Area Development
Baja California, one of 33 states in the republic of Mexico, is located in the Northwest quadrant of Mexico, immediately south of California. The events of September 11, and the subsequent consolidation in the North American economy, created a shakeout that resulted in portions of several industrial sectors transferring production from Mexico to China. Consumer electronics was particularly impacted. Since 2004, however, a system of global production sharing has emerged with many firms establishing manufacturing platforms in both China and Baja California. The biggest manufacturing turnaround in Baja California's history is being driven by:

    • logistics proximity to the U.S.;
    • rising fuel costs; and
    • high productivity in Mexico.

This will continue during 2006 with expansion plans by existing global firms manufacturing in Mexico - as well as new relocations from Europe, Asia, and North America. As Baja California commences its largest investment boom in 30 years, international investors and corporate users are actively participating across a broad spectrum of opportunities. Foreign investment in the manufacturing sector was $6 billion in Mexico during 2005 - and expected to rise even more during 2006. As usual, Baja California, due to its proximity to California and major U.S. markets, will reap the lion's share of the investment.

Manufacturing Sector Leading the Way
The manufacturing sector in Baja California, led by the cities of Tijuana, Mexicali, Tecate, and Ensenada, represents the most dynamic employment engine for the state. During the contraction period from 2002 to 2003, Baja California lost more than 50,000 manufacturing jobs. This trend has been reversed with the creation of 78,000+ jobs from 2004 to 2006.

Tijuana, with a population of in excess of two million, is situated immediately south of San Diego, California. These two cities share the most dynamic international border in the world, with daily pedestrian and vehicle crossings totaling more than 400,000. Mexicali, with 900,000 inhabitants, the state capital of Baja California Norte, is located two hours east of San Diego and directly south of El Centro and Calexico, California. Mexicali, hosts two international border crossings. Tecate is located 20 minutes east of Tijuana, adjacent to Tecate, California; it also enjoys its own international border crossing. Ensenada, long known for its cruise ship terminal and international port, has also attracted a major cluster of foreign manufacturers and the new Punta Colonet port project; it is located 1.5 hours south of Tijuana.

As of March 2006, Tijuana had a total of 573 global manufacturing plants in operation, Mexicali had 137, and Tecate and Ensenada were hosting 144 and 78 foreign firms, respectively.

Hotspots and Opportunity Sectors
Electronics: The electronics industry has traditionally been shared by Asian and U.S. firms producing for the consumer electronics and business sectors. Tijuana was the television capital of the world, producing over 70 percent of the world's televisions, 19-inch and above. Tijuana produced more than 13 million analog and digital televisions during 2005. Global brands such as JVC and Hitachi recently expanded. Sanyo recently completed a milestone - 10 million televisions produced for Wal-Mart - in Tijuana. Delta Electronics from Taiwan has shifted production to projection TVs with dlp (digital light processing) technology. ADI is contracting manufacturing for new television-makers from People's Republic of China (PRC) - again, in Tijuana. In Mexicali, monitor-maker NEC moved production to China, but Taiwanese monitor-maker Acer/BenQ opted to retain its plant as a showroom facility and R&D center - offering quick turnaround for its North American clients. Even Mexican firms such as Diamond Electronics have entered the television market in Baja California. The rebound in the electronics industry supersedes manufacturing. Several national retailers are actively searching for repair and fulfillment centers to rapidly modify returned products and ship them back to the U.S. market.

Automotive: Automotive firms and suppliers are now located in every manufacturing city in Baja California. Tijuana produces the CSX 427 model of the Shelby Cobra luxury sport car. Toyota purchased a 700-acre site situated between Tecate and Tijuana for its twelfth manufacturing plant in North America. Already in production, this plant will produce more that 50,000 Toyota Tacoma pickups annually by next year. Some Toyota suppliers have committed to establish in Baja, while others are currently investigating ways to enter the market. Three other automotive OEMs are seriously considering Baja operations due to logistics access to Pacific Rim suppliers, nearby port infrastructure, emerging automotive labor pools, and proximity to major U.S. markets.

Medical: Another hotspot to watch is the biomedical sector due to its high profile: 34 plants operate in Tijuana - with more than 60 in the state. Medtronic, from Minneapolis, and Tyco Healthcare have led the way for several years, but new world-class manufacturing facilities were established during 2005 for DJ Orthopedics and Wilson Greatbatch Technologies. Many of the medical device firms operate sophisticated "clean rooms" and are licensed by the FDA to manufacture Class III medical implantable devices. Medtronic held job fairs during its market investigation to assess the training capacity for local workers in Tijuana; the local engineers and operators have contributed to Medtronic's Mexico success in a meaningful way.

Trends to Follow
The expansion and relocation trend to Baja California is the result of a number of industrial factors becoming more evident each year, as follows:

Global production sharing to increase between Asia, Latin America and Europe - Since 2005, insiders view global production in a different light. Market investigation and due diligence will enable manufacturers to determine which products are better suited to assembly in Mexico or Asia, and which goods may be suitably shared between these locations. Baja California is at the crossroads for these decisions.

3rd party logistics (3PLs) supporting JIT and transportation - Logistics tracking and transportation priorities are more important than ever. While many operators still handle logistics in-house, the growth of the burgeoning 3PL market in Baja California is evident. Firms such as Sanyo Logistics, Hitachi Freight, and UPS Global Logistics support client needs well beyond transportation. In Baja, logistics firms are consolidating supplier shipments, and providing kitting (grouping parts together) and just-in-time inventory management. 3PLs are active in every sector in Baja, freeing up crucial plant space for higher value assembly and manufacturing. The new port project at Punta Colonet, south of Ensenada, will create significant opportunities across a wide spectrum of industries and service providers. This early-stage project will provide a new deepwater port, free-trade zone, and rail links to the north.

OEMs need their suppliers in Mexico - OEMs are requiring annual cost reductions from their suppliers. Some targeted goals can only be met through supplier relocation to Mexico. As OEMs globalize, they are inviting their supplier base to move with them, locating in campuses or nearby. In Baja, Samsung and Toyota are the most recent examples.

Baja California's aggressive state government in pursuit of targeted clusters -To increase Baja's awareness worldwide, the state government has organized numerous trade missions to Asia, Europe, and North America, and sponsored global manufacturing conferences. To increase the state's attractiveness, it now offers tax breaks, training programs, and other incentives. One training program was recently developed for Plantronics, maker of telephone headsets, and a local state university.

Mexico's new free-trade zone legislation - The first strategic free-trade zones were authorized in Mexico during 2005. The new free-trade zone law simplifies customs inspection, tax reporting, and logistics in and out of Mexico through advantages above and beyond the standard "maquiladora" (traditional) manufacturing law. Three operators in Baja California are actively seeking sites to establish new free-trade zones to benefit global manufacturers. These sites will offer multimodal facilities and on-site customs inspection.

High tech's new opportunity in Baja California - Global operators are shifting more than assembly and manufacturing to Baja California. R&D functions are also featured in numerous Baja operations. Firms such as Mattel, Medtronic, and Acer have utilized locally grown engineering talent with great success in Baja California for several years. Engineering graduates are available from all major universities throughout the state. One example of this growing trend is the new Silicon Border project in Mexicali. The 10,000-acre science park broke ground in 2005 and is intended to provide a strategic alternative for cost-effective semiconductor operations in North America.

Global Investors Converging in Baja to Support Global Manufacturers
With concern that the U.S real estate market has seen the last of double-digit returns, global investors and developers are also following corporate users into Baja California. Institutional and private investors for industrial properties are taking advantage of U.S.-style leases, denominated in U.S. dollars, and guaranteed by companies in the parent country. Current returns range at least 2-5 percent higher in Mexico than home countries. Originally Prologis entered the Tijuana market, followed by recent portfolio investments by JLL, AMB, IGS, and CPA. During 2006, Prudential and Verde Realty are making a strong push into Baja California, purchasing large tracts of land.