Should the Obama Administration take Mexico for Granted?

Why is the US Congress always occupied with east-west issues such as with Afghanistan, Iraq, Syria, Palestine and Ukraine, while practically ignoring its neighbors south of its borders (i.e. Mexico)? To place it into perspective, consider the number of times Secretary of State, John Kerry or even President Barack Obama have met with Mexico’s President Enrique Peña Nieto. …maybe once or twice per year which barely compares to the hundreds of stops made in the Middle East alone.

The term ‘shuttling between capitals’ to negotiate trade deals and peace treaties with the US seems never to apply to Mexico or Central/South America, and yet Mexico is the US’s second largest trading partner moving over USD$500 billion in goods and services across its borders. With so much hanging on the balance, especially with immigration reform and border security between both countries, is it prudent for the US to take its neighbors south of the border for granted? …and what can Mexico say differently to place its agenda on a priority list for high level officials in Washington?  

Foreign Affairs Forum
At a recent forum at the Council on Foreign Relations in New York City called, Mexico as a Global Player sponsored by the Foreign Affairs publication as part of a series on Mexico titled, Mexico’s Muscle, Revealing the Strength, the Minister of Economic Growth for the State of Mexico, Adrian Fuentes Villalobos, along with a cadre of supporting experts from both countries, sat on various panels where they proposed the idea of a NAFTA Version 2.0 (North American Free Trade Agreement). This enhanced version of the 1994 NAFTA agreement would seamlessly combine Canada, US, and Mexico into a North American partnership, one based on shared job creation and prosperity building.

Over the past twenty years, NAFTA used up most of its political capital in Washington and depending upon who you ask has rendered mixed results. The Huffington Post, for example, underscores the net loss of 1 million American jobs plus a net US trade deficit of USD$181bn, while Mexican-sponsored research groups show a contrasting view that highlights the creation of 6 million jobs between both countries along with a 500% increase in trade capacity. Despite their differences of opinion, one indisputable benefit was the development of a manufacturing hub for heavy industry located in the center of Mexico.

What was once a sparsely populated territory has now been transformed into a series of industrial parks that when viewed from 30,000 feet high appear organized like the floor of a modern plant. Top multinationals such as GM, Chrysler, GE, BMW, Boeing, Nescafe, DuPont, and Embraer, to name a few, have established a presence in the region with their key suppliers located nearby. As testimony to their commitment and confidence in its future prospects, many companies are continuing to invest hundreds of millions of dollars to accommodate their imminent rapid growth. Foreign investors including global banks have had a key role in boosting Mexico’s FDI (Foreign Direct Investment), which has doubled to USD$35.2bn in 2013 when compared to the year before.

For a country that has carefully mapped this massive expansion and has been responsive to the strategic needs of global manufacturers, one would expect that by all reasonable standards, Mexico’s achievements thus far would have earned it international recognition, and yet, when it comes to members of the US Congress, nothing could be further from the truth. For a slew of political reasons, elected US officials have conveniently stuck to two key issues when discussing US-Mexican relations, immigration reform and border security. With good reason, members of the panel spoke of their efforts to change the dialogue with the US but have done so with little success. The US Ambassador from Mexico to the US, Eduardo Medina Mora, described his personal hidden frustrations as he described his daily reminders to members of Congress on the many potential benefits Mexico can offer to the US. Clearly, the two pending bills have greatly polarized US-Mexican relations, which has resulted in a decoupling between Washington politics and the multinationals operating in Mexico.

The newly elected President Enrique Peña Nieto recognized his country’s political shortcomings early on after being sworn into office and in a series of extraordinarily bold moves pushed through four noteworthy bills to help bring his country closer to a US framework. These include:

  1. An energy reform bill that for the first time allows foreign direct investments to improve the country’s energy portfolio and infrastructure.
  2. A telecommunications bill that has broken a long-held monopoly among cell phone and television operators.
  3. An education reform bill that among other challenges will reward teachers on the basis of merit.
  4. A labor bill that makes it easier for companies to hire and fire employees.

In each case, President Enrique Peña Nieto had to take on powerful labor unions and business tycoons to successfully dismantle their influential centers. His efforts won him praise both domestically and internationally. His ingenuity and leadership earned him the respect from his country peers at the G-20 economic meetings. However, despite President Peña Nieto’s notable achievements, Mexico still has never been recognized as a priority by either the Obama Administration or members of the US Congress. Not all was lost. In response to Mexico’s relentless requests to gain access to high level officials in Washington, the White House finally acquiesced in May of 2013 to form the HLED platform, which stands for, you guessed it, High Level Economic Dialogue. Truly an unimaginative acronym and more than likely a US stalling tactic, the HLED limits Mexico to one annual meeting with cabinet-level officials in Washington.

According to one of the panelists, what Mexico needs is a revised narrative, one that addresses key mutual benefits that elected US officials can pitch to garner the support of their constituents. Just asking the US to change their dialogue away from immigration reform and border security, may not be enough. I believe something more is needed and have taken the liberty to lay out a few suggestions below (see appendix) that could help a Mexican delegation send the same intended message to the Obama Administration but, hopefully, in a more compelling manner.

I would be remiss not to mention the current threat from drug cartels in Mexico and the illegal immigration of Central and South Americans that travel through Mexico to reach the US border. No doubt it is one of the key concerns that weigh on elected officials’ minds and the American people. However, as history has shown us repeatedly, a strong economy is a far greater deterrent than an over-extended border protection scheme. By boosting medical tourism along the US-Mexican border, expanding the State of Mexico’s manufacturing hub, and educating both US and Mexican youth to meet increasing STEM job demand, drug cartels will be forced to circulate elsewhere.  As for non-Mexican immigrants, they should find employment in their own respective countries caused by a spillover effect triggered by NAFTA Version 2.0.

Hopefully the acronym HLED will some day soon be changed to read The North American Partnership or TNAP – (NAFTA Ver. 2.0). There members would agree to meet at least monthly with US cabinet officials. Maybe then, Mexico will know it is no longer being taken for granted.

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 (APPENDIX)

A Revised Narrative for the Mexican Delegation

In an effort to change the narrative presented at the event, I have listed three key strategic points that on their own merits should help gain the attention of US political leaders.

I. Establish tiered industrial zones within Mexico’s manufacturing hubs that focus on a balanced trade-off between a range of country content ratios of finished products (i.e. US versus Mexican content) and corresponding tax policies.
Currently, the Mexican delegation claims that the US content for products manufactured in the State of Mexico is 40%. If the State of Mexico developed trade-friendly policies that applied favorable tax rates based upon US content, then further  tiered them for companies with lower US content, US leaders would view the gesture favorably and be forced to respond accordingly. For this scheme to work, however, Mexico should maintain a bi-lateral, transparent, third-party auditing process to ensure the policy is attracting the right kind of companies. At the end of the day, the same US companies who enjoy the maximum benefits will become the Mexican delegation’s greatest advocates in Washington. They will do a more effective job selling Mexico’s North American partnership to members of Congress and the American public than anyone else.

II. Open dialogue to develop trade policy between medical tourism in Mexico for US baby boomers in exchange for STEM education assistance for Mexican youth.
Just south of California, Tijuana has become the capital of the world for medical tourism with over 1 million annual visitors who generate over USD$1bn in economic benefits to the area. With the predicted shortage of doctors in the US, the retiring of 77 million baby boomers, and the introduction of Obama Care, the US may no longer have the manpower to take care of its aging population’s medical needs. Rather than leaving this situation to chance, US leaders would do well to help develop affordable pathways for the most common procedures by leveraging the abundance of Mexican doctors. Another potential idea would be to use approved Mexican medical procedural rates as a basis for insurance policy reimbursements, hence giving policyholders real options rather than just high deductibles.

In exchange for Mexico’s cooperation, the US can agree to help develop stronger STEM education curriculum (Science, Technology, Engineering, Mathematics) for its young adults who comprise over half of the Mexican population. Clearly Mexico’s immediate needs lie in educating their youth to fill a growing demand for engineers, whose efforts in turn will also help fuel the US economy, especially if the US content of manufactured products remains around 40% as stated earlier in point number one.

III. Highlight the expected reduction in border crossings over the next 5 years  based on a trending reduction in fertility rates in Mexico and improvements in  job prospects for Mexican youth.
Data shared at the event claimed that by 2020, Mexico’s fertility rates will decline from 2.67 children per child-bearing mother today to 2.2, which is comparable to the US current rate of 2.06 and the ‘replacement level’ of 2.1. The Mexican delegation should circulate these findings along with studies highlighting the reduced need to protect the US border from future Mexican immigrants because there will be fewer interested candidates. The billions saved trying to protect 51 guard posts along the longest border in the world (2,000 miles) could be allocated elsewhere including for launching Mexico’s vision for NAFTA Version 2.0.

© 2014 Tom Kadala

Advanced Manufacturing – GE’s Response to Full Employment

When Tom Donilon, the National Security Advisor for President Obama was asked what the two most pressing issues that kept him up at night, he replied, terrorist attacks and the US declining national competitiveness. The backdrop of 600,000 unfilled manufacturing jobs at a time when unemployment is near 8% has most certainly been his nightmare in the making. He must be asking himself, how could our educational system fall so out of line with industry demands, especially when student debts have exceeded $1 trillion? With such a large investment made to prepare our youth, what kind of a workforce do we have as a Nation? If vacant manufacturing  jobs were filled today with US workers, experts tell us that the contribution of our manufacturing economy would jump from its current level of $1.8billion to $2.2trillion! What has gone terribly wrong?

Political leaders supporting manufacturing initiatives in Washington are calling for another ‘Sputnik moment’ to inspire American students to pursue manufacturing careers. Without a ready inventory of workers to support a competitive manufacturing base, America’s future will always be vulnerable to outside economic threats. History reminds us of our true potential, when in 1945, 50% of the products produced in the world were ‘Made in USA’. Today that number has trended down to 22%.

At a recent press gathering in Washington DC’s Newseum sponsored by GE (General Electric Company) and The Atlantic Magazine, GE’s CEO, Jeff Immelt, along with an impressive slate of industry experts and thought leaders addressed the next chapter in US manufacturing and its expected role in creating jobs. David Arkless, Manpower Group’s President of Global Corporate and Government Affairs, led the discussion with a non-sugar coated account of how the Chinese have managed to grow their manufacturing base, while the White House has been floundering along forming more committees than solutions. Arkless explained how the Mayor of Tianjin, Huang Xingguo, (the 4th largest urban population in China) learned from speaking with over 2,000 foreign firms in his district that their number one concern was a ready supply of skilled workers at the right cost. Working with his local universities, the mayor and his team of advisors forecast the skill sets companies in Tianjin would need in the future and created specific course tracks that met these requirements. Local students who chose a STEM career were offered a tuition-free package and employment after graduation. Tianjin’s efforts appear to be paying off well, since this year the city is expected to grow at 17.5%, well above China’s average of 6.5%. Arkless asked out loud why the US Government could not do the same as the Mayor of Tianjin.

Could/should the US follow a similar manufacturing strategy as the Chinese? 

The other panel members argued strongly against Arkless’ recommendations, citing that the US has a different political system and could never ‘get away’ with what is socially acceptable in China. What the US Government could do, instead, is establish a set of certification guidelines that colleges can follow and employers can use to hire with confidence. Colleges that produce well-trained employees using these standardized tests could expect their employers to reciprocate with needed financial support, which in turn would alleviate the need for future government subsidies. Based on each college’s performance, free markets would determine the academic institutions that can deliver and those that should be dissolved or merged.

Despite the many efforts to entice students to follow a manufacturing career track today; however, the US strategy is clearly not working. For starters, most students are not aware that goods are produced on factory floors in the US. For years they have heard negative news coverage about the loss of US factory jobs to other countries with lower wages, so much so, that college to them is their ticket to avoid a dead-end job on an assembly line. Like a page taken from a Charles Dickens novel, they perceive factory jobs as requiring long tedious hours in a dark and dingy work space spewed with numerous health hazards.

At the event, GE’s CEO, Jeff Immelt, exclaimed the pressing need to change this archaic perception of factory work among young students. Parents, teachers, and guidance counselors alike had to be on-board too. Results from a recent survey showed that only 3 out of 10 parents supported a manufacturing career for their children. Without greater parental support, the hurdle to attract students to a STEM career path (Science, Technology, Engineering, Mathematics) would become insurmountable, especially among the emerging, young Latino population who tend to be family centric. Alcoa’s VP of Human Resources, Natalie Shilling, noted that children’s long-term interests in STEM subjects tend to drop off significantly during the 6th grade level. In response Alcoa has partnered with local schools to sponsor science fairs and family factory visits but expressed concern that their ‘grassroots’ efforts may be insufficient.  Like GE, they also see the urgent need for a formalized regulatory framework backed by sound government policies.

Advanced Manufacturing
Factories today are referred to as operations of ‘advanced manufacturing’.  Unlike yesterday’s plants, they include robots, ‘lean’ manufacturing practices that improve overall process efficiencies, and local distribution channels. They are smaller, cleaner, and automated. For example, the labor required for the production of a GE refrigerator is only 1.8 hours, less time that it might take to install the unit at a customer’s home and read the manual. Breakthrough technologies such as 3-D printing are pushing the limits on smaller runs of customized products with near-zero waste. GE is investing heavily in 3-D printing technology citing its shorter design cycle benefits. Shaving one or two years off the traditional design-to-production process could translate into significant savings and competitive advantages.

Immelt’s predicament poses an interesting future for manufacturing. As wages have been squeezed out of the cost of production, the focus on future investments has shifted away from countries with cheap labor to regions that offer a steady flow of skilled workers, access to specialized materials, and a basic infrastructure to move goods to consumers. Where specific components are lacking, GE is prepared to make investments to ensure the integrity of their business model over an expected plant life-span of 40 to 50 years.  Immelt believes that this ‘in-country’ strategy will prepare GE to serve an expected one billion middle class entrants over the next five years.

What does Immelt consider to be a skilled workforce worthy of GE’s consideration? According to Immelt, future workforces must be capable of performing ‘additive manufacturing’, which means they will need the knowledge-base to combine some computer training with artisan skills. They must also work competitively in teams. How important are team skill sets to Immelt? Recently the shortage of skilled workers prompted GE to call back veteran GE employees, who according to Immelt, will need some technical training but will easily fit in, since they already have proven GE team work experience. 

…and yet, one key question remains. Can GE’s ‘advanced manufacturing’ strategy achieve full employment without an increase in US exports? Time will tell.

As currency wars mount, what will stop US trading partners from setting up their own ‘advanced manufacturing’ operations that service their own local markets? Factories will be cheaper to build and faster to set up locally, therefore, offering a distinctive advantage over imported finished goods. Furthermore, STEM online training courses such as edx.org and ocw.mit.edu will help prepare a viable pipeline of qualified local STEM students/workers virtually anywhere in the world.

Immelt’s predecessor, Jack Welch, once envisioned the future of manufacturing with factories mounted on moving barges that would dock at different ports-of-call depending upon the market demand for a manufactured good. In part his vision had some validity. The barges he referred to, are today, smaller and more agile high-tech factories that can be easily built adjacent to their intended buyers.

© 2013 Tom Kadala

Implications for ‘On-Demand’ Manufacturing

When asked if they were considering pulling their manufacturing facilities out of China, 45% of US-based CEO’s interviewed in a recent Boston Consulting Group survey, said the idea was under serious consideration. Has manufacturing in China become too expensive for American companies or has new tooling technologies and processes eliminated the need for China’s cheap labor? If the trend for US companies is to return to the US or ‘reshore’, what will the new industrial landscape look like in the next few years?  How should CEO’s, government officials and job seekers prepare? 

With more machines replacing workers, China’s appeal as a global manufacturing base is wearing thin. According to an MIT Forum on Supply Chain Innovation (supplychain.mit.edu) held on July 25, US firms are taking a closer look at the Total Cost of Ownership (TCO) and have discovered a slew of hidden costs that ‘cheap labor’ has been masking all along. For instance, US firms that outsource their manufacturing to China are often forced to absorb 100% of a product’s liabilities, since China’s legal system is virtually unenforceable. ‘Made in USA’ also translates into increased quality control, which in turn can keep a tighter lid on counterfeits, a chronic issue with Chinese producers.

The US government along with non-profit organizations are pushing awareness-campaign web sites along with evaluation tools to encourage more US CEOs to consider ‘reshoring’ sooner, (reshorenow.org).  Congress believes that ‘reshored’ manufacturing plants in the US will help create sustainable jobs in economically depressed regions, while providing much needed positive news for unemployed voters.

Contrasting policies: US vs China
While the US is ‘reshoring’ its operations to setup state-of-the-art manufacturing facilities back home, China is aggressively retooling its existing facilities to replace many of their low-wage workers. Foxconn Technology Group (foxconn.com), also assemblers for Apple products, recently announced plans to replace two-thirds of its work force with one million robots by 2013. These robots will be made in China, courtesy of the many US-trained Chinese engineers who have been forced by the US government to return immediately after graduation. US firms such as Boeing, iRobotics, and IBM have lobbied heavily in Congress to prevent this unnecessary ‘brain drain’ by requesting the issuance of work permits and extended visas with fewer restrictions to encourage qualified foreign students to remain in the US longer.

A glimpse at the future…
The implications of the US’s ‘reshoring’ and China’s retooling is starting to lay down the foundations for ‘on demand’ manufacturing where products are produced not only on an as-needed basis but also to a buyer’s specification at the time the order is placed.  Shipments would arrive either immediately (i.e. at a retail outlet) or on the same day.  A glimpse into the future shows how this phenomenon could be achieved using clusters of networked mini-plants and warehouse facilities.  A possible rendition of this concept follows:

In the not so distant future, tooling companies will eventually perfect the design of a fully automated manufacturing facility that can fit and operate inside a 20 or 40 foot container for easy transport and installation anywhere in the world. These modular containers would be networked together, stacked to meet seasonal demand, and monitored remotely. They would be as mobile as laptops are to professionals today offering unprecedented agility and optimal efficiencies based on a multitude of input and output variables.  Hence, if the price of raw material were to suddenly drop below a certain level in one part of the world or a market preference demand spike in another, mini-plants would be moved accordingly to take advantage of the opportunity arbitrage.

Mini-plants moved from one location to another would plug in the same way a voip phone (VOice of IP) operates today.  Once plugged into the network, the plant would operate as though it were located in the same office as the employees hired to operate it.  A comprehensive network of plant modules would optimize order flow by producing products closest to the buyer, hence, reducing or eliminating both inventory and transportation costs. Plant capacity would vary from as little as one unit using 3-D printing technology, for example, to multiple custom units using a network of local machines. (3Dsystems.com). Eventually smaller, faster, and safer machines will enable new industries such as urban factories that would locate mini-plants adjacent to designated retail outlets.

If evaluated in pieces, this futuristic vision is already in play today. Beginning with the recent landing of Curiosity on the planet Mars, one can be certain that remote operations of large machinery is on course to improve with time. The ‘on-demand’ manufacturing idea is currently being tested at a large grocery chain in New Jersey where vegetable produce is grown indoors, one floor above the retail space using hydroponic farms, (city-hydroponics.com).  The mini-plant/warehouse combination is a soon-to-be reality at Amazon as it responds to a recent sales tax levy.  Amazon plans to setup smaller warehouse operations in all 50 States to offer same day delivery for their most popular items.  It would be only a matter of time before they decide to manufacture some of these items under their own brand at these same sites.

Implications…
Consumers may love the idea of some day ordering exactly what they want, when they want it and to receive all of this exceptional service at an affordable price, since supply chain cost would have been significantly reduced. However, these technological advancements have a darker side.  They come at a steep social cost because they eliminate more jobs than they create, an issue that can no longer be ignored as unemployment continues to rise globally.  This serious dilemma leads to the second part of this article by asking the following question.

If technology advancements, which continue to grow at an exponential pace, are eliminating more jobs than they can create, what, then, can CEOs, government leaders, and job seekers do to rebalance this trend?  

There really is no one answer or silver bullet that will solve this problem.  Part of the reason is that the benefits from adapting new technology today can easily reach a global population at exponential rates.  As greater numbers demand more for less (and in a shorter time period than ever before), technology continues to advance at an unstoppable pace stripping our planet of its precious resources, while also eliminating jobs.

Has the pursuit for new technology become a runaway train?  If so, the only antidote to counter its job loss effects would be to integrate innovative thinking at every level of society and at a global scale.  With this new initiative, every breathing individual would partake in some form of innovation group exercises regularly, to build upon experiences, new ideas, and ultimately unveil breakthrough solutions.

A few ideas so far…
Chile’s government has taken a bold move. They have been offering a no-questions-asked stipend of forty thousand dollars to any young, unproven web entrepreneurs with a good idea, if the approved candidate agrees to spend six months working on their new startup in a newly established innovation incubator located in Santiago, (startupchile.org). This initiative has inspired Chile’s young adult population to start their own companies, while being mentored by some of the best entrepreneurs and developers on the planet. A simple but powerful idea, Chile has created a valuable global supply chain for its own innovation needs.

Chile is not alone.  Many countries have developed innovation centers too and support regular networking events for techies and entrepreneurs.  For example, New York City has Gary’s Guide (garysguide.com), a weekly calendar of informal discussions and gatherings.  There anyone who may be testing the waters can share ideas, look for partners, and attract funding. Many of the gatherings listed are free or cost less than $25 to attend. Also, Boston offers Mass Innovation Nights (innovationnights.com) where startups compete and vote for funding among their peers.

At the corporate level, Facebook offers a good example for CEOs with their ‘hackathons’. Each week, a group of programmers spend an evening, developing new application ideas that are later presented and voted upon the following day. Ideas are implemented, tested and ranked.  Those ideas that come out on top can usually point to a long trail of previous ‘hackathon’ events and results that led them to an optimal solution.

Job seekers should seek ways to update their skills by taking advantage of some of the many free online courses being offered this Fall through various top universities including Harvard/MIT (edx.org). These are not accredited courses, yet, but do an excellent job of teaching current and relevant materials.  Another good source to brush up on high school and college basics is Khan Academy (KhanAcademy.org). If learning a new computer language such as Java or HTML5 is on your to-do list, consider signing up for a free trial at Safari Books Online (safaribooksonline.com) where they offer access to current libraries of technology books. Many more options are available through your favorite search engine.

A Call-to-Action!
To maintain our economic drivers going forward, the balance between new technology and job creation will require the efforts and contributions of every living person including YOU. That is because no one person or company has the answer.

Regardless if you are a CEO, a politician, or a job seeker, sitting on the sidelines with the hopes that this economic storm will soon blow over may not be your best choice. Instead, consider moving away from the receiving end of innovation and partake in its creation. You can start by participating in any one of the rapidly evolving community-based initiatives located near you. As you learn more, keep in mind that this new era of ‘on-demand’ manufacturing is as much about producing products more efficiently as it is about stimulating innovative thinking. One cannot survive without the other.

If you are looking for ideas to integrate an innovation culture among your staff or team, please contact me directly at tom@researchpays.net