Nogales, Mexico: a High-Tech Link in the Global Supply Chain

By Kirsten Boele

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In a cavernous factory hall occupied by tables, chairs, work equipment and shelves stacked with cylinders of colorful cable thread, young women are quietly braiding cables – some of the most tedious work in the world. While ranchero music brightens the atmosphere, the women remain focused. They only take their eyes off their meticulous braiding tasks to smile at the occasional work-floor joke from Plant Manager Mark Ruth.

“We have gone from bust to boom,” Ruth says about the maquiladora sector in Nogales.

Ruth set up the cable assembly facility of Scott Electronics Inc. in Nogales, Sonora, three years ago. The maquiladora – a factory that assembles products from duty-free imported materials and ships the assembled products across the border duty-free again – produces about $1.5 million to $2 million worth of cable assemblies each year.

After serving in the U.S. military for twenty years, Ruth made an unusual shift to the maquiladora sector. “I was kind of thrown down here and got stuck,” Ruth says.

In the last 14 years he started up six different plants in Mexico and has seen the maquiladora sector through thick and thin – post North American Free Trade Agreement (NAFTA), the recession in 2000, the U.S.-Mexico border build-up after 9/11, the current recession and the development of Nogales into an important player in the world market of high-tech products.

“China now is what Nogales was 25 years ago,” Ruth says. China is still good for bulk, but Nogales developed into a high-tech assembly center over time, according to Ruth.

How It All Started

Historic black and white photographs of Nogales show a town of one-story buildings tucked away in a landscape of rolling hills. But that was fifty years ago. While the streets of Nogales still smell like freshly made tacos and tortillas, today almost 200 factory buildings, hundreds of scurrying workers and loads of trucks are part of the scenery.

Rougly half a century ago Nogales started to develop its maquiladora sector. After the bracero program – a U.S. guest-worker program for Mexicans – ended in 1964, Mexico implemented maquiladora laws to provide jobs for the returning labor population, according to Wendy Vittori, President of the Arizona – Sonora Manufacturing Initiative.

These laws, which over time have been superseded by trade agreements such as NAFTA, allow U.S. companies to export materials to Mexico, assemble them there and import the product back to the United States without paying duties.

In the beginning these maquiladoras were primarily textile factories, but many moved to China for its incredibly low labor costs. The company MTD International, which produces lawn mowers, compared the costs of their facilities in Nogales, Mexico and Suzhou, China and found that an hour of handwork including benefits in Nogales is only $1.81 compared to $13.52 in the United States. However, the labor costs in China are still approximately 50 percent lower than in Nogales.

Maquiladoras moved to China and Nogales specialized in electronics and technology.

Edwards Vacuum, for example, is a global leader of high-tech vacuum pumps used in flat panels, pharmaceutics, scientific instruments and the semiconductor industry.

At the company’s assembly plant in Nogales, young men protected by safety glasses juggle a thousand different parts and tools to provide hospitals such as the University Medical Center in Tucson, Ariz., with a pump that supplies clean air. The Mexican music and the occasional Spanish interaction becomes part of a product that travels the globe.

The Labor Force Drives Efficiency

Three years ago Edwards’ facility in Nogales replaced its facilities in Tempe, Ariz., and Boston, Mass., because of the attractive labor costs and geographic location, according to Plant Manager Robert Heward.

“Now we are getting more efficient – our headcount is coming down, but we are putting out more product and our backlog is getting less,” Heward says. Edwards has manufacturing facilities in 20 countries, but Nogales is one of the largest volume facilities within Edwards globally, Heward says.

But setting up a new plant in a foreign country often goes hand-in-hand with a few start-up problems. A U.S. manager coming into Mexico faces some challenges. “For me, which was frustrating, was a U.S. manager coming into Mexico,” Heward says. He had to alter Edward’s training and include practical application and initial work inspections to properly train their Mexican employees.

But investing in a more comprehensive training pays off. “Once you get their understanding of it, what I have seen is a better result here [Nogales] than there [the United States],” Heward says.

In addition, especially during the first years, the labor turnover can be high. Other facilities such as Scott Electronics Inc. have a steady and stable workforce with hardly any turnover.

“I have been working here for three years,” says Veronica Hernandez, an employee at Scott Electronics Inc. Over the years she got promoted.

Hernandez, a young woman in her 20s, stares through her glasses and weaves a black 10-inch cable together with a yellow one. Her table is covered with different sizes and colors of thin rubber string. Her left hand tattooed ‘Vero’ and her right hand work together in a familiar harmony.

It is all about efficiency and facilities move to Nogales to achieve more efficient production. Tripp Hindle III, President of HITRAN, moved part of his manufacturing process from Flemington, New Jersey, to Nogales three years ago.

“It is not hard to be fairly discouraged by some of the work ethics we find in the U.S.” Hindle’s experiences with the Mexican workforce are better. “There is a fairly significant structure of very capable and trained individuals here,” Hindle says.

In addition, the wages in New Jersey, which include health insurance, unemployment insurance, social security insurance, federal and state taxes and pension contributions, are almost five times more expensive than the wages in Nogales, which include health insurance, federal and states taxes, and shelter costs, according to Hindle. This makes a big difference when producing a labor-intensive product. “So if you have a product that has a reasonably high labor content there is considerable advantage,” Hindle says.

A Family Business Takes Advantage of the Maquiladora Opportunity

“It’s a family-owned business. It was started by my dad and grandfather and goes back a lot of years,” Hindle proudly explains.

Today, he and his brother continue the legacy by running a successful company specializing in inductors and transformers with facilities in Flemington, NJ, and Nogales. Last year the company received the supplier of the year award from the $37.1 billion company GE Energy.

The decision to move to Nogales was not only driven by a desire to live the romantic life of the Southwest. “I was always looking for an opportunity to live in the Southwest anyway,” Hindle explains. And increasing global competition allowed Hindle to relocate. “We need to be able to compete price wise with manufacturers from China, India and other places,” Hindle says.

And HITRAN’s profitability has increased. “It is not unusual to be able to get 25 percent out of the costs of the product in terms of cost differential between New Jersey and Mexico. It puts us in a very nice competitive position,” Hindle says.

The maquiladora benefits are not only reserved for the big players in the game. Smaller companies can also set up shop in Mexico. HITRAN, for example, started its cross-border venture with the help of the shelter program from Collectron, Inc.

Collectron, Inc. established in 1969 currently shelters 31 different maquiladoras in Mexico. Collectron, Inc. arranges the building and the workforce, manages accounting and administration and takes care of customs and environmental certificates. This way the owner or plant manager can completely focus on product assembly, according to Collectron, Inc. Representative Susana Gaxiola.

It sounds like a perfect business plan, but what if a recession hits?

Did the Recession Hit Nogales’ Maquiladoras?

Companies lay off employees, businesses downsize, unemployment rates mount, exports fall, corporations file bankruptcy and consumption plummets read the gloomy headlines of last year’s news articles. The U.S. recession hit the global world market.

Before the downturn the maquiladora sector in Nogales was growing robustly, according Vittori of the Arizona – Sonora Manufacturing Initiative. An economic study about the Arizona-Sonora region from the University of Arizona shows that before the recession foreign investment grew significantly and the maquiladora employment in Sonora steadily increased to more than 86,000 employees in 2006.

Did the recession thwart this strong growth trend?

“You cannot make sweeping generalizations about it. It is an artifact, because it is not managed as a sector. Different companies have different situations,” Vittori says.

Plant Manager Ruth of Scott Electronics, Inc. says the recession affected demand and the predictability of demand differently in every sector. “The medical industry is pretty steady, they don’t go through the peaks and valleys,” Ruth says. “But the semi-conductor industry is out of control. Trying to forecast that industry is like playing pin the tail on the donkey. It’s feast or famine – lights on or lights off. You got to be prepared either way.”

And Scott Electronics, Inc. was prepared. The company still achieved the best results in terms of sales and growth during last two years.

The family-owned business HITRAN experienced more profound effects of the recession. “We have not been able to move forward as fast as we planned,” Hindle says.

But moving part of HITRAN’s manufacturing activities down to Nogales softened the impact of the recession. “Even in a time of recession or tough economic times are you not better off with a manufacturing facility in an area of low cost production?” Hindle asks, “The answer is always going to be – yes.”

Today Nogales’ high-tech maquiladora sector has become part of the global supply chain and is heavily intertwined with the U.S. economy. Geographic proximity is a plus for U.S.-based companies, but crossing the U.S.-Mexico border is easier said than done.

Crossing the Border

Long lines of trucks crawl north like a conglomeration of snails. The burning sun attempts to reach the leftover patches of asphalt. After wasted hours truck drivers finally start the extensive entry process – documentation checks, radiation detectors, license plate readers, x-ray detectors and black uniformed authorities inspecting vehicles with canine dogs – hoping to reach the delivery destination in time.

In 2009 more than 270,000 trucks crossed through Nogales. Lined up bumper to bumper this line of trucks would span from Nogales to Seattle, Wash. In addition, almost three million cars, around 600 trains and more than 12 million people entered. One third of the trucks heading northbound through Nogales carry approximately $15 to $20 billion worth of products from the maquiladora sector each year, according to Port of Entry Expert of the Arizona/ Sonora Commission Luis Ramírez. “It is the gateway of trade, but many consider it a substantial speed bump in the road.”

The 34 year-old infrastructure of the ports of entry is not equipped to handle the booming commercial flows. A recent study by Ramírez Advisors Inter‐National, LLC concluded that the Nogales’ ports of entry are outdated, overburdened, under-staffed and lack coordination with Mexico. “It is an absolute miracle that stuff is getting through,” Ramírez says.

And this affects business. An extremely lucky truck driver waits only 45 minutes. A 4-hour wait is average and occasionally a driver spends the whole night in the slow-moving wait lines. It is not only the wait that is costly for companies, but it is the unpredictability of the wait times that take a toll on trade, according to Ramírez.

But this is going to change. Already $365 million has been allocated to Arizona to completely rebuild its ports of entry and at least double their capacity by 2015. The goal is predictable crossing points. The mega investment is aimed to make international operations more effective, more efficient and more predictable, according to Ramírez.

What will Nogales’ Future Bring? 

With the envisioned improvements of the ports of entry, a skilled and efficient labor force and the proximity to the U.S. border, Nogales remains an attractive option for high-tech manufacturing.

As the global market is changing U.S. companies like HITRAN are forced to look for new business opportunities. “China and some other places around the world are not as attractive as the used to be. There is a changing landscape in terms of costs and effectiveness in other parts of the world,” Hindle says.

Last year Mexico jumped ahead of both China and India and is now the top location for sourcing low-cost manufacturing from the United States according to a study of the global business-advisory firm AlixPartners comparing the cost of manufacturing in the United States with 12 low-cost countries.

But a lack of familiarity with manufacturing in Mexico prevents U.S. companies from understanding the benefits their next-door neighbor can offer, according to Vittori.

“Whenever I talk to other companies about coming to do business right here, the one major thing I tell everybody is that you need to understand that this is not the U.S. This is Mexico,” Hindle says. “There are slight changes and accommodations that have to be made, but the advantage is huge.”

Proudly Hindle shows the assembled inductors that are ready for transport to the United States. He is thrilled about expanding and assembling more high-tech products such as transformers at the Nogales’ facility in the near future. After the factory tour Hindle waves goodbye from the lunch area, while chatting away in Spanish with his employees.

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