Mexico Watch Interview With Gale Thompson,
VP of Business Development
For The Offshore Group: January 2003

Tucson, Arizona-based Offshore Group started its shelter program for maquiladoras in Mexico back in 1986, back when less than 1,000 factories operated under the in-bond assembly scheme. Since then, the company founded by Sonora industrial mogul Felix Tonella has seen the number of maquila factories quadruple and a million new workers folded into its labor force. Offshore now has over 30 manufacturers under contract and employs more than 11,000 workers in Guaymas, Sonora, not far from its Arizona headquarters, and in Saltillo, Coahuila, near to the General Motors and DaimlerChrysler production centers.

The company has been witness to the sector's fierce contraction in the past two years, with intensifying competition from Central America and Southeast Asia and, especially, the rise of China as the global manufacturing powerhouse. Gale Thompson, vice president of business development, has worked in both Mexico and Asia, and spoke with Orbis Senior Mexico Editor Jeffrey Wright regarding his perspective on the current downturn and the competition from across the Pacific Rim.

Jeffrey Wright: There've been a lot of reports recently about the threat from China in manufacturing and to the maquiladora sector. It seems that the Offshore Group would be very familiar with those issues and possibly have felt the effects itself.
Gale Thompson: We have, we are certainly aware of the threat, or of the competition. We've been successful in spite of China but we have also been very leery. One of our clients is currently considering China as an option and is possibly leaving our park. So it's real and we certainly feel it. They are in the electronics industry and are in the PRC already, and are considering closing down the whole operation and moving it all over there. Obviously, when you're dealing with labor-intensive work, China is considerably less expensive, although oftentimes people don't put the expenses in full context. Mexico offers many advantages, but there are some disadvantages.

JW: What would you name as a disadvantage that may have gotten more acute?
GT: I think Mexico is out to kill the goose that lays the golden eggs with their tax issues and several other issues that make Mexico more expensive.

JW: Mexican corporate tax rates are too high? Too complex?
GT: It's not necessarily the corporate tax but there are other issues, such as duties, for example. In 2002, raw materials and equipment became dutiable which beforehand were not dutiable or they came under the in-bond arrangement. So those are some issues now that are alarming to us. It's not the same Mexico that used to be very attractive to maquiladoras.

JW: According to the law firm Baker & McKenzie, this year Mexico may have addressed some of those issues, clarifying or streamlining some of the duty barriers...
GT: We're waiting to see some of the results of those issues; some things are still up in the air. We are very interested onlookers wondering what is going to become as a result of that.

JW: How about the advantages?
GT: Number one, there is the proprietary issue. Someone told me a funny definition for Chinese R&D. Instead of research and development, it's receive and duplicate, so people that have any intellectual property that they want to guard are a little bit leery about doing things there. Number two is proximity. Companies want to do operations that are short-run within the vicinity of the US because the turnaround time can't be as long. Proximity is very significant in the automotive industry, for example, because they are just-in-time suppliers. Also for technical support, it's just a lot easier to send an engineer down to Mexico than across the Pacific Rim. And then the third thing is a great infrastructure here in Mexico and the US dealing with regulatory agencies. The FAA looks at the stuff that is being made in some of our aerospace clients' plants; for medical devices it's the FDA.

JW: There's been a lot of talk about Mexico moving up the global manufacturing value chain, aerospace, for example, you are seeing some troubles in the EMS sector but are you seeing an upturn elsewhere?
GT: I have worked in Mexico for over thirty years, and I have noticed a tremendous shift in the past five years. What we are seeing today is state-of-the-art production. We have with us right now about seven aerospace companies, they've all come within the last three, three-and-a-half years. So, going up the value chain, and the technology chain, yes. More machining, more complex work, more capital-intensive type work. One firm that joined us just recently is in the optics industry. Right here in Tucson we have a major research cluster for optics so we are competitive in that area. We have another that is in medical devices. When they originally started they had probably 50 people. A year later they've got roughly 150 people. They said they would be have over 200 by the fall of 2002 but they haven't grown even though their production has increased. The plant manager tells me they are just overwhelmed with the productivity of the Mexican worker; they in fact are meeting their production objectives without the increase in workers they had expected. We see more and more companies with fewer workers and more capital equipment. A company that has 3,000 people in the US I think would just blow right by Mexico, but when you're talking about companies with 50 or 100 workers, they are very keenly interested in Mexico. As a general rule, if it's low engineering content, high-volume manufacturing, low inventory costs, then they'll look at China.

JW: As a shelter program one of the main things that you will do for your clients is dealing with the labor side of thing. Have you found that the environment has grown more complex?
GT: We have not had issues with the labor unions. They have been very supportive and have worked very closely with us on several issues that go beyond Mexican labor law. We have some companies that have been hit very severely in the last year and with the union we've been able to reduce some costs, to work some things out with the union that would be much harder than working with the labor relations board in Mexico. Have things become more difficult with the unions? On the contrary, the union has been very supportive of us. From the very beginning we established a good relationship with the union.

JW: Companies that have been in Mexico for a number of years may have grown more sophisticated in their understanding of Mexico, and in that sophistication may have realized that labor relations, payroll, customs, industrial park management, and so on, is best left to an expert, so have you been able to offset the softness in new entrants to Mexico by attracting companies already in the country that are now looking for a shelter program?
GT: We have some very large companies with us that have been previously established in Mexico. Parker Hannifin has been in the country for quite some time, and their aerospace division chose to come with us because of the hassle of these things you're talking about. Tyco, Delphi, Kimberly Clark, and Textron, all have moved some divisions over to us. I was talking to the VP of operations of one of these companies and I asked him what differences he saw in cost [in a shelter program] and he said, well, it's about a wash in cost, but the virtue is that my plant manager can focus on the product, our core business, and not worry about all those peripheral items. Consequently, they've closed down some plants in Mexico and then relocated them within our facilities. It's just easier.