"Japanese Fall Foul of Rise in Mexico Costs: Electronics Makers Chose Tijuana for its Tariff Exemptions. Conformity with NAFTA Spells their End", writes Alexandra Harney.
By Alexandra Harney:
"Not far from the Farmacia Alegria drugstore and the Restaurant Le Gong on the dusty main street in Tijuana, Mexico, sits a complex of pristine white factory buildings. Outside, bony girls with tangled hair beg beside cars and dilapidated trucks trundle towards town.
But inside the factory gates it is another world.
Matsushita Electric Industrial, the Japanese consumer electronics manufacturer better known as Panasonic, has erected a series of assembly plants here that employ nearly 3,000 people for most of the year. The factories turn out between 10,000 and 11,000 television sets every day and represent one of Matsushita's most important overseas manufacturing sites.
They are also at the centre of what could become a rancorous debate between Mexico and Japan. A group of 70 Japanese companies with factories in the Tijuana area - known as maquiladoras - is preparing to file a protest with the Mexican government about a planned change in import tariffs.
Next month the Mexican government will lift tariff exemptions for maquiladora companies in an attempt to bring its policies into line with those of the US and Canada, the other members of the North American Free Trade Agreement. In an attempt to compensate for the resulting increase in costs, Mexico has created 20 special categories in which companies will pay up to 5 per cent tariffs on thousands of items imported from outside the Nafta region.
But for those materials that do not fall into these categories, companies will pay the equivalent of the difference between the highest tax in the Nafta region and the lowest: for example, companies will be required to pay only a 10 per cent tariff on goods that carry a tariff of 35 per cent in the US and 25 per cent in Mexico.
Japanese manufacturers, which represent the second largest group of maquiladoras in Tijuana after US companies, are angry. They argue that they came to Mexico precisely to take advantage of the favourable tariff environment.
"These changes will hurt the competitiveness of companies with operations here," says Kenichi Yoshida, the president of Matsushita Television and Network Systems Company of America, which operates the Tijuana plant.
Matsushita estimates that the application of general tariffs - on essential supplies such as batteries, remote controls and timber for television cabinets - will cost it nearly Dollars 3m (Pounds 2m) each year. Although that represents only a small fraction of the nearly Dollars 800m in sales it expects to record next year, executives contend that this is still a high price to pay.
Mexican officials counter that companies have known of the new tariff regulations for years and that the government has made significant concessions with the sectoral programme to help keep maquiladora companies competitive.
"Ninety nine per cent of imported products have been included in the sectoral programme. Therefore they will still have a substantial advantage," says one.
But for big Japanese consumer electronics manufacturers, many of which have television factories in Tijuana, the added costs could not have come at a worse time. "TV sets are not a profitable business to be in right now," says Toshio Shiokawa, the general manager at Matsushita's Tijuana plant. "Profit margins are 1-2 per cent at best, depending on the company."
Although the Japan Maquiladora Association, which represents 70 companies including Sony and Hitachi, is not threatening to leave if the tariff exemptions are not restored, one member argues that Tijuana is no longer the manufacturing paradise it once was.
When Matsushita first arrived there in 1979, for example, Japanese executives regularly slipped into town for lunch. These days Japanese employees cross the border into the US each day in company buses.
Most companies tightened security after Jiro Sasayama, the president of Mogami de Mexico, the local arm of a Japanese electronics manufacturer, was murdered during a bungled carjacking attempt at a Tijuana intersection in May last year. A Sony executive was luckier: he escaped with his life intact after a carjacking.
Mr Yoshida, driving his shiny green Buick sedan past the spot where Mr Sasayama was killed, says: "I avoid this route as much as possible."
Despite these difficulties, the Japanese are not leaving Mexico anytime
soon. The country's low labour cost - half that of cities 30 minutes north
in California - and its location between Latin America and the US and Canada
makes it an ideal site for manufacturing."
Additional References:
2. "Export of Electric Power from California to Mexico".
3. "Export of Natural Gas from California to Mexico".