Team Members: Jack Kwan Junjie Xia (Jacky)

BUS 515 Project Presentation Maquiladoras Team Members: Jack Kwan Junjie Xia (Jacky)

Agenda • Introduction • Historical Perspective • Current State of the Maquiladoras • Analysis of Textile Industry • Challenges of the Maquiladoras • Recommendations BUS 515 Presentation

Introduction • Definition: Maquiladoras are factories that import materials and equipments on a duty-free and tariff-free basis for assembly or manufacturing and then re-exports the assembled product. • Maquiladoras originally referred to the factories in Mexican towns along the United States–Mexico border ( Source: www.wikepedia.com/ ) BUS 515 Presentation

Historical Perspective • In 1964, the United States decided to eliminate the Bracero Program which was originally a temporary contract labor program for Mexican workers. • In 1965, facing this situation, the Mexican government introduced the Border Industrialization Program (BIP), which contributed to the establishment of industries along the United States-Mexico border. • The primary intentions of the BIP were to encourage industrialization in Mexican border regions, attract foreign investment to aid in Mexico’s economic development, and to reduce the unemployment rate along the Mexican side of the border. BUS 515 Presentation

Historical Perspective • Mexican legislation permitted factories called Maquiladoras at the northern border for the first time in 1965 which allowed US components to be assembled in other countries and then re-exported back to the US without being taxed on re-entry. • In 1966, Machinery, vehicles and parts could be imported into Mexico duty free for assembly or other processing. The products returned to the US with Mexico only taxing the value added. BUS 515 Presentation

Historical Perspective • In 1971, the Maquiladoras program expanded to non-border areas. • In 1973, Maquiladoras were exempted from the law limiting foreigners to a maximum of 49% of ownership of Mexican firms and allowing 100% foreign ownership of Maquiladoras. • Since 1973，Maquiladoras had also accounted for nearly half of Mexico’s export assembly. BUS 515 Presentation

Historical Perspective • Between 1995 and 2000 exports of assembled products in Mexico tripled, and the rate of the industry’s growth amounted to about one new factory per day. • By the late twentieth century, the industry accounted for approximately 25 percent of Mexico’s gross domestic product, and 17 percent of total Mexican employment. • However, profits generated from Maquiladoras were typically sent back to the United States, or other investor-based countries, and therefore, Maquiladoras did not promote direct economic development within Mexico. BUS 515 Presentation

Current State of the Maquiladoras • Since globalization has contributed to the competition and advent of low-cost offshore assembly in places like China, and other countries in Central America, Maquiladoras in Mexico have been on the decline since 2000. • According to federal sources, approximately 529 Maquiladoras shut down and investment in assembly plants decreased by 8.2 percent in 2002. • There exists over 3,000 Maquiladoras along the 2,000 mile-long United States–Mexico border, providing employment for approximately one million workers. BUS 515 Presentation

Current State of the Maquiladoras Countries of Origin (Source: San Diego Union Tribune, Business Section, C-1, April 20, 2003) BUS 515 Presentation

Current State of the Maquiladoras Examples of Maquiladoras’ companies in Mexico (Source: National Institute of Statistics - The Maquiladoras Reader) BUS 515 Presentation

Current State of the Maquiladoras Labor Force of Maquiladoras ( Data is current as of September 2003, INEGI - National Institute of Statistics - Source: The Maquiladoras Reader ) BUS 515 Presentation

Current State of the Maquiladoras BUS 515 Presentation

Current State of the Maquiladoras • In the first quarter of 2006, exports from Maquiladoras to the US were worth US$24.96bn, up 17% from their exports in the first quarter of 2005 when goods worth U$21.33bn were shipped. • In February 2006, the number of people working in Maquiladoras was 1.176 million which was 2.4% higher than in February 2005. BUS 515 Presentation

Analysis of Textile Industry • Before China joined the WTO in 2001, Mexico had a productive industry in textiles, footwear, leather and other goods. • From 2000 to 2004, 33.8% of the Maquiladoras in Mexico pulled out and moved to China, resulting in 150,000 jobs lost in the textile industry. • In 2005, the WTO quota system for textiles and apparel expired, which helped to liberalize shipments from the rest of the world. BUS 515 Presentation

Analysis of Textile Industry • From 2001-2005, there was an avg. of a 4.3% annual decline in jobs in the textile industry. • More recently, there has been a 17% decrease in employment in the textile industry from 2005 to 2006. BUS 515 Presentation

Analysis of Textile Industry • Contributing Factors for the decline of textile industry in the Maquiladoras: -Inability to compete w/ lower international labor costs and cheaper raw materials. -Higher operating costs: electricity,water & gas -Lack of funding from private lenders who are apprehensive towards lending to an industry in decline. -Post 9/11/01 U.S. economic slowdown in demand for apparel BUS 515 Presentation

Analysis of Textile Industry cont. • Maquiladoras shifts focus: - Adopting production of electronics and automobiles and various components - Production of goods that can promise fast delivery to the US (Just-in-time) - Implementation of technology and more efficient production processes, focusing on higher value added products, (I.e. healthcare products) BUS 515 Presentation

Challenges for Maquiladoras • Water: Surface and groundwater supplies are threatened along the US-Mexico border due to the dumping of raw sewage, agricultural runoff, and industrial and hazardous waste pollution... • Air: According to the EPA, border area residents are exposed to health-threatening levels of air pollutants, including carbon monoxide. BUS 515 Presentation

Challenges for Maquiladoras • Factories lack health and safety regulations leading to hazardous working conditions. • Lack of labor rights: long hrs, no overtime pay • Worker abuse • Exploitation of child labor • Poverty and a low standard of living force many laborers to illegally enter the US for better paying jobs. BUS 515 Presentation

Challenges for Maquiladoras • Problem in attracting foreign investment due to crime,illicit drug trafficking, poverty, and lack of transportation infrastructure. • Over the last 10 years, foreign investment in China has grown 83% while increasing by only 45% in Mexico. BUS 515 Presentation

Challenges for Maquiladoras • Lack of negotiations with China to combat smuggling of contraband goods that circumvent duties imposed by customs authorities. • Wage structure for unskilled laborers in Mexico just cannot compete with the lower wages offered in China. BUS 515 Presentation

Labor Cost Comparison BUS 515 Presentation

Recommendations • They need to restructure the production line to accommodate more capital intensive products with higher value added. • They need to integrate more technology in the production process to increase productivity which will help the industry compete more effectively against the lower labor costs in China. • They need to attract more foreign investment to help their industry grow. • They need to educate and/or re-train their employees to adapt to the new demands for a higher skilled workforce. BUS 515 Presentation

Maquiladoras BUS 515 Presentation

Team Members: Jack Kwan Junjie Xia (Jacky)