SILICON VALLEY (SOUTH)

UNCLAS TIJUANA 000774


E.O. 12958: N/A
TAGS: ECON EINV EIND ETRD MX
SUBJECT: SILICON VALLEY (SOUTH)

REF: (A) 08 MONTERREY 314 (B) 08 TIJUANA 977 C) 07 MONTEREY 783


BRINGING HIGH-TECH TO THE MEXICAN DESERT
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1. Mexico has had only moderate success in attracting high-tech
industries. Guadalajara, in south-central Mexico, claims to be
the "Mexican Silicon Valley", being a leading producer of
software and electronic and digital components. Some states
have attracted aerospace companies. However, most high-tech
companies only do their manufacturing in Mexico. Mexico lags
other middle income countries, particularly those in Asia, in
moving to the next pillar of high-tech: design, development,
and testing (see refs A and B). A group of American
executives from the semi-conductor industry is trying to change
that. Their investment, dubbed "Silicon Border", is a ten acre
science park modeled on Taiwan's highly successful Hsinchu
Science Park. Located just outside the Baja California state
capitol, Mexicali, and adjacent to the U.S. border, Silicon
Border will create an "Asian cost structure in North America",
according to its CEO, Daniel Hill.


2. Science parks differ from the traditional industrial parks
found throughout Mexico in that they focus solely on high-tech
industries ("taking items from the element chart and making them
into products", as Hill describes it) and usually contain
academic institutions on site. The Autonomous University of
Baja California (UABC) has already committed to a campus inside
Silicon Border, and a private university, the Center for
Technical Teaching (CETYS),is interested in setting up
laboratories inside the park. Silicon Border is designed to
attract companies in the photovoltaic (electronic components
used as light sensors),flat panel display, semiconductor, MEMS
(microelectromechanical) and NANO (nanotechnology),LED (little
light bulbs commonly found on electronic devices),aerospace,
and ultra-precision machining industries.

COMPETING WITH ASIAN RIVALS, COPING WITH THE CREDIT CRUNCH
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3. Hill told econoff that Mexicali was an attractive location
due to abundant energy at a low cost (Mexicali has two
thermoelectric plants and one natural gas-fired energy plant,
and high volume users are charged only seven cents a k/h),
sufficient water supply (out of five municipalities in Baja,
Mexicali is the only one without serious water supply issues),
reasonable wages (only $25k/year for engineers),and an educated
workforce. The state and federal governments have also put
together attractive tax incentives, particularly for the first
companies that become tenants. According to Hill, the above
factors make Baja's cost structure very competitive with Asia,
even if wages are still a bit higher in Mexico than in China.
Mexico's intellectual property laws are also generally
considered to be better than those of China or India. What
will give Silicon Border a real advantage over Asian factories,
according to Hill, is the location, in the heart of NAFTA, the
largest market in the world. He hopes companies will see a
benefit in reducing transport times to hours, rather than days
from Asian factories, and having overlapping time zones which
will make doing business more efficient.


4. Despite these advantages, Mexicali is not yet assured to
become the Silicon Valley of the south. While Mexico as a
whole does a good job educating engineers, Baja California has a
difficult time retaining them in state as they are lured away by
job offers in Mexico City, Monterrey, or the U.S. Silicon
Border's location in the hot desert of Mexicali will hardly be
more appealing. Security concerns may scare off some investors
(Hill admits he lost one potential alternative energy company
due to this issue). The company's plans to build a border
crossing on-site have not even been vetted with the USG or GOM.
The biggest obstacle, however, has been timing. Silicon
Border is completing construction just as the global credit
crunch is hurting potential investors. Its first announced
tenant, Q-Cells, a German solar panel manufacturer, had to back
out recently when it lost its credit line with ING. A similar
park near Monterrey, Mexico, called "City of Knowledge" is only
fifty percent full (ref C).


5. COMMENT: Still, Silicon Border's investors are veterans of
the semiconductor industry in Asia, so are not unaccustomed to
some of the obstacles faced in setting up factories in an
overseas environment. They appear undeterred by the challenges.
Hill says he is in negotiations with ten or eleven firms, from
the U.S., Taiwan, and Japan, and expects three or four of those
firms to make announcements this year that they will be moving
into Silicon Border. He hopes to have leased all the land by

2011.

HAAS