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Surviving China The Mexican Way

A focus on tourism, quality and custom manufacturing, have promise

A report originating in Mexico City indicates that President Calderon's administration would be placing primary emphasis, support and financing on Mexico's tourist destination sector, believing it to be of far greater economic and job-creating potential than the manufacturing sector.

Understandably, the manufacturing industry is questioning the wisdom of such an undertaking. Since the early 1980s the export manufacturing sector, foreign-owned maquiladoras in particular, has provided the most significant growth in startups, long-term capital investment and labor employment. Maquiladoras surpassed tourism in capturing dollars, becoming second only to oil exports until remittances claimed the No. 2 spot.

During the U.S. recession in the early 1990s, maquiladora growth almost came to a standstill, but again saw an upsurge beginning in 1995 after a peso devaluation again caused wages to plummet in dollar terms. Once again, Mexico was a labor bargain for its biggest client country to the north.

If the report proves to be correct, what has occurred to have Mexico's new administration set a new course?

Mexico experts can prove the course is actually old policy. Tourism has been a major part of the nation’s economy since the early 1950s. The development trends in cities like Acapulco, Puerto Vallarta, Mazatlan, Cancun, Cozumel followed by Cabo San Lucas, Ixtapa-Zihuatanejo, Guadalajara and Mexico City itself attest to this.

The Sea of Cortes eastern states of Sonora and Sinaloa, and the western states of Baja California and Baja California Sur are experiencing an unprecedented tourism boom. Baja's northern coastal real estate boom also is without precedent.

So it is not a new course. Rather it is a refocusing on realities both long present and long undernourished. And then there's the influence of that other reality China.

Recently I joined two prominent industrialist owners of manufacturing companies in Tijuana in a discussion of border economic integration. This subject also is a part of our San Diego reality.

The first of the two is Rosino Serrano, owner of Ensambles Serragal, a manufacturer of quality furniture. A third-generation furniture manufacturer, Serrano is a Spanish expatriate who in 1982 immigrated and settled in Tijuana. He has served as president of the National Confederation of the Furniture Industry of Mexico, and is on the board of advisers to the National Chamber of Industry.

What does he think of the report of Calderon's focus?

He is correct, he began, China cannot compete with Mexico’s sun, beaches, food, tequila, open hospitality, mariachi and other music, and fiestas.

Serrano acknowledges that many of Mexico's maquiladoras are moving to China or have gone out of business. But rather than follow that route, his business has evolved to produce high-end furniture and focus on the needs of luxury hotels. This sector, he says, wants furniture to reflect the personality of each hotel. Buying Chinese furniture stored in a mega-warehouse in Los Angeles may deliver substantial cost savings, and usually is of good quality, but the product is not custom and is limited to what is in stock.

Mexican companies, Serrano says, must understand they are not competing just with businesses in China. Rather, they are competing with China the country. Starting with its undervalued currency, China offers industry ridiculously low energy and water costs, low regard for labor safety, limited environmental compliance regulations and wages that are a third of those paid in Mexico. This can be done, because the Chinese government subsidizes housing, so that a worker earning $50 a month only pays $15 a month for housing, and less than $3 for electricity, gas and water.

Serrano's business from its start in 1984 through 2001 was 40 percent sales in Mexico and 60 percent to U.S. hotels and major furniture stores. In San Diego for instance, his furniture was chosen for the renovation of La Valencia in La Jolla, Rancho La Valencia in Rancho Santa Fe and Loews in Coronado as well as hotels in New York, Hawaii, San Francisco, Las Vegas and even Japan.

But in 2001, sales swung to 65 percent to 75 percent in Mexico as the tourism boom began. Demand, he says, is getting stronger. In the Cabo area alone, 15 hotels have been furnished by his company, and each week brings two or three requests to bid on business in other cities.

While he purchases more than 95 percent of the materials used in manufacturing his furniture in San Diego, Serrano has noticed in particular the furniture hardware comes from China, as those items are no longer manufactured in the United States.

Also learning to successfully compete with Chinese-based businesses is Hector Trujillo, co-owner of Tauro Cristal in Tijuana. Trujillo has an industrial engineering degree and has been in the glass manufacturing business for 25 years. He started in 1989 and now is considered the largest specialty glass manufacturer in northern Baja California. His firm distributes products from Glasspro, International Window Corp. and American Shower Door. It supplies various size glass table tops along with making glass furniture.

After opening Tauro, Trujillo says sales were 40 percent in Mexico and 60 percent in the United States. But this changed about five years ago, to where now 60 percent of sales are to U.S. customers. The reason is China has so flooded the United States with inexpensive, standard-size glass that many small glass suppliers have gone out of business. That leaves Tauro available to pick up custom glass orders.

Trujillo agrees that President Calderon is on the right track with his tourism focus, provided the government does more than give lip service to developing infrastructure needs that world-class tourist destinations and second homes or retirement housing for U.S. citizens requires. Part of the infrastructure must be providing resources to local authorities to train building inspectors to assure compliance with existing construction codes.

An example is glass windows and doors. Trujillo says Mexican builders are too frequently price driven and can disregard functionality and factors such as wind gusts along the coast that will eventually break weak glass. This opens the door for Chinese glass to eventually take over the glass industry of Mexico.

President Calderon may just be right in pursuing both the temporary-visitor and expatriate permanent visitor business, particularly with aging Americans, who under the right circumstances can be attracted to live better in the warm sun of Mexico.

There's no reason more Mexican manufacturers cannot outmaneuver their Chinese counterparts and take advantage of this new trend, just as have Rosino Serrano and Hector Trujillo.

Patrick Osio Jr. can be reached at patrick@transbordercommunications.com