The Other Mexico: A Wave of Investment

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Nam (center) leads Skyworks' Mexicali plant and an engineering team of 300 Brad Swonetz/Redux

In 2007, Fusion Specialties chose Juárez over China for a new mannequin plant Shaul Schwarz/Corbis

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Indeed, though the crime wave was obvious early last year, investment kept coming—until the global financial meltdown.

Meanwhile, a quiet transformation has begun south of the border. For much of the decade, Mexican officials watched with dismay as multinationals crated up maquiladora operations and moved to lower-cost havens in Asia. Mexico's schools, roads, and bureaucracy still rate poorly in international competitiveness rankings, making it hard to graduate to more sophisticated industries.

Yet national statistics obscure the progress several Mexican states and cities have made in boosting their ability to compete. Studying successful models in Asia, the U.S., and Europe, local governments collaborate with universities and private industry to upgrade their workforces, parts-supply networks, research and development programs, and infrastructure. They have become magnets for factories that go well beyond assembly work. Mexican exports of aerospace products, for example, have nearly tripled, to $3 billion, since 2003. In March, French President Nicolas Sarkozy announced that Eurocopter would invest $550 million to make helicopters in Querétaro, a rising production and engineering base for General Electric (GE), and Bombardier.

On the national level, sound fiscal and monetary policies after the 1994 financial crash have made Mexico better able to endure global shocks. "You can now do business here in a stable macroeconomic environment," says World Bank country director Axel van Trotsenburg.

Mexico also stands to benefit from a subtle but steady shift in strategic thinking by U.S. manufacturers, who are reassessing their reliance on Asia and focusing more on "near-shore" options. Rising Chinese costs and fears of higher trans-Pacific shipping prices if oil spikes again are part of it. With capital scarce and markets hard to forecast, companies don't want to tie up cash in inventory as they wait for their cargo to arrive. Such reasons are driving precision manufacturers like GKN Aerospace, a maker of aircraft engine components, to cluster close to the border in cities like Mexicali. "If you have to reduce costs, China is too far away. Our products can cost $80,000, so we can't afford mistakes," says GKN Mexicali plant manager Ardy Najafian.

Other big factors are China's rampant piracy, quality failures, and communication problems. In Mexico, U.S. companies can better control their operations than in China, where they often must work with government-linked partners. When Fusion Specialties, the No. 1 maker of mannequins, moved some work offshore in 2007 to cut costs, it chose Juárez over China because goods can reach such U.S. retailers as Nike (NKE), Gap (GPS), and J. Crew (JCG) in two days rather than five weeks. Also, "it was a definite risk that we would lose our intellectual property in China," says Richard Moran, vice-president for operations at Fusion, which holds patents for its polyurethane molding process.

A recent survey of 136 U.S. manufacturers by Boston supply-chain consulting firm AMR Research confirms Mexico's rising business stature. While 15% of respondents said they expect to cut output in China, only 5% plan to do so in Mexico. Companies intending to expand in Mexico outnumber those planning to cut back by 5 to 1. In China, that ratio is 2 to 1. "Mexico clearly is gaining at China's expense," says Kevin O'Marah, AMR chief strategy officer. As for Mexico's violence, O'Marah says compared with other things multinationals confront daily—disease outbreaks in China, abrupt policy shifts in Moscow, riots in South Africa—"it's scary, but not enough to prevent you from going." So when U.S. demand returns, says Boston Consulting Group Senior Partner Harold L.