Recent Changes in the Maquiladora Industry

In the last few years we have witnessed unusual behavior in Mexico’s export maquiladora industry. Having performed as one of the most dynamic manufacturing sectors in the last decade, at the end of 2001 a significant reverse cycle began, not only in the number of workers or in the generation of aggregate value (which would be relatively normal in any economic cycle), but for the first time a declining number of establishments was also registered (see graph below). In the second half of 2001, 456 establishments were lost out of a total of 3,735 so that for 2002 the reduction versus the level reached in mid-2001 was 20 per cent. This change in the aggregate, perhaps more noteworthy, was not the only change.

Graph 1: No. of Maquiladora Establishments

Source: INEGI

Since the first signs of a slowdown were perceived in industrial activity in the US there has been cause for concern, bearing in mind that Mexico’s export sector is closely linked to the performance of US industrial acitivity. However, the situation caused some alarm when maquiladora activity, traditionally on the margin of such fluctuations, was also affected. Maquiladoras are great generators of employment and, with 1.35 million workers, came to represent 30 per cent of manufacturing employment therefore fully justifying the concern.

The Adjustment

In slowing its rate of activity, the maquiladora industry registered a performance that we might call classical because the moments of adjustment in the performance of each of its three main aspects were clearly differentiated: employment, aggregate value and the number of establishments.

Graph 2: The Maquiladora Industry (Annual change, %)

Source: INEGI

As can be seen in graph 2 above, looking at its broad aggregate figures, the cycle more or less passed through the following three stages:

1. First, employment started to contract long before the other variables and the impact here was deeper, such that at the end of 2001, the declines were around 20 per cent in annual terms.
2. In the second stage, the figures for aggregate value, characterized traditionally by great volatility, began to slow. This time, however, showing an unambiguous declining trajectory, also reaching its most intense fall at the end of 2001 (around 10 per cent), although its recovery was to begin rapidly, and for the end of 2002, only a year after its worst moment, aggregate value in the industry achieved positive annual rates of change.
3. Finally, a contraction in the number of establishments towards the second quarter of 2002 marked the third and most critical stage, because although it was of less intensity than employment, the reduction in the number of plants (by as much as 14 per cent) brought with it the latent possibility that further layoffs of workers would take place.

Main Effects

The sequence of the adjustment tells us that the industry faced primarily the exploding crisis of its reserves of productivity, i.e. reorganizing itself and gradually reducing the number of workers, while trying to preserve output rates. Thus, one of the immediate consequences was a considerable increase in productivity in the industry, an effect that would be maintained in the medium term. By way of illustration, it should be stated that aggregate value per worker for the whole industry rose by 41 per cent between 2001 and 2005 (it increased from $114 to $161 monthly per worker). Among the sectors most favored by these productivity gains are footwear, toys and sports items, up 72 per cent and 64 per cent over the same period, respectively.

Meanwhile, within many of the plants production was reorganized. Previously, they had easily tended to ‘specialize’ and the fluctuations in production were ‘adjusted’ by changes in the work force, hiring more workers when it was necessary to increase production and firing them when orders fell off. Due to the crisis, many companies have ‘adapted themselves’ and it has now become more common to find a stable number of workers at the establishments, so that what serves as the adjustment valve is the emergence of other product lines within the same plant, giving companies greater flexibility to deal with the market’s requirements.

Given all of this, it is inevitable that some production lines are more sensitive than others to the cost of labor and therefore depends to a greater extent on continued low remunerations. Thus, when the process of deterioration in the sector began, the most immediate option for the industries that respond to this description were two kinds of migration, one of limited scope and another of greater scope. In the first case they moved into federal entities where wages were predominantly lower, while others sought a bigger change. Central America and Asia constituted the main destinations for this second type of relocation.

The period of adjustment led to far-reaching changes in the nature of the maquiladora industry in Mexico. One of the sectors that best summed up the typical maquiladora concept was textiles and dressmaking. In fact, its abundant labor requirements make this activity one of the most adaptable to the maquiladora scheme to benefit from the low cost of labor. Therefore, when its room for maneuver narrowed, the textile industry ceased to be the sector in which the maquiladoras employed most workers in Mexico, ceding first place to the construction and transportation equipment assembly sectors, as well as to the manufacture of electrical and electronic materials and accessories. The reorganization of the textile sector was due to greater average plant sizes (from 234 workers in 2001 to 365 in 2005), which will make it possible to exploit some advantages of scale.

Nevertheless, through the rearrangement of the industry, the return of several companies has been seen (after they reconsidered some key factors), such as Mexico’s closeness to the US market and relevant productive criteria. In assessing the cost of labor what is important is not the absolute level but the relative level, i.e. adjusted for productivity. The gains obtained in this respect were substantial and offset any pressure from costs (hardly 8 per cent in wages versus the 41 per cent increase in productivity referred to previously).

New Opportunities

This climate of change opened many opportunities within the industry. Of course, those related to the technical operation of the same stand out with others that together generated gains in productivity. However, we should not forget those that led to programmed expense management. We refer here to a more efficient and, above all, more flexible supply, not only of raw materials, but also of general services, something that had been somewhat overlooked.

Traditionally, this industry has been characterized by a relatively limited management of inventories, because, by definition, large amounts of raw materials are not held (they order only what they are going to use). At the same time, the assembly processes used to be of short duration, indicating limited opportunities to substantially improve the management of materials or the transportation of products.

However, the opportunity for more efficient treasury management has to do with the time variable, and this has started to change. Given the flexibility demanded by the industry’s new operating system, where it is necessary that a difference in time between the availability of a resource and an obligation is registered, there will be an opportunity to obtain an advantage from it with good treasury management. Everything appears to indicate that this is what has happened.

Before the crisis discussed here, we can see certain volatility in the expense structure. This means that there was an opportunity to program this more efficiently. To look at this phenomenon, we consider a volatility indicator, i.e. the coefficient of variation. This indicator is constructed by dividing the standard deviation for the data in question by their average. Given the nature of this indicator and conditions, we can contrast variables with very different magnitudes, without invalidating the comparison.

An approximate indicator of what would be susceptible to being managed via a treasury is the difference between the generation of aggregate value (resources) and the various operating expenses (obligations). Thus, if for the overall industry we compare its performance before and after the crisis, this gap presented much more volatility previously: in fact, its co-efficient of variation was reduced to less than half, falling from 0.13 to 0.05 points.

In the same sense, we can confirm that each component of expenses experiences similar behavior, with the exception of electricity expenses (see table 1 below). In other words, the circumstances allowed a better programme of expenses: the crisis opened a window of opportunity for the programming of company treasuries, and we can assume that such an opportunity is not exhaustive.

Meanwhile, the maquiladoras have transformed themselves. They are gradually moving away from being merely assembly or packaging shops, and are evolving into an industry that makes parts and now into one that is beginning to enter the area of product design. These two stages (corresponding to the so-called second and third generation maquiladoras) have increasingly been evident, and are opening possibilities for interacting with a larger number of suppliers, as well as starting to experience longer periods of time between product orders and deliveries, not due to inefficiency, but because they have started to engage in more complex processes.

Prospects

The gains from productivity are here to stay and what we can expect is a gradual return to the previous aggregate levels, although perhaps with a new physiognomy oriented more towards the generation of aggregate value per worker. In many cases, they are probably not the same actors (some sector changes testify to this), but the industry has started to re-experience a certain dynamism.

The most recent data shows gradual recovery in large numbers. Certainly, the industry is still far from reaching the highest levels it had, but it does appear to be on the way. For example, regarding employment we find that in August 2005, it was 13 per cent below the highest level reached, while in aggregate value the gap is 4 per cent, and in terms of the number of establishments the difference is 25 per cent. In the three cases, although they have different velocities, there is ongoing recovery.

Given what we have said, the face of the maquiladora will not be the same as before, and its new physiognomy should reflect a different sector and regional structure in Mexico. Activities oriented towards a greater generation of aggregate value per worker and relocation to places that combine lower relative labor costs with skilled labor will be the issues that demand particular focus.