Salsa and Chips

GUADALAJARA —  In this comely colonial city better known for its mariachi music and fine tequila, the talk is of world-class thyristors.

Far south of the thriving maquiladora electronics industry along the U.S.-Mexico border, investors have poured more than $850 million into Mexico’s second-largest city, creating tens of thousands of high-tech jobs over the last three years.

Every player in the global computer and telecommunications business seems to want in on a NAFTA-fed boom that has emboldened Guadalajara, one of Mexico’s garden spots, to begin calling itself Silicon Valley del Sur.

OK, so Guadalajara can’t yet claim to be a caldron of Palo Alto-style entrepreneurship or breakthrough technologies. Its Periferico beltway, where more factories are springing up each month, is no superhighway; there are still traffic lights every couple of miles.

But as the taco stands make way for new plants, Guadalajara is fast achieving a critical mass of cutting-edge production facilities. Its leading companies are in the early stages of top-quality product design as well--increasingly using Mexican rather than foreign expertise.

The importance of the boom lies less in some Silicon Valley fantasy than in the city’s determined creation of an integrated high-tech industry that does more than bolt machines together. Indeed, Guadalajara is quietly fomenting just the kind of industrial evolution that Mexico needs to create good jobs, reduce imports and expand its middle class.

“I have 52 engineers, all of them Mexican, doing design work on new products that will be produced and available in the next year,” Carlos Bue, director of the immense Philips Consumer Communications plant, said as he surveyed a display rack of his plant’s state-of-the-art cordless, cellular and switchboard phones.

Guadalajara, the capital of Jalisco state and center of the nation’s tequila industry, mariachi music and the charro cowboy tradition, has long boasted of a colorful and sophisticated cultural life, including an opera season and other amenities lacking in most of Mexico--though the growth has also spawned an expanding fast-food sprawl.

Those traditional strengths are enhanced by strong technology-oriented schools and universities and a long-established core of multinational manufacturing giants such as IBM, Motorola, Philips, Kodak and Hewlett-Packard.

Guadalajara’s eternal-spring climate has attracted nearly 50,000 American retirees to the nearby lakes district. And locals and outsiders say the city, with its population of 3.1 million, its leafy suburbs and its fancy new malls, is creating an electronics hub for the long haul.

“The quality of production is as good as anywhere,” says James Savage, an industry analyst for BT Alex. Brown Inc. of Baltimore. “You have a region which is very cosmopolitan, in the same time zone as the U.S.; you have very strong engineering personnel, and you have relatively easy transportation. You’re able to do . . . total system assembly. So Guadalajara ends up being a very attractive, low-cost, high-quality North American site to manufacture electronics products.”

Yet few Mexican cities were hit as hard as Guadalajara in the peso crisis that began in late 1994 and the subsequent recession of ’95. But even that had a positive outcome.

The crisis became the catalyst for an alliance between business and the Jalisco government, which crafted an ambitious growth strategy and then tenaciously implemented it.

Bue (pronounced “bway”) is president of the state electronics industry chamber as well as head of a factory that, since 1991, has grown from 1,500 to 7,400 full-time employees. He is a key architect of Jalisco’s electronics boom.

Bue recalled that shortly after he became head of the chamber in early 1996, members met for three days to discuss how to make electronics the linchpin of the state’s growth.

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What was unusual, Bue said, was the role of government, particularly Sergio Garcia de Alba, the new state economic promotion secretary. Garcia, himself a former business executive, had joined the Cabinet after Alberto Cardenas of the opposition National Action Party won the governorship in 1995 from the long-dominant Institutional Revolutionary Party.

Garcia didn’t just turn up at the industry congress to make a polite speech; he stayed for the entire three days, rolling up his sleeves to join the electronics executives in hashing out a strategy that relied equally on private-sector and state commitment.

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The heart of the strategy was to develop an entire production chain--from raw materials to component manufacture to support services to assembly to distribution--and not to just rely on the existing name-brand manufacturers of greater Guadalajara, such as IBM.

“We understand that it is important to have all the links of the chain working together, which reinforces the competitiveness of the industry,” Garcia said in an interview. “If we only have the end of the manufacturing operation, we could be vulnerable to cyclical or market factors.”

The traditionally inward-looking city deftly exploited the manufacturing and marketing opportunities created by the North American Free Trade Agreement and the cost advantage that followed the peso devaluation, leveraging its recovery into an explosion of development.

The enactment of NAFTA in 1994 fueled an influx of Asian electronics companies that wanted to be positioned in North America for regional trade. About 265 Asian businesses opened facilities in Guadalajara in 1996 and 1997, according to a local electronics trade group. The collapse of the peso also accelerated the rush to Mexico by foreign manufacturers eager to slash production costs.

To attract investors throughout the production chain, Garcia instituted a program of government incentives, such as infrastructure and cheap land and subsidized training. Adolph Horn, a former U.S. diplomat who settled in Guadalajara in 1960 and is president of the American Chamber of Commerce here, said Garcia also simplified the procedures for opening and running a business. By cutting the red tape, the state reduced the potential for corruption, Horn said.

A central goal was to attract globally competitive contract electronics manufacturers to work with the original equipment manufacturers. As a result, five of the world’s 10 largest contract computer and electronics manufacturers now have operations in Guadalajara: SCI Systems, Solectron, Jabil Circuit, Flextronics and Natsteel Electronics. These companies, all U.S.-based except Singapore’s Natsteel, build electronics products for name-brand firms.

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Today, Guadalajara accounts for 70% of Mexico’s computer production and 95% of telecommunications manufacturing, according to Emigdio Franco Preciado, director of the Jalisco state electronics association. “And there is not one electronics company that is not growing.”

Guadalajara is also becoming a center for development of Spanish-language software, with more than 230 software development laboratories, according to Garcia’s office.

A major difference between Guadalajara and the border’s electronics industry is the percentage of local content, Garcia said. One percent to 2% of components used by border firms are locally produced; most parts are imported and then reexported in the final product.

With the production-chain strategy in Guadalajara, local content has now reached 20% of the finished products, and by year’s end it should rise to 30%, with an estimated value of more than $1 billion.

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Small start-up companies are feeding hungrily on such growth. Cumex, a maker of printed circuit boards, opened in 1995 with 20 workers as a joint venture between a Texas firm and a local industrial group. Sales manager Gerardo Garduno, who jumped from IBM to help start Cumex, said the firm has grown to 250 employees and will soon expand to a new site across the street.

Such hiring binges have more than erased the impact of the peso crisis, which cost 38,000 so-called formal-sector jobs in Jalisco in 1995.

The state has since created 140,000 jobs, including 20,000 directly in electronics last year alone, and many more in businesses that supply the industry. The average wage in the sector is $1.20 per hour, better than in most Mexican industries. The city’s unemployment rate has been below the national average for most of the last two years.

But the plants still must battle Mexico’s past reputation for poor quality. Charlie Mullen, senior industry consultant for Technology Forecasters Inc. of Alameda, Calif., said Guadalajara “is perceived largely as a good place for labor-intensive products, and it’s close to the U.S., but there’s just the typical suspicion of Mexican products around quality. A lot of that is overcoming perceptions rather than overcoming reality.”

Mullen said the arrival of giant contract manufacturers such as SCI Systems and Solectron will help resolve lingering concerns because “these companies can’t afford not to have good quality.”

In mid-January, the chamber established an office to attract and support still more industry suppliers in fields such as plastic-injection molding, machining and sub-assembly. Its 18 full-time engineers and researchers will identify the industry’s product and service needs for potential investors.

Electronics exports from the state exceeded $4 billion in 1997, up 66% in two years. “We are sure that through the year 2000 we will double our exports,” Garcia said.

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In fact, the growth has occurred so quickly that some worry Guadalajara could become a victim of its own success, outrunning the supply of skilled workers and pushing wages higher. That would undermine what has been another competitive advantage for Guadalajara beyond low-wage costs: The city boasts of a stable work force and tranquil labor relations.

Whereas annual labor turnover in border factories can hit 100%, in Guadalajara it has been just 1% to 2% a year, Garcia said. Border workers are often migrants who arrive from interior cities and stay until they have earned enough to return home for a while--or slip into the United States.

The industry is also able to draw skilled employees from the state’s seven universities and 164 technical schools, and is investing in new curricula with the schools to develop technicians. The big companies have set up programs with the region’s universities and technical colleges to train enough local workers and managers.

Bue said that when he left Motorola’s Guadalajara plant and joined what was then an AT&T; plant in 1992, the company had 14 foreign directors. That number is now down to two, yet its telephone production has grown from 1.5 million in 1991 to an estimated 22 million this year.

In January, Hewlett-Packard said it was consolidating hemispheric production in Guadalajara of four more product lines, including OfficeJet and DeskJet printers that were previously built in Asia and the U.S. Investment in the new operations in 1997 and ’98 will reach $400 million and create 3,000 more jobs, mostly at HP’s suppliers in Guadalajara, spokeswoman Laura de la Pena said.

The site already houses a vast manufacturing plant for personal computers and laser printers, as well as a Latin American distribution operation. Together, they exported more than $1 billion worth of products last year. The plant also includes a design center responsible for worldwide laser printer and integrated printer-scanner products.

At Motorola, worldwide manufacturing of such products as thyristors, a category of semiconductor, has been transferred to Guadalajara from Asian plants under the firm’s “centers of excellence” strategy, said Gabriel Macias, head of materials procurement. The site’s research and development team holds some thyristor patents.

Macias, a Guadalajara native, is just 29. He, like many young technical managers, attended a local university and speaks English fluently but has never lived abroad. He spent seven years in manufacturing before he was shifted to a broader management role.

“I’m very proud talking about the growth here, and I like to hear that comparison between Guadalajara and Silicon Valley,” he said. “We are elevating the status of knowledge, of the capabilities of the whole society. Guadalajara is also starting to export our skilled people to other Motorola sites, including to the head office in Phoenix.”

Solectron, of Milpitas, Calif., the world’s second-largest contract computer manufacturer after SCI, has made perhaps the most dramatic recent expression of faith in Guadalajara’s future. Solectron has erected an immense complex of four hangar-sized sheds covering nearly 1 million square feet (and it has space for four more) to make computer components for brand-name firms in Guadalajara and for export.

The factory began production in October and now has 750 employees. Within four years, says production director Oscar Huerta, the plant should have from 8,000 to 10,000 employees, which would make it Solectron’s second-largest manufacturing site after its operation in--where else?--Silicon Valley.

* Related Story: The real Silicon Valley has lots of imitators around the world. A1

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Silicon South

Guadalajara, the center of Mexico’s Jalisco state, is enjoying a technology and electronics boom and likes to call itself Silicon Valley del Sur.

The Lineup

Major electronics firms among the dozens in the Guadalajara area:

* Hewlett-Packard: 1,400 employees at two plants; research and development for paper-handling components for laser printers; assembly of personal computers and components; contract manufacture of scanners, automobile LEDs and printers

* Philips Consumer Communications: 7,340 employees; manufacture of wireless, conventional and cellular phones, answering machines and pagers

* Kodak: 2,400 employees; manufacture of single-use cameras, writeable CDs, film

* SCI Systems: Manufacture of circuit boards for keypads

* Motorola: 1,500 employees; manufacture and assembly of semiconductors

* IBM: 7,000 employees; assembly of desktop and laptop personal computers

* Siemens: 720 employees; assembly of electronic and auto components

* Solectron de Mexico: 900 employees; assembly of printers, computers, cellular phones, telecommunications systems

* Natsteel: 1,000 employees; manufacture of circuit boards

* Jabil Circuit: 250 employees; manufacture and assembly of circuit boards and electronics components

The Stats

Electronics exports from Jalisco state

1998*: $7 billion

* Projected

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Sources: Companies, Jalisco state