Cross-border manufacturing rises from pandemic lows

On the disc: a conversation with Fabiola Luna

Fabiola Luna became president of the Association of Maquiladoras, Index Ciudad Juárez, in 2021. The trade group represents manufacturing facilities along the US-Mexico border that import components, assemble them and export finished products. She talks about cross-border trade and the impact of the pandemic.

Q. Why do we call this cross-border manufacturing?

It is an industry mainly located along the US-Mexico border, which facilitates the logistics of international trade. All raw materials arrive temporarily in Mexico, then are used in the manufacturing process and re-exported to the United States. Texas being a border of several Mexican states, it is the main intermediary of the American-Mexican manufacturing trade.

Ciudad Juárez is particularly important because it was here that the maquiladora model was born in the 1960s, and since then it has been the economic backbone of the border region.

Fabiola Luna

Some of our factories include high-tech robotics; some have automated processes with a good mix of traditional labor and robots.

Ciudad Juárez has 320 factories employing 330,000 workers. About 60% of all maquiladora jobs in the state of Chihuahua are in Ciudad Juárez. Originally, maquiladora factories were located in industrial parks near international border crossings, but they are now spread throughout the city.

Q. How do maquilas fit into what US consumers see in the market?

Our main maquiladora industry is the automotive sector. This represents 38% of employment in the first quarter of 2022. We manufacture all kinds of automotive-related products, such as seat covers, seat belts, battery cables and wiring harnesses. Thus, virtually every car owned by US consumers has a component made in Ciudad Juárez. We also manufacture high-end all-terrain vehicles (ATVs), refrigerators, washers, medical-surgical equipment and even candies. The popular Brach’s sweets are made here.

Q. How has merchandise changed over the past 20 years?

What we produce today is completely different from what we did 50 years ago. Our manufacturing processes have also evolved with new technologies. For example, some of our factories include high-tech robotics; some have automated processes with a good mix of traditional labor and robots.

We’re even adopting the technology needed to power the production of electric vehicles. We also have factories that manufacture for Apple, including iPhone, MacBook and AirPods. We manufacture electronic products that have become essential. the [maquiladora] the industry has evolved at the pace required by the businesses and markets we serve. Nonetheless, our industry continues to be labor intensive with a good mix of automation and a more skilled workforce.

Q. How has the pandemic affected cross-border manufacturing?

We still have supply chain issues, mainly in the automotive and electronics sectors. If our customers can’t produce due to supply chain issues, we don’t get production orders for the components we manufacture here.

At the start of the pandemic, between March and April 2020, our industry had to close for more than two months. The government ordered non-essential businesses to close, so the city’s only essential industry was medical device manufacturing.

Eventually, we negotiated with the government, and industries such as automotive and electronics were granted essential designation due to increased demand from the United States. In addition, we had to continue to pay 100% of our workforce’s wages during the months of closure…in addition to all fixed costs. Even now, with reduced production orders, our payrolls must remain unchanged.

The main challenge was to protect the workforce from COVID-19. We had to adjust our manufacturing processes to meet national and international safety standards, such as social distancing between workers. When vaccines were available nationally, we made sure, in coordination with local and federal authorities, to vaccinate the majority of the workforce.

Once we mastered the vaccination process, supply chain issues arose. Our production orders have been significantly reduced. We didn’t have enough raw materials and components; we had no truckers. Even though the international bridges were open for international trade, we had no product to ship. In fact, we still face supply chain issues, although we anticipate they could be resolved by mid-2022.

During the worst days of the pandemic – before vaccines were available in Mexico – we worked with the Mexican Consulate in El Paso, the city government of El Paso, and U.S. Representative Veronica Escobar to organize a campaign to mass vaccination for industry.

Officials on both sides of the border were surprised at the order of the process. We vaccinated about 400 people every 30 minutes. We ended up vaccinating 33,000 people between July 6 and July 31. Even though it was only 10% of our workforce, it bought us time until we received vaccines from the Mexican government.

The future of the industry in our region is encouraging. There is a lot of expected future demand for products that will be incorporated into new technologies, such as those in electric vehicles, but it all depends on the investment decisions that need to take place now to produce in 2023 and 2024. However, it is difficult to plan in the current context [January 2022] COVID-19 situation.

Q. What steps is the industry taking to meet US demand two years into the pandemic?

It was very complicated; we monitor our orders almost to the minute as these orders can change several times during the day. We make efficient use of everything we have such as labor, components/raw materials [and] funding and always looking for additional business around the world. We are still monitoring the current economic conditions in the United States because as soon as there is an increase in demand, we will see our production orders increase.

One thing we’ve learned during the pandemic is that we’re not 100% dependent on the US market. We have learned to cope with the drop in demand from our main customer, and at the same time we have diversified our activity.

Q. As the US talks about “relocating” manufacturing to alleviate supply chain issues, is cross-border manufacturing getting more attention?

There are discussions about how to bring manufacturing processes back to the region to make North America more self-sufficient. High-level talks are underway on ways to manufacture certain components in Mexico and the United States that are currently imported from other parts of the world. We are in constant communication with our customers and are looking for ways to correct, in the short term, what we have experienced during the pandemic.

Q. How do the United States-Mexico-Canada Agreement (USMCA) trade rules challenge collaborative agreements?

Before USMCA enactment [July 1, 2020], we were taken into consideration and our concerns noted. In theory, the majority of our demands were included in the negotiations. Many of the new requirements, such as the new rules of origin, will be phased in, giving us time to adapt. So far, it’s really difficult to gauge the effects of the USMCA on our bottom line given the pandemic.

Hopefully once the pandemic is over, we will have time to assess how the USMCA will affect our business and how we might find ways to minimize the impacts, always working closely with our customers to maintain our manufacturing system. well-oiled cross-border.

Q. Are recent national policies in Mexico, such as minimum wage increases, affecting the maquiladora industry?

In every new administration, there are new laws to obey, and that [Andrés Manuel López Obrador] administration is no exception. We are a bit used to it. So what we do every time is inform the new government of the impact of new laws on our activities.

We were not significantly impacted by the new minimum wage law requiring increases of more than 50% in 2019 as we were already paying more than twice the minimum wage. We doubled the minimum wage for the very few workers who only earned minimum wage, and we had to adjust our pay scales.

We also had to inform our workers that the mandatory wage increases were reserved for minimum wage earners, not all employees. However, subsequent minimum wage increases in 2020 (5%), 2021 (15%) and 2022 (22%) are impacting the industry.

We are negotiating with the federal government on strategies to limit wage increases in the coming years since in the border region we are already paying what the new mandatory increases are trying to achieve.

Q. Is the region ready to move into the next phase of manufacturing, which may require the development of advanced materials and software?

We have great expectations for the future when it comes to new technologies and manufacturing processes for electric vehicles. Almost all car factories in our region are already working on different projects with their respective customers.

Such manufacturing projects could materialize in 2023 or 2024. For example, we are working on the new wiring systems that new models will require and evaluating what new tools, materials [and] even the manufacturing space we might need. We are already including today in our budgets what we might need two years from now despite the difficult times we have been through during the pandemic.

South West Economy is published quarterly by the Federal Reserve Bank of Dallas. The opinions expressed are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

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