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