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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Monterrey was rocked by gangland shootouts and even a grenade attack on the U.S. consulate last year, but now is relatively tranquil.

Monterrey and surrounding cities are nurturing engineering centers and high-end component suppliers such as Nemak, which makes lightweight aluminum engine blocks for major automakers. Monterrey certainly can't match Bangalore or Shanghai in sheer numbers of engineers. But a $250 million IT services industry has taken root, doubling in five years, to 7,000 workers. The concept of Mexico as a near-shore alternative to India was pioneered by Monterrey software firm Softtek, which counts 17 of America's 50 biggest corporations as customers. Indian outsource shops Infosys (INFY), Wipro (WIT), and Tata Consultancy Services have followed Softtek's lead. To improve the quality of local IT workers, 25 Monterrey university educators spent eight months studying training methods at the Infosys campus in Mysore, India, where tens of thousands of raw recruits a year are turned into software developers.

With engineering salaries in Mexico starting at around $12,000, the cost gap with India isn't huge. In terms of hourly rates, India is 25% to 30% cheaper than Mexico, says Jagmohan S. Nanaware, general manager of the Monterrey development center of Sasken Communication Technologies, an Indian maker of cell-phone software. But add the indirect costs of travel, high Indian staff turnover, and collaboration at odd hours on complex jobs with colleagues half a world away, and the real gap is closer to 15% to 20%. For many U.S. companies within just an hour or two by air, Monterrey makes more sense. Quality is good, too. "At first we didn't know what kind of engineers we would get, so we brought over six from India," says Nanaware, who doubled his Monterrey staff, to 120, in two years. Within six months, "Mexican engineers were contributing beyond our expectations."

A FRAGILE BEGINNING

Tight collaborations with industry and universities are essential. "Our aim is that for every dollar we invest, we get two from industry," says Mario A. Martínez Hernádez, dean of engineering at the Tecnológico de Monterrey. Foreign schools pitch in, too. The CarTec Project is a tieup with Virginia Tech and Tec de Monterrey to train 50 Mexican students to design cars, from the fiberglass molds used to make body parts to the engine and interior ergonomics. The students are developing a compact car, but Tec's ultimate aim is to build a talent pool skilled enough to make Monterrey a global center of car design, rather than just assembly.

Would that all of Mexico were like Mexicali and Monterrey. Sadly, it is not. Many states are making slow progress, and the central government does a poor job of coordinating development. Some executives fear drug violence and government corruption could eventually again snuff out enthusiasm for Mexico. "You can't have investment in a country that's perceived as lawless," says Julio A. de Quesada, president of the Executive Council of Global Companies, a group of 38 multinationals operating in Mexico.

Yet if it can make headway in solving these problems, Mexico's bigger moment could arrive when recovery comes and multinationals start to invest anew. Many now look to China for manufacturing and to India for engineering. By becoming a top locale for both low-cost production and design right on America's border, Mexico could offer a better alternative. That helps explain why tenants are keeping their space in Russell's Juárez industrial parks. "Nobody," he says, "wants to be caught without capacity when this market turns."

Engardio is an international senior writer for BusinessWeek . Smith is BusinessWeek's Mexico bureau chief.