Thanks in large part to a border economy that defies stereotypes and a world-class scientific community, a city famous for its surf is riding a different kind of wave.Destination 2016: PittsburghDestination 2016: San Francisco
At the top of a nearly completed highway on-ramp near the Otay Mesa border crossing in San Diego, a pair of flags, U.S. and Mexican, snapped in the mid-April wind. A podium stood next to a white-peaked tent enclosing rows of folding chairs. To the north, east and west was the United States—San Diego and Chula Vista. To the south, Mexico—Tijuana and Tecate, once notorious as destinations for those in search of vice but now rapidly growing industrial centers. Bulldozers chugged back and forth on the plain below. In every direction, the landscape bustled with commerce: warehouses, roads, truck stops and factories. Toyota makes pickup trucks here; Solar Turbines, a subsidiary of Caterpillar, makes gas turbines; and 3D Robotics, the country’s largest commercial drone manufacturer, makes drones.
Cross-border manufacturing and an educated workforce make this a great city to be in business.
San Diego invests in its infrastructure, from new highways to light rail.
Resources including VC support, lab space for biotech and a collaborative atmosphere welcome startups.
The gathering was a celebration, attended by the U.S. consular general in Tijuana, the Mexican consular general in San Diego, representatives of the governments of Tijuana and San Diego, and local chambers of commerce from both sides of the border. The focus of their excitement: the on-ramp, one of the first components of a $1.3 billion investment in border infrastructure by the San Diego Association of Governments (SANDAG), a regional planning agency, and the California Department of Transportation (Caltrans).
That San Diego is spending hundreds of millions of dollars to build a road connecting it to Mexico might come as a surprise to Americans who have been following the presidential campaign. Two days earlier at Soldiers & Sailors Memorial Hall in Pittsburgh, presidential hopeful Donald Trump had declared that “our jobs are going to Mexico…companies are moving to Mexico…and we’re going to stop it.” He then led a call-and-response with the audience, chanting, “Build the wall! Build the wall! Build the wall!” Along with his calls for a border wall and mass deportations of Mexicans in the United States, Trump advocates a 35 percent tariff on goods produced by U.S. companies in Mexico.
Taylor Guitars factory. © Robert Benson
But for those gathered at the on-ramp in San Diego, Trump’s vision seems not just at odds with reality, but also profoundly threatening to the region’s sophisticated international economy. This area is the heart of what the business communities in San Diego and the Mexican state of Baja California call the “CaliBaja Mega-Region.” The Mega-Region is a bilingual industrial furnace that, along with the city’s scientific and military communities, has helped fuel the rise of San Diego as one of the most business-friendly, economically advanced cities in the country. Thanks in large part to a complex legal, social and economic symbiosis between Tijuana and San Diego, the Mega-Region’s GDP is estimated at more than $230 billion, roughly equal to that of Ireland. San Diego provides capital, scientific and technical knowledge, and management expertise, while Tijuana provides a highly skilled manufacturing workforce, ample space and lower costs.
This mutually beneficial economic relationship also fuels close personal, political and cultural ties. With 3.2 million people in San Diego County and another 3.1 million in Baja California, “it’s all one big city,” says Denise Moreno Ducheny, one of the on-ramp celebration’s attendees, who represented San Diego County in the California State Assembly and Senate and was the first woman and first Hispanic assembly chair (she is now a senior policy advisor at the University of California San Diego’s Center for U.S.-Mexican Studies). Issues that other cities might see as challenges are treated as opportunities by San Diego and Tijuana. Just as “the county and the city of San Diego have to work together to get things done, the two regions across the border from each other have to work together to get things done,” says Mark Cafferty, CEO of the San Diego Regional Economic Development Corporation.
One company helps tell the story. San Diego–based Taylor Guitars has been making high-end instruments since 1974 and has a maquiladora, as cross-border factories are known, in Tecate, about a 30-minute drive from downtown San Diego. Crossing the border takes about 10 minutes on foot—just walk through the gate, show your passport, put your bag through an X-ray machine and you’re in.
Taylor’s 19,000-square-foot maquiladora isn’t some sort of quaint, low-tech woodshop. Guitar bodies move around a massive factory floor on an aerial conveyor system, and each body has a radio-frequency ID tag so employees can quickly find its status and location. Huge ventilation ducts whoosh as clean air is cycled through the building to reduce dust and fumes. Misters send a fine spray of water into the air to ensure a constant humidity that prevents the guitar wood from warping.
Taylor has 466 employees in Tecate. They operate laser cutters, troubleshoot heat presses and supervise robotic fabric cutters and staining machines. The maquiladora produces 550 guitars a day—entry-level instruments that would cost too much to make in the U.S. to be profitable. Taylor’s factory in San Diego, which employs 432 people, produces 150 higher-end guitars.
The division of labor works: Company revenue was $109 million in 2015, but without the revenue from its Mexican-made guitars, Taylor would be hard-pressed to compete globally. “In the U.S., we have like 60 or 70 percent market share,” says Ed Granero, vice president of product development for Taylor. “We’re the leader, so it’s hard to get more of that business in the U.S. Where do you go? You go overseas.”
Taylor is hardly alone. Companies that make everything from solar cells to medical devices are headquartered in San Diego but carry out their manufacturing activities in Mexican border cities, primarily Tijuana and Tecate. For workers in Mexico, the maquiladoras provide higher wages and better job security than are available in other parts of Mexico. For American companies, maquiladoras mean massive savings on wages; this savings allows them to manufacture product lines that would be unprofitable if made in the U.S. Having maquiladoras in Mexico makes U.S. companies more competitive globally, and by helping American companies succeed, maquiladoras ultimately create jobs on both sides of the border. “Even though we’re producing in Mexico, we’re producing with our own components,” says Paola Avila, vice president of international affairs for the San Diego Regional Chamber of Commerce. “Those are produced by Americans, creating jobs here on the U.S. side. We’re not trading with Mexico, we’re producing together.”
The Mexican government created the maquiladora program in 1965 after the U.S. ended the Bracero Program, which had allowed seasonal migration for agriculture workers. Three decades later, NAFTA came into effect, and the economy in the Mega-Region exploded. As a result of NAFTA, American companies are able to manufacture in Mexico and pay no duty on raw materials imported to Mexico for use in the factories and no duty when they bring the finished product back across the border into the U.S. “There’s been 10 percent growth each year in trade to Mexico since NAFTA,” says Ron Roberts, chairman of SANDAG.
That may sound like it reinforces Trump’s gripe that Mexico is “stealing” U.S. manufacturing jobs, but the truth is more complicated. Components cross back and forth over the border many times over the course of manufacturing. “Whatever we import from the Baja region is 40 percent U.S. content,” Ducheny says. “Imports from China only include 4 percent U.S. manufactured parts.” Bilateral trade between the U.S. and Mexico is valued at $531 billion annually, according to the Office of the United States Trade Representative; the U.S. is Mexico’s largest export market, while Mexico is the second-largest market for American exports behind Canada.
Every day some 3,000 trucks cross the border at Otay Mesa in each direction. At San Ysidro, the main border crossing for cars and foot traffic, an estimated 300,000 people cross daily. There’s constant construction, and changes to roads on one side of the border must be coordinated between the two countries. Typically, that means local governments. “We’ve been working with Mexico for years and years,” says Héctor Vanegas, borders program manager for SANDAG. “We are the only regional council where Mexico sits as a member of our governing board.” Every year San Diego and Tijuana send joint delegations to both Mexico City and Washington, D.C., to lobby for border-related investment and legal improvements.
Taylor makes its most expensive guitars, handmade from solid wood and retailing for between $1,660 and $9,500, in the United States. The maquiladora mass-produces veneered guitars which retail for $428 to $1,700. Before Taylor opened that maquiladora in 2000, the company didn’t have a competitive introductory range of guitars—$1,660 is a lot for someone just learning their chords. High prices were particularly problematic as Taylor tried to enter foreign markets whose weaker currencies made the company’s guitars prohibitively expensive. “A lot of people say, ‘Why didn’t you just make all those guitars here in the U.S. instead of in Mexico?’” Granero says. “The reality is, we wouldn’t be able to make that guitar in the U.S. We would lose money on every one.”
While the minimum wage in Mexico is around $4.25 per day, employees in Tijuana’s maquiladoras can expect a minimum of $15 per day—paltry by U.S. standards, but roughly triple what they could make in other parts of the country. For those in engineering or management roles, incomes range from $23,000 to $63,000 per year. Those wages have drawn people from all over Mexico to work in Tecate and Tijuana’s maquiladoras. “Conditions are better than in other parts of Mexico,” says Yadira Ochoa, who makes guitar cases in the Taylor maquiladora. “The pay is better, and the work is secure.”
Beyond labor savings, companies with maquiladoras benefit from shorter supply chains and easier management and quality control. “One of the huge benefits is we can actually come here and see how things are going, make sure that the DNA is duplicated in both places, make sure of the design, the work, how it’s functioning, even how the carpet is laid, even how the finishes are done,” says Granero. “We wouldn’t be able to do that if it was deeper in Mexico or if it was in another country” like China.
This applies especially to startups or companies developing new products. “It’s a much riskier proposition to manufacture in China as a startup,” says Avila. “When you’re designing a prototype in China and then it comes back to you a week later and there’s a mistake, now you have to fly back, oversee it, make the changes. It’s costing your company so much money.”
Quality control is also far easier when the factory is a 40-minute drive from headquarters, rather than across the Pacific. Chris Anderson, the CEO of San Diego–based drone manufacturer 3D Robotics, wrote in the New York Times in 2013 that the shorter supply chain offered by maquiladoras “means that a company can make things when it wants to, instead of solely when it has to…When we started 3D, we produced everything in China and needed to order in units of thousands to get good pricing. That meant that we had to write big checks to make big batches of goods—money we wouldn’t see again until all of those products sold, sometimes a year or more later. Now that we carry out our production locally, we’re able to make only what we need that week.”
The maquiladoras are not stereotypical low-skill, low-wage sweatshops making T-shirts and shoes. “Textiles have gone away,” Granero says. “They’re overseas, in China or Thailand.” Low-skill manufacturing or assembly “basically does not exist anymore in this part of Mexico. It’s all relatively high skilled, and some of it is very high tech.” Kyocera’s maquiladora makes cell phones. Plantronics’ maquiladora makes Bluetooth headsets.
Biotech company Thermo Fisher, which has a major footprint in the San Diego area, has hired 100 software engineers in Tijuana, with plans to expand to 400 in the next year, according to Avila. It’s just one of dozens of biotech firms in San Diego that are flourishing in part because of the city’s special relationship with Tijuana. “The quality workforce in our combined region here—binationally—is excellent,” Avila says. “You have Mexico producing as many engineers as we are. We have a labor gap when it comes to computer science and software engineers in the U.S., but you can have operations here in San Diego and hire software engineers right across the border.”
It’s a win for both countries. Every three jobs created in Baja California today result in the creation of one job in the U.S., according to Jerry Sanders, former Republican mayor of San Diego and now CEO of the San Diego Regional Chamber of Commerce. The international expansion enabled by the Mexican guitar line has helped “the brand grow bigger,” Granero says, “which means more jobs in the U.S.”
In late April, the San Diego Regional Chamber of Commerce launched an initiative to promote further job creation in San Diego County and the Tijuana region. “We’re seeing the opportunity to grow,” says San Diego mayor Kevin Faulconer. “This is about creating good-quality jobs.”
In stark contrast to some of the national dialogue, San Diegans speak warmly about their Mexican neighbors. The maquiladora system has been an economic boon for San Diego. Wages are high; San Diego had the ninth-highest median household income in the country at $66,200 per year, according to a January 2016 report from the San Diego Regional Economic Development Corporation. Likewise, the quality of life is exceptional; the city is famous for its year-round glorious weather and outdoor activities. And over the past few decades San Diego has become an increasingly sophisticated and culturally diverse city. San Diego also has a diversified economic base: Besides cross-border manufacturing, it hosts some of the country’s top biotech firms, such as genomics firm Illumina and Craig Venter’s Human Longevity. Buoyed by VC money—VC software investment in 2015 was $517 million, according to the San Diego Regional Economic Development Corporation—the tech sector is steadily growing.
And, of course, San Diego’s economy is bolstered by an enormous military presence. According to a 2011 report by the San Diego Military Advisory Council, “San Diego is home to the largest concentration of military in the world,” with over 60 percent of the U.S. Pacific fleet stationed there. As U.S. foreign policy increasingly pivots toward Asia, that military presence is only likely to grow.
Of course, growth brings challenges. Because so many people want to live in San Diego, rents are the fourth-highest in the nation and rising rapidly—5.4 percent from October 2014 to October 2015. Homelessness is a visible problem downtown, partly because of those high rents, partly due to downtown development and also due to the fact that the moderate climate makes the city appealing to the economically unstable. Despite California’s move to raise the minimum wage to $15 per hour by 2022, many blue-collar workers have found it difficult to keep up with San Diego’s growth. On a Thursday in mid-April, the normally quiet downtown was filled with chants as workers from the Service Employees International Union marched. They were protesting low wages and calling for an immediate increase of the minimum wage to $15. “We need it right now,” says one of the protesters, Marco Herrera, a security guard who has worked at buildings including Petco Park and Qualcomm Stadium.
Despite these social problems, the overall outlook for the Mega-Region is positive. One of the most ambitious border projects is the $120 million Cross Border Xpress (CBX), a land bridge connecting parking lots and airline check-in in San Diego with the terminal of Tijuana’s international airport. It costs just $12 to use the bridge, which is a 20- to 30-minute drive from downtown San Diego. That bridge is key to San Diego’s continued growth as a tourism and business hub. Lindbergh Field in downtown San Diego has only one runway, and the nearby mountains prevent some larger airplanes from landing. Tijuana doesn’t face those limitations, and its airport is rapidly adding flights to Asia and South America. Even before the CBX was finished in December, an estimated 2 million U.S. travelers flew out of Tijuana annually. When the CBX opened, its builder, billionaire Sam Zell, told an audience, “When the rest of the country is talking about building walls, in San Diego and Tijuana we’re building bridges.” Sanders, the former Republican mayor of San Diego, echoes Zell’s point, saying that Trump’s proposals for the border are “a ridiculous concept.”
The CBX is just one example of innovative integration between San Diego and Tijuana. In March, Uber launched service from San Diego to Tijuana—its first international service. In Chula Vista, a “binational campus” supported by U.S. and Mexican universities is in the works; the school will offer bilingual higher education specifically tailored to the Mega-Region’s economy. San Diego and Tijuana submitted a joint bid to host the 2024 Summer Olympics; as a symbol of solidarity, they did so even before the International Olympic Committee allowed such joint bids. And many San Diegans have family and houses on both sides of the border, and vacation in the Baja wine country. “Our association with the border of Mexico is an advantage; that’s something we have that other people don’t,” says Joe Terzi, CEO of the San Diego Tourism Authority.
In the Imperial Beach neighborhood of San Diego, the Tijuana estuary wildlife preserve encompasses 2,500 acres of wetland along the border. To the south you can see Tijuana stacked up on the mountains, its famous bullring in the foreground. To the north is the city of San Diego. This is the point where waters from the U.S. and Mexico meet the Pacific Ocean. A fence runs along the edge of the wetland to prevent people from walking between the beaches in California and Mexico, although the water flows unimpeded; unlike most rivers in North America, the Tijuana River runs south to north. Like the estuary, the economy of San Diego has thrived because it is at the confluence of Mexico and the United States: “It’s a whole system,” says Avila. “And all of it is required for the future. We’re looking toward the future.”
This article was originally published in the 2016 June/July issue of Worth.
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