World Watch -- Chips And Salsa

In the last five years, contract electronics manufacturers (CEMs) have converged on Guadalajara, a pleasant, colonial city of 3.5 million residents in western Mexico. Building massive factories on the city's outer edges and hiring tens of thousands to churn out tech products, the operations have transformed an economically depressed region into Mexico's Silicon Valley. The city lays claim to the title on not one but two big signs in Spanish and English above the local airport exit -- and with good reason. Guadalajara, Mexico's second largest city, boasts the country's greatest concentration of new-economy companies. Its tally of electronics firms swelled from 25 in 1995 to more than 125 by the end of last year. The sector's workforce mushroomed from 5,000 to 90,000. New companies arrive each month. Existing ones are expanding. In a region where unemployment was among Mexico's highest, job candidates suddenly have grown scarce. "If they have good eyesight, hands, and legs, we'll hire them," says Hung Chee Loh, who started NatSteel Electronics Ltd.'s factory in 1995. The envy of Silicon Valley wanna-bes everywhere, Guadalajara now is sprinkled with factories producing computers, cell phones, laptops, motherboards, connectors, pagers, routers, scanners, and printers at breakneck pace. Each workday at least two cargo planes depart Guadalajara International Airport loaded with factory goods bound for market centers to the north. Soon Guadalajara will eclipse the Asian industrial enclaves as the top maker of tech gear for American consumers. The city owes its Silicon Valley stature mainly to the world-class CEMs that have made Jalisco's state capital their North American production base. Their presence has drawn a host of other electronics companies as well. NatSteel of Singapore was the first CEM to start Guadalajara operations. Others quickly followed: Jabil Circuit Inc. of St. Petersburg; SCI Systems Inc. of Huntsville, Ala.; and two California Silicon Valley giants, Flextronics International Ltd. of San Jose (based in Singapore) and Solectron Corp. of Milpitas. Solectron, the world's largest contract manufacturer, built an industrial campus on Guadalajara's southern edge in just six months -- during the rainy season of 1998. Originally six factories linked by a futuristic overhead walkway, the complex already is expanding by another four buildings. The company chose Guadalajara, says Alejandro Gmez-Montoy, the Solectron Latin America president who oversees the Guadalajara operation, because the city has an established base of OEMs; good cargo transport by air, sea, and highway; and a low-cost labor force that includes unskilled as well as skilled workers. Pay for line work averages $1.60 an hour, including benefits. Engineers, technicians, and middle managers earn from $1,000 to $1,700 a month. "And it's green," Gmez-Montoy says of Guadalajara. "There are roses and flowers all over the city. This was the ideal choice." Of Solectron's 7,000 employees, about 1,000 are technicians, engineers, and managers trained in the city's nine universities and technological institutes. Gmez-Montoy himself is a product of the Autonomous University of Guadalajara. "Everything that had been building in the city in the last 25 years came to a head with NAFTA and new market needs," he says. The North American Free Trade Agreement is a major influence in persuading manufacturers to relocate from Asia, where production has been concentrated since the 1970s. Under terms of the pact, tariffs on computer and other selected electronic goods are dropped only if made in Canada, the U.S., or Mexico. Companies have until 2001 to comply under Mexico's maquiladora program, which many manufacturers use. While the NAFTA rule contributed to Guadalajara's tech boom, there are other reasons for the sudden arrival of global tech companies. The cost of producing goods in Mexico nearly halved when the 1994 peso devaluation slashed Mexican wages. The following year the opposition National Action Party won control of the Jalisco government, and Sergio Garcia de Alba, a local water-park developer who became economic development secretary, launched an intense effort to recruit contract manufacturers. "We selected electronics because it was one of the fastest-growing industrial sectors in the world with strong global companies involved," he says. "We already had some of those companies here. They didn't have very large operations, but they were international." More importantly, however, Garcia's recruitment campaign coincided with an accelerating trend in the nuts-and-bolts part of the high-tech industry. Global, billion-dollar CEMs are taking over factory production for clients that prefer to concentrate on product development and marketing. Nowadays, goods sold under brand names such as Apple, Compaq, Ericsson, or Cisco Systems are made by companies most consumers never heard of. "The industry is seeing a move of contract manufacturers to different low-cost areas around the world to be closer to the OEMs and the markets. Guadalajara is in the lowest-cost area of North America," says Eric Miscoll, chief operating officer of Technology Forecasters Inc., a research firm in Alameda, Calif. The businesses define themselves more as electronics-manufacturing service providers than manufacturers, a point Gmez-Montoy emphasizes. "Solectron is in the service industry. We happen to do it through manufacturing," he says. Contract electronics manufacturing is growing more than 28% a year, twice as fast as the electronics industry as a whole. The penetration rate of business among OEMs rose from 9.5 % in 1998 to 11.2% in 1999. By 2004, Technology Forecasters projects, it will be 26%. Hewlett-Packard Co., a Guadalajara pioneer that established manufacturing in the city in 1982, has turned that business over to the contract manufacturers. One of its former plants now is used to develop and test computer printers in conjunction with a San Diego facility. The other serves as a distribution and procurement hub for Central and South America. "Ten years ago I could have shown you around 20 production lines and told you, 'Look at all the people I have working for me.' But now it's a different environment," says Jaime Reyes, director of the printer operation. Companies such as Hewlett-Packard say contract manufacturers save them money and improve the quality of their products. The constant threat of losing business keeps the manufacturers perfecting work on the shop floor where it has grown more high-tech, with components and circuit boards put together by machines with surface-mount technology rather than young women wielding soldering irons. The CEMs lend their expertise to product design by making prototypes and suggesting easier manufacturing methods. Because they use parts in huge volumes, they get bigger discounts on components. In some instances, the firms also provide distribution and repair services. CEMs also offer clients the flexibility to cope with the industry's lightning-fast technological changes. They can quickly shift production among facilities in different areas of the world depending on changing market demand and local production costs. This very nimbleness threatens Guadalajara's Silicon Valley success, however. If companies such as Solectron need only six months to start operations, they can close them down just as quickly. The shrinking of the local labor pool and a recovering Mexican economy is putting upward pressure on wages in Guadalajara. Any increases that cut into the companies' competitiveness could drive them away. "We're already looking at Brazil," says NatSteel's Loh. "I would say another five to 10 years and we won't be here." Economic development secretary Garcia is well aware of the challenge of holding onto the electronics companies. "What we have is good for a few years," he says. "We're trying to diversify products and attract suppliers. Maybe we can depend on manufacturing for the next 15 years. But we need to cross from the manufacturing side to the innovation side. We've got to connect this go-go economy from outside with local companies." Among the elements considered essential to replicating California's Silicon Valley, Guadalajara has several: top-flight universities and research institutes; a high-quality, flexible workforce; and a government devoted to nurturing, not regulating, business. But the region lacks tech-savvy law firms, accountants, consultants, and financial analysts; an improving infrastructure; an environment that promotes local entrepreneurs; and the money, lots of money, needed to make that happen. "It's a good start to be the sister city of Silicon Valley," says Solectron's Gmez-Montoy. "I'm sure the industry will definitely increase here as soon as the third-tier suppliers come in. And we'll probably add different types of products. Whether we reach the size of Silicon Valley," he ponders, "I doubt it."