warring drug cartels.

Alan Russell spoke about the state of the maquiladora industry during the State of the El Paso Economy Conference on Tuesday at the El Paso Natural Gas Conference Center at the University of Texas at ElPaso. (Mark Lambie / El Paso Times)

Even so, that’s only part of the story, said K. Alan Russell, president of TECMA Group, a contract manufacturing company headquartered in Juárez.

While cartel violence in Juárez and the global recession have dominated the world’s attention, Russell said he is confident the U.S. and Mexican governments have strategies that will quell the killings. He said the violence has had minimal impact on manufacturing businesses across the border and they are well poised for growth as better economic times return.

What’s more, the El Paso-Juárez region has weathered harsher downturns. In the recession of 2000- 02, about 60,000 manufacturing jobs were lost in the region as many manufacturers moved operations to Asia, particularly China.

“This is not a ghost town where buildings are empty all over the place,” Russell said about Juárez.

Manufacturing businesses in Juárez also have planned well to emerge from the recession perhaps better poised for business growth than before.

Maquilas have avoided more significant layoffs by transitioning to four-day and even three-day workweeks during the economic slowdown. As the United States and Mexico emerge from recession, maquilas could ramp up their production quickly and efficiently.

While the devalued peso is painful to the economy, it could make the region more attractive to the automobile industry’s parts manufacturers that may try to expand when the economy rebounds and auto sales improve, Russell said.

Bob Cook, president of the El Paso Regional Economic Development Corp., or REDCo, said Tuesday that auto-related companies already are closely watching manufacturing in Juárez.

About 35 percent of all maquila industry is auto-related, he said, and companies are preparing to make a move once the economy starts looking up.

REDCo has identified 12 to 15 auto industry suppliers that are looking at Juárez as a potential market for expansion, he said.

“We’re seeing a lot of activity but not a lot of decisions right now,” Cook said. “We’ve already had several companies in the auto industry that have come into our market.”

Darren Meritz may be reached at dmeritz@elpasotimes.com; 546-6127.

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(Fortune Small Business) — Jason and Rodney Carr hate to raise their prices. Their Gardena, Calif.-based distributor of curtains and home fabrics, Softline Home Fashions, usually keeps its costs low by sourcing materials overseas: 100% of their raw goods and 80% of their finished products come from China. But recently, China hasn’t paid off the way it used to. In the past five months, the Carrs have seen their manufacturing expenses rise 20%.

“It’s a battle every day,” says Rodney Carr. “We are not going to cut salaries, staff or any other assets that are important to the company. Sometimes we compensate by raising prices, but mostly we’re just eating the additional costs.”

Once the epicenter of low-cost manufacturing, China is becoming an increasingly expensive place to do business, thanks to a series of sweeping mandates introduced to pacify discontented Chinese citizens and global critics. This month’s Olympics will be a coming out party 10 years in the making. Aware that the world is watching, China has intensified its efforts to clean up its domestic affairs by enacting stricter environmental and labor controls, increasing its land and commodity prices, and slashing the export-tax rebates that helped create the country’s giant trade surplus.

Environmentalists, economists and labor watchdogs praise these initiatives as critical steps in the right direction for both China and the global economy. But coupled with the falling dollar and the rising yuan, these movements have put the pinch on many small U.S. outsourcers struggling to keep up with China’s rapid changes.

Melanie Corpstein, CEO of Adorable Originals, a Phoenix firm that manufactures toys and clothing, has seen the profit margins for her line of dolls shrink since she began manufacturing them in China in 2003.

“In this economy we are in no position to ask the customer to pay more,” she says. “Though my company continues to grow, China’s shift has made me closely monitor other expenses, such as how many hours my team works and how much our office supplies cost.”

What’s driving the cost spike? No one change bears primary responsibility for the sharp increase, but added together, a complex web of adjustments have altered the economics of doing business in China.

Green Initiatives China’s fledgling efforts at environmental reforms, particularly in its most industrialized and developed regions along the east coast, gained steam in 2001, when the country triumphed in its bid to host this summer’s Olympic Games. As this week’s opening ceremonies crept closer, other events added to the sense of environmental urgency.

“The SARS outbreak in 2003, along with the Songhua River spill in 2005, were catalysts for a great national movement to improve the health system and to clean up the environment,” says Deborah Seligsohn, a Beijing-based delegate for the World Resources Institute. Other catalysts included growing awareness of China’s emissions on the world’s climate and Beijing’s desire for energy independence.

The government kicked off a 5-year plan to increase the country’s energy efficiency by 20% between 2006 and 2010, in part by relying more heavily on renewable energy sources: By 2020, China expects renewable energy to account for 15% of its national consumption. The plan also called for the closure of inefficient factories, particularly steel, aluminum and cement plants.

Progress was steady, but the results were not significant enough to improve air quality sufficiently for Olympics conditions. Therefore, in addition to its long-term plan, Beijing implemented emergency measures this summer to address air pollution. Dozens of factories around Beijing were abruptly forced to halt or slow production. Some of those factories will reopen after the Olympic Games, but others are shuttered for good.

After the litany of recalls last year of flawed Chinese goods, U.S. retailers began to crack down on their suppliers’ quality controls (see “The New China Price”). That pressure led to greater enforcement of safety and cleanliness rules that had been on China’s books for some time.

“Pollution was a major source of discontent among the population, but U.S. retailers were pushing for low costs. Local officials were bribed to turn a blind eye,” says Andy Rothman, a Shanghai-based China strategist at brokerage house CLSA. “But now, Beijing has its eye on local authorities. Manufacturers are being more careful about obeying rules that were previously ignored.”

The Carrs know this all too well. “It’s the responsibility of the importer to ensure that the product is safe, and hence, the manufacturing facility has to be up to U.S. standards,” says Jason Carr. “We’ve had to implement improved processes for dying the fabric and disposing of the water that is emitted from the machines. We also have to carefully control the lead content in the dye solutions.”

The Carrs want to deliver clean, crisp, environmentally friendly products and packaging. During their five annual trips to China, they ensure that the factories they work with are complying with the new standards. But the new regulations come at a cost that is higher than the average consumer likes to pay.

Adorable Originals’ Corpstein oversees some production herself, making trips to China to direct 50 factory workers as they stuff and sew her company’s dolls. But that isn’t enough to satisfy the retailers Corpstein works with, many of whom require documented quality-control data.

“We get certificates of compliance, which make the retailer and consumer feel comfortable about the product,” she says. “But the lab tests cost thousands of dollars.”

Labor Controls A tough, new Chinese labor law went into effect on Jan. 1, making it compulsory for employers to offer employment contracts, a social security program and overtime pay.

The labor law was driven by internal political dynamics, such as rising public discontent over low wages, lackluster labor rights and rising economic inequality, says MinXin Pei, senior associate in the China Program at the Carnegie Endowment for International Peace. Its effects are already being felt: Numerous studies, including two recent ones by the Economist Intelligence Unit report and Booz Allen Hamilton, indicate that wages in China are rising by 10% to 15% annually.

That figure, together with the new restrictions imposed by the labor law, has kept businessmen like Ted Hornbein on their toes.

Hornbein is managing director of Asia operations for Richco, a Chicago firm that manufactures plastic fasteners, wire management devices and circuit-board hardware. Six months before the law was passed, Hornbein visited a Chinese labor bureau to learn about the new regulations and get advice on how to set up a labor union for his workers. But after running the numbers, Hornbein realized that complying with the labor rules would send his costs soaring out of control.

“We were running two, 12-hour shifts every day, but the new labor law restricted how long the temp workers could be on the job,” he says. “It was difficult to find enough workers to cover six, four-hour shifts. As an alternative, I replaced 20 workers who cut excess metal off the components after casting with an $85,000 machine, which has increased my capital expenditure.”

That price tag will keep going up: Hornbein has to replace the machine several times a year.

Such incidents have Chinese authorities already reconsidering the full sweep of the changes they’ve mandated.

“There’s a feeling that this law might be too much, too soon,” says Auret van Heerden, President of the Fair Labor Association, a worldwide worker advocacy organization. “HR is a recent discipline and the courts are starting to get overwhelmed.”

Inconsistent implementation of the law is also a problem. “Enforcement is spotty, uneven and unreliable, especially across regions,” analyst Pei says. The cost of implementing the new policies is high for government agencies as well as businesses, and local governments have no incentive to enforce the policies when they can instead extort coverup payments from non-complying local businesses.

But even if Beijing modifies the labor law, business owners aren’t off the hook. The Chinese government is currently pushing for insurance for all workers and is making more of an effort to prevent worker abuse by staging unannounced spot checks at factories. And one way or another, experts expect Chinese workers to continue escalating their expectations of better wages and working conditions.

“The recent labor reforms are a good starting point, because workers know their rights and can sue if they are being abused,” Van Heerden says.

Commodity, Oil and Land Prices
Perfect Pushup founder Alden Mills manufactures his Tiburon, Calif., company’s fitness equipment in two Guangdong province factories. Since moving his manufacturing overseas in 2004, Mills has seen a 20% to 30% cost jump. Perfect Pushup specializes in ergonomically correct workout-equipment handles made of metal and rubber; the rise in oil and steel prices has taken a direct toll on the company’s bottom line.

“We go through exhaustive design analysis and limit the need for costly materials, while also maintaining functionality,” Mills says. “Everyone has to get creative to keep costs in line.”

While steel and iron prices have surged more than 30% since 2007, oil and natural gas prices have nearly doubled, and are hurting small businesses that now pay more for both the raw manufacturing materials of their products and to transport the finished goods back to the U.S.

“We’re being hit hard, seeing price rise every few months,” says Richco’s Hornbein. “To offset the price of the rubber and plastics we use, we have to make our manufacturing processes very lean and ship our inventory on an LCL [less-than-container load] basis to save on shipping and handling costs. Also, we have to investigate whether it’s cheaper to import the materials on a duty-free basis instead of sourcing them locally.”

Mills takes a different approach to curbing costs. “I’ve come to expect steel prices to change every 90 days,” he says. “So I look to buy in bulk for six months out.”

The price of land on China’s east coast is also on the rise. Rents are increasing in Shanghai, Beijing, Guangzhou and Shenzhen.

“There’s less land available now on the coast,” says CLSA strategist Rothman. “Beijing has set up an infrastructure with roads and transportation inland to encourage heavy industry to develop there. Inland regions have cheaper land and power – but keep in mind that the labor force is moving against that trend, migrating to the east coast.”

While rising costs for raw materials and land prices impact all business, the companies hit the hardest are those that conduct their transactions in U.S. dollars, thanks to the Chinese currency’s rapid appreciation against the dollar.

Cutting Tax Rebates
Since 1985, tax rebates given to exporters have allowed Chinese products to be fiercely competitive on the international market. But over the past few years, and particularly in the past 12 months, Beijing has been axing rebates for thousands of goods across a wide variety of industries in an attempt to reduce China’s trade surplus.

China levies a 17% value-added tax (VAT), a tax on the added value of goods and services that is incurred in any exchange. The country traditionally grated exporters a full rebate on the tax. But to curb its trade surplus, China has begun reducing the VAT refunds on most items from 17% to 5%. For some goods, especially those whose manufacture is highly polluting, the refund has been eliminated entirely. Batteries, for example, first had their refund slashed to 5%, and then, just weeks ago, were eliminated completely from the rebate list because they contain cadmium – a toxic chemical that harms the environment and workers’ health.

Analysts expect China to continue using VAT adjustments as a tool for trade rebalancing – which means exporters in most industries shouldn’t expect a return to the full-refund days any time soon.

“[China] is in image-building mode,” says Ron Haddock, Shanghai-based vice president of consulting firm Booz Allen Hamilton. “These efforts promote high-quality goods.”

Such moves are ultimately good for the global economy and for Chinese workers, but they’re still painful for businesses accustomed to the old rules. “We feel the Chinese government’s rebate slashes every time our goods leave the country,” says Jason Carr. “It really impacts international distribution.”

Now What?
The trends that are shaping China’s evolution won’t revert, but will progress slow after the Olympics are over? And for business owners seeking lower-cost locales, where is next? Will India and Vietnam become the new manufacturing epicenters? On Thursday, Fortune Small Business will check in with part 2 of our look at China’s changing business conditions.

From http:// money.cnn.com/2008/08/11/smallbusiness/china_no_longer_cheap.fsb/index.htm?postversion=2008081111