Twin Plant News is a monthly industrial trade magazine, established in 1985, focusing on the operations of major companies in the United States and the maquiladoras in Mexico. Readers include maquiladora managers and their staff, engineers and the management teams of the maquiladora's parent corporation - most of which are in the Fortune 500.
A: The short answer is a maquiladora is a factory or assembly plant operated in Mexico under preferential tariff programs established by the U.S. and Mexican governments to encourage the development of industry in Mexico. Mexico allows materials to be used in maquilas to enter duty-free, provided the finished product is then immediately exported out of Mexico. The U.S. in turn charges these products a much lower tariff than products from other countries.
The long answer is that the Maquiladora program was created on Sept. 1, 1965, when Mexico President Diaz Ordaz initiated the Border Industrialization Program, which had been developed by the Arthur D. Little Co. The program was patterned after a production-sharing model in use in Portugal. The concept is simple: each factory would be treated as an individual foreign processing zone, thereby allowing the plant to import duty free into Mexico all equipment, machinery and materials that were production related.
The program coincided with a 1964 ruling by the U.S. Congress that established a preferential tariff for U.S. made components that were sent offshore and assembled into finished goods that were subsequently exported to the United States. Upon their export back to the United States, export duties would be assessed only on the value of the imported good, minus the value of the U.S.-made components (value added).
Specifically, a maquiladora is a status granted by the Mexican government to an assembly or production plant that exports its work product out of Mexico. Under NAFTA, however, requirements on the amount of work product that must be exported out of Mexico have been removed.
Q: How do they work?
A: A maquiladora typically performs assembly, or sub-assembly, operations. Components are imported duty free to Mexico, whereupon a maquiladora performs the assembly needed to complete the work. The finished product is then exported out of Mexico, or in some cases to other maquilas where it is used in another assembly operation. (For example, a wire harness is assembled in Juarez and then sent to auto assembly operations in Hermosillo or Saltillo where it is installed in cars and trucks. The finished cars and trucks are then exported out of Mexico.
Before NAFTA, maquilas were required to export all of their production out of Mexico so as to avoid creating unfair competition for Mexican industry, which wasn’t able to compete globally. However, NAFTA eliminated requirements on how much production must be exported. Today’s maquilas can sell their product into the Mexican market, if they choose.
Q: How many U.S. companies run maquiladoras?
A: The statistics can be deceiving. About 40 percent of the more than 3,000 maquilas are U.S.-owned. Another 47 percent are Mexican-owned, however, most of those companies are subsidiaries of U.S. corporations. It is safe to say about 90 percent of the maquilas trace their parentage to U.S. firms.
Q: How do maquiladoras benefit U.S. companies?
A: The primary advantage for a U.S. company to operate a maquila is the lower cost of labor in Mexico. Labor typically costs about $21 an hour in the United States, compared to about $5 an hour in Mexico. Other advantages include more favorable labor law in Mexico and fewer union-driven work rules.
In other instances, maquilas fill jobs that U.S. workers are no longer willing to work. Assembly line operations that require nothing more than simple hand work for eight hours a day frequently go unfilled in the United States.
Q: What are the effects on the economies of the United States and Mexico?
A: The maquila sector is Mexico’s number two source of jobs. There is no question that the growth of the maquila industry has been responsible for the growth of Mexico’s middle class and Mexico’s ability to recover from the 1994 peso devaluation.
In the United States, the maquila industry has allowed U.S. businesses to remain competitive with Asian (China, South Korea, Malaysia) companies offering the same goods for less. Without the maquila industry, many U.S. companies would have lost the battle against Asian imports and had to close. Instead, shifting production to Mexico allows U.S. companies to stay competitive and expand in other areas. For example, in the years since NAFTA went into affect, the U.S. auto industry has actually expanded employment in the United States, while also growing in Mexico.