FOREIGN TRADE ZONES AND TAIWANESE INVESTMENT ON THE BORDER

UNCLAS CIUDAD JUAREZ 000025


E.O. 12958: N/A
TAGS: EIND ECON ELAB ETRD MX
SUBJECT: FOREIGN TRADE ZONES AND TAIWANESE INVESTMENT ON THE BORDER


1. SUMMARY: Since late 2007, Ciudad Juarez has suffered a net
loss of more than 80,000 manufacturing jobs as a result of the
global economic slowdown. However, these losses would have been
even worse without the impact of new investment and job growth
in the outlying community of San Jeronimo. The establishment in
2007 of Free Trade Zones (FTZ) on the U.S. and Mexican sides of
this section of border ten miles west of downtown Juarez is the
catalyst for growth. By operating in this specialized customs
zone, firms seeking to export manufactured goods to the United
States can reduce labor and logistics costs. In 2008, Foxconn,
a Taiwan-based manufacturer of electronics and computer
components, invested USD 185 million to build a new assembly
plant in San Jeronimo, becoming the first company to operate
within the FTZ in Chihuahua. Opened in February 2009 and
currently employing 8,000 Mexican workers, the plant expects to
eventually hire an additional 12,000 people. Foxconn's
Corporate Vice President and Chief of Business Operations for
Latin America, Francisco Uranga, says the FTZ makes San Jeronimo
the most competitive site for assembly operations along the
entire U.S.-Mexico border.

BACKGROUND


2. On December 30, 2002, the Government of Mexico amended its
customs law to allow what is called a `Regimen de Recintos
Fiscalizados Estrategicos'. Recintos fiscalizados are customs
regimes that operate similarly to free trade zones in other
parts of the world. (Note: In the rest of this report recintos
fiscalizados will be referred to as free trade zones.) Goods
transferred within FTZs are not subject to customs tariffs and
quotas. This allows manufacturers to import parts and
components into Mexico duty free to be transformed into a
finished product for export. When the finished product exits
the FTZ, the duty is paid either at the rate applied to the
imported parts or at the rate applied to the finished product,
whichever is lower. This reduces the importer's total tax
burden, making the product more competitive.


3. Major differences between the FTZ regime and the traditional
IMMEX maquila program include the elimination of secondary
customs inspections, which reduces the time it takes for
products to reach market; simplified customs declarations, which
reduce brokers fees; and a three-day grace period to correct
import declarations, which increases flexibility and reduces
penalty fees. Unlike maquilas, FTZs must be located adjacent to
a customs facility; but where this option exists, manufacturers
benefit from added security with fewer goods lost, damaged, or
stolen during transport between the port of entry, warehouse,
and customs facilities.

FOXCONN TAKES ADVANTAGE OF THE NEW CUSTOMS REGIME


4. In 2007, the GOM authorized Corporacion Inmobiliaria San
Jeronimo to establish an FTZ along the U.S.-Mexico border in San
Jeronimo, Chihuahua. That same year the El Paso-based Verde
Realty Group received approval from the U.S. Foreign Trade Zones
Board to expand Foreign Trade Zone No. 197, to include the area
in Santa Teresa, New Mexico immediately adjacent to the San
Jeronimo FTZ. The establishment of these zones on both sides of
the border made feasible the construction of bi-national
manufacturing campuses, with labor intensive assembly activities
conducted in Mexico and staging and distribution in the United
States.


5. To promote investment in San Jeronimo, the Chihuahua state
government provided a payroll tax incentive, training funds, and
electricity subsidies for companies that invest in the FTZ. The
state government also invested USD 8.5 million in the
construction of a border highway linking downtown Juarez and San
Jeronimo, which reduced the travel time between the two
locations from one hour to ten minutes.


6. In February 2009, Foxconn opened an assembly plant in San
Jeronimo, becoming the first company to operate within the
Mexican FTZ. Foxconn is the trade name
of Hon Hai Precision
Industry Co. Ltd., the largest manufacturer of electronics and
computer components in the world. Foxconn manufactures on
contract for many U.S. companies, including Dell, Microsoft, and
Apple Inc. It is unusual among Juarez manufacturers in that it
is Taiwanese-owned, since U.S. companies own roughly 90 percent
of local maquilas. Foxconn's 1,200 acre campus in San Jeronimo
currently employs 8,000 Mexican workers, but company managers
expect total staffing to reach 10,000 by March 2010 and 20,000
by 2012. Foxconn currently produces computers for Dell at the
San Jeronimo campus, but plans to begin manufacturing Apple Inc.
products as it scales up operations over the next two years. If
Foxconn meets its staffing projections, the San Jeronimo
facility will become the largest manufacturing plant in Mexico.

HOW THE FTZ OPERATES, AND BENEFITS FOR INDUSTRY


7. For manufacturers like Foxconn, there are three main
advantages to operating within the FTZ. According to Jerry
Pacheco, Executive Director of the New Mexico Small Business
Development Center Network, the average northbound commercial
crossing time at Santa Teresa is 20 minutes, compared with 1.5
to 2 hours at El Paso ports of entry. This efficiency gain
provides Foxconn a competitive advantage over companies that
operate near the El Paso ports. (Note: Foxconn managers admit
crossing times may rise as they increase production. For
instance, in their first year of production, Foxconn operations
resulted in an additional 115 commercial truck crossings a day
at the Santa Teresa POE, increasing traffic there by almost 80
percent. The potential bottleneck at the port of entry
represents the single greatest threat to Foxconn's ability to
continue to scale up operations, said Pacheco.)


8. The second benefit for a company that chooses to operate in
the FTZ is that it has more control over its cash flow.
Companies can warehouse goods in the FTZ for up to two years
without paying taxes. Manufacturers can decide when to move
their products out of the FTZ within the two year period,
depending on cash flow availability. While it is unlikely that
an electronics manufacturer like Foxconn would want to warehouse
products for such a long period of time, the added flexibility
is a benefit.


9. The third and most fundamental benefit is that the FTZs
allow manufacturers to improve global supply chain management.
For instance, most of the components for the Dell computers
Foxconn produces in San Jeronimo are imported from Asia through
an FTZ at the Port of Long Beach, California. These components
are then transported here by Foxconn's sole logistics
contractor, Expeditors International. Inputs are warehoused in
Santa Teresa and transported across the border into the Mexican
FTZ for assembly. Once assembled, most of the computers are
exported to the United States for sale, at which time the first
customs duties are assessed.

BENEFITS FOR WORKERS AND BORDER COMMUNITY


10. Foxconn has increased employment opportunities for
residents in the Anapra neighborhood of Ciudad Juarez, one of
city's largest low income communities. Anapra, located at the
western edge of urban Juarez, offers the closest supply of labor
for Foxconn. Consulate officers observed dozens of Foxconn
buses transporting hundreds of employees from the manufacturing
plant to their homes in Anapra along the newly constructed
border highway.


11. Foxconn's Mexican employees benefit from various training
opportunities. According to Francisco Uranga, Foxconn's
Corporate Vice President for Latin America, Foxconn frequently
sends select employees to one of the company's many campuses in
China for training and to gain a better understanding of the
company's global inter-connectedness. Foxconn managers say such
programs promote knowledge and technology transfer into the
broader economy.


12. COMMENT: In spite of the city's record levels of drug
violence, Foxconn has determined that Juarez is still a good
place to conduct low-skill, low-cost manufacturing. Customs
benefits associated with the San Jeronimo FTZ are improving the
company's cost competitiveness, while Foxconn investment will
create jobs and presumably foster technology and knowledge
transfer. Critics though argue that, as is the case with
maquila plants, Foxconn's production model limits "spill over"
into the broader economy by not creating backward linkages to
Mexican companies. Furthermore, political wrangling over the
location and authorization of future FTZs remains problematic.
Despite potential drawbacks, the projected large scale of
Foxconn's operations in San Jeronimo could make it one of
Mexico's premier manufacturing platforms for export into the
United States. If this happens, expect to see other Asian
manufacturers follow Foxconn's lead.


MCGRATH