Torreon's Blue Jeans Boom: Exploring La Laguna's Full Package Solution

The transformation of La Laguna, Mexico's jeans wear mecca, from maquila manufacturing to full package production presents a NAFTA success story in many respects.

the jury still may be out on how NAFTA has truly benefited -- and ultimately will stimulate -- the development of Mexico in terms of bringing the country's standard of living and production capabilities closer to those of its richer neighbors to the north. However, close examination of the post-NAFTA denim wear industry in the La Laguna region, which has been developing since 1994, already reveals an empowering transformation from a maquila-driven manufacturing base to a stronger, more integrated full package form of export manufacturing.

This evolution, an excellent comparison of the pre- and post-NAFTA periods, is significant because it illustrates how La Laguna has been able to increase investment in its manufacturing infrastructure, create higher-wage jobs and open new opportunities for local entrepreneurs, all of which suggest social and economic improvements.

La Laguna encompasses the neighboring cities of Torreon, Gomez Palacio and Ciudad Lerdo as well as several rural communities. The region, and specifically Torreon, which is its financial and commercial center, has a long tradition of apparel manufacturing that dates back to the 1940s, particularly in the production of blue jeans for the Mexican market. However, financial crises in the 1980s almost destroyed the industry.

During the mid- to late 1980s, when Mexico liberalized its trade laws in order to participate in the General Agreement on Tariffs and Trade (GATT), many jeans firms in Torreon went out of business. Following the opening of the Mexican market in 1986, a surge of imports exacerbated the problems faced by a struggling Mexican economy, which already was troubled by staggering national debt and debilitating currency devaluations. As a result, most of the Torreon survivors were forced to concentrate on export assembly operations under 807/maquila programs.

The predominance of maquila production in La Laguna prior to NAFTA allows us to answer three main questions: 1) What specific mechanisms within NAFTA are transforming production systems toward a more integrated type of manufacturing? 2) To what extent is full package production or integrated manufacturing becoming predominant? 3) Are there positive consequences of these changes in terms of equity, economic development and living standards?

Factors that Triggered the Boom

There are three key mechanisms that have driven an increase in both the volume of apparel and the number of production activities performed in La Laguna: the implementation of NAFTA; the peso devaluation; and the entrance of a different type of U.S. apparel buyer into the region.

1 Implementation of NAFTA. The most obvious consequence of NAFTA has been a change in the rules of the game for producers in Mexico. By progressively eliminating many U.S. tariffs, quotas and other non-monetary barriers to apparel production (such as restrictions on processes that could be performed in Mexico to reap U.S. duty reductions), NAFTA opened the door to the development of full package capabilities. (For more on Mexico's full package evolution, see Gereffi's and Jennifer Bair's article "U.S. Companies Eye NAFTA's Prize," Bobbin, March 1998.)

Whereas the surge in U.S.-Mexico maquila manufacturing in the late 1980s and early 1990s brought growth primarily in La Laguna's apparel assembly activities, the boom of full package production has encouraged the establishment and expansion not only of sewing plants but also textile mills, cutting facilities, laundries, finishing operations and some design and pre-production capabilities. Moreover, NAFTA allows the use of Mexican inputs, such as buttons and labels, which has spawned the growth of trim-related businesses in La Laguna.

As shown in Figure 1, in 1993 the region was dedicated almost exclusively to apparel assembly. By 1996, Mexican-made denim, trim and labels were being used for blue jean exports, and laundering and finishing were being performed in Mexico. By 1998, cutting and distribution were emerging in the region as well. However, marketing and retail, often considered the most profitable activities in the apparel supply chain, are still performed almost exclusively by U.S. brands and retailers.

2 The Peso Devaluation. While NAFTA created opportunities for Mexico to take on additional production activities, the peso devaluation in 1994 and 1995 increased the general demand for Mexican manufacturing. After three years of relative stability, the Mexican peso suffered a dramatic devaluation at the end of 1994. The exchange rate jumped from 3.4 pesos per U.S. dollar in September 1994 to 6.8 pesos per U.S. dollar in January 1995.

The peso devaluation increased the number of U.S. apparel clients interested in La Laguna. As a result, the quantity of jeans manufactured in the region quickly multiplied. Table 1 shows that prior to 1994, only three U.S. manufacturers, Sun Apparel (now a part of Jones Apparel Group), Wrangler (part of VE Corp.) and Levi Strauss & Co., had a significant presence in the region. By 1998, the number of clients had grown significantly (the most salient examples are listed in Table 1). At the same time, the number of jeans manufactured in the region jumped nearly tenfold from 500,000 pairs per week to 4.5 million pairs per week (see Table 2).

3 New Types of Buyers. The combined effect of NAFTA and the peso devaluation attracted new types of apparel buyers to the region. Whereas the 807/maquila model of export production before NAFTA was linked to large U.S. apparel manufacturers who provided cut parts for Mexican assembly, the emergence of full package production after NAFTA enticed U.S. retailers and branded marketers to consider Mexico as an alternative to Asia for their sourcing needs. As shown in Table 1, this diversified clientele included companies with higher status labels and more expensive products than those firms that made blue jeans in Mexico prior to 1994.

Retailers and branded marketers require high volumes of full package production for two main reasons. First, they dedicate themselves primarily to design, distribution and marketing. Full package services relieve them of many manufacturing responsibilities, from fabric sourcing to cutting and packaging. Second, because retailers and marketers base their business on consumer image and the power of their brands, they typically seek to distance themselves from potentially damaging associations with exploitative manufacturing practices. Some would argue that maquila production has a greater tendency for poor working conditions than does full package production because there is less financial investment required, less local ownership and more emphasis on utilizing inexpensive assembly labor.

The Transformation of Torreon

The blue jeans industry in the La Laguna region transformed as new high-profile clients entered the picture, the size of orders increased and full package activities accelerated. Table 2 offers several indicators of this transformation, from increases in production capacity to the prices La Laguna-made jeans can fetch at retail. The latter have risen in part because of increased demand, but also because jeans with higher retail prices are being made in the region.

Significantly, an estimated 50 percent of the approximately 4.5 million pairs of jeans exported each week from the region in 1998 were made of Mexican textiles. Of this percentage, about half (or 25 percent of overall jeans exports) can be attributed to full package production. Although no accurate estimate can be provided, the rest of the production in La Laguna is moving to what is locally known as "half package" -- i.e., the cutting, assembly, laundering and finishing of jeans, but not the acquisition of denim, trim and other materials.

The following sections explore other important aspects of the transformation of La Laguna, including: the capital investment and technology transfer that has helped to build the region's textile and apparel production capabilities; the increase in Mexican ownership and accompanying profits in the apparel supply chain; and changes on the labor scene.

Capital Investment and Technology Transfer

As orders have increased and more image-conscious firms have begun buying jeans in La Laguna, the region's manufacturers have invested in more modem equipment and facilities, sometimes as a condition of doing business with major customers, such as Levi Strauss. They also have invested in new types of machinery and software, such as computer-controlled industrial washers and dryers, which are needed to perform full package production.

For example, in recent years Wrangler has spent $40 million in the construction of a cutting, assembly and laundering plant; Kentucky-Lajat has put approximately $40 million into a laundering and finishing facility; and the Parras-Cone joint venture has invested almost $100 million to build a denim mill.

In terms of technology transfer from the United States to the La Laguna region, U.S. firms have promoted or introduced at least four technological advantages to the region, including:

* automated sewing and assembly systems;

* computerized cutting technologies;

* water recycling systems for laundering activities (spurred by increasing environmental preservation efforts by the Mexican government); and

* online inventory replenishment systems with connections to U.S. clients.

Profits and Ownership

La Laguna's development also can be measured by the extent to which production is benefiting the region's local communities, in terms of retention of profits and ownership of different parts of the process.

The new activities being performed in La Laguna -- textile production, cutting, laundering, finishing and, to a lesser extent, the manufacture of trim and other inputs -- are important to the local creation and retention of wealth because they add higher value to jeans than assembly alone, and thus offer larger profit margins. For example, consider that a production cost of $10 for a pair of jeans typically might include $1.50 for assembly, $4 for fabric and $4.50 for cutting, laundering and finishing. Before NAFTA, most Mexican companies only profited from assembly. Today local firms benefit across more stages of the apparel supply chain.

Local ownership also helps Mexican communities to retain wealth because profits earned by Mexican companies tend to stay in Mexico. La Laguna's expansion into new apparel production activities and the subsequent increase in profits have attracted more Mexican entrepreneurs, including large, diversified corporate groups, to the industry, as shown in the box below.

                    Patterns of Ownership in La Laguna
Denim              Apparel         Full Package
Mills              Assembly        Production
Lajat Textiles [2] Mexican         Wrangler [1]
Parras-Cone [3]    contractors [2] Sun Apparel [1]
                   Creaciones      Siete Leguas [2]
                   Lobo [2]        Grupo Libra [2]
                   Viesca 2000 [2] Kentucky-Lajat [3]
(1.)Firms with 100 percent U.S. capital
(2.)Firms with 100 percent Mexican capital
(3.)Joint Ventures

It is important to note that La Laguna companies involved in joint ventures usually enter these alliances as equals, either by providing local production know-how or a major share of the capital. For example, Grupo Lajat, a large corporation that has interests in cotton and gas, formed a joint venture with U.S.-based Kentucky Apparel in which each member has a 50 percent share of both U.S. and Mexican operations.

However, brand marketing and sales, the activities that yield the greatest profits, continue to be controlled by U.S. companies in most cases. Grupo Libra and Kentucky-Lajat are among the few Mexican apparel firms or U.S.-Mexican joint ventures that have sales offices in the United States. Moreover, Mexican apparel brands are almost unheard of in the U.S. market. So while Mexican companies are gaining ground in the areas of profits and ownership, they are not yet on equal footing with their U.S. counterparts.

The Labor Scene

Labor-related benefits of the post-NAFTA growth in La Laguna can be classified in six different areas: employment; wages and benefits; working conditions; unions; personnel; and rural communities. Each one requires further explanation.

Employment. Since 1993, apparel employment in La Laguna has increased 600 percent (according to unofficial estimates by the authors), compared with growth of 100 percent in the auto industry; 80 percent in the construction industry; and only 3 percent in the commerce/services sector. Table 2 offers more statistics that show the general dynamics of employment in the region.

Wages and Benefits. Wages in La Laguna have been rising steadily since 1994. The base wage in the region is about 1.5 times the Mexican minimum wage, which is approximately US$5 per day for an average, entry-level sewing operator. However, few operators in La Laguna will work for this amount. In addition to the minimum wage, many companies offer productivity bonuses that can increase the income of an operator up to three times the minimum wage. Such payment schemes are necessary because of the increased competition for labor among companies. A large percentage of operators achieve productivity levels required to obtain the highest levels of income.

Working Conditions. La Laguna jeans manufacturers, especially those with high profile branded apparel clients, have become more focused on ensuring that their operations are safe and nonexploitative. The presence of very visible branded clients in the region has increased the emphasis on improving working conditions. Companies such as The Gap and JCPenney Co. have created and imposed very detailed codes related not only to the final quality of the product, but also to the quality of the process.

Any plant or company that fails to fulfill code of conduct requirements--which range from compliance with local labor laws to the cleanliness of the firm's bathrooms -- is in danger of losing its contracts. In addition, most production facilities in La Laguna have been constructed since 1994, and have been designed and equipped to provide good ventilation, lighting, ergonomic equipment, etc.

Unions. In tandem with the liberalization of its economy, the Mexican government reduced the power of unions. Union representation and collective bargaining have almost disappeared in La Laguna. However, workers exercise their power by moving from one company to another fairly often, using mobility and the high demand for labor to bargain for small wage increases, transportation to and from work, free lunches, educational classes, raffles and prizes. Turnover rates in the region can reach 10 percent weekly.

Personnel. The high competitive labor market in La Laguna has forced many companies to slash educational standards to a minimum, and some companies do not require basic writing and reading skills. Currently, most of the region's apparel companies provide limited options for upward mobility and relatively few positions for skilled workers and professionals. However, the industry's low educational requirements can be seen as favoring the most impoverished strata of Mexican society. Wages are not tied to education but to productivity, offering an opportunity for the most disadvantaged workers in Mexico to earn a living wage. Furthermore, companies frequently provide opportunities for workers to continue (or begin) their education.

Rural Communities. It is hoped that NAFTA will create much-needed employment opportunities in Mexico's rural communities, which have become a dependent periphery with wages 30 percent lower than in urban areas. While apparel industry expansion into rural areas remains limited nationwide in Mexico, accounting for approximately 10 percent of overall apparel jobs, La Laguna's rural apparel labor force represents 30 percent of the total apparel employment in the region.

Tapping the Region's Full Potential

Despite the relatively low wages of the La Laguna apparel industry, some U.S. companies already are beginning to look for alternative manufacturing sources in the lower-cost areas of the world where there is less competition for labor. Still, the transformation of La Laguna into a full package player promises to help the region maintain its position as a major jeans wear hub, despite the potential exodus of some clients or a reduction in order volume.

Mexican capital is playing an increasing role in the region's growth, assuring stability in the economic development process and helping to retain some of the economic wealth generated in the area. At this point, La Laguna and the Mexican economy have potential to move to a higher level in the production hierarchy by mastering activities such as design, textile supply, distribution and marketing. Whether this potential is fulfilled remains an open question, but considerable progress is evident.

Gary Gereffi is director of the Markets and Management Studies Program at Duke University. He wrote earlier articles on full package production in the Americas that appeared in the November 1997 and March 1998 issues of Bobbin. He can be reached at tel.: 919-660-5611; fax: 919-660-5623; or e-mail: ggere@soc.duke.edu.

Martha A. Martinez, who graduated from Monterrey Institute of Technology (Monterrey, Mexico) in 1994, is a Ph.D. candidate in sociology at Duke University. Her current research focuses on interorganizational networks, particularly the role of social capital in the survival and efficiency of strategic alliances among North American firms. Martinez can be reached at tel.: 919-660-5603; or e-mail: martinez@soc.duke.edu.

Editor's Note: This report originally was prepared as a background note for the World Bank's World Development Report, 2000/1 on poverty. The findings will be used to illustrate how regional economic integration can promote local industrialization.

                           New Players Enter the
                          La Laguna Apparel Scene
                       Sampling of Key Manufacturing
                  Participants and Clients of the Region
Type of Firm      1993
Manufacturers     Farah
                  Sun Apparel
Branded Marketers Levi Strauss & Co. [BM]
                  Wrangler [BM]
Retailers
Type of Firm      1998
Manufacturers     Farah/Tropical Sportswear Int'l. (TSI) [1]
                  Sun Apparel/Jones Apparel Group [2]
                  Aalfs
                  Kentucky-Lajat
                  Grupo Libra
                  Siete Leguas
                  Tarrant Apparel Group
                  Red Kap
Branded Marketers Levi Strauss & Co. [BM]
                  Wrangler [BM]
                  Action West [BM]
                  Guess
                  Polo Ralph Lauren
                  Chaps by Ralph Lauren
                  Calvin Klein
                  Liz Claiborne
                  Tommy Hilfiger
                  Donna Karan
Retailers         The Gap [BR]
                  Old Navy [BR]
                  The Limited [BR]
                  Kmart
                  Wal-Mart
                  JCPenney Co.
                  Sears
                  Target

(BM.)The firm is a hybrid brand marketer and manufacturer. For instance, Wrangler is both a manufacturer (i.e., owns and operates manufacturing facilities) and a brand marketer (markets its own brand).

(BR.)The firm is a hybrid brand marketer and retailer. For instance, The Gap is both a retailer and a brand marketer (i.e., sources production for its own brands).

Notes:

(1.)TSI acquired Farah in 1998, and has since divested Farah's manufacturing operations in Mexico.

Source: Direct researcg by authors.

(2.)Jones Apparel Group acquired Sun Apparel in late 1998.

Note: Many brand marketers have representation in the region through other players both on and off the chart. For example, Warnaco Group holds many Calvin Klein jeans licenses; Sun Apparel holds the license to produce jeans under the Polo Jeans Company brand from Polo Ralph Lauren; Tarrant Apparel Group produces for the Limited, etc.

                         Indicators of La Laguna's
                         Post-NAFTA Transformation
Variables                1993
Jeans Output/Region
(pairs per week)         500,000
Jeans Output/Company
(pairs per week)         Maximum 50,000
Jeans Exports Made of
Mexican Denim            10%
Assembly Price per
Piece (US$)              $0.90 to $1.10
Retail Price (US$)       $10 to $40
Activities with          Assembly
Mexican Ownership
Types of Firms Active in Apparel Manufacturers
Region                   Maquila Contractors
Regulation of            Mexican Legislation
Working Conditions
Employment in
Apparel/Textiles         12,000 [*]
Apparel/Textiles % of
Total Employment         5%
Main Sources of          Automobile 20%
Manufacturing Employment Apparel/Textiles 17%
                         Other 63%
Unemployment             7% to 8%
Variables                1998
Jeans Output/Region
(pairs per week)         4.5 million
Jeans Output/Company
(pairs per week)         Maximum 540,000
Jeans Exports Made of
Mexican Denim            50%
Assembly Price per
Piece (US$)              $1.50 to $2.05
Retail Price (US$)       $10 to $80
Activities with          Assembly
Mexican Ownership        Laundry
                         Cutting
                         Finishing
                         Textiles
                         Trim and Labels
                         U.S. Sales Offices
Types of Firms Active in Apparel Manufacturers
Region                   Maquila Contractors
                         Diversified Corporate Groups [+]
                         Brand Marketers
                         Textile Exporters [+]
Regulation of            Mexican Legislation
Working Conditions       U.S. Buyers' Codes of Conduct
Employment in
Apparel/Textiles         70,000 [*]
Apparel/Textiles % of
Total Employment         14%
Main Sources of          Apparel/Textiles 40%
Manufacturing Employment Automobile 23%
                         Other 47%
Unemployment             3.1%

(+.)Examples of these diversified corporations and textile exporters include Grupo Lajat, Grupo Soriana and textile producers such as Parras-Cone and Textil Lajat.

(*.)Employment figures are informal estimates of the total number of jobs (permanent and temporary) in the textile and apparel industry in the region.

Sources: Direct research by authors. Employment data calculated from estimates by Fomento Economico Laguna de Coahuila (FOMEC) for La Laguna region.

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