TFHO1: POLITICAL CRISIS PROMPTS PLANT'S CLOSURE

UNCLAS TEGUCIGALPA 001043 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON BBSR BEXP EINV ETRD KDEM HO SUBJECT: TFHO1: POLITICAL CRISIS PROMPTS PLANT'S CLOSURE REF: TEGUCIGALPA 996 ¶1. (SBU) SUMMARY: Judco Manufacturing Inc., a U.S.-based automotive industry supplier, is in the process of closing its manufacturing facility in San Pedro Sula as a direct result of the political crisis. The company located its plant in Honduras in 2005 for reasons including the country's political stability, historic ties to the U.S., abundance of skilled labor, and short shipping times. As recently as December 2008, Judco was considering expanding its operations in Honduras. The June 28 coup d'etat, with its ensuing curfews, border closures, and sometimes violent demonstrations, prompted Judco instead to terminate its operations in Honduras. The company is in the final stages of shifting the plant to Mexico but it is facing some obstacles from the GOH. Though this is the first case that has come to our attention of a U.S. company closing its operations because of the political situation in Honduras, it is likely that many companies that were thinking of opening operations or expanding may be looking elsewhere instead. END SUMMARY. ¶2. (SBU) Judco Manufacturing Inc., a U.S.-based automotive industry supplier, is in the process of closing its manufacturing facility in San Pedro Sula as a direct result of the political crisis. EconOff discussed the reasons for the decision with Judco's Honduras-based director of operations on October 9. -------------- Judco Happy To Be in Honduras -------------- ¶3. (SBU) Judco opened its first offshore manufacturing plant in 2005. It initially considered locating the plant in China, but finally selected Honduras despite the higher cost of labor. Reasons for the decision included Honduras's political stability and historic ties to the U.S. Additional factors included the abundance of skilled labor, reduced shipping times, and the fact that the factory would be in the same time zone as offices in the U.S. ¶4. (SBU) Judco located the plant in San Pedro Sula and hired 275 workers to complete the final assembly of electro-mechanical custom switches and wire automobile harnesses for export. The Judco executive said that the plant was so profitable that in December 2008 Judco was considering expanding its operations in Honduras. It developed plans to open a second facility and increase its local workforce to 500 people. -------------- Judco Gets Nervous -------------- ¶5. (SBU) Judco began reconsidering its operations in Honduras after President Manuel "Mel" Zelaya raised the minimum wage by 60% in January 2009. The Judco executive said that when Zelaya proposed adding a fifteenth month's salary and his rhetoric shifted left, Judco decided to suspend its expansion plans because "the horizon did not look favorable". (Note: In addition to their regular salaries, all Honduran employees receive mandatory bonuses equivalent to a month of salary in June and in December - the 13th and 14th month. Zelaya was considering adding a third bonus, a "15th month." End note.) -------------- Judco Calls It Quits -------------- ¶6. (SBU) The June 28 coup, with its ensuing curfews, border closures, and sometimes violent demonstrations, prompted Judco to terminate its operations in Honduras. The company's executives were concerned that a prolonged political crisis would interrupt shipping operations and that Judco would no longer be a reliable "just-in-time" supplier. The Judco executive said that the company contacted the Overseas Private Investment Corporation (OPIC) regarding political risk insurance but was told that it was only available for new factories, not existing facilities. ¶7. (SBU) The Judco executive said that Judco found it much easier to open its plant in Honduras than to close it. When they arrived, the GOH "laid out the red carpet" and assisted Judco through the regulatory process for establishing a business in Honduras. Judco is currently in the final stages of shifting the plant to Mexico but it is still facing some obstacles from the GOH. Numerous government offices each want Judco to complete a form and pay a fee prior to issuing the paperwork required for Judco to transfer its equipment to Mexico. The Judco executive complained that "there is no clear path to what is required to ship material." -------------- Comment -------------- ¶8. (SBU) Honduran business leaders have in recent weeks expressed concern to us that, after years of hard work on their part promoting Honduras as a place to open a factory, the political crisis would taint the country's reputation overnight (reftel). This is the first case that has come to our attention of a U.S. company closing its operations solely because of the political situation. Certainly, the negative impacts of the global economic crisis have badly hurt Honduras's apparel and automotive based assembly industry. Local estimates are that 30,000 of the 150,000 maquila jobs have been lost due to the crisis. This case is especially salient since its operations were profitable and it previously had expansion plans. One of the intangible economic costs of the political crisis is the number of jobs that will never be created because companies either suspended expansion plans or no longer consider Honduras an attractive place to establish a base of operations. LLORENS