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THEREPORTMexico 2014

Baja California

CONTENTS BAJA CALIFORNIA 2014

Port to portPage 9

Renewed focus on making Baja California amanufacturingcentre isalso increasingdemandfor transport, logistics and utilities infrastruc-ture and creating opportunities for firms withexpertise in these areas. As of 2014, the pro-posed project pipeline was valued at over$5.05bn and included land, air and sea trans-port, as well as water, sewage and electricity.

Value for integrationPage 15

A cornerstone of the local economy,manufacturing is a major source ofemployment and accounts for a largeproportion of the state’s GDP. Closecollaboration between industry andhigher education institutions is tar-geting high-tech and research-focusedtechnical skills. This is in addition to sus-taining strong levels of foreign directinvestment, which surpassed $250min the electronics segment in 2013.

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LOOKING ON THE SUNNY SIDEOpportunities in varied sectors abound for thestate

INTERVIEWFrancisco Arturo Vega de Lamadrid, Governor,Baja California

PORT TO PORTExpanding infrastructure across theboard

DIVERSIFIED OFFERINGHydrocarbons are being bolstered withrenewables generation

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TAKING TO THE AIRAerospace manufacturers look anew to BajaCalifornia for production

VALUE FOR INTEGRATIONRegional relationships are key to themanufacturing sector’s long-term health

SMARTER CHOICESEfforts to boost human capital can sustaingrowing foreign investment

MORE THAN SUN AND SANDBroadening the state's appeal to local andinternational tourists

INTERVIEWCarlo Bonfante Olache, Secretary of EconomicDevelopment for Baja California

WINE AND FISH ON THE TABLEDiverse agricultural and fisheries productsprovide rich opportunities

Chairman: Michael Benson-ColpiEditor-in-Chief: Andrew JeffreysDirector of Field Operations: ElizabethBoissevain

Regional Director: Abby LindenbergCountry Director: Maria Merono

Regional Editor: Peter GrimsditchEditorial Manager: Jacobo Bermudezde Castro Carbajo

Managing Editor: Alistair TaylorDeputy Chief Sub-editors: BarbaraIsenberg, Martin StegmanSub-editors: Sam Inglis, Sean Cox,Danya Chudacoff, Krystell Jimenez,Oliver Ayyildiz, Abraham Armstrong,Usman Ahmedani, Ivan GladstoneContributing Sub-editor: MiiaBogdanoff

Analyst: Pablo Castellanos

Senior Editorial Researcher: SusanManoğluEditorial Researchers: Souhir Mzali,Jenna Oelschlegel, Sara Costa, GeorgeFitzherbert-Brockholes, MariahPittman

Art Director: Yonca ErginArt Editors: Meltem Muzmuz, İlaydaGedikGraphic Assistant: Gülhan AtbaşIllustrations: Shi-Ji LiangPhotographer: Mark Hammami

Production Manager: Selin Bolu

Operations & Administration Manager:Burçin IlgazLogistics & Distribution Coordinator:Esra SezginOperations Assistant: Öznur Usta

Field Operations Executive: MeltemOkurField Operations Assistant: Arda Özgen

Project Manager: Frida VargasProject Coordinator: Daniela TelleSerrano

BAJA CALIFORNIA OVERVIEW

The warm weather of BC is attractive for niche tourism activities

Baja California (BC) is the Mexican state located far-thest to the north-west of the country, abutting theGulf of California, also known as the Sea of Cortez, andthe state of Sonora. To the west lies the Pacific Oceanand to the north are the US states of California and Ari-zona. Since it is divided by mountains, the Sierra de BajaCalifornia, BC’s weather and biodiversity patterns areequally split. The Sonora and Vizcaino deserts to theeast and south, respectively, have dry climates with lowprecipitation. However, the path of the Colorado Riverthrough the north-eastern part of the state allowsurbanisation as well as agriculture in the area. Themunicipality of Mexicali has one of the lowest recordsof rainfall in the country, with less than 50 mm a year.The average annual temperature is 22.6°C in Mexicali,making it the state’s warmest municipality.

To the west of the Sierra mountains, the coastalregion, so-called because it borders the Pacific Ocean,has a much milder climate year round. Cities in thecoastal region include Tijuana, where the average tem-perature is 17.6°C and also Ensenada with 17.13°C andan average 250 mm of precipitation a year. Ensenada’sweather in some of its valleys, like Valle de Guadalupe,make it an excellent location for agriculture. Its wineindustry is one of the best known in the country. Thestate has five municipalities: Tijuana, Playas de Rosar-ito, Ensenada, Tecate and Mexicali, which is the state’scapital. The state has two large urban conglomera-tions, and the coastal zone, which includes Tijuana,Ensenada, Rosarito and Tecate, which is the most pop-ulated area of the Mexicali Valley. The southern part ofthe state is sparsely inhabited and is home to off-roadracing, cave paintings and multiple natural parks.HISTORY: The first settlers of BC are said to have arrivedaround 14,000 years ago and originally belonged tonomadic tribes. European knowledge of the peninsu-la’s existence is much more recent, dating back to 1534,when the Spanish sailor, Fortún Jiménez, aboard the shipConcepción, visited the area. The first settlement ini-tiatives from the Spanish Crown were failures, due to

the lack of water and the difficult agricultural condi-tions. It was not until more than a century and a halfafter the Spanish arrival, in 1697, that the first success-ful Jesuit mission was founded. Similar missionary set-tlements were founded and grew, with the objectiveof converting and Europeanising locals by introducingagriculture, cattle raising and trade. These missionswere centres of religious and political power until 1822.INDEPENDENCE: The Mexican Independence Warcame and went without a single uprising in the penin-sula, due to its lack of communication with the rest ofthe country. It was not until the arrival of ThomasCochraneandhis fleet that thepiratingmenacebroughtthe need to look for support from the recently inde-pendent Mexican Empire. In 1848 the empire was par-titioned, following to the Mexican-American war, andAlta California became US territory and later the statesof California, Nevada, Arizona, Utah and parts of Col-orado and Wyoming. Two years later, BC was dividedinto two northern and southern districts. In 1930 thetwo districts became territories. At that time the North-ernTerritory (nowBC)hadapopulationofunder50,000.STATEHOOD: In the 1950s the territory, as much ofnorthern Mexico, was mostly still a sparsely populatedsemi-desert region. However the population had grownfivefold from the 1930s and its economic activitiesstarted becoming more important. BC officially becamea state in 1952 and by 1960 the population had dou-bled. This growth, in combination with the creation ofthe export manufacturing programme, or maquila asit iswidelyknow,wasby1965thebeginningofthestate’seconomic and demographic boom.

The manufacturing related bonanza was further con-solidated in 1994 with the implementation of the NorthAmerica Free Trade Agreement (NAFTA). This spurredimmigration to BC among Mexicans seeking jobs. Morerecently, the state has seen a diversification ofcommercial activities. Cities like Tijuana and Mexicalihave become lively urban centres with widely variededucational, gastronomy and entertainment options.

The state has a dry, desertclimate in the south andeast, while thenorth-western part of BChas a much milder climateand is well suited toagricultural production.

BC was officially recognisedas a state in 1952, fuellinggrowth that doubled thepopulation by 1960 andresulting in an economicboom starting in 1965.

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Looking on the sunny sideOpportunities in varied sectors abound for the state

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POPULATION &WORKFORCE: BC has more than 3.3minhabitants, amounting to around 3.5% of the country’spopulation. Its median age is 26 and almost 40% ofinhabitants are under the age of 20. As with most ofMexico, thebiggestpercentageofthepopulation isMes-tizo (of mixed Amerindian and European blood),although some small indigenous communities still exist.A large migration from East Asia in the 19th and 20thcenturies formed a sizable community, with the Chi-nese community in Mexicali one of the most notedexamples. BC is also host to a large number of Ameri-can and Canadian immigrants. It is estimated that morethan 200,000 Americans live in the state, many of themretirees. A strong wave of in-country migration frommany different Mexican states is responsible for themulticultural composition and is strongly related withthe economic boom of the manufacturing industry andthe desire to move on to the US. Migration to the statein the search of economic opportunities has causedthe economically active population (EAP), which wasreportedly 1.5m for the entire state, to achieve thehighest overall economic activity participation in thecountry, at 61% of the population over 14.

The latest employment figures from February 2014show a 94.53% employment rate, according the Sec-retariatofEconomicDevelopment(SecretaríadeDesar-rollo Económico, SEDECO). The two border municipal-ities, Tijuana and Mexicali, are home to almost 80% ofthe people. Of the state’s inhabitants, almost 92% livein urban areas and more than 80% are concentratedin its five main cities. The capital city of Mexicali has anestimated population of 998,000, while Tijuana, thestate’s largestcity, ishome toanestimated1.67minhab-itants. Ensenada and Tecate’s inhabitants are calculat-ed at 503,000 and 108,000, respectively (CONAPO).EDUCATION:With its 951,000 students, 55,000 teach-ers and 4400 schools, BC has one of the highest pub-lic investments in education. The Mexican Institute forCompetitiveness (IMCO) points out that 31% of theEAP has attended high-level education. The state has187 tertiary institutions, of which 67 have postgradu-ate studies, according to the 2013-14 Sistema Educa-tivo del Estado de Baja California. In IMCO’s 2012 com-petitiveness report, BC advanced nine spots in theEconomic Sector Innovation category, showing thestate’s commitment with industry cooperation, inno-vation and research. Patent registration grew from oneper million inhabitants in 2008 to 5.84 in 2010.POLITICS: BC was the first state to elect a governingparty different from Partido Revolucionario Institu-cional (PRI), since the foundation of the political par-ty in 1929. As of 1989, Partido Acción Nacional (PAN)has governed the state. PAN is the political party thatwas also responsible for the federal government from2000 until2012, when theelection of PresidentEnriquePeña Nieto brought the PRI back to federal office. Fran-cisco Vega, the current governor of BC, took office in2013 as the fifth-consecutive PAN governor. PAN ispart of the Pacto por México, a tri-party agreementaimed at legislating a number of political reforms, suchas the fiscal, energy, education and telecoms laws.

ECONOMY: At MXN424bn ($32.9bn), the figure citedby the National Institute of Statistics and Geography(Instituto Nacional de Estadística y Geografía, INEGI) in2012, BC’s GDP would place it at slightly under 3% ofthe national total, locating it as the 11th-largest in thecountry. BC’s GDP fell by more than 8% in 2009 due tothe economic crisis in the US and strong trade andcommercial ties with its northern neighbour. Econom-ic recovery has been under way since 2010 with 2.2%growth, 4.4% in 2011 and 4.2% in 2012, according toINEGI. BC’s main economic contributors to GDP aremanufacturing and commerce with 19.4% and 16%,respectively, according to figures from the state’s Min-istry of Economy. Total direct foreign investment (FDI)is reported at $192.4m for the last quarter of 2013,and at $771.1m for the whole year, growing 30% from2012 figures. Remittances have slightly risen and standat $542m for 2013, according to SEDECO.

BC has the most industrial parks of any state in Mex-ico, adding up to 93, including two techno parks, andone IT cluster, according to Foro Consultivo CientíficoyTecnologico,anorganisationthatbenchmarksscience,

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THEREPORT Mexico 2014

Approximately 94% of the state’s inhabitants are employed

The state’s economy was hithard during the 2008-09global downturn, but it hassteadily recovered, with2.2% growth in 2010, 4.4%in 2011 and 4.2% in 2012.

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Baja California GDP, 2007-12 (MXN bn)*

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technology and innovation developments in the coun-try.Thestateranked10th incompetitiveness inthe2012state ranking by the IMCO, moving up three places from2010. The institute also said BC was the most efficienttax collection service of all Mexican states.

Historically strategic sectors in the state includeaero-space, electronics and metal-mechanic manufacturing,with medical appliances and medical services bothshowing strong recent growth. Carlo Bonfante, BC’sSecretary of Economic Development, told OBG in aninterview, that the current administration is seeking toreposition the state as major investment attractionhub. He said competition is fierce, not only within Mex-ico but also with places like Alabama, Georgia, Texasand Arizona which are offering incentives and grantsfor re-shoring and general development in their states.The secretary said two of the strongest upcoming sec-tors in the state will be mining, which will see the devel-opment of significant investments in metallic-miningexploitation, and renewable energy. Bonfante forecastspossible FDI of $3bn-4bn in mining and $3bn in ener-gy. Other sectors that will probably receive attentiondue to their recent development in the state includebiotechnology and information technology.INCENTIVES: The Mexican tax system is arranged suchthat most taxes are collected at the federal level, andstates and municipalities have limited room to offer fis-cal incentives to attract investment. In the case of BC,incentives are offered in the form of reductions in pay-roll tax and utilities costs such as water and wastewater.However, as Bonfante told OBG, the state is concen-trating on attracting investments based on long-termfactors such as the availability of competitively pricedresources including natural gas, water and electricity.TAX REFORM: BC and all the border areas in Mexicohave faced challenges due to the recent passing of fis-cal reform.Thechange in legislationbroughtan increaseto value-added tax in the border region to 16% fromthe previous 11%. The steeper comparison to Califor-nia and Arizona’s 7-9% taxes may be detrimental to

tourism, especially for day-trippers, and caused infla-tion of 0.34% during the month of February 2014.IMAGE ABROAD: BC, together with the rest of Mexi-co, has long been battling the issue of negative per-ception abroad. Current statistics show that the statehas turned a corner on safety and security issues.Reported violent robbery is down by 33%, while kid-napping has dropped by 71% compared with 2009 fig-ures, according to 2012 figures issued by BC’s Secre-tariat of Public Safety (Secretaría de Seguridad Públicadel Estado, SSPE). In a comparative approach, BC wouldrank below 18 US cities for violent crime and below 12for murders, according to statistics from the US Fed-eral Bureau of Investigation (FBI) and SSPE. Robert Lyle,chairman of the Baja California Centre, told OBG, “Neg-ativeperceptionpersists and we have towork onchang-ing it. The Tijuana Economic Development Commission(CDT) has a commitment to change that image with itsTijuana Innovadora programme. We have invited peo-ple likeAlGoreandLarryKing, inordertogetmoreatten-tion and show that things have changed.”INFRASTRUCTURE: Availability of multimodal trans-portation including rail, seaports, airports and highwayshave made integration of the state’s logistics a possi-bility. Proximity with one of the largest seaports (LongBeach California) and Los Angeles Airport has been animportant factor as well. Further integration is underway with the announcement of a 120-infrastructure-project plan by the state’s infrastructure department.The plan is not limited to transportation. It includesopportunities in sectors such as water desalination,sewage and energy generation. The total value of thepipeline amounts to MXN65bn ($5.05bn), from whichthe state will be looking to obtain more than 27% fromprivate investments via PPP contracts.ENERGY: Three natural gas connections with the USgives the state access to competitively priced energyresources. IEnova, a company owned by Sempra Ener-gy, and InterGen both have privately owned electrici-ty generation facilities for energy export that add upto more than 1000 MW. Additionally, BC is host to thelargest geothermal energy facility in the country, Cer-ro Prieto, with more than 540 MW installed capacity.In addition to these it has developed the first state-gov-ernment owned Wind Park, La Rumorosa, with 10-MWcapacity. BC is the only state in Mexico that has anagreement with a private company for lower electric-ity costs. Wind and solar power could be the biggestgrowingsectors,withtherecentlypassed energyreformaimed at opening up energy markets. Generation, trans-mission and distribution of electricity, added to waterand gas sales by pipeline, amounted to MXN16.1bn($1.25bn) in 2012, or 3.8% of the state’s total GDP.AGRICULTURE & FISHING: Agriculture and fishingcontribute MXN13.7bn ($1.06bn) to GDP, 3.2% of thestate’s total. In regard to agriculture, the main produc-tive areas in BC, Mexicali, Guadalupe and San Quintin,arehost tomostof thestate’sharvests.The limitedavail-ability of water in the coastal zone has created oppor-tunities indesalinationandefficientwatermanagementtechnologies for agriculture. These opportunities would

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Agriculture and fishing contribute 3.2% to BC’s GDP, but new efforts to provide water could see this grow

Three natural gasconnections between BCand the US enable thestate to accesscompetitively pricedresources.

The availability ofmultimodal transport,including rail, seaports,airports and highways, hasmade integration of thestate’s logistics a possibility.



allow expansion of the state’s already established wineindustry. In the fishing sector, an initiative by the fish-ing secretariat to mitigate against over-exploitation ofstocks and strengthen enforcement by local and fed-eral officials is expected to incentivise industry andprotect resources. Additionally, recent attention toaquaculture and mariculture, combined with advancesin biotech and industrial biology, may bring importantinvestment opportunities in an already growing sector.TOURISM: With a diverse geography and long historyin the sector, the state annually generates more thanMXN50bn ($3.9bn) from the tourism industry. Morerecently, the focus is switching to growing niches suchas the meetings, incentives, conferences and exhibi-tions (MICE) sector where a MXN600m ($46.6m) invest-ment produced the Baja California Centre in 2013, avenue that hosted 150,000 people in its first year.Another sub-sector, health tourism, will almost cer-tainly see expansion. The state aims to formalise it bycreating a special directorate. The 510,000 patients ayear estimated by the Health Tourism Cluster is fore-seen to grow to 800,000 in 2014 in light of the formal-isation decision, combined with rising US health carecosts and an already strong service provider base.MANUFACTURING:The state’s main industrial strengthlies in manufacturing, with MXN87bn ($6.8bn) in 2012representing over 20% of its GDP . The sector has seena steady recovery from the 2008-09 crisis. With longestablished industries such as electronics and homeappliances, the manufacturing base of the state isstrong. Other highly developed sectors include med-ical device manufacturing and automotive. A new play-er in the field that could see growth in the comingyears and carries great potential is manufacturing ofrenewable energy equipment. One plant is already man-ufacturing solar panels and subsectors are seeking toincrease the proportion of locally procured materialsand supplies, opening up opportunities in that area ofproduction as well. Additionally, there are more than60 aerospace manufacturers in the state and this seg-ment has grown more than 20% in the past eight years.BIOTECH: Research institutions in BC have been animportant part of the biotech sector’s evolution.Advances in the areas of fish reproduction and farm-ing have seen the possibility of repopulating the almostextinct totoaba population. Additionally, incubationand technology transfer programmes, such as BajaIn-nova (see analysis), have given rise to achievements insectorssuchasthepharmaceutical industry.TheCICESE-Silanealliancehasseenthebirthofahigh-techresearchcentre with nine patents under its belt already.INFORMATION TECHNOLOGY (IT): IT firms like Soft-ek, Telvista, Samsung SDA and Gameloft settled in thestate to capitalise on support. It@baja, BC’s IT cluster,has been driving growth and the new Baja Innovationand Technology Center Tijuana (BitCenter), a 5000-sq-metre space, will host 25 small IT firms. Expressionsof support have come from the government, researchinstitutions and technology clusters focused on IT.OUTLOOK: Close to the US and far from most of therest of Mexico, Baja California has historically sought

totread itsown path. This pathhas induced it tobecomepart of a bi-national and bi-cultural environment. Hav-ing a neighbour with the economic capabilities of Cal-ifornia can be an advantage or a challenge dependingon viewpoint. However, recent economic recovery fig-ures and stability have been shown that BC’s path mayjust be the correct one. Access to tangible resourcessuch as natural gas, water and electricity and intangi-ble ones, such as a trained and abundant workforce,distinguish the state from other potential investmentregions. If BC continues to support the integration ofeducation and industry, the state could see a markedshift frommanufacturingtothedevelopmentofan inno-vation and research driven market.

However, for this to happen at a major scale thereis much to be done. Exciting examples in some sectorsalready show the way, while industries like aerospace,where research and engineering centres are already upand running, and biotech, where important advancesrelated to the local fauna and human health have beenmade, are setting an example of what could be thebeginning of an even more rapid advancement for BC.

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Tourism brings in around $3.9bn in revenue for the state each year

The state’s main industrialstrength lies inmanufacturing, whichcontributed $6.8bn in2012, or more than 20% ofits GDP. The sector has seena steady recovery from the2008-09 crisis.

Manufacturing

Commerce

Other services

Real estate & services

Construction

Transport, mail & storage

Gov't activities

Educational services

Energy generation, gas& water distributionAgriculture & fishing

Mining

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16.4%

16.1%

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12.1%

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4.4%

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GDP by sector, 2012

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BAJA CALIFORNIA INTERVIEW

Francisco Arturo Vega de Lamadrid

How does not being connected to the nationalpower grid affect power intensive industries?VEGA: Thanks to our location adjacent to the eighthlargest regional economy in the world, the US state ofCalifornia, the BC region benefits from enough import-ed power to service all new investment spaces. Themajority of products and services in the area are cov-ered by the North American Free Trade Agreement,which covers the linking of distribution systems forelectricity and gas. This, in turn, provides security andimproves supply to both sides of the border.

In addition to wind-generated power, what typesof clean energy can be produced in BC?VEGA: BC has many renewable resources. We haveone of the highest levels of solar irradiation both in thecountry and world, and the state is Mexico’s biggestgeneratorofgeothermalenergy,withan installedcapac-ity of 540 MW at the Cerro Prieto geothermal plant.We also have a 150-MW wind power park under con-struction. Furthermore, BC has the resources to devel-op tidal and wave hydropower, as well as the potentialto tap biogas from landfills. Currently, we have a pri-vate firm working on a system for processing methanefrom cattle manure to generate electricity. Finally, weare working through the State Energy Commission toidentify public-private partnership (PPP) opportunitiesfor renewable energy generation. Thus the state lawrequires that 50% of electricity consumed in govern-ment buildings must come from renewable sources.

Alongside the MXN65bn ($5.05bn) of government-funded infrastructure projects under way, whatopportunities exist for the private sector?VEGA: The government of BC has identified more than100 strategic projects that will support development,help generate employment and boost the welfare ofall families in BC. Investment opportunities arise in var-ious areas of economic activity, covering a wide spec-trum of projects dealing with urban, economic, social

andother issues. Included intheseprojectsare improve-ments to Mexico’s road network, such as better linksto the border crossings into the US via California. Air-port cargo and passenger seaports facing the PacificOcean in the BC region are also receiving attention. Inaddition to these key focus points, there are a numberof other projects to improve logistics and transporta-tion infrastructure. Within this scope, government sup-port is being provided for road paving equipment, socialwelfare initiatives, programmes to boost safety, as wellas for renewable energy projects in both wind and solar.

The state government is set to spend a record budg-et over the next six years. Furthermore, we now havethe opportunity to carry out projects via PPPs, wherethe investment risk is shared between the collaborat-ing sides. This provides a level of legal certainty forfirms involved in the upgrading of the region’s infra-structure and logistics platforms.

What measures is the government taking to sup-port small and medium-sized enterprises (SME)?VEGA: In BC, 99.5% of companies are SMEs and theyaccount for approximately 68% of employment in thestate. We have created a Business Services Centrewhere SMEs can receive training and support in termsof joining the formal economy if they are not part of italready.Thecentrealsoaimstodevelopafriendlierbusi-ness framework, with easier procedures and less redtape. We also provide guidance on management ofoperating costs and financing options available for newbusinesses, in addition to training, advice and techni-cal assistance to help strengthen operations.

Through the State Programme for the Developmentof Providers, small businesses are made aware of theopportunities available for fulfilling the needs of bigbusiness and industry. The programme also providessupport for certification,business management, accessto funds and introduction to export events and semi-nars. Our maingoal is to help companiesrealisethe ben-efits of formality, thereby strengthening the economy.

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Realising benefitsOBG talks to Francisco Arturo Vega de Lamadrid, Governor of BajaCalifornia (BC)


BAJA CALIFORNIA ANALYSIS

The state’s project pipeline has a projected total cost of some $4.9bn

With close to 60m crossings per year (in both direc-tions), the boundary between Baja California (BC)and the US is the most crossed border in the world.BC is one of six Mexican states that shares a borderwith the US as well as being one of the 11 stateswith access to the Pacific Ocean along the state’s720 km of Pacific coast. The administration is look-ing to expand the existing infrastructure by includ-ing, as part of the State Development Plan, an aggres-sive public-private partnership (PPP) offering of 120infrastructure projects in many different fields suchas transport, water treatment, storm- and wastewatermanagement, and energy. The cost of the projectpipeline adds MXN63bn ($4.9bn), of which MXN17bn($1.3bn) are expected to come from private investors.TRANSPORT: The 265-km border between BC andthe US states of California and Arizona has six cross-ing points with California, which are located in themunicipalities of Tijuana, Tecate and Mexicali. Atone, San Ysidro, 13m cars cross each year. Based ona study by San Diego's Regional Planning Agency(SANDAG), which projected an 87% increase in vehi-cle traffic through San Ysidro by the year 2030, anon-going expansion project for the crossing pointis currently under way. The US government plans toinvest $226m in 2014 and the total projected costis calculated at more than $700m.

The state has over 200 km of BC railways, com-prising 144 km of main lines, 45 km of secondarylines and 29 km of private railways. Ferromex’s railline serves Mexicali. This is a 50/50 joint venture withUnion Pacific with a crossing at the Mexicali/Calexicoborder. On the other side of the Rumorosa moun-tain range, railroad operations are under the admin-istration of the State Government of BC and areconcessioned out to Carrizo & Gorge Company. Thisrailway consists of a short line from Tijuana to Tecate,where there is a border crossing to Campo, CA.Although there is no direct rail link between Tijua-na and Mexicali, it is possible to transport goods via

Tijuana-Tecate-Campo-Calexico-Mexicali. Tijuanaalso has a daily connection to San Diego, operatedby Rail America, while a link to Los Angeles, the USand Canada is available through BNSF. The plan tobuild a railroad from Tijuana to the Ensenada regionis also in a priority for the current administration.PORTS: Five seaports make up the port system in BC;four on the Pacific Coast and one in the Sea of Cortez.The most prominent one is Ensenada, which moved2.37m tonnes of cargo in 2013. This port connectsBC with the US west coast and the Asian market andis integrated into the Intermodal Corridor Ensena-da-Border BC. The corridor joins the Ensenada, Tijua-na, Tecate and Mexicali Customs houses with the USto accelerate ground cargo transit. However, manycompanies in the BC region still prefer to ship viaLong Beach port (which handles 75m tonnes of car-go per year), even with the extra effort required toimport/export products via truck.

The Port of Sauzal de Rodríguez, or “El Sauzal”, isonly 10 km north from Ensenada. It is mainly usedfor food industry cargo, moving live, frozen andprocessed products to US and Asian markets. Expan-sion plans for this port are under way (see analysis).AIRPORTS: BC has four main airports, Tijuana, Mex-icali, Ensenada and San Felipe, which between themhandle almost 6m passengers per year. Works to becompleted in 2014 are under way by Otay TijuanaVenture and Grupo Aeroportuario del Pacífico (GAP)for a direct Mexico-US border crossing in Tijuana air-port, which in its first phase will cost more than$50m, plus $34.5m for the purchase of land in theUS. These projects explore the potential for con-necting Tijuana Airport directly with the US withoutinvolving border authorities. With this move, Tijua-na’s airport aims to be a hub for the Southern Cal-ifornia and BC region. In 2014 passenger and cargotraffic for this area centred around the San Diegoand Los Angeles airports, which had 17m and 66mpassengers, respectively, compared to Tijuana’s 4m.

The port system in BCprovides transport accessvia both the Pacific Oceanand the Sea of Cortez fromfive facilities, four of whichare on the Pacific coast.

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BC shares a border with theUS states of California andArizona. The 265-kmborder has six accesspoints with California, andjust one, at San Ysidro, sees13m cars pass througheach year.

Port to portExpanding infrastructure across the board


HIGHWAYS: The state’s highway network consistsof more than 2700 km of paved roads. Federal High-way 2, the connection point linking BC to the rest ofMexico, runs from Tijuana to Mexicali and all theway to Mexico City. The cities of Tijuana and Mexi-cali offer road connections to the ports of Ensena-da and Long Beach, as well as ground connectionsto the US. Mexicali connects to Calexico throughtwo of its three border crossings, and Tijuana con-nects to US Interstate Highways I-8 and I-5.STRATEGIC PLAN: Manuel Guevara, the secretaryof infrastructure and urban development for BC,emphasised to OBG the importance cargo transport,logistics and connectivity have on the state. He saidone project would connect the railway lines fromTijuana and Tecate to Ensenada. The planned lengthof the line is 98 km, with an investment of around$140m, which would make it possible to import andexport transport cargo from the Pacific Ocean, viathe port of El Sauzal, between the US and Mexico.The project is based on the existing concession onthe right-of-way possessed by the state and wouldbe planned as a PPP. This mega-project is seen asworking in concert with an expansion of the El Sauzalport and an intermodal terminal in the Otay area witha total cost up to MXN5bn ($388.5m).WATER: The Colorado River provides most of thestate’s water, and the main urban areas of Mexicali,Tijuana and Ensenada depend almost completely onthis body of water. There are bi-national treaties thatensure water availability, although the cost of bring-ing water to each of these cities varies greatly. WhileMexicali is directly on the river’s path, both Tijuanaand Ensenada are more than 200 km away. Waterhas to be pumped up more than 1000 metres tocross the La Rumorosa mountain range. The cost ofthe infrastructure and the energy requirements oftransporting water make it an expensive resource.

With an installed capacity of more than 100 MW,the state spends some MXN600m ($46.6m) a year

on electricity for water pumping alone, Javier Orduño,the director of BC’s State Energy Commission, toldOBG. Complexities, such as transport in the drink-ing water infrastructure, have revealed a new set ofbusiness opportunities in the field of water desali-nation. Currently Ensenada has its first project underconstruction. At a cost of $48m, OHL Mexico, a trans-port and utilities construction firm, is building aplant that will output 15 cu metres of potable waterper minute for more than 90,000 inhabitants. Adevelopment of this type indicates the maturity ofthe technology in combination with the high watercosts in the area, averaging MXN17-18 ($1.32-1.39)per cu metre, will make it possible to replicate thistype of projects in the state as long as reliable, long-term water tariff contracts can be guaranteed.HEALTH CARE: Health infrastructure consists ofalmost 100 hospitals and clinics, both public and pri-vate, according to 2011 figures from the National Insti-tute of Statistics and Geography (Instituto Nacional deEstadística y Geografía), the latest available. The num-ber of private clinics and hospitals in the state hasshown a 40% increase in the past 10 years. The spe-cific services catering to health care tourism havereceived much attention, to such an extent that thecurrent administration has decided to create a spe-cial directorate to exploit it (see analysis).MINING: The mining industry consists mostly of non-metallic exploitation. The main product of the regionis sand, with a value of MXN2.1bn ($163m) from thetotal mining production of MXN3.93bn ($305m) in2012, as reported by Servicio Geológico Nacional.The predominance of non-metallic mining is due tothe closure of the San Felipe Company in 2001, whichreduced the state’s gold and silver production. How-ever, in 2010 Grupo México, a mining holding,announced a $1.5bn project in El Arco, which wouldcentre around copper extraction and boost thestate’s metallic output. The biggest challenge forthis project includes the underdevelopment of trans-port and utilities infrastructure in south-east BC, afact that could bring new investments in the sectorfor the undeveloped south-east part of the state.

If the current administration is able to break thefinancing barrier for its major projects, upcomingyears could see significant investments in infrastruc-ture. As Guevara told OBG, “More important thanincentives, such as tax reductions, the best way tobring investment to a region is by building infra-structure. That is why this is the main challenge forthe administration if it is to regain a leading role inthe region.” Mexico has long faced challenges for PPPprojects, for which BC is doing a thorough revisionof the state’s existing PPP legislation, published in2009. The new PPP law is expected to be completein 2014 and should simplify and expedite therealisation of these kinds of projects. The state’sown annual MXN6bn ($466m) budget, combinedwith private investment and the possibility of devel-opment funding from financial institutions, such asNADBank, could make these developments a reality.

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The state is host to more than 2700 km of roads and highways that connect it to the capital and the US

The state’s water supply isprimarily sourced from theColorado River, and severalcities in BC are completelydependent upon it.Bi-national treaties withthe US ensure the securityof this supply.



Seasonal tariffs could give renewables generation unique potential

The Baja California (BC), energy sector has a num-ber of peculiarities. BC is interconnected to the USnatural gas pipeline system, giving its industry accessto this reliable and competitively priced energy source(see analysis). Regarding electricity, BC is one of thetwo states in Mexico – the other one being Baja Cal-ifornia Sur (BCS) – that is not connected to thenational electrical system (SEN). However, as opposedto BCS, BC profits from various points of electricalinterconnection with the US, which has importantimplications for the energy sector and BC consumers;mainly, the possibility to buy and sell energy from andto the much more competitive US market. Numer-ous new opportunities in the energy sector areexpected and a considerable inflow of capital willbe required, based on the fact that the energy indus-try in Mexico is on the verge of seeing the biggestchange since the nationalisation of the oil and gasand electricity sectors in 1938 and 1960, respective-ly. As of 2014, the full implications of these reformsand the details of draft legislation remained in thehands of legislators in the Mexican congress.OIL & GAS: BC’s gas sector has been and should con-tinue to be an active one. “BC has three natural gasconnections, one in Tijuana, one in Mexicali and onein Algodones for natural gas importing, which is agreat advantage that the rest of the country doesnot possess,” Javier Orduño, director of BC’s StateEnergy Commission, told OBG. In addition to thepipelines, Sempra Energy completed in 2008 a $975mliquefied natural gas re-gasification terminal, “EnergíaCosta Azul”. This terminal is intended to receiveimports from the US West Coast and Asia for the Mex-ican NG pipelines, mainly for electricity generation.On the oil side, the state-owned oil company,Petróleos Mexicanos (PEMEX), reports no activecrude production. However, investment opportuni-ties exist in the form of storage and distributionfacilities for refined products, as well as in servicestations. However, the phasing out of fuel oil in many

thermoelectric facilities operated by the ComisiónFederal de Electricidad (CFE), combined with thesubstitution of natural gas for power, has exacerbat-ed the slowdown of the oil and oil-product business.ELECTRICITY: Due to the lack of interconnection tothe rest of the country’s electric grid, BC has beenforced to tread its own path. Even with the existinginterconnection with the US, electricity imports arenot significant, with 214 GWh imported from a totalof 11,821 GWh (2%). On the other hand, BC export-ed 830 GWh to the US in 2010, according to the CFE.

With 1.1m local users and the possibility to exportto the US, the BC energy market could attractinvestors’ attention when the energy reform finallysettles. Current CFE generation capacity includes320 MW conventional thermoelectric, 1262 MWcombined-cycle, 299 MW turbogas, and 540 MWgeothermal. Additionally there are two private gen-erators with combined cycle plants, Sempra/IEnovawith 679 MW and InterGen with 1100 MW.TARIFFS: The BC region has two main seasons forvariable tariffs (mainly those for industry). The sum-mer season has an additional peak demand chargedue to the extra load used for operating air condi-tioning and refrigerating units. This charge can makeelectricity tariffs considerably higher for said sea-sons, which in turn could render industry in the arealess competitive. BC has an agreement with a pri-vate company to provide competitive electric pricesfrom surplus energy produced at private plants.RENEWABLES & CLEAN ENERGY: A significant chal-lenge to renewable energy development is resourcemapping. The availability of detailed resource mapsis crucial to firms for minimising risk and maximis-ing investment in renewable projects. For severalyears, the National Renewable Energy Laboratoryhas brought wind and solar resource maps to Mex-ico. However, not all regions are the same, and BChas unique geographical features that require moredetailed wind and solar maps to justify investment.

Due to the lack ofinterconnection to the restof the country’s electricgrid, BC has had to forge itsown path. Even with theexisting interconnectionwith the US, electricityimports are not significant,with 214 GWh importedout of a total of 11,821GWh (2%).

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Diversified offeringHydrocarbons are being bolstered with renewables generation


GEOTHERMAL: BC has long been known for beinghost to the largest geothermal installation in Mex-ico. The CFE’s Cerro Prieto project started in the1970s and has been developed in five stages. Thelast one, “Cerro Prieto V” consists of a 100-MW pow-er plant, and the projects combined equal more than540 MW. At the moment there are no private geot-hermal plants in the state. However, this may changein the upcoming years since companies such as Drag-on is already operating the first private geothermalplant in Nayarit and others such as ENEL are start-ing their geothermal programmes.WIND: BC is the only state in Mexico with a state gov-ernment owned wind park. “La Rumorosa I” is a small,10-MW facility constructed by Turbo Power BajaEnergy but owned and operated by the BC govern-ment. More important than its capacity is the factthat it served as proof that the Tehuantepec regionis not the only exploitable area for wind generationin the country. As of mid-2014, two other firms weredeveloping projects in the “Rumorosa” region: Sem-pra, via its Mexican sister company IEnova, and Mex-ico Power Group. IEnova is developing a first phaseof a 156-MW project, which will be located close tothe US-BC border. With an investment of more than$300m, the project will connect with the US via theSunrise Powerlink, in east San Diego. This intercon-nection will be made possible via a new cross-bor-der 230-KV transmission line. The US Department ofEnergy issued a presidential permit to a subsidiaryof Sempra International for construction, operationand maintenance of the connection. When com-pleted, the transmission line will supply electricityfrom the Mexican wind farm to the California mar-ket. For the second project, Mexico Power Group isplanning a 72-MW wind park for public street light-ing in Tecate, Rosarito and Ensenada. One of thebarriers to development in the Rumorosa region isthe lack of interconnection infrastructure, as thereare few power lines available and no sub-stations.

SOLAR: On the solar front, CFE has started opera-tion of the MXN259m ($20m) 5-MW pilot solar proj-ect in Cerro Prieto with an outlook to construct a 50MW thermo-solar facility in the area. Other permitshave been requested to the Energy Regulation Com-mission (CRE) and additional proposals have comefor example, in the form of thermo-solar energyfrom companies such as Abengoa.

However, the lack of explicit incentives support-ing capital-intensive renewable energy technolo-gies, like solar, has kept the growth of the sector ata slow pace, with only 5 MW installed, 60 MWapproved and around 100 MW under constructionas opposed to California’s over 5600 installed MW(2013:SEIA/GTM). This could change with the upcom-ing energy reform if incentives such as feed-in tar-iffs could be set by generation technology.BIOGAS: Biomass technology has not seen signifi-cant participation in Mexico with a share of 3.8% ofall the national renewable energy generation(CFE/CRE) and BC has been no exception. Howev-er, recently a new 1-MW biogas from animal wasteproject has been announced in the state. The proj-ect is to be built as a PPP with the energy genera-tor BLP, the meat producer Bona Carne and theState’s government who is also the intended cus-tomer, planning to use said energy to cover some ofit’s services, mainly schools. The biogas sector, espe-cially from animal waste, could become a profitablefield if incentives, reliable long-term contracts withthe substrate generators (ranches, farms, slaughter-houses, etc.) and high value PPPs could be reached.HYDROELECTRIC: Since 2010 there’s been an ini-tiative for a run-of-the-river hydro project relatedto the Mexicali-Tijuana aqueduct. The idea is to utilisethe potential energy of the water coming down fromthe Rumorosa range to generate electricity and off-set energy requirements for pumping. Such a proj-ect could be of great economic interest since waterpumping expenses for the aqueduct amount to morethan MXN600m ($46.6m) per year, Javier Orduño,director of BC’s State Energy Commission, told OBG.

BC’s energy interconnection with the US in bothnatural gas and electricity provides a stable plat-form for investments in the energy industry. Addi-tionally, the high demand for energy in California, witha special emphasis on clean and renewable energy,could boost these types of projects in the BC regionfor several years. This boost would depend on mul-tiple factors, including the acceptance by the Cali-fornia Energy Commission of Mexican projects ascertified renewable production. If certification anda firm framework can be established, the export ofrenewable energy and/or renewable energy certifi-cates could transform previously under-performingprojects into profitable ventures. The availability ofnatural gas could also further incentivise the open-ing of the local electricity-generation market bycombined-cycle in order to offer more competitivetariffs for industrial consumers, as long as theenergy reform establishes a clear framework for it.

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The state has 5 MW of solar power installed, 60 MW approved and around 100 MW under construction

Pumping water is extremelyexpensive due to the state’sgeography, amounting toroughly $46.6m annuallybetween Mexicali andTijuana.



BC allows duty-free imports and exports for the sector

The fact that more than 60 companies, representing39% of the total aerospace industry in Mexico, areinstalled in Baja California (BC) is a testament to thehistoric development of a focused cluster in the state.Sectoral developments can be traced back more than80 years. An aircraft factory in the city of Tijuana, calledthe Compañía Aérea de Construcción y Transporte, wasfounded in 1927. Its aim was to compete with the USaeronautical industry and it did so by designing threeplanes: BC-1, BC-2 and BC-3. The BC-2 was the first tocomplete the Mexicali-Mexico City flight and later wenton to complete various missions to Central America. Itsless successful successor, the BC-3, discouragedinvestors from continuing to put capital into the com-pany, causing it to shut down in the 1930s. The oldestcompany still operational in the sector is RockwellCollins, established 49 years ago, which also makes itthe oldest aerospace firm in the country.CAPACITY: The current situation for the aerospacecompanies is promising. Worldwide, the aerospace sec-tor is experiencing large backlogs: Boeing alone report-ed $441bn on the order books in 2013, graphicallyillustrating the immediate requirement of more capac-ity in the sector’s value chain. Mexico has been up tothechallenge.Since2001AlixPartners,aUS-basedadvi-sory firm specialised in business consulting, placedMexico over India and China as the most competitivedestination in manufacturing for the US market (2011US Manufacturing Outsourcing Index, Alix Partners,2011). In the past eight years, the country recorded asustained annual growth of 17% in aerospace exports.In 2011, BC’s export contribution of $1.15bn represent-ed 27% of the national total, according to ProMéxico,the export promotion agency.

BC hosts a wide diversity of companies that includeHoneywell, UTC Aerospace System, Gulfstream, Eaton,Parker, Lockheed Martin and Hutchinson Seal. Close to$13bn has been invested by the aerospace industry inthe state. Also, as an added value, during the upcom-ing implementation of the Bilateral Aviation Safety

Agreement (BASA), aerospace firms will be allowed tocertify as complying with FAA regulatory issue Mexi-can-made aerospace designs & components in accor-dance with US standards. This will avoid duplicate cer-tifications or additional reviews by US governmentagencies. The BASA should drive further investmentinterest in the country in general and in the BC regionin particular. Tomas Sibaja, Chairman of the BC Aero-space Cluster, told OBG, “BC is a leading authority inthis sector. With an average yearly growth of above 20%inthepasteightyears,alleconomic indicators–whethermeasuredinexportandimportvalues,employmentgen-eration, number of companies and most importantmaturity and diversification data – confirm these facts.”The BC Aerospace Cluster reported that 2013 invest-ment results were positive, showing a 122% increaseon the amount of investment recorded in 2012.LOCATION: The presence of more than a third of thecountry’saerospacefirms inBC isnotbychanceorcoin-cidence. UTC, a major aerospace and defence contrac-tor, chose the state in preference to China, India andthe Czech Republic. As with many other sectors, thegeographical proximity to the US, and more specifical-ly the California and Arizona markets, make integrationsimple and convenient. Around 75% of exports in thestate are to the US, while the rest heads to Canada, theUK, France and Germany, among others. Added to thegeographical proximity, BC allows duty-free importsand exports for the sector, in addition to other incen-tives in the form of tax reductions such as payroll tax-es and costs of utilities such as water.WORKFORCE: BC’s history of aerospace developmenthas made the state advance hand-in-hand with thesector. This has, in turn, encouraged higher educationinstitutions to offer industry-specific solutions target-ing the sector. A total of almost 16,000 employees par-ticipate in the sector in BC. “In cooperation with someof the main educational institutions, such as ColegioNacional de Educación Profesional Técnica, UniversidadTecnologica de Tijuana, Centro de Estudios Tecnicos

Worldwide, the aerospacesector is experiencing largebacklogs: one firm alonereported $441bn on theorder books in 2013,illustrating the pressingneed for more capacity.

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Between 2006 and 2014the nationwide aerospacesector experienced annualexport growth ofapproximately 17%, and in2011 BC contributed 27%of total exports.

Taking to the airAerospace manufacturers look anew to Baja California for production


Industriales y de Servicios and Universidad Autónomade Baja California, the cluster will open four aerospacedevelopment centres to train specialists in machining,welding, superficial treatment, painting, tooling, soft-ware development and blueprint reading,” Sibaja toldOBG. In addition to these four centres, the cluster iscoordinating a project called CAMPPEC/CCE. This isintendedtoavoidsendingpartsthatrequirespecialserv-ices across the border, by opening a technical centrethat can provide services such as precision machining,surface treatment, assembly, design and engineering.VISION CHANGE: BC has long been known for its man-ufacturing economic models: “maquiladora” (free tradefacility) and shelters that have brought a great amountof business to the area (see analysis). In 2013 alone,foreign direct investment in the region reached $771m,most of which went to manufacturing. Recently, how-ever, there has emerged a tendency to shift away fromthe manufacturing models and cover design and engi-neering needs in the region. Carlos Cordova, the exec-utive director of the Industrial Development Commis-sion of Mexicali, told OBG, “The companies who cometo the state today are not those of 10-15 years ago.Back then, they came and hired thousands of employ-ees. Now they have evolved. They look for a highertechnological value and much lower labour volume.The automotive parts manufacturer, GKN Driveline, isa good example. It has a composite division manufac-turing facility in Mexicali, which, among many things,produces parts for the Black Hawk helicopter.”

The aerospace industry has been one of the leadingsectors in applying Knowledge Process Outsourcing(KPO) in the region. Eaton Aerospace, a division of theIreland-based power management solutions company.,for example, possesses an aircraft simulator as part ofits facilities. Honeywell Aerospace, first established inBC in 1980, has been developing its Mexicali Researchand Technology Centre. This centre is a clear exampleof the evolution process from manufacturing to engi-neering. Ricardo Garcia, site leader for the centre, told

OBG, “One of the problems in manufacturing is that thedesigners are far away from where the products aremade. We are leveraging local engineering capabilitiesto support the manufacturing footprint across Mexi-co,” Garcia said. “This will bring with it a higher value-added, since we would not only provide faster delivery,better quality and cost reduction, but also better inte-gration of design and manufacturing processes.”

Another example of aerospace innovation is 3DRobotics. The company was co-funded by former WiredMagazine editor, Chris Anderson, and Jordi Muñoz, aBC local who came to aerospace with a background inDIY drones and became a successful entrepreneur. Thefirm specialises in unmanned aerial vehicle (UAV) man-ufacturing and is headquartered in Berkeley, CA. It hasengineering facilities in San Diego and a manufactur-ing plant in Tijuana. The company is an example of thebenefits of bi-national integration, innovation and tech-nology exchange in the aerospace cluster.CHALLENGES & OPPORTUNITIES: The aerospaceindustry in Mexico has low local and national supplychain integration, and many of the processes necessi-tate crossing an international border in order to becompleted, as many of the supplies come from outsideof Mexico. Even with the possible exemption ofimport/export taxes, the additional expense, time andlogistics implications of such low-integration-levelprocesses open up an obvious question: Could the Mex-ican aerospace sector be more efficient through fur-ther supply chain integration? Many believe so, includ-ing the Premio Nacional del Emprendedor, which in2012 gave the BC Aerospace Cluster a MXN6m($466,000)grant for integrationandsupplychaindevel-opment. Part of the grant was used to seek opportu-nities, which were estimated at an annual $1.18bn inthe form of market demand for aerospace products.Additionally, 30 smaller Mexican enterprises were iden-tified as potential sector suppliers, of which 15 areestablished in BC. These potential suppliers will be goingto London in 2014 to visit the Farnborough Internation-al Air Show to look for export opportunities in anattempt to incentivise such integration, leading to aprocessofseeking investmentstoexpandtheaerospaceindustry’s abilities to manufacture components.

With the continuation of the National Aerospaceand Defense Contractors Accreditation Programmeand implementation of the BASA, BC will likely seeimportant growth in the sector. However, competitioninside the country is fierce, with other states offeringincentives in the form of tax exemptions and reduc-tions, as well as lower land costs. Nevertheless, BC willcontinue to be a prime location for aerospace, partlydue to its history, advances in education/industry pro-grammes and the availability of a trained workforce. Ifthe efforts currently under way by companies like Hon-eywell Aerospace and cluster directors are sustained,they may succeed in redirecting the industry towardsa greater emphasis on engineering and design. Provid-ed investment figures maintain their upward trajecto-ry and supply chain integration is achieved, the effectcould be a growth circle leading to more investment.

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New technical centres can provide assembly and design services

The state should continueto be a prime location foraerospace, partly due to itshistory, advances ineducation/industryprogrammes and theavailability of a trainedworkforce.



Products ranging from electronics to guitars are manufactured in BC

The manufacturing industry in Baja California (BC) goesback to the 1960s, as a response to post-war industri-alisation plans of the US, Japan and Europe. Duringthose years, the maquila concept, which referred to afree trade zone manufacturing operation, was appliedto identify a specific type of industry. However, theterm actually derived from an incentive programmeestablished by the Mexican government in 1965 andgeared to the industrialisation of the areas near Mex-ico’s northern border. A maquila refers to a factoryowned by foreigners used to assemble imported partsfor finished products which are exported. Inherent inthe original idea was that labour costs would be low.

In 1994, with the signing and implementation of theNorth American Free Trade Agreement (NAFTA), the BCmanufacturing industry saw an unprecedented boom,with year-on-year growth of 19.7% in 1993-94 risingto 43.8% in 1994-95, according to figures issued by theNational Institute of Statistics and Geography (Institu-to Nacional de Estadística y Geografía, INEGI).

Initially, companies employed large numbers of work-ers for labour-intensive jobs, mainly in industries suchas textiles and consumer electronics. In more recentyears, the manufacturing industry has come a long way:modernisation of the state’s infrastructure, resourceavailability and the existence of a skilled workforcehave converted a sizeable slice of that growth into thecreation of high added-value industry.GLOBAL: Fender, a musical instrument manufacturer,has been a part of the BC industrial sector for morethan 25 years. Its facility in Ensenada started with stringproduction, and today the factory manufactures com-plete instruments, including guitars and amplifiers. BC’sworkforce has been a key part of this evolution.

As Isela Hernandez, Fender’s human resources man-ager, told OBG, “We have employees with more than23 years of experience and we are one of the compa-nies with the lowest staff turnover rate in the region.”

Today, Mexico boasts commercial agreements withmore than 40 countries including the US, Canada, the

EU and across Latin America. BC’s manufacturing indus-try has capitalised on most of these agreements. Withsuitable geographic access to large consumer mar-kets, BC has become a benchmark among Mexicanstates, being the leader in sectors such as aerospace(63companies),consumerelectronicsand,morerecent-ly,developinghigh-techsectorssuchasmedicaldevices,semi-conductors and renewable energy.TARGET MARKETS: Another significant developmenthas been the expansion of target markets. Originally,the manufacturing sector was mostly focused on pro-ducing exports destined for the US.

However, themarketshavesinceshifted.This isaresultofseveral factors, includingthe inclusionofCanadawithNAFTA in the mid-1990s, while more recently, acceler-ated globalisation and economic growth in Mexico andmuch of Latin America has increased the profile of BC’smanufacturing sector from both the Mexican marketand the entire Latin American consumer base.

According to the World Bank in 2012, in global termsthe Latin America market includes 581m people, witha GDP of around $5.34trn, or 6.9% of the global total,of which Mexico’s 120m inhabitants contribute approx-imately $1.17trn. This expansion of the market’s focushas been further supported by Mexico signing a num-ber of agreements with Latin American trade blocsincluding Mercosur, Mexico-Central America Free TradeAgreement and the Pacific Alliance.

Although many commercial business models havebeen applied, today the region has forged a name foritself, meaning that companies do not rely solely on out-sourced operations. Many brands and original equip-ment manufacturers have installed manufacturingplants in BC, producing everything from componentstomarket-readyproducts.Thesector’sdiversityhasseenthe emergence of products from televisions to auto-mobiles to solar panels to radio frequency transmitters,and prosthetics to pacemakers and many others.

Given its strong interdependency with the US econ-omy, the 2008 crisis brought many challenges to the

The large number ofcommercial agreementsbetween Mexico and othercountries, in particularwithin Latin America, hasproved a boon formanufacturing in the state.

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Geographic access to theUS, Canada and much ofLatin America has enabledthe state to build up anumber of segments,including aerospace,consumer electronics andhigh-tech sectors.

Value for integrationRegional relationships are key to manufacturing’s long-term health


state and the sector. GDP in BC fell by 8.2% from 2007to 2009. However, more recent numbers point towardsrecovery, with an 11.2% uptick from 2009 to 2012,according to figures from INEGI. Additionally, withincreasing tendencies to bring back offshore manufac-turing operations to North America, the bi-nationalregion that includes BC and southern California mightsee profitable cross-border cooperation going forward.GEOGRAPHICAL ADVANTAGE: As in many other sec-tors, proximity to US markets has been a strong driver.In the case of manufacturing, due to the origins of thefirstbusinessmodelsused,BC’s locationwasnotsomuchadvantageous as crucial to kick-off the sector. In theearly days of manufacturing plants operating in FTZs,simple, labour-intensive partial transformation of prod-ucts were carried out, requiring the operation to be asgeographically close as possible to keep costs down.

At present, BC’s location remains a significant fac-tor in the sector’s development, but in a different man-ner. Due to the evolution of manufacturing, BC hasbuilt important infrastructure for the simplification andefficiency of global commerce. Many examples exist,including border crossings, railroads, highways, sea-ports and airports, which make commercial exchangeeasier not only with US markets, but also with Canada,Latin America and Asia. Moreover, regional integrationwith neighbouring areas such as San Diego and Impe-rial County have created new commercial and knowl-edge-exchange opportunities, notably in electronics,medical devices and aerospace, among others.BUSINESS MODELS: Economic units for export man-ufacturing,ormaquila, isabusinessmodel thathasbeenactive in BC for more than 50 years. It has been char-acterised by profit generation based on the creationof added value by outsourced manufacturing, the gen-eration of labour-intensive employment and the importof raw materials and components for their assemblyand export back to the US.

TijuanaEconomicDevelopmentCorporation(DEITAC)estimates that more than 500 such units exist just in

the city alone, while the BC’s arm of the Secretariat forEconomic Development (Secretaría de. DesarrolloEconómico, SEDECO) notes more than 900.

In 2006 the Mexican government published a Decreefor the Promotion of the Manufacturing, Maquila andExport Service Industry, known more widely as IMMEX.This programme provides beneficiaries the advantageof temporarily importing, free of import duties and val-ue-added tax (VAT), the goods needed for use in anindustrial process or service to produce, transform orrepair foreigngoodsforsubsequentexportand includesthe provision of related export services. This includesraw materials, parts and components, shipping contain-ers, machinery and equipment.

Companies involved in all these fields can participatein the IMMEX programme as long as they comply withcertain conditions. However, early 2014 saw a stepback in the IMMEX programme, when President EnriquePeña Nieto’s fiscal reform was applied. In addition toraising VAT from 11% to 16% for the border zone, thereform targeted import duties and individual voluntaryarrangement exemptions that apply to IMMEX compa-nies. The first change converted tax exemptions to taxrefunds. To obtain refunds stricter rules regardingrequirements and procedures have been proposed.While the reform has been in effect since January 2014,the lack of procedure and infrastructure has slowed fullapplication of the IMMEX modifications. Nevertheless,these amendments should be in effect by October2014 at the latest, according to an announcement bythe Tributary Administration Service.SHELTER: Another approach to offshore manufactur-ing adopted by companies has been the shelter mod-el. As Enrique Esparza Jr, president of DEITAC, told OBG,“The shelter model is a business arrangement that wasfirst applied in the 1970s. In it, a foreign investor hasno legal presence in the host country. Instead there isa third party that provides all the administrative serv-ices while the investor focuses on producing.”

In its more than 40 years of existence the model hasseen key changes in BC, most importantly the fact thatmany investors are not afraid of having a legal pres-ence in the state anymore. As such, investors oftendecide to form a legal entity, but still keep the shelterservices for their convenience.

Normally, shelter contracts last from three to fiveyears in line with facility-leasing contracts. Such mod-els have been present in most sectors across BC andare mainly sought after by medium-sized companiesranging from $15m to $500m in annual sales, accord-ing DEITAC. However, recent market trends are show-ing a tendency to drift towards more integrated busi-ness models, meaning further consolidation of fullproduction processes in the state, as shown by thepresence of manufacturing facilities for leading glob-al electronic companies such as Samsung, Toyota, Pana-sonic, JVC,Plantronics,Hitachi, LGElectronicsandSharp.

Contact manufacturing, on the other hand, is anintermediate entry model used for offshore productionoperations. In this model an external manufacturingservice firm takes on part or all of the production

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Collaboration between industry and education is aimed at training workers to meet the sector’s needs

Fiscal reforms in early 2014that include higher VAT andimport duties are expectedto affect the incentivesoffered to companiesparticipating under theIMMEX initiative.



processes, requiring in some instances specialised func-tions including engineering, product development andlogistics. One of the most successful schemes includeselectronic manufacturing services (EMS), with compa-nies such as Foxconn already involved.WORKFORCE: Interaction and cooperation betweeneducation and industry has been the name of the gamein the sector. Most medium and higher education insti-tutions have one or several programmes to train thelocal workforce in line with the manufacturing indus-try’sneeds.Examplesontheeducationside includeUni-versidad Autónoma de Baja California, Centro deEnseñanza Técnica y Superior and Universidad Tecno-logica de Tijuana, and, on the industry side, electronicmanufacturer Foxconn and semiconductor manufac-turer Skyworks. Josep Marce, materials director at Sky-works, told OBG, “Given the automated equipment weuse, we seek operators with a technical background. Incoordination with local technical schools and govern-ment, we try to ensure that there is new talent in thegeneral labour workforce with the right skill sets forour industry. We also offer all our current employeesthe opportunity to become technicians, creating devel-opment and career paths not only for operators, butalsoforourprofessionalstaffwhohavemaster’sdegreesor even PhDs,” he said.RE-SHORING: The US financial crisis triggered in 2009has brought high levels of unemployment in the statesimmediately north of BC’s border. Indeed, Californiahas an unemployment rate of about 7.9%, while someof its counties, such as Imperial, have levels above 22%,according to the US Bureau of Labour Statistics in 2013.

This, combined with technological advances and areduction in labour-intensiveness and other factors, hasincreased talk of re-shoring manufacturing operationsfrom its overseas locations, primarily China or India.Somestates intheUS, includingTexasandGeorgia,havemade significant efforts to offer companies incentivesto re-shore. However, the process has not been seenas solely a US effort. Bi-national economic regions havealso been considered. One such example includes theCali Baja region, of which BC is part.

This project’s main objective is to bring together SanDiego County, Imperial County and BC, with the idea ofcreating a more competitive region. Each of the threegeographical areas offers different strengths. In num-bers, the mega-region has a population of almost 7m,with a labour force of more than 3m and a total GDPof above $200bn. Access to consumer markers in theUS, Latin America and Asia makes the project an inter-esting opportunity for the manufacturing sector anda strong candidate for re-shoring. Nevertheless, muchneeds to be done to fully integrate the three areas inorder to place them as a prime candidate for new andreturning manufacturing operations. This includes sim-plification of migration processes and further integra-tion of infrastructure and educational systems.ELECTRONICS: In the past 30 years, BC has becomeone of the most important regions in the world for man-ufacturing electronic products. The sector consists ofmore than 200 companies that manufacture a vast

array of products, from high-tech microchips and semi-conductors to home appliances and musical instru-ments. The electronics sector is currently one of thefastest growing, with some $250m in foreign directinvestment (FDI) in 2013, as reported by the investmentpromotion agency ProMéxico, which represents morethan 30% of the total FDI in the state.

From the companies that make up this cluster, around60% are located in Tijuana, while Mexicali is home to afurther 21%. The workforce numbers around 92,000workers, according to a 2013 study by the UniversidadTecnológica de Tijuana, making the sector an impor-tant source of employment. One of the markets withthe most potential, semi-conductor production, has along history in BC. Skyworks’ Mexicali plant, which hasbeen operating since 1969, employs more than 2800peopleandspecialises insemi-conductormoduleassem-bly and electrical testing.

In the consumer electronics sector, BC is considereda television manufacturing giant, producing more than19msetsperyear.Foxconn’sTijuanaEMSplanthasmorethan 3800 permanent employees. The Taiwanese com-pany is also planning to strengthen its product designoperations in the state. In an interview with OBG, Edgar-do Blanchet, VP of business planning and logistics oper-ations at Foxconn, said, “The company is committed tostrengthening the local design operations with morethan 80 Mexican engineers designing products, giventhat Foxconn has noticed not only the current tenden-cies, but also the stability that exists in the region. Ifwe had not seen such stability the company would notbesearchingforfurther local integration.”CurrentlyFox-conn uses BC suppliers for many of its plastics, metalsand paper/cardboard needs, but they are looking tofurther expand their local supplier base.MEDICAL DEVICES: Another long established sectoris medical device production, which has been presentin the state for more than 20 years. The segment’srecent growth has been close to a steady annual 8%,according to the Medical Products Industry Cluster

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Growth in the local medical device manufacturing segment has been close to a steady 8% per year

Re-shoring initiativesinclude proposals to bringtogether San Diego Countyand Imperial County inCalifornia with BC to createa more competitivemega-region.

BC is a major centre forelectronics manufacturing,attracting FDI of $250m in2013. More than 200companies operate in thestate, covering a wide arrayof products.


(MPIC). The industry comprises around 130 compa-nies in the country, with BC hosting more than half ofthem, 67 companies in total. The sector has seen sol-id growth in employment generation from 27,000 in2004 to roughly 45,000 jobs in 2013 just for BC.

The industry inBCcoversmorethan100productfam-ilies and has an import/export balance of $1.5bn and$4.9bn, respectively. The cluster organisation was bornaround eight years ago and seeks in its developmentgoals to foster a local supply chain, incentivise localhuman capital formation, promote investment, inno-vation and technological development, and to facilitategovernment relationships, mostly in the form of com-pliance. As in most other manufacturing sectors, localintegrationandsupplierdevelopmentcouldoffer invest-ment opportunities in the near future.

However, a possible deterrent could be the pace ofthe sector, as Angel de la Campa, president of the MPICtold OBG. “One of the particularities of the medicalindustry is that it has specific complexity and timing,”he explained. “It is a sector with a lot of quality regula-tions and fulfilling all the requirements may take timebecauseanychange insuppliersorrawmaterial requiresa validation protocol, which can take time to developdepending on the specific component’s criticality. Soprocurement development is not simple, especially forsuppliers without previous medical device manufactur-ing experience,” he added.AUTOMOTIVE: With over 50 companies producing acomplete range of light vehicles, heavy vehicles andauto-parts, BC is a strong competitor in the overallMexican auto industry. Companies such as Toyota andKenworth have been key participants manufacturingcomplete vehicles in the state. Kenworth, now part ofthe PACCAR Company, has been present in Mexicalisince 1970. After its $70m expansion in 2006, the plantwasrecognisedasthegroup’sbestplantworldwidequal-ity-wise in 2008. Other examples include parts com-panies like Prime Wheels, which received incentives intheformoftaxreductionsfortheyears2012-13totalling

more than MXN1.6m ($124,320) for its $100m invest-ment,and most recently Hyundai, which has announcedthe opening of second plant in the state with an invest-ment of $130m. Hyundai’s Aluminium Die Cast Centrewill play a part in a sector that employs more than30,000 in the state, with its main markets being the US,Canada and Mexico.RENEWABLE ENERGY: Boosted by changing energypolicies both in Mexico and the US, one of the mostrecent developing economic areas has been the man-ufacture of renewable energy equipment. It has seensignificant growth in recent years. One of the maindevelopments has been the recent opening of Sunpow-er’s solar panel manufacturing facility in Mexicali. Theplant has been operating for three years, employingaround 1000 people. Sunpower’s decision to invest inMexicali came almost directly after a Department ofEnergy (DOE) federal loan guarantee of $1.2bn for theconstruction of the California Valley Solar Ranch (CVSR)in San Luis Obispo County was not well received bysome of the American public. Carlos Cordova, from theIndustrial Development Commission of Mexicali, toldOBG, “The city of Mexicali has a strong advantage hav-ing Imperial Valley as our cross-border counterparty.The Valley has become very strong in the field of renew-able energy both solar and wind. We currently haveagreements in which the goal is to attract renewableenergy generation to Imperial and do the equipmentmanufacturing in Mexicali.”

InadditiontoSunpower,SEDECOreportsanothersec-tor participant in the region is Kyocera Solar.

In the immediate future, the sector will probably hita bump due to the current fiscal reform, which couldcause it to slow down. However, in a medium time frameas in other sectors, manufacturing shows two strongtendencies that should set the industry’s direction. Thefirst is the need to develop reliable locally integratedsupply chains. Such development needs bring, first,the possibility of direct investment in procurement and,secondly, if local procurement is achieved, the possi-bility of further companies investing in the area. If thisdevelopment circle gains momentum, the state andthe cross border region could see significant invest-ments in the coming years, possibly becoming a majorre-shoring destination.

The second tendency in BC is related to integration,but in this case refers specifically to knowledge. Manyfirms are looking to have their research and develop-ment centres close to their advanced manufacturingcentres. Such proximity is not only to facilitate com-munications but also for cultural and geographic rea-sons.ThisalignswithBC’sdevelopment, sincethestate’spublic and private sectors have focused on advancingon two fronts: the formation of a well-educated work-force and the development of strong cross-border rela-tions with US regions where many of the research anddevelopment centres lie.

If the geographic knowledge integration tendencycontinues as it is, BC could move forward in itsdevelopment towards more advanced manufacturing,design,engineeringandintegratedproductionofgoods.

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More than 50 companies produce a complete range of vehicles

The Calibaja region has apopulation of 7m residentson either side of theborder, a labour force of3m and a regional GDP thatexceeds approximately$200bn.



Education levels have risen considerably since BC’s creation in 1952

Since having a prepared workforce is one of the maindrivers of any economy, the skill levels available in aregion can make or break an investment deal.

“We know that a decisive factor for the location ofany company or investment is human capital availabil-ity in the region. In Baja California (BC) we have manyhigher education institutions, so there is a vast amountof scientific talent and resources for human capitalformation, which is a key element in such decisions,”Felipe Cuamea Velázquez, rector of UniversidadAutóno-ma de Baja California (UABC), told OBG.

However, as opposed to fiscal incentives, relative-ly low electricity costs, supply-chain integration andother similar advantages an economic region can pro-vide, education and workforce skill levels tend to beless obvious, if not less important. BC has long beena centre for manufacturing goods, with almost 20%of the state’s active population directly employed inthe sector. Nevertheless, there has been a recent shifttowards design, engineering and creation. This trans-formation has required, and will continue to demand,more and more qualified professionals in each of theareas the state has historically participated in, as wellas in the upcoming opportunity niches.WORKFORCE: According to 2012 figures from theNational Institute of Statistics and Geography (Institu-to Nacional de Estadística y Geografía, INEGI), BC’sworkforce of more than 1.4m is primarily concentrat-ed in its two cities, Tijuana and Mexicali, which com-bined are home to around 1m workers.

In fact, BC currently has a lower unemploymentrate than its US neighbour California, with the latestfigures from INEGI indicating a 5.1% jobless rate forBC for the last quarter of 2013, as opposed to the 7.9%rate calculated for California by the US Bureau ofLabour Statistics. The average daily wage in Mexicalifor a direct employee was reported to be $9-11 in ear-ly 2014, according to Sada y Asociados, a Mexicali-based business consulting firm. This figure is slightlyhigher for Tijuana. For the export industry, meanwhile,

the majority of employees receive higher wagesdepending on their positions.

The state’s active population is largely employed inthe services sector, which accounts for approximate-ly 42% of the workforce, followed by the commerceand manufacturing sectors with 21% and 19%, respec-tively. Mexico’s Federal Labour Law (MFLL) regulatesemployment relations, as well as establishes the coun-try’s minimum wage, which varies by region.

In January 2014 the minimum wage for BC was setat a daily rate of MXN67.29 ($5.23). However, mostindustries in BC pay wages well above the minimum,with unskilled workers able to make between 70%and 120% more, depending on the sector.

As laid out under the MFLL, the working weekextends to a total of eight hours per day for six daysa week. In addition, it stipulates seven days of officialholiday and six days of elective vacation, giving a year-ly working time of 300 days or 2400 hours. Comparedto most of Europe and a number of other countriesthat stipulate 20 days or more of official holiday, theMexican working year is a relatively long one.EDUCATION: BC was legally recognised as a state in1952. In the early years, the main cities each had apopulation of fewer than 200,000 inhabitants, whichmade higher education in BC mostly non-existent.

More recently, however, the state has seen inter-esting and dramatic changes in its population’s atten-dance and performance levels in education. Of thegroup under 14 years of age, more than 95% areenrolled in education. For those aged between 14and 24, meanwhile, the number in full-time educa-tion rose from 29% in 1990 to more than 42% some20 years later, according to INEGI. This indicates astronger focus on education.

The educational make-up includes more than 20public and private universities. The four most impor-tant ones are UABC, Centro de Enseñanza Técnica ySuperior (CETYS), Centro de Investigación Científicay de Educación Superior de Ensenada (CICESE) and

Unemployment in BC issignificantly lower than inneighbouring California,with a jobless rate of 5.1%in the last quarter of 2013as compared to 7.9% northof the border.

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The services sectoraccounts for around 42% ofthe local workforce,followed by the commerceand manufacturing sectorswith 21% and 19%,respectively.

Smarter choicesEfforts to boost human capital can sustain growing foreign investment


Universidad Tecnológica de Tijuana (UTT), with eachinstitution ranked highly in its respective specialty.HIGHER EDUCATION: In addition to improved atten-dance levels, BC has seen its higher educational seg-ment grow, diversify and specialise over the years.

UABC is the oldest and largest higher education insti-tute in the state, with an enrolment figure of morethan 50,000 students. Covering all of BC’s main cities– Tijuana, Mexicali, Tecate and Ensenada – UABC’sstudy programmes have historically focused on engi-neering, while the university has also forged cooper-ation with technology companies including Skyworksand Honeywell, among others.

Also concentrated on engineering, but with anadministrative focus, CETYS is a private university setup by a group of local businessmen in the 1960s. Asthe only university outside of the US to be accredit-ed by the Western Association of Schools and Colleges,CETYS’ cooperation programmes include working withlocal industries in the aerospace, electronic and auto-motive sectors, including with groups such as Hon-eywell, Gulfstream, Skyworks and Kenworth.

“In the past 10 years, higher education institutionshave opened programmes to address the state’s spe-cific needs. A business development policy has beendefined by the finance sector and new programmeshave focused on supporting industries identified askey in BC, such as aerospace, semiconductors, bioengi-neering, nanotechnology, renewable energy, wine andgastronomy,” Cuamea told OBG.

Today, 57 years after the institution was opened,more than 40% of UABC’s funds come from such coop-eration programmes. Indeed, most higher educationinstitutes in the state have achieved similar numbers.TECHNICAL EDUCATION: Alongside economicgrowth, the state has seen its population grow. Themost recent census numbers by INEGI show thatalmost 60% of Tijuana’s population is composed ofmigrants from other states in the country. In additionBC receives an average of 80,000 re-patriates (Mex-

icans returning from the US) every year. This type ofmigration has caused a lot of people to settle in BC.

Industrial growth and efforts to attract investmentto the state have also created a viable employmentmarket, as evident with an unemployment rate of justover 5% in 2013. Nevertheless, the industry oftenrequires specific skills for its workers, even at entry-level positions. This has created a challenge and onethat has seen a variety of education institutions beingset up, including the National College of Profession-al Technical Education (Colegio Nacional de EducaciónProfesional Técnica, Conalep) and UTT.

These institutes relate to those niches in a very spe-cific manner: the educational model is designed to pro-vide technicians and engineers with professional com-petences in accordance to market requirements. Studyprogrammes are designed in conjunction with firmsto achieve the quickest and most pertinent integra-tion to the workforce possible. An institute which hasseen encouraging results is the UTT. Formed 19 yearsago, the institute mostly offers technical programmescalled técnico superior universitario, or TSU, whichinclude units aimed at both engineers and techni-cians. Today, 70% of TSU graduates find jobs withintheir fields less than six months after graduating,while this number is above 80% for UTT engineers.

Israel López Zenteno, UTT’s industrial cooperationsecretary, told OBG, “Hyundai’s decision to open itsrecently announced motor plant was strongly influ-enced by the fact that BC could provide the requiredhuman resources. Hyundai came to us for educationprogrammes and we have been working with them inparallel as they install the new production lines,” hesaid. “A similar case is happening with Plantronics andother companies that ask for special order educationprogrammes.”

Additionally, the institute has worked with compa-nies such as Toyota, Samsung, Panasonic, Foxconnand Honeywell, offering customised educational serv-ices for its future and existing employees. In effect,the courses are apprenticeships in another guise.

Also on the technical side is Conalep, an education-al institute that is part of the National System of Tech-nological Education. Created in 1978, BC’s state uni-versity branch began operations as a decentralisedpublic agency in 1999. Within BC, Conalep has sixcampuses located in four municipalities and one atthe Centre for Assistance and Technology Services inTijuana. The institution’s principal objective is focusedon training high school graduates as technical pro-fessionals. In addition, the institute offers services inemployment training, inter-sectoral linkages, com-munity support, as well as providing advice and assis-tance to technology companies. Within BC, Conalepcurrently trains more than 8000 students and 64% ofits graduates are placed in the labour market in theirstudy area within the first year.RESEARCH: As Arturo Serrano Santoyo, a researcherat the Directorate of Innovation and DevelopmentDrive at CICESE, told OBG, “The role of technical edu-cation institutions is the generation of human

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Entry-level positions in the manufacturing industry require a high level of skill and technical ability

The state’s populationcontinues to grow, with alarge number of migrantsfrom other parts of Mexico,as well as re-patriates fromthe US, moving to BajaCalifornia.

A number of educationinstitutions have been setup in the state to providetechnicians and engineerswith sufficient professionaltraining to meet the needsof local industry.



resources for industry’s needs today. In the researchfield, we want to develop what the industry will needin five to 10 years so that existing industries stay, aswell as to attract further attention from other indus-tries which can see that BC’s workforce possessesthe talent to change the environment, design and doresearch,” he told OBG. “We want to align ourselveswith the production elements of our state, specifical-ly industry clusters such as medical devices, softwareand aerospace, and to find synergies for our gradu-ates to further connect with them,” he added.

CICESE has in fact expanded to other cities, evenbeyond BC’s borders. Ensenada has long been knownas Mexico’s knowledge capital and has the highestnumber of researchers per capita in the country;CICESE has been an integral part of the process, beinghost to more than 2000 of them. Today the institu-tion is an important research centre, working mostlyin the fields of earth and ocean sciences, but also inexperimental biology – mainly at the request of biotechcompanies – and information technology (IT). Thecentre is currently working on large projects with twostate companies: oceanographic research for PetróleosMexicanos and energy research in geothermal gen-eration with the Federal Electricity Commission. Inaddition, collaboration with firms such as Honeywell(aerospace), Plantronics (medical devices) and Silanes(pharmaceutical/biotech) have been conduits fortransferring the institution’s research efforts to indus-try. Indeed, a CISESE-Silanes joint venture produceda technology transfer centre responsible for the grant-ing of nine patents and 10 others pending in both Mex-ico and the US. At the same time, UABC has 32 patentspending in Mexico, demonstrating the success in turn-ing education and research in BC into a key product.INNOVATION: As it is a crucial step in the produc-tive chain, innovation has historically been keptinsourced. Nonetheless, there is now a worldwidetrend for knowledge process outsourcing (KPO). Themain worldwide destinations for KPO are India and Cen-tral and Eastern Europe, but BC is also starting toestablish itself as an important destination. Directinvestment figures in the state rose 42.3% from $542min 2012 to $771m in 2013, and such growth could verywell be innovation driven.

Serrano told OBG, “Recently we have seen as an indi-cator of innovation that master and doctoral degreegraduates are being hired by local industries. Thisshows the manufacturing industry is no longer onlyassembly, but tends towards advanced manufactur-ing, development and innovation.”

UTT’s Lopez, meanwhile, said UTT have seen inno-vation projects in a wide number of segments, althoughthe ones that have raised the most interest are IT,mechatronics, industrial maintenance, renewableenergy and environmental technologies.

Two examples of innovative developments in thestate involve Baja's Innovation and Technology Cen-ter Tijuana (BitCenter) and BajaInnova. BitCenter is a5000-sq-metre work and knowledge exchange cen-tre in which around 25 large, medium and small com-

panies and independent developers collaborate. Itwas built with the support of the National Council ofScience and Technology, the Secretariat for Econom-icDevelopmentand private sector collaboration, includ-ing the National Chamber of Electronics, Telecom-munications and Information Technology, and theeducation sector. Of note, BitCenter recently hostedthe innovation event Startup Weekend Tijuana, whichis essentially aimed at developing ideas and turningthem into profitable businesses.

One of BitCenter’s tenants serves as the secondexample of innovation. BajaInnova is a business incu-bator formed by CICESE, the Centre for BiologicalResearch of the North-west and ACAD, a consultingcompany. It aims to be an accelerator for knowledgetransfer by providing support to existing and futurecompanies for research and development and com-mercialisation of high-tech products and services.The incubator is currently working on projects relat-ed to IT, notably service virtualisation, computing pro-cessing and connectivity, as well as biotech initiativesincluding biodegradable bioplastics production frommarine bacteria and biofuels from bacteria.

If trends continue, BC’s expanding industry will con-tinue to require an equally expanding workforce. How-ever, as opposed to previous regional development,the specific skill requirements of the aspiring labourforce will need to shift gradually to new demands. Thecurrent tendency for KPO added to ongoing innova-tion initiatives in the state will require greater talentand more highly skilled and competent workers. Thesearch for manufacturing supply-chain integrationwill primarily require technicians for semi-conduc-tors, high-precision machining, materials and similarfields. While upcoming technology clusters, such asIT or biotech will require high-level researchers andengineers, if educational efforts continue to focus oncooperation and research and innovation, BCcould be well positioned to benefit from increasingglobal demand for high tech industry and new talent.

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Ensuring that BC’s workforce has the talent and skills to grow the research segment is a key priority

The state is becoming anincreasingly importantdestination for knowledgeprocess outsourcing, withdirect investment figuresjumping 42.3% from $542min 2012 to $771m in 2013.


State officials hope to attract a wide range of visitors and tourists

Proximity with the US, particularly California, has madeBaja California (BC) an historical access point fortourists seeking everything from beaches to extremesports to retirement tranquillity.

Every year BC’s border sees around 30m inboundcrosses from the US. That influx does not include thosecoming through its airport and seaports, and the statereceives more than 16m visitors from abroad eachyear. The final ingredient of the total is another 11mfrom within Mexico, according to the Secretariat ofTourism (Secretaría de Turismo, SECTUR). Tourismaccounts for about 12% of the state’s GDP, accordingto the ministry, and the domestic investment agency,ProMéxico, indicates that this translates into a valueof MXN51bn ($3.96bn), making tourism an importantsource of income for the state.

In the years before 2007, a boom in investment fortourism saw much construction activity on condos,hotels and retirement homes, however, the econom-ic crisis brought many of these projects to a halt.Notwithstanding, the sector has been recovering andhas been among the top growers since 2010.VARIED OPTIONS: BC’s tourist offer is diverse. Withaccess to both the Pacific Ocean and the Sea of Cortez,its geography also includes mountain ranges, valleys,deserts and national parks. BC is home to the second-most-visited touristic port in the entire country, Ense-nada, attracting approximately 800,000 visitors a year,according to the tourism secretariat.

The state’s waters also have a rich variety of speciesfor sports fishing. Some 38% of the state’s area is ded-icated as a national reserve, with parks such as Par-que Nacional Sierra de San Pedro Mártir, ParqueNacional Constitución de 1857 and Valle de los Cirios.

BC accounts for more than 90% of all the wine pro-duced in Mexico, mostly in the Valle de Guadaluperegion, and other lesser known ones like San Vicenteand Santo Tomas, which in recent years have becomeimportant agro-tourism destinations, with wine tast-ing, boutique hotels and festivals. In addition to wine,

the region’s gastronomy is aided by several produc-tive agricultural valleys, such as Valle de Mexicali andthe San Quintín region.INVESTMENT OPPORTUNITIES: Having the US as aneighbour, more specifically California, BC not onlyhas geographical proximity to an extremely vast mar-ket, but it also has proximity to tough competition. Primedestinations, including San Diego, Los Angeles, Disney-land, Palm Springs and Hollywood, are just a few hours’drive north. This fact brings an enormous need forinfrastructure in the area to be able to compete withthe attractions to the north.

Oscar Escobedo, BC’s secretary of tourism, told OBG,“The state’s activity is a very dynamic one… and we arepushing multiple projects in the tourism sector, alwayswith a focus on sustainability.”

Included in the many tourist industry projects underway in the area are two marinas, one on the Pacificside and the second 30 km from the tip of the Sea ofCortez. These projects try to exploit the fact that Cal-ifornia and Arizona are two of the US states with thehighest numbers of registered boats.

Other examples include construction of the Tijua-na Airport-US bridge, the expansion of the Otay bor-der crossing and the Coastal Railway System.

In addition to those projects, the construction of theEnsenada/Ojos Negros Airport, as well as the additionof several smaller runways – such as Cataviña – aretrying to attract private airplane owners to explorethe more remote southern regions of the state, suchas Bahía de los Angeles.MICE: As an organised segment, meetings, incentives,conferences and exhibitions (MICE) existed more in the-ory than in practice until 2013.

Other than investments made for conference facil-ities within privately owned hotels, few specific effortswere made from the public sector to encourage thegrowth of MICE. This changed in 2013 with the open-ing of the Baja California Centre. The centre was builton 10 ha of a 200-ha land plot, with an overall

The border between the USand Baja Californiaexperiences over 30minbound crossings from theUS each year, not includingvisitors arriving at air andsea ports.

Over 90% of the nation’swine output is produced inBaja California, primarily inthe Valle de Guadaluperegion, which has becomeimportant for agro-tourism.

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More than sun and sandBroadening the state’s appeal to tourists



MXN600m ($46.62m) investment for the first phase.The remaining area will be developed according to amaster plan that is being prepared by the Urban LandInstitute, a non-profit organisation responsible formany sustainable urban development projects.

The entire development will create investment oppor-tunities that include hotels, a golf course and furtherreal state and infrastructure. The conference centrehosted more than 150,000 visitors in its first year andis looking to top the 200,000 figure in 2014.

Appropriately, the MICE sector 2013 annual nation-wide congress was hosted in the centre. This congress,organised by SECTUR, was aimed at promoting spe-cialised tourism products for the sector, developing val-ue chains and encourage networking.HEALTH TOURISM: The health tourism sector in BChas been active since the 1940s, although the termwas not yet in use then and the sector was not prop-erly organised. It was not until the formalisation of thesegment began during the beginning of PresidentEnrique Peña Nieto’s administration in 2012 that theterm has been widely applied in BC.

The local sector originated with dental care, whichcovered more than half of the entire health tourismmarket. The main centre is the town of Algodones, con-sidered by some as the town with more dentists percapita than any other in Mexico. In recent years, den-tistry’s market share has decreased and it now com-prises slightly over 30% of the total.

The total number of tourists who visit BC for healthtreatments of some kind is difficult to pin down. Eachstudy seems to have a different figure, a phenomenonnoted by the health tourism cluster.

However, BC’s SECTUR figures show that more than500,000 patients visited the state in 2013, accompa-nied by a further 600,000 people. The sector had seena sharp decrease in the early 2000s for various rea-sons, including the economic crisis, the swine flu pan-demic and security concerns. Recent conditions haveimproved, showing annual growth of between 4% and15%, depending on the source.

According to the local Secretariat of Tourism, thesector’s economic benefit was estimated at over $100min 2013, with some 800,000 visitors forecast for 2014.Tijuana typically keeps a market share of more than80%. The profile of visitors has also changed: beforethe early 2000s most patients were Anglo-Saxon, whilein the later years the market has seen mainly Hispan-ic visitors. Cluster leaders, in collaboration with SEC-TUR and the Mexican Consulate in Los Angeles, havebeen visiting the main Mexican and Latino associationsto promote the sector. These and other efforts haveresulted in the approval of various companies that sellUS-approved medical insurance to Latino workers, forwhom medical treatment is then offered in BC.

In addition to these, companies such as Blue Shieldand MetLife provide products in which it is stipulatedthe client can opt for a payment for treatment thatcan be applied in either Mexico or in the US, withoutdiscrimination. Karim Chalita, the health cluster pres-ident, told OBG, “The most required services include

plastic surgery, bariatric treatment, ophthalmology,oncology and, of course, dentistry.”INNOVATION & CHALLENGES: The sector has seenits fair share of innovation in recent years. One of themain examples that BC (and Mexico for that matter)has to offer is stem cell therapy. Such treatment is notcommercially available in the US and Canada, makingMexico and particularly BC the closest destination forpatients in North America.

The sector has encountered a barrier due to the nov-elty of the niche, however, this drawback has beenattenuated by the creation of the Heath Tourism Direc-torate under SECTUR, charged with promoting it. Anoth-er development barrier has been the border crossingtimes, which can be inconveniently long for patients.To avoid them a “medical line” has been created, whichcaters specifically for patients getting treatment inBC and works as a fast-pass that can be issued by thephysician to expedite the patient’s return home.

Finally, as has been seen with the MICE sector, oneof the main challenges to health tourism relates to over-coming the market loss resulting from the 2008 eco-nomic and social crisis, in which patient numbersdropped from more than 1m to less than 500,000 injust a couple of years.

The tourism sector has always been one of BC’sstrengths. If the state manages its affairs well and con-tinues to fight the problem of external perception, thesector’s growth will continue.

However, in the short term, tourism is expected tobe affected by the federal government’s recent taxpolicy change. This raised the level of value-added taxfrom 11% to 16% at the beginning of 2014 for citieswithin 20 km of the US border, and the policy is mostlikely to be a deterrent for some travellers, particular-ly those day-trippers who cross into BC from Califor-nia in pursuit of inexpensive food, pharmaceuticalsand alcohol, among other things. If this bump in theroad issmoothed, thesectorcouldbepoisedforgrowth,especially in the MICE and health tourism niches.

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Tourism contributes approximately 12% to state GDP, accounting for some $3.96bn

It is estimated that healthtourism contributed morethan $100m to the state’seconomy in 2013, and800,000 health tourists areexpected in 2014.

Approximately 500,000patients visited the state in2013, accompanied byroughly 600,000supporting visitors. Annualgrowth is pegged at 4-15%,depending on the source.

BAJA CALIFORNIA INTERVIEW

Carlo Bonfante Olache

For which sectors is BC seeking further investment?BONFANTE: Several strategic sectors have been iden-tified based on industry size, cooperation among com-panies and institutions, and global economic trends,among other things. Most efforts have been focusedon aerospace, automotive, medical devices and elec-trical-electronic industries, clean energy, informationtechnology (IT), mining, medical and business tourism,as well as agroindustry, biotechnology and aquacul-ture. We are also planning to participate at varioustrade shows in 2014 and 2015, including FarnboroughAir Show, Heli Expo, ILA Berlin Air Show, AeroCon,AeroDef, MRO Americas, MD&M West and East, WIND-POWER, Intersolar,Solar Power International,ConsumerElectronics Show, Prospects and Developers Associa-tion of Canada Mining Investment Show, and more.

How can BC utilise its competitive advantages toincrease foreign investment?BONFANTE: There are some states in the north andcentral part of Mexico that pursue the same strategicsectors that we do. To be competitive we have tried toexploit BC’s natural advantages, including competitivepowerrates, lownaturalgasprices,accesstowater fromthe Colorado River, close proximity to the US border, ITaccessibility, a large concentration of manufacturingoperations in free zones, and diversified exports. Wealso have a growing, skilled, educated and cost-com-petitive labour force, a non-unionised environment,and a pro-business community. Other advantagesinclude having the largest concentration of industrialparks in Mexico and international airports with directflights to Narita, Japan and Shanghai, China. Takentogether these factors allowed BC to attract $5.1bn offoreign direct investment from 2008 to 2013.

Regarding competition with the southern states ofthe US, rather than compete with them, we can buildalliances to collectively promote the region. The Cal-ibaja region provides access not only to markets in Cal-ifornia, but also to the wider North American market,

as well as to the markets of Latin America and thePacific Rim. The government understands the impor-tance of attracting new investment as it will increaseour workforce and improve the quality of living. Thus,our role is to encourage and facilitate the arrival of newcompanies that will enrich the economy.

As the US economy recovers and the world’s ener-gy map shifts west, how will BC’s role change?BONFANTE: As a result of the boom in fracking andexploitation of unconventional oil and gas, the outlookfor the energy market has changed. Just 10 years agofew expected natural gas prices to be as low as theyarenow. Indeed, tobecomemoreattractive,BCwillneedto use its competitive advantages such as its location,skilled human resources and energy infrastructure. Hav-ing electricity and natural gas interconnected to theUS market gives BC an advantage over the whole coun-try, thus enabling lower costs for the manufacturingsector. Energy reform will contribute to the region’seconomic development by growing the energy sec-tor’s supply chain and increasing the market share ofproducts manufactured in BC in the California market.

What different factors must be considered in anyrenegotiation of the North American Free TradeAgreement (NAFTA)?BONFANTE: While NAFTA has had a positive impact onthe Mexican economy for the past 20 years, particu-larly in the manufacturing segment, Mexico and BCmust continue to promote cooperation agreementswith the US and Canada. High Level Economic Dialogueis a key example of commitment between Mexico andthe US, and it aims to boost competitiveness and con-nectivity, foster more economic growth and innovation,and build a partnership for global leadership. Trade andlabour market integration, security, the developmentof strategic projects, energy cooperation, innovationand technology exchange, are the most importantissues NAFTA must consider in any new agreements.

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Competitive advantagesOBG talks to Carlo Bonfante Olache, Secretary of Economic Developmentfor Baja California (BC)



The local wine industry dates back more than a century

Unlike many states in Mexico, Baja California (BC) hashistorically had a commercially-driven agriculture sec-tor, mainly focused on exports. According to ManuelValladolid Seamanduras, secretary of agriculture andlivestock production promotion in BC, “The current fed-eral administration is implementing public policy seek-ing productive agriculture, separating self-consumptionand subsidies from any evaluation of the sector,” he toldOBG. BC’s primary industry, agriculture and fishing, rep-resents 3.2% of its GDP, according to figures for 2012from ProMéxico, the national investment promotionagency. The state’s total agricultural production wasworth MXN11.4bn ($885.8m) in 2012, an increase ofmore than 6% over 2011, according to the Secretari-at of Agricultural Promotion (Secretaria de FomentoAgropecuario, SEFOA). Two main agricultural areas existin the state: Mexicali Valley and the Coastal Zone.MEXICALI VALLEY: A 200-ha irrigated area in thenorth of the state, Mexicali Valley is close to the US bor-der in the municipality of Mexicali. Its products consistmainly of wheat (85 ha), livestock fodder (60 ha), cot-ton (30 ha) and vegetables (8 ha). In addition to agri-culture, thevalley ishometofourfederally-certifiedmeatproduction facilities owned by companies such asSuKarne and Bona Carne, where more than 280,000head of cattle are processed each year. One of the mainadvantages of the Mexicali Valley is that, although it isin the middle of the desert, the Colorado River providesa constant source of water. A bi-national treaty signedin the 1940s guarantees both the quantity and thequality of the water received from the river.COASTAL ZONE: Covering the municipalities of Tijua-na, Rosarito and (mainly) Ensenada, and with a year-round moderate climate, the Coastal Zone containsseveral different agricultural models, from an array ofhighly-technified agriculture in San Quintín to the moretraditional wine region of Valle de Guadalupe. Howev-er, even with its excellent climate, the Coastal Zone hasan important development barrier, the availability ofwater. Most of the water for the coastal areas of Tijua-

na and Ensenada is made available by the aqueductsthat carry it from the Colorado River and transport ithundreds of kilometres across and over the 1000-metre heights of the Rumorosa mountain range. Thewater from the aqueducts is only for human consump-tion and not considered for agricultural use.

Originally, the Coastal Zone was able to exploit localgroundwater reservoirs, but these have little-to-norecharge, causing access to end either in the form ofdry wells or through saltwater infiltration. As such, theCoastal Zone has seen the need to apply technologiessuch as water desalination to cover its agriculturalwater needs. The land for exploitation and its produc-tivity will be closely connected with investments inwater desalination in the area. One place where highproductivity has been achieved following the comple-tion of a desalination project is San Quintín.SAN QUINTÍN: An important part of the Coastal Zone,this valley consists of about 3 ha of protected agricul-ture – greenhouses – which produce around 30% ofBC’s tomato exports and a variety of berries includingstrawberries, raspberries and cranberries, in additionto other products such as onions and cabbages. SanQuintín’s water supply depends heavily on desalina-tion plants and other technological advances.LOCAL MARKETS: Even though BC has a strong agri-cultural industry, there are still multiple opportunityniches, not only in the form of exports but also for localconsumption. The state produces only 22% of its eggconsumption, and most of its pork meat, around 25,000tonnes a year, is imported from Sonora and the US.WINE: The wine industry in BC dates back to 1888when Bodegas de Santo Tomás was founded. Howev-er, until the 1970s there were only four or five wine-makers in the region. Much of the grape harvest wasfocused on brandy production. An oversupply of grapesin the 1970s encouraged companies such as Domecqand L.A. Cetto to take a greater interest in wine pro-duction. The International Organisation of Vine andWinechoseMexicofor its internationalcongress in1980

Baja California’s totalagricultural production was$885.8m in 2012, anincrease of 6%year-on-year over 2011.Mexicali Valley and theCoastal Zone are the twomain agricultural centres inthe state.

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The state’s rich climatesupports the production ofa variety of goods,including wheat, cotton,vegetables, tomatoes,grapes and berries, amongothers.

Wine and fish on the tableDiverse agricultural and fisheries products provide rich opportunities


and that was the spur to placing Mexican wines on theinternational map. The industry is still developing today.BC is responsible for about 90% of national wine pro-duction, according to SEFOA. Cultivated areas are cal-culated at approximately 3700 ha, one-third of theusable land. The market comprises more than 70 winer-ies in its different valleys, with the Guadalupe Valley themost widely known. Camilo Magoni, an oenologist fromL.A. Cetto, told OBG, “Two-thirds of the domestic winemarket is served by imports. I think there is great oppor-tunity for domestic producers to win a higher percent-age of that market and have a more decisive andstronger participation than what we have today. Ofcourse, that involves having investments in the fields,in the vineyards, technological innovations, investmentsin cellars and in marketing.” The wine industry faces noless of a problem in water availability than the rest ofthe agricultural industry. Water from wells has increas-ing salt content from seawater infiltration, causingexcess salt to show up in the wine. Some wineries, suchas Monte Xanic, have addressed the problem by cap-turing rainwater to use for irrigation. Whatever thesolution, major investments in infrastructure are need-ed to address the water issue and create sustainablegrowth to exploit the other two-thirds of usable landand make an already growing industry into a strong one.FISHING: Although Mexico has 17 states with accessto the sea, only four have a state-level fishing secre-tary. The BC fishing industry represented a total ofMXN1.15bn ($89.36m) in 2012, according to the Sec-retariat of Fisheries and Aquaculture (Secretaria dePesca y Acuacultura, SEPESCA).

Matías Arjona, secretary of fisheries and aquacultureof BC, told OBG, “The past six years have seen greatadvances in the fishing industry, mainly in the form ofmanaging and sorting fishing areas and permits.”

Those advances culminated with the signing of anagreement for collaboration between federal and statefishing agencies to maintain and control federal fish-ing permits and avoid unregulated and secret fishing.

In addition to Asia, the US is an important market forBC fisheries, with the majority of products going to SanFrancisco and Las Vegas. Most of the live product ispacked in Ensenada and then shipped by truck to LosAngeles, where it is flown to its various destinations andis, in the main, delivered within 24 hours of beingcaught. Processed products, whether canned or frozen,are mostly prepared in Ensenada and shipped from theport or in some cases shipped from Long Beach.AQUACULTURE: One of the main goals for fisheriesunder the current administration is to support thedevelopment of aquaculture and mariculture. Althoughthese segments are young, the MXN356m ($27.66m)accrued in 2012 represented around 31% of BC’s fish-ing industry, according to SEPESCA. There are threemariculture companies in operation in BC and they dealmainly with bluefin tuna and oysters. Additionally thereare investments in upcoming projects for productionof species including seabass, corvina and jurel. In con-trast, aquaculture sees its best opportunities in placessuch as the Mexicali Valley, where inland shrimp andsalmon projects are feasible. Although investments ininfrastructure and dredging would be required to makesuch projects a reality, both sectors could find a majormarket for their products in top-shelf US restaurants.REGULATIONCHALLENGES:Recentregulatoryadjust-ments brought the Mexico-US export of bivalve shell-fish to a halt. Authorities from the US Food and DrugAdministration (FDA) demanded an eight-month haltto Mexican imports due to adjustment of administra-tion differences with Mexico’s Federal Commission forHealth Risk Protection (Comisión Federal para la Pro-tección contra Riesgos Sanitarios, COFEPRIS). A simi-larsituationalsohappened in2000.BC isaimingtoavoidsuch situations by getting two FDA-approved labora-tories operational for early quality compliance checksand any preventive measures deemed necessary.

The agricultural industry in BC has strong potentialowingto itsclimateandgeographicalproximitytoamar-ket of more than 50m consumers (California, Arizona,BC and Baja California Sur). If barriers such as the avail-ability of water in the Coastal Zone are overcome in aprofitable manner, there could be an increase of pro-duction and exports. On the other hand, the local BCmarket offers exploitable potential for products suchasporkmeatandeggs.Thefishing industry inBCisgoingthrough a significant transformation in an effort toensure it stays sustainable. However, opportunities inthe aquaculture and mariculture fields could make theindustry grow if efforts in the areas of research, infra-structure and regulation continue to be taken forward.

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Baja California is home to more than 70 wineries and accounts for 90% of national wine production

The aquaculture andmariculture segmentsbrought in almost $28m in2012, equal to roughly 31%of the local fishing industry.Access to large marketsnorth of the border,particularly California,presents an opportunity forexpansion.


SOURCE: OEIDRUSBC, SAGARPA

Municipality 2010 2011 2012

Ensenada 5903.41 4307.14 5426.49

Mexicali 4430.45 5584.71 5901.67

Playas de Rosarito 63.74 55.72 0.00

Tecate 53.64 38.55 38.40

Tijuana 32.18 26.25 25.72

Agricultural production, 2010-12 (MXN m)

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