Mexican manufacturing and other economic activities in the State of Yucatan
Tecma Talks with veteran consultant, Ralph Biederman, about Mexican manufacturing and other economic activities in one of the country’s southernmost states.
Tecma Group of Companies:
Welcome to another installation of Tecma Talk podcasts. These are a series of audio recordings that consist of conversations with experts that are both within and external to the Tecma Group of Companies. Today we have with us, an individual who is the latter. He is an individual that has been working throughout Mexico for several decades. His name is Ralph Biederman. Ralph, could you please introduce yourself with a little bit of your professional background for the listener?
Thank you very much or inviting me. First of all, I don’t consider myself to be an expert. I am more a “lifelong” student in this area, because we’re always learning new things every day. Basically, I was introduced to Mexico through a previous employer, the Brunswick Corporation, which is based here in Chicago. I worked there for fifteen years.
In 1979, they asked me to get involved with a project to locate their first plant in Ciudad Juarez, Mexico. It’s a company called Productos Marine. It still exists today making products for the marine engine industry. The company asked me to keep its operating divisions apprised of what was going on in manufacturing in Mexico. I joined a couple of trade groups in order to do that. Then, in 1987, I left Brunswick to start Mexico Consulting Associates.
Since 1987, I’ve been helping companies with site selection, start-ups, supplier development and a whole host of other subjects, which typically are of interest when companies want to start their Mexican manufacturing. I’m not industry oriented, I am more process oriented. In other words, I take people that are somewhat interested in Mexican manufacturing, but don’t know a lot about it and doing business there. I walk them through the process to come to a satisfactory conclusion as regards whatever it was that there needs were.
I’m continuing to do that today, all over Mexico.
Tecma Group of Companies:
Ralph, we have known each other for a couple of decades, now. You’ve been involved in a lot of projects, and have done work related to Mexican manufacturing for a lot of interesting individuals and groups. Now, I learned that you are doing something that I thought would be interesting to discuss during this Tecma Talk podcast because, when we think of Mexican manufacturing, primarily we think of the border. We also think of interior sites, like Monterrey, for instance, and, more and more, South Central Mexico where there is a large automobile industry concentration that is growing. However, one of the places that does not come immediately to mind when discussing Mexican manufacturing are some areas in the far south of the country. I know that you are doing some work for the State of Yucatan in order to help them to promote their industry.
Can you tell us a bit about the economic make-up of the Yucatan?
Yes. You are absolutely correct. One of the reasons for, let’s say, lack of visibility of Yucatan in the early years was primarily because, as you know well, when the maquiladora industry, and Mexico manufacturing, began, it was basically focused on the border. At that time, you couldn’t establish Mexican manufacturing operations beyond the frontier. As that situation slowly changed, people began to be looking in other locations.
The Yucatan was probably the farthest in distance for them, especially if they were looking at a map of Mexico. The state is actually north of Mexico City, but is considered to be in the Southeast. If you look in terms of road distance, certainly if you have a Mexican manufacturing plant in Nuevo Laredo or in Ciudad Juarez, Tijuana or in Mexicali you are basically three to five miles from the United States. In Yucatan, let’s say road distance, from Nuevo Laredo is about 1500 miles, and Ciudad Juarez is 1900 miles. So, in terms of access, a lot of people were continuing to focus on Mexican manufacturing on the border, the border cities and the border states.
The Yucatan is actually a colonial state. Merida, the capitol of the State, was founded in 1540 by the Spanish conquistador Francisco de Montejo. It is a very old city, but for many, many years, as a part of the Yucatan peninsula, it’s been a bit removed from the rest of the country. It is still quite a distance to Mexico City. Also, the Yucatan was one of the last places which engaged in Mexican manufacturing, especially in terms of foreign direct investment.
I first went to Merida in 1987, when the State government asked to provide some ideas as to how they could better market themselves in the United States, and that is still a challenge today. This is when you are trying to compete in the area of Mexican manufacturing against the cities and places that you mentioned, like Monterrey, and the State of Guanajuato where there is tremendous investment in automotive. The Yucatan has understood that it is not going to get a lion’s share of Mexican manufacturing investment. If you look at where foreign direct investment in Mexico has gone in the last ten or fifteen years, recipients have been, primarily, the six border states but, obviously, now states like Guanajuato are coming up through the ranks.
The State of Yucatan has a population of about two million. Half of them live in the City of Merida, which is the capital. If you look at the employment of the States in terms of different economic activities, a large portion of them are in either manufacturing or commerce. To a considerable degree, that is Mexican manufacturing for the local or the regional market. This is industry that is not necessary for export. The first maquiladora to arrive in the Yucatan did so approximately in 1984. It was a company called Ormex, a division of Ormco in Los Angeles. This is a manufacturer that makes orthodonture. I first visited that factory on my first trip to Merida in 1987. That company is still there, and growing in terms of numbers of employees.
If you look at the make-up of the Mexican manufacturing maquiladora industry, the presence of manufacturers in Yucatan is relatively small in comparison to other states. Yucatan has a total of sixty-eight maquiladoras right now that employ a total of about twenty thousand workers. There are some large companies in that make up. Obviously, Ormex is one of them. Another one is Grupo Monty, which makes Levi’s. That is an Asian investment in Mexican manufacturing.
A lot of the investments have been in textiles and apparel, primarily because the fully loaded wage rates in the Yucatan are significantly less than those found along the border. There are a number of reasons for this. One of these is that, historically, Mexico was divided geographically into three minimum wage zones, and the Yucatan was in the lowest. Now there are, of course, two zones and not three. Also, the big companies (the GEs, the LGs, the Electroluxes and all of the automotive companies, were not located in the Yucatan. So, what would be considered customary and competitive wage rates were not as high in the Yucatan as there were in the border. The Mexico manufacturing wage rates were driven heavily by larger international companies. That is one of the region’s advantages.
In terms of economic activity, the State is somewhat agricultural oriented, when you get out of the major city. Within Merida and the region, however, certainly distribution is very big. This is so because Merida is located just twenty miles from the Port of Progreso, which is one of the largest ports in Mexico and the largest one in the Southeastern part of the country. This information provides a little idea as regards the area’s economic activities, and where the Yucatan is today compared to some of the “big hitters” that are located closer to the border.
Tecma Group of Companies
Ralph, you mentioned the number of maquiladora plants that there are today operating under the IMMEX program. You also mentioned how many they employ. You also mentioned the distance from the border. In terms of logistics, for the companies that you did mention, those sixty-eight companies, what is the primary way that they deal with and accomplish their logistics needs, in terms of imports and exports?
That is a good question, because I think that, for a prospective investor, who is going to the Yucatan for the first time and who has never been there, it is likely that they are going to look at the map and say, “how do I get there from here?” There are quite a number of ways of getting to Merida by air from the United States and also from Mexico. Distance-wise, when you arrive there, probably one of the first questions that you will have is: “If I have incoming material and components, and I want to ship, let’s say primarily to the United States and to Canada, how do I get product in and out?” The answer to that question has been the Mexican Port of Progreso, which, as I mentioned, is twenty miles north of Merida. Merida is, of course, where most of the Mexican manufacturing maquiladoras are located. As I mentioned, Progreso is one of the leading ports in Mexico. Product comes in and goes out of it primarily via container. Container shipping comes in
mainly from Houston, Texas and from Panama City, Florida. That has been traditional. During my first trip in 1987, I visited with Linea Peninsular, which is the main company that conducts container shipping out of Progreso. It is fifty-two hours from Progreso to Panama City. Linea Peninsular has four ships that move containers from Progreso each week. They ship primarily to Panama City, but also to Houston.
If you are going to be an investor, and Mexico is not your market, you are going to have to consider ocean freight. Earlier, I mentioned that if you were to ship by truck to Laredo, you’re talking about a distance of about fifteen hundred miles just to get to the United States. Panama City is less than six hundred miles from Progreso by ocean freight. If you look at the geography of the country, certainly Merida, Progreso and the Yucatan are very close to the Southeastern part of the United States. To give an example, a company called Sidwell that manufactures furniture for IKEA in the Southeastern US. It was the largest shipper of containers from Progreso to Panama City. They were shipping three thousand sofas a week across that route, and, then, distributing in Alabama. That, of course, is not the only way to get product to the United States. We have an automotive supplier called Air Temp, that, if you believe it or not, that makes condensers and parts of air-conditioning equipment for automobiles. They started their Mexican manufacturing thirty years ago in Merida, and they now have a new plant in Puebla that supports Volkswagen and Audi. They ship from the Yucatan to Detroit, once a week, by truck. I would say that this is somewhat unusual, but believe that they find it to be economical because they have their own trucks. Most Mexican manufacturing companies, however, would not ship this way. They would more likely do so by ocean freight.
When Ormex went to Mexico in 1984, you can imagine orthodonture, or very small items for dental use. All of their incoming components and finished product went in and out by Federal Xpress. If you look at it, this is the epitome of high value, low weight and, also, a lot of labor content, and Ormex did its shipping by air freight.
There also is an air freight company called Amerijet that flies out of Miami, and into Merida several times a week. So there are ways of getting larger cargo into and out of Merida. To reiterate, again, we are talking primarily about container freight.
Last year, the Port of Progreso handled about 4.3 million tons of freight. Half of that amount, believe it or not, was hydrocarbons or fuel oil. This is because the Port handles ninety-five percent of the fuel requirements of the whole Yucatan Peninsula. Progreso is also one of the largest ports of entry for things such as wheat and other grains. You might not be surprised to learn that one of the newest features found at the Port of Progreso is its cruise terminal. It now receives cruise ships three to four times a week, and sometimes there are two ships there at once. This is something that did not exist, when I first traveled to Merida in 1987, because the existing break bulk terminal that was there was not even containerized. It only had a draught of sixteen feet, which was not very deep. During the early 1990s, the government expanded the Port, and the container facilities are now four miles offshore which can be reached via causeway. That’s also where the cruise ships come in and the Port is now fourth largest for tourism in all of Mexico.
Over the years, there have been a lot of things that have been promoted by the State of Yucatan, and they have had a lot of successes.
The Tecma Group of Companies:
Ralph, I don’t want to use the word “expert” again, but you do have a voluminous knowledge of Mexico. You’ve been doing business there for decades. There are a group of people that are associated with you that, together are called the “Mexico Consulting Associates.”
If people want to get in touch with you to, perhaps, talk about this subject, the Yucatan, or tap into your knowledge on any other Mexico related matter, how can they get in touch with you?
I can be reached at email@example.com, or give me a call. I am in Chicago. My number is 847-615-2771, and I would be happy to try to answer any question that a caller may have.
Tecma Group of Companies:
Ralph, I want to thank you for talking to us today. It has been very interesting to learn about the Yucatan, and we wish you good luck in all your present and future endeavors.