Electronics-industry executives who have invested billions to set up shop in Mexico are wondering how the promised economic, social, and political reforms of the country's incoming president will affect them.
President-elect Vicente Fox Quesada, whose campaign platform included raising wages, creating more jobs, and eliminating corruption and crime, will take office Dec. 1. The former Coca-Cola executive and member of the National Action Party cinched the presidential race earlier this month, breaking more than 70 years of control by the Institutional Revolutionary Party.
While acknowledging that wages are a thorny issue, high-tech executives and political observers are optimistic that Fox's pro-business background is a good sign for continued growth. It could take time, however, before the effects of policy changes are evident, they said.
"From the reaction of the [Mexican stock] market after the election, the mood is positive. Stocks are up and the peso was re-evaluated," said an official at the Mexican Embassy in Washington.
"Fox will continue the current administration's sound macroeconomic policies," she said. "Overall, the political institutions [current president Ernesto] Zedillo established or strengthened are definitely going to remain. We're not going to see any sudden change in policies. Some U.S. investors had put plans on hold, but now they're going to go through with them."
Mexico, which in recent years has opened its trade doors to other Latin American countries and Europe and is trying to build relationships with Asian countries, has long been a bedroom community for U.S. companies seeking low-wage centers close to the border.
Mexico has successfully lured many multinational companies, including electronic-component suppliers, contract electronics manufacturers, and OEMs. Last year, Mexico received $11.5 billion in foreign investments, bringing the total capital injection between 1994 and 1999 to $70 billion.
North America accounted for 67% of the funds, with the manufacturing sector and the maquiladoras (foreign-owned companies doing business in Mexico) making the biggest contributions to the country's coffers. Growth is expected to push forward, with major companies such as Jabil Circuit Inc. and Solectron Corp. expanding projects there.
Labor costs, however, could be a trouble spot for high-tech manufacturers hunting down the world's least-expensive locations to offset tight profit margins.
Compared with other countries' manufacturing wages, Mexico's are among the lowest at $1.80 an hour, according to a report from Merrill Lynch & Co. Inc., New York. While not as inexpensive as China or Malaysia, the rate is significantly lower than the average hourly wage of $19.10 U.S. companies pay domestic manufacturing workers.
"If Fox raised wages, it would make [U.S. manufacturers] less competitive," said Alejandro Gomez Montoy, Solectron's vice president and president of Solectron de Mexico. "We want to compete with other low-cost countries in the world."
But whether foreign investors or businesses will retreat if there is a wage hike is debatable.
For the past several years, Mexicans have seen their wages climb because a strong economy and ongoing expansion have put their skills in demand, said Angel Cifuentes, general manager at ON Semiconductor Inc.'s plant in Guadalajara, Mexico.
"The wage level in Mexico has been going up. The economy has been good, and the peso has not been devalued," Cifuentes said. "What's happening with wages, though, is not only being driven by the economy. There are a number of companies building here, and demand for people in the region is increasing. There's a need for more people with professional and manufacturing skills."
Higher wages and salaries could mean lower turnover and greater productivity, which is something CEMs with Mexican facilities are already witnessing, said Pam Gordon, president of Technology Forecasters Inc., Alameda, Calif.
"High turnover in Mexico used to be the downside for doing business there," she said. "The contract manufacturers are seeing less turnover than they did a year ago."
Other advantages of doing business in Mexico, such as proximity to the United States, a young, educated work force, and lower operating costs, could also outweigh any projected pay raises, other observers said.
"It's unclear what the impact of a wage increase could be. A wage increase doesn't necessarily mean companies will be uncompetitive," said Tim Bennett, senior vice president, international, at the American Electronics Association, Santa Clara, Calif. "As we saw in the Nafta debate, wages in Mexico are only a fraction of the total operating cost. The total operating cost is a key factor. ... It's also about the cost of transportation and the cost of security for shipments and personnel."
President-elect Fox has a number of other tasks to tackle, including lowering the crime rate, further developing the infrastructure, erasing corruption, and providing better enforcement of contract and intellectual-property protection laws, observers said.
"The two main issues [Fox] will face are infrastructure development and security," said Stephen L. Bradford, an attorney at Carlsmith Ball, a Los Angeles law firm that works closely with U.S. and Mexican businesses. "There is literally highway robbery going on, and insurance for goods being transported is very expensive."
How well the country improves its transportation and telecommunication infrastructures could have a bearing on how successful businesses will be in launching supply-chain management programs, according to Karen Peterson, research director at Gartner Group Inc.'s Research and Advisory Services at the Integrated Logistics Strategies research center in Dallas.
"There's a surge of interest in this area," she said. "Supply-chain integration will be an important aspect for companies doing business there. If we see investments continue to be made in telecommunications and the infrastructure, that's a good sign for supply-chain management."
In the long run, strides made on those fronts would keep Mexico an attractive place, AEA's Bennett said.
"If, over time, these efforts lead to improvements in other operating conditions, that may also offset the wage-cost component," he said.