LVII Maquiladora Industry Outlook Meeting Mexico s Maquiladora Industry Outlook:

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LVII Maquiladora Industry Outlook Meeting Mexico s Maquiladora Industry Outlook: 2006-2012 John H. Christman Director and Consultant Maquiladora Industry Econometric Service Global Insight, Inc.

1 LVII Maquiladora Industry Outlook Meeting Mexico s Maquiladora Industry Outlook: John H. Christman Director and Consultant Maquiladora Industry Econometric Service Global Insight, Inc. Hosted by: Co-hosted by: THE GREATER MCALLEN ALLIANCE Daniel B. Hastings, Inc. International Bank of Commerce International Distribution & Logistics Coldwell Banker South Texas College McAllen, TX Sept. 29, 2006 Copyright 2006 Global Insight, Inc.

1995-2006 in Review Operating Plants Employment Value of Production 1 Dec 95 2,267 +9.8% 681,251 +13.4% 31.2 +20.1% Dec 96 2,553 +12.6% 799,347 +17.3% 42.2 +35.2% Dec 97 2,867 +12.3% 938,825 +17.

2 in Review Operating Plants Employment Value of Production 1 Dec 95 2, % 681, % % Dec 96 2, % 799, % % Dec 97 2, % 938, % % Dec 98 3, % 1,043, % % Dec 99 3, % 1,195, % % Dec 00 3, % 1,310, % % Dec 01 3, % 1,071, % % Dec 02 2, % 1,067, % % Dec. 03 2, % 1,050, % % Dec. 04 2, % 1,131, % % p Dec. 05 2, % 1,156, % % June % 1,223, % % 1Variation vs. June Billions of U.S. dollars P Projection, Copyright 2006 Global Insight, Inc. annualized 2

3 The Maquiladora Industry: Principal Macroeconomic Indicators Variation (%) pr 2006 p 05p/04 06p/05 p Plants (a) 3,590 3,630 3,003 2,860 2,810 2,811 2, Employment (000) (a) 1, , , , , , , Gross Production Value* Imported inputs* Added value in Mexico* Average annual peso/dollar Exchange rate (48-hour, interbank) (3.3) 1.1 Average wage for line workers, including obligatory benefits (dollars/hour) P Projection as of Sept., 2006 Global Insight, Inc. Pr Preliminary, official * In billions of dollars. (a) Annual average Copyright 2006 Global Insight, Inc. 3

4 Key Maquiladora Industry Statistics Number of Operating Plants (a) Employment (000) (a) Total Exports* Value-added in Mexico** , , ,703 1, ,802 1, ,808 1, ,812 1, (b) 2,822 1, * In billions of U.S. dollars ** Trade surplus in Mexico s favor (a) As of December 31 of each year. (b) January-June Only Sources: Compiled by Global Insight and CIEMEX-WEFA with information from the General Statistics Bureau ( ), INEGI and Bank of Mexico. Copyright 2006 Global Insight, Inc. 4

5 Maquiladora Industry At-A-Glance Number of plants (June 2006) Total maquiladora exports (Jan.-July) 2,822 6 $61.83 billion dollars 2,816 in April $53.40 billion in % 2,801 in April Peso exchange rate Number of employees (June 2006) 2006 Jan.-Aug. average to US$ million 49, Average million in April 05 48, annual average million in April 04 67, annual average annual average Number of plants differential in annual average (official, INEGI, net) 6 In 2006 (Jan.-June) 10 1/2 Copyright 2006 Global Insight, Inc. 5

6 Maquiladora Industry At-A-Glance Overall industry growth, real (INEGI) Major players (June 2006) % Plants Empl. (000) % Electronics, electrical % Automotive parts, components % Textile, apparel % % of industry total % Direct foreign investment (January-June) 3.1% p , ,172.2 Plant location (June 2006) ,043.5 Border cities 1, ,961.1 Non-border cities in border states ,474.5 Other states ,813.1 p 2006 (Jan-June) 1,530.7 p P Preliminary, Official hr Interbank Rate 2 Millions of U.S. dollars, covers only imports of fixed assets by the Maquiladora Industry Data compiled by Global Insight, Inc. from the following sources: INEGI, Bank of Mexico, SECOFI, SECON 2/2 Copyright 2006 Global Insight, Inc. 6

7 Maquiladora Industry Growth (June of each year) 3,735 3,582 3,294 (Thousands) 1,500 1, ,302 2,976 2,868 2,801 2,816 2,822 1, ,135 1,211 1,074 1,058 1,126 1,174 1,223 1,200 1,100 1, Operating plants (LS) Total direct employment (RS) 800 Source: INEGI, revised. Copyright 2006 Global Insight, Inc. 7

8 Maquiladora Industry Recent Evolution of Direct Employment Month Net Change Previous Month Month Net Change Previous Month Month Net Change Previous Month January 1,309, ,057,709-13,779 1,065,847-2,101 February 1,294,743-14,510 1,049,874-7,835 1,067,153 +1,306 March 1,279,217-15,526 1,049, ,074,008 +6,855 April 1,264,909-14,308 1,064, ,243 1,065,679-8,329 May 1,240,984-23,925 1,079, ,611 1,070,705 +5,026 June 1,210,825** -30,159 1,074,476-5,173 1,057,765-12,940 July 1,185,384-25,441 1,080,021 +5,545 1,045,598-12,167 August 1,164,978-20,406 1,075,742-4,279 1,050,825 +5,227 September 1,148,717-16,261 1,080,548 +4,806 1,059,801 +8,976 October 1,122,060-26,657 1,089,469 +8,921 1,071, ,926 November 1,094,743-27,317 1,085,241-4,228 1,065,939-5,788 December 1,071,488-23,255 1,067,948-17,293 1,050,210-15,729 Annual Differential Dec./Dec ,538-3,540-17,738 **Record high month for number of operating maquiladoras *** Best level since October Source: INEGI. (revised, official though Dec. 2005). P Preliminary, Official 1/2 Copyright 2006 Global Insight, Inc. 8

9 Maquiladora Industry Recent Evolution of Direct Employment p 2006 p Month Net Change Previous Month Month Net Change Previous Month Month Net Change Previous Month January 1,069, ,506 1,144,806 13,080 1,172,987 16,510 February 1,070, ,149,918 5,112 1,176,155 3,168 March 1,079,989 +9,813 1,162,294 12,376 1,191,250 15,095 April 1,098, ,526 1,165,065 2,771 1,199,331 8,081 May 1,125, ,698 1,170,914 5,849 1,218,047 18,716 June 1,125, ,174,003 3,083 1,223,180*** 5,133 July 1, ,563 1,167,380-6,623 August 1,133,750 +4,611 1,171,726 4,346 September 1,138,918 +5,168 1,172,816 1,090 October 1,138, ,178,838 6,022 November 1,140,824 +2,610 1,180,760 1,922 December 1,131,726-9,098 1,156,477-24,283 Annual Differential Dec./Dec.- 81,516 24,751 **Record high month for number of operating maquiladoras *** Best level since October /2 Source: INEGI. (revised, official though Dec. 2005). P Preliminary, Official Copyright 2006 Global Insight, Inc. 9

10 Maquiladora Industry by Sector Total Plants Total Employment (000) Chg from Chg from June 06 June 06 June 05 June 05 INDUSTRY TOTAL 2, , Automotive parts, equipment, accessories Textiles, wearing apparel Electronic, electrical materials, accessories Assembly of electrical, electronic machinery, equipment, articles Wooden and metallic furniture, parts Chemicals Foodstuffs Toys, sporting goods Assembly, repair of non-electric tools, equipment Footwear, leather goods Other manufacturing Services Source: INEGI Copyright 2006 Global Insight, Inc. 10

11 Major Maquiladora Cities by Number of Operating Maquiladoras Border Cities June 06 Chg from June 05 Non-Border Cities June 06 Chg from June 05 Tijuana Monterrey Cd. Juárez Guadalajara /Zapopan Reynosa/Rio Bravo Chihuahua 80 6 Mexicali Ensenada 80 0 Matamoros Merida Tecate Puebla / Tehuacan Nogales 95 6 Torreón 47-2 Cd. Acuña 47 0 Aguascalientes 36-1 Nuevo Laredo 42-1 Gomez Palacio / Lerdo 31-4 Piedras Negras 34 0 Hermosillo 30 1 S. Luis Rio Colorado 25-1 Agua Prieta 19-1 Total (above) 1, Total (above) Metropolitan Area Source: INEGI Copyright 2006 Global Insight, Inc. 11

12 Major Maquiladora Cities by Employment (000) Border Cities June 06 Chg from June 05 Non-Border Cities June 06 Chg from June 05 Cd. Juárez Monterrey Tijuana Guadalajara /Zapopan Reynosa/Rio Bravo Chihuahua Matamoros Mérida Mexicali Puebla Cd. Acuña Torreon Nogales Aguascalientes Nuevo Laredo Ensenada Piedras Negras Gómez Palacio / Lerdo Tecate Hermosillo S. Luis Rio Colorado Agua Prieta Total (above) Total (above) Metropolitan Area Source: INEGI Copyright 2006 Global Insight, Inc. 12

13 Maquiladora Industry by States: (total number of operating plants) Jan 01 Jan 02 Jan. 03 Jan. 04 Jan. 05 June. 06 INDUSTRY TOTAL 3,630 3,174 2,972 2,810 2,820 2,822 Aguascalientes Baja California 1,280 1, Coahuila Chihuahua Durango Federal District (México City) Guanajuato Jalisco México State Nuevo Leon Queretaro Puebla S. Luis Potosi Sinaloa Sonora Tamaulipas Yucatán Zacatecas Other states Note: As of June, there were no registered operating maquiladora plants in Michoacan, Nayarit, Tabasco or Quintana Roo. Source: INEGI Copyright 2006 Global Insight, Inc. 13

14 Maquiladora Industry by States: (Net employment in thousands) Jan. 00 Jan. 01 Jan. 02 Jan. 03 Jan. 04 Jan. 05 June '06 INDUSTRY TOTAL 1, , , , , , ,223.2 Aguascalientes Baja California Coahuila Chihuahua Durango Federal District (México City) Guanajuato Jalisco México State Nuevo Leon Queretaro Puebla S. Luis Potosi Sinaloa Sonora Tamaulipas Yucatán Zacatecas Other states Note: As of June, there were no registered operating maquiladora plants in Michoacan, Nayarit, Tabasco or Quintana Roo. Source: INEGI Copyright 2006 Global Insight, Inc. 14

15 Maquiladora Volume of Production Index Index Base 1993= p January February March April May June July August September October November December Annual Average Sources: INEGI, Bank of Mexico Copyright 2006 Global Insight, Inc. 15

16 Manufacturing Sector Annual Percent Growth in Mexico (index: 1993=100) Manufacturing Sector Growth Maquiladora Manufacturing Sector Growth p P Preliminary, Official Jun.-July Source: INEGI Copyright 2006 Global Insight, Inc. 16

17 Net Monthly Change in Operating Maquiladora Plants January February March April May June July August September October November December Source: INEGI, Monthly Statistical Reports, revised, official. Copyright 2006 Global Insight, Inc. 17

18 New Maquiladoras in 2006* (a sample) Plant State Plant State Plant State AFSM Systems Son. EDM Plextron Coah. Arrow International Electrolux (New plus expansion) (2) Robert Bosch Arvin Meritor Qto. Flextronics (new) Reckitt Benckister Belden CDT Son. Flextronics (expansion) B.C. Sanmina SCI (expansion) Jal. Borg Warner Hirasaka Sanyo (expansion) N.L. Cardinal Health Tamps. Honeywell Aerospace Selectron (new) Cessna ITT International Selectron (expansion) Cherry Electrical (expansion) Kyocera (expansion) B.C. Sharp (expansion) B.C. Clarion Technologies Laird Tamps Solectron (expansion) Jal Cole Hersee Coah. LG (expansion) N.L. Steel Technologies Comercial Vehicle (expansion) Son. LG Electronics Tamps Steris Corp. N.L. Continental AFA Meridian Automotive (expansion) Gto. TTE (New) C-Cor B.C. Nokia (Expansion) Tamps. TTE (expansión) C&G Garments OKE Electronics Coah. VidrioCar Eastprint Osram Sylvania Eaton Aeroespace B.C. Perlos Tamps. * Confirmed programs as of Sept Source: Global Insight, direct research. Copyright 2006 Global Insight, Inc. 18

19 Direct Foreign Investment in Mexico (a) (in millions of U.S. Dollars) 30,000 3,500 25,000 20,000 15,000 10,000 5,000 10, ,366 9,526 1,416 9,186 1,681 12,830 2,110 11,933 2,778 12,703 2,986 14,911 26,650 2,172 2,043 14,435 1,961 10,721 2,474 18,900 2,813 17,805 1,531 8,692 3,000 2,500 2,000 1,500 1, p(a) 2006(a)* 0 Total (LS) Maquiladoras (b) (RS) P Preliminary, official for 2005 *January-June only (a) Includes manufacturing, banking, and financial services, telecommunications, maquiladoras, self-service, and department stores, acquisition of Mexican companies, etc. Includes reinvestment of dividends and intercompany transfers. (b) The National Foreign Investment Registry registers as Maquiladora Industry DFI only the total value of imported fixed assets. Note: Does not include portfolio investments. Source: Bank of Mexico, SECON, SHCP Copyright 2006 Global Insight, Inc. 19

20 DFI and the Maquiladora Industry (in millions of U.S. dollars) Qtr I II III IV Total 2, , , , , ,813.1 Sources: SECON, Bank of Mexico. Covers only imports of fixed assets by the Maquiladora Industry. Copyright 2006 Global Insight, Inc. 20

21 New DFI in Mexico and the Maquiladora Industry (January-June of each year, figures in millions of dollars) (Index 2000=100) New DFI (a) Index Plus Maquiladoras (b) Index Ratio , , , , , , , , , , , (a) Excludes Maquiladora Industry. (b) Imports of fixed assets (M&E, DFI) by maquiladoras. Source: Secretariat of the Economy, Bank of Mexico. Copyright 2006 Global Insight, Inc. 21

22 Reynosa Region Maquiladora Growth (annual average) * Plants Employ (000) Note: Includes Rio Bravo *As of June Sources: General Statistics Bureau ( ), CIEMEX-WEFA, INEGI Copyright 2006 Global Insight, Inc. 22

23 Participation of Reynosa in the Maquiladora Industry in Tamaulipas (by number of plants) As of Dec. 31, each year Plants (a) Tamps. Total % Country Rank * * As of June (a) Includes Rio Bravo Sources: CIEMEX-WEFA, Secretary of Industry and Commerce, Secretary of the Economy, INEGI. Copyright 2006 Global Insight, Inc. 23

24 Mexico s Foreign Trade (Millions of U.S. dollars) % Variation July 05 Jan.-July 06 July 06 P J06 p /J04 Total Exports 16, ,503 19, Petroleum Sector 2,750 23,862 3, Agricultural, Livestock 291 4, Mining Manufactures 13, ,484 15, Non-Maquiladoras 5,812 51,655 7, Maquiladoras 7,488 61,829 8, Total Imports 17, ,280 20, Capital Goods 1,989 16,661 2, Intermediate Goods 12, ,802 15, Non-Maquiladoras 6,835 57,616 8, Maquiladoras 5,648 48,815 6, Consumer Goods 2,329 19,817 2, Total Trade Balance (total) Maquiladoras 1,612 13,644 1, Copyright 2006 Global Insight, Inc. P Preliminary, official for July Sources: INEGI, SHCP, Bank of Mexico 24

25 Maquiladora Industry Trade Balance (millions of U.S. dollars) Exports Imports Trade Surplus ,269 20,466 5, ,103 26,179 4, ,920 30,505 6, ,166 36,332 8, ,083 42,557 10, ,854 50,409 13, ,467 61,709 17, ,881 57,598 19, ,041 59,296 18, ,925 59,048 18, ,952 67,742 19, ,756 75,129 21, Jan.-July only P 61,829 48,815 13,644 Variation* 15.9% 16.7% 13.4% P Preliminary, official *Variation vs. January-July 2005 Copyright 2006 Global Insight, Inc. Source: Bank of Mexico, INEGI, SECOFI, SHCP. 25

26 Key Competitive Sectors for Maquiladoras Automotive parts, components Aerospace Electronics (large-size LCD flat screen TVs) Software Metalmechanics Medical/hospital instruments and supplies Pharmaceuticals and compounds (excl. above) Niche market, upscale, J-I-T goods Information Technology, general Defense materials, equipment. Copyright 2006 Global Insight, Inc. Source: Global Insight 26

27 The Model For Maquiladora Industry Competitiveness/Survival Emphasis on attracting/retaining high-tech plants High complexity plants, tailored to high-end customers, with quick J-I-T response time for customers in volatile, cyclical markets Capital-intensive investment Full-fledged efforts at vertical integration of the industry, more value-added production Prompt leveraging and taking overnight advantage of new U.S. and global competitive factors Maquiladoras must have their own business model engineering, R&D at maquiladora level Key: complete elimination or real streamlining of the government jungle of rules and regulations, to truly help promote the above points with investors Copyright 2006 Global Insight, Inc. 27

28 Elements for Increasing Maquiladora Competitiveness* 1. Consolidation of Production Lines 2. Build-to-Order programs 3. Lean manufacturing, proximity to suppliers 4. Six Sigma Programs 5. Flexible manufacturing programs 6. Modular assembly 7. Design advances (R&D) 8. Reverse integration 9. Strategic alliances with plants in other maquiladora countries 10. Complete streamlining, full integration of logistics * Assuming no fiscal or other competitive promotional incentives by the Federal government. Copyright 2006 Global Insight, Inc. 28

29 The New Maquiladora Industry Decree When? What will the final Decree look like? Will it merge maquiladoras with PITEX? Will it really stimulate new and existing DFI in the Industry? Will it really simplify and speed up Customs procedures and processing times (in Mexico)? And cut Customs costs? Will it markedly reduce burdensome governmental regulations and paperwork for the maquiladoras? Will it represent a true opportunity for increasing the industry s global competitiveness? Particularly in the high-tech and IT sectors? Mexico vs. China vs. India The President-elect. What will be his government s attitude towards the Maquiladora Industry?. Copyright 2006 Global Insight, Inc. 29

30 Some Risk Areas in The elections in Mexico (the President-elect takes office Dec. 1) and the U.S. (Congress in November Democrats could win a majority in the House) Once again, strong pressures against Outsourcing outside of the U.S. by U.S. labor unions and Political Action Groups. More and more effective infrastructure investments on both sides of the border. Speeding up and simplifying Customs procedures, also on both sides. The entire migratory quagmire it won t go away! Impact on overall U.S.-Mexico relations. Essential: at least an adequate and sustained recovery of the U.S. economy and a much more dynamic manufacturing sector. Our most recent projection is that average annual growth in the period will be 2.95%, hardly robust. And it could be a very uneven quarter-by-quarter performance. Interest rates, consumer demand, new construction uncertainty. Mexico s image with programmed and potential DFI (primarily public safety and drug trafficking). Border tensions and violence. The new government s foreign investment and trade`policies. Speculation abounds. Copyright 2006 Global Insight, Inc. 30

31 Maquiladora Industry Projected Growth (annual averages) 2000 No. of Plants (net) 3,590 Total employment (000) 1,291.3 Employees /Plant ,811 1, p 2,824 1, p 2,838 1, p 2,897 1, p 2,927 1, p 2,968 1, p 3,016 1, p 3,059 1, P Projection by Global Insight, Sept Copyright 2006 Global Insight, Inc. 31

32 Maquiladora Industry Gross Value of Production and Trade Surplus (Billions of current U.S. dollars) Gross Production Value Trade Surplus 1 Gross Production Value Trade Surplus Value-added in Mexico 2 Projections by Global Insight, as of Sept Source: Banco de Mexico, INEGI Copyright 2006 Global Insight, Inc. 32

33 Maquiladora Industry Gross Value of Production (billions of U.S. dollars) SECTOR %Variation 12 1 /05 Total Electrical, electronics Automotive parts, components Textiles, Apparel Wooden, metallic furniture, accessories Services Machinery, tools Toys, sporting goods Foodstuffs, processed Footwear, leather goods Other manufacturing industries Projections by Global Insight, Sept Copyright 2006 Global Insight, Inc. 33

34 Maquiladora Industry Growth Projections PRODUCTION BY SECTOR (a) Electric/Electronic (% growth) Transport Eqpt (% growth) Textiles, Apparel (% growth) (0.8) (4.5) (28.0) Furniture (% growth) 17.2 (0.2) EMPLOYMENT 3 Electric/Electronic (% growth) 13.9 (1.1) Transport Eqpt (% growth) Textiles, Apparel (% growth) 13.0 (6.8) (3.4) (4.5) (3.3) (21.4) Furniture (% growth) 11.0 (6.3) Annual average in billions of U.S. dollars 2 Average annual growth projection, Baseline Forecast, Sept Annual average in thousands (a) Percentage variation vs Copyright 2006 Global Insight, Inc. 34

35 Projected Maquiladora Plant Outlook by Selected States Industry Total Plants Employment (000) Chihuahua Plants Employment Baja California Plants Employment Tamaulipas Plants Employment Sonora Plants Employment Coahuila Plants Employment Nuevo Leon Plants Employment (Annual averages, projected as of (As of 12/31) 9/15/06) ,279 1, , ,976 1, ,802 1, ,808 1, ,812 1, ,824 1, ,897 1, ,968 1, ,059 1, Copyright 2006 Global Insight, Inc. 35

36 Maquiladora Industry Labor Costs Average Hourly Wages 1 (U.S. dollars) Average of Direct Labor, Technical, and Administrative Personnel, Obligatory Fringe Benefits included Projections, Copyright 2006 Global Insight, Inc. 36

37 Assembly Line Wages by Sector 1 (dollars per hour) p 2010 p 2012 p Transport eqpt Electrical, electronics Textiles, apparel Furniture, accessories Machinery, tools Foodstuffs Footwear, leather goods Services Toys, sporting goods Other manufacturing industries Industry average Annual average, includes obligatory fringe benefits P Projection by Global Insight, Sept Copyright 2006 Global Insight, Inc. 37

38 Prospects for the Maquiladora Industry in Employment: 1.44 million workers (24.0% above the 2005 level) (annual average). Number of plants: 3,060 (8.8% above the average 2005 level), including 1,864 (60.9%) in border cities (81% in northern border states). Gross production value: $157.9 billion dollars (44.8% above the 2005 level), this figure is almost equivalent to gross exports. 1 Baseline Forecast (probability factor: 50%), most probable scenario as of Sept Annual averages. Copyright 2006 Global Insight, Inc. 38

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