(FORTUNE Magazine) – EVERY WEEKDAY morning at 5:30, Guadalupe Mendosa, 35, a stocky woman with a sixth-grade education, awakens in a tiny house outside Tijuana. She prepares breakfast for her brother and mother and then begins a half-mile walk to work. Thirty miles away, in an air-conditioned condominium in San Diego, Harvard MBA William Ingram, 29, is just returning from a four-mile jog. He downs a plate of bacon and eggs, jumps into his blue Volvo, and speeds south along the Pacific Ocean on Interstate 5. These two worlds come together in a low, square building two miles south of the Mexican-American border. Here, in a business Ingram started in 1983 with $10,000, Mendosa spends 9 1/2 hours a day testing and soldering electronic chips that will go into hearing aids sold in the U.S. For her labors she earns the Mexican minimum wage -- about 14,000 pesos a week, or roughly $22. Though unthinkably low for a U.S. worker, this sum enables her to live what by Mexican standards is a middle-class life. Says she: ''To me this job is an opportunity. I couldn't have found work anywhere else.'' For a growing number of Mexicans, foreign-owned factories like this one -- called maquiladoras, from the Mexican word for ''handwork'' -- are the one bright spot in an otherwise devastated economy. Nearly a quarter of a million Mexicans, up from 150,000 in 1982, work in 800 maquiladoras bunched along the south side of the U.S. border. Last year these plants accounted for half of Mexico's manufactured exports, passing tourism as the country's second-largest earner of foreign exchange, after oil. By the end of the century they could easily employ more than one million workers. Waterbeds, computer keyboards, carburetors, derricks, toys, extension cords, and refrigerators are just a few of the products assembled in maquiladoras. Most television sets labeled ''made in America'' were put together in Mexico. The bulk of the electric garage door openers and windshield-wiper blades sold in the U.S. are made in the Mexican border city of Matamoros, near the bottom tip of Texas. Clothing accounts for about one- third of maquiladoras' production; one Juarez plant churns out 18,000 sports jackets a week. A plant in Nogales claims the title of world's biggest trombone maker. Suppliers of services also employ maquiladoras: In Juarez workers sort American supermarket coupons, in Tijuana they sort walnuts. For U.S. companies, large and small, manufacturing in Mexico has become an increasingly important weapon in the battle against overseas competitors. Years ago, Mexico lifted duties on imports of components used to make products sold in the U.S. When those goods cross back over the border, the U.S. imposes duties only on the value added by the Mexican labor, plus any foreign- made parts. But the 25-fold drop in the value of the peso since 1982 has made moving south of the border even more alluring. The average wage rate for unskilled Mexican labor is now one-sixth that of Japan and a little more than half that of Asia's ''four little dragons,'' Singapore, South Korea, Hong Kong, and Taiwan. Last year, U.S.-based companies shipped about $3 billion of duty-free parts to Mexican assembly plants. Ohio-based R.G. Barry Corp. stitches together its popular, fuzzy pink and blue slippers in Juarez. Says Jacque Fisher, Barry's vice president of manufacturing: ''We were getting such tough competition from imports that moving to Mexico was a matter of survival.'' General Motors Chairman Roger Smith positively beams about the strategic decision GM made in the mid-1970s not to rely too heavily on Far Eastern suppliers. Instead, a growing portion of GM's labor-intensive operations -- cutting and sewing car seats or assembling electrical wire harnesses -- are handled in 17 Mexican factories. Says Smith: ''For us these plants have been very successful.'' With many American manufacturers moving to ''just in time'' inventory systems, the quick delivery possible from Mexican border towns gives them an additional edge over Asian alternatives. ''Mexico's proximity makes it by far the preferred place to be,'' says Richard Michel, head of a General Electric group that supports a number of border factories. JAPANESE COMPANIES that manufacture in the U.S. have been quick to take advantage of this burgeoning backyard Hong Kong. By some estimates, the Japanese employ 30% of Tijuana's 25,000 maquiladora workers. Panasonic, which builds TV cabinets in Tijuana and ships them to the U.S. for final assembly, is expanding its 200,000-square-foot Mexican plant threefold, while Sanyo is tripling capacity in its Tijuana refrigerator plant. The Japanese also appear, once again, to have figured out how to run their plants more efficiently than the competition. At Panasonic's factory, staple guns go off in a rapid-fire staccato; they pop at a more leisurely pace in American-owned plants. For some Americans the new economic power of Mexico's border towns is unsettling. Veronica Kastrin-Callaghan's family owns a warehouse park in El Paso that handles maquiladora-made products from Juarez. Says she: ''Juarez has grown in recent years, both in size and in what it can accomplish technically. Now people around here talk about the importance of Juarez to El Paso, rather than the reverse. It's been a humbling experience.'' U.S. labor unions complain that the migration to Mexico is costing their members jobs. Says an AFL-CIO official in Washington: ''There's a direct connection between layoffs in this country and the opening of new plants in Mexico.'' Sensitive to such charges, many big U.S. companies decline even to confirm the size of their Mexican operations, though they argue persuasively that the trade-off is not between jobs in Pittsburgh and jobs in Chihuahua City, but between manufacturing in Mexico and going elsewhere abroad. In cities on the U.S. side of the border, only a handful of plants have sprung up to feed components to Mexican assemblers, though the number is growing. Most companies still find living with long supply lines cheaper than building new factories. Such cities as El Paso, Nogales, and Brownsville mainly serve as bedroom communities for the growing number of American executives who drive daily into Mexico. Cracks one maquiladora manager who lives in El Paso: ''This is the only place on earth where Mom and the kids can live in the U.S., while Dad commutes to the third world.'' That commute can make the daily grind on, say, New York's Major Deegan Expressway, or Los Angeles's Santa Monica Freeway seem like a Sunday outing. Cross from El Paso to Juarez over the high-walled bridge on Route 10, and you enter a world of bumpy, rutted streets, enormous traffic circles, and tired- looking supermarkets. The traffic is awful -- at any rate, no worse than being surrounded by a horde of New York cabbies. But beware of causing an accident. The police may demand the entire cost of repairs in cash on the spot. Since pollution control devices are a low priority, a haze of hot, stale air hovers everywhere. At night, youngsters looking for tips sip lighter fluid and spit it out in flames, lighting up the intersections for passing motorists. THE MAQUILADORAS themselves look pretty much like any small Sunbelt factory in the U.S. They are invariably sprawling, one-story concrete-block buildings, with a cafeteria and nurse's station tacked onto the side. Their windowless interiors can be dreary and are often filled with little more than smudged plywood tables, chairs, and countless bins jammed with things for workers to crimp, sort, or shove together. But hardly any of them qualify as outright sweatshops. A few factories are surprisingly modern and complex. In Juarez, Outboard Marine has installed millions of dollars' worth of elaborate new machinery in a plant that makes carburetors and drive controls for its Johnson and Evinrude motors. In Tijuana, Cobe Corp. assembles kidney dialysis equipment in a room so carefully filtered that it is virtually dirt-free. About 70% of maquiladora workers are women, usually with no more than a primary school education. Unlike many of the men in the factories, they rarely treat their jobs as a way station on the long journey to the U.S. side of the border. Says Guadalupe Mendosa, the Tijuana maquiladora worker: ''To go to the U.S. is tempting. But my family is here. Besides, the culture and traditions of the U.S. are hard to get used to.'' Most big U.S. manufacturers prefer the Mexican towns along the Texas portion of the nearly 2,000 mile border because they are closer to their Midwestern industrial bases. Unions are more active here, and 40-hour work weeks are standard rather than the 48-hour week that prevails in the hills around Tijuana. The flat, open countryside of eastern Mexico also permits construction of American-style industrial parks. In Juarez, where more than one-third of all maquiladora workers are employed, some 200 foreign-owned plants are concentrated in a half dozen big industrial parks. These parks offer some relief from the headaches that inevitably accompany doing business in Mexico. Typically, their Mexican owners provide water, sewer, and power hookups. Often they even build the factories. The companies in the parks organize extras for workers, such as athletic leagues. Parking lots are frequently sprinkled with volleyball nets and basketball hoops. During lunch breaks, employees stretch out on the green lawns in their brightly colored company smocks. Despite these amenities, most maquiladoras suffer turnover rates as high as 70% to 100% a year. Their young, unskilled employees are forever searching for shorter commutes or better working conditions. William Boyd, president of Fashion Enterprises Inc., whose coat factory in Juarez employs 1,100, figures he spends about $450,000 a year training new arrivals. TO MAINTAIN a steady supply of workers, some foreign-owned plants now advertise on the radio. A few have even begun sending buses into the hills to the cardboard-shack slums called ''colonias'' to round up potential employees. Because they are required only to pay the Mexican minimum wage, maquiladora managers assiduously avoid bidding up wages to attract and hold employees. Instead, they try to lure workers with fringes -- subsidized bus rides, cheap cafeterias, attendance bonuses, even Michael Jackson records. One plant manager with a major U.S. company estimates that such extras have boosted labor costs about 65%. Customs is another unavoidable hassle with which maquiladora managers must cope. Even duty-free goods have to go through the formalities of a border check. Mexican inspections are usually perfunctory and can sometimes be speeded up by passing the customs agent a cigarette stuffed with a $20 bill. But U.S. agents on the lookout for drugs are often excruciatingly rigorous. At any time during the day, their searches might back up traffic for hours, throwing schedules out the window. The delays caused by customs paperwork tempt a number of managers to cheat. ''Sometimes I need supplies from El Paso right away or the whole plant will shut down,'' says an operations supervisor at a Juarez plant. ''Or a customer in New York will promise a big order if I get him a sample in 24 hours, but customs takes 48 hours to do the paperwork. So I stick what I need in my trunk and hope no one asks me to open it. Someday I'll go to jail, but I don't know if it will be in Mexico or the States.'' One hazard maquiladora managers do not face is constant pressure from bureaucrats to fork over kickbacks and bribes. Mexicans call this practice ''la mordida'' or the bite. The Mexican government apparently takes pains to keep foreign-owned factories from being bitten. Says Richard Bolin, head of the Flagstaff Institute, an Arizona-based consulting group that specializes in world trade: ''I know of a customs officer who once tried to shake down an industrial park operator in Nogales. When he complained, that officer got a phone call from a top treasury official in Mexico City telling him to stop. He stopped.'' In many cities the rapid growth of the maquiladoras is straining local governments' ability to provide basic municipal services. In Tijuana, water pumps supplying homes and factories routinely shut down. Making a phone call from the U.S. to any Mexican border town can require 15 or 20 tries. Power outages and brownouts are common. Workers in Matamoros recently labored by candlelight. AS LONG AS these problems persist, many sophisticated components will not get made in Mexico. If the lights go out on an assembly line, companies pay a price in lower productivity. But a power failure in a semiconductor fabrication plant, say, could destroy an entire batch of expensive silicon wafers. International Rectifier Corp., which imports semiconductors for its electric converter plant in Tijuana, recently decided to build a $90-million semiconductor factory in California. David Kiepler, who manages the company's Mexican assembly operation, says that putting the plant in Tijuana was never an option. For now, companies whose products or prototypes require a lot of customizing should also look somewhere other than Mexico for help. ''In Singapore and Taiwan there's a die-cast shop and a chip-board assembler down every back alley,'' says Bill Ingram, the young maquiladora mogul whose Tijuana-based company does subcontracting for electrical, defense, and medical companies. ''They have the capital and the skills to make almost any change a customer wants. But there are no widget makers in Tijuana.'' According to Ingram, maquiladoras are best-suited for assembling mature products whose labor content is at least 30% of their manufactured cost. Some of the drawbacks to manufacturing in Mexico are slowly disappearing. To cope with the scarcity of well-trained Mexican engineers, the owners of industrial parks in both Juarez and Tijuana have built technical schools on their property. Honeywell recently solved its telephone tie-up by winning permission from the Mexican phone company to set up a microwave dish linking phones and computers in its Juarez factory with its technical staff in Dallas. Near Tijuana, American developer Trammel Crow has even devised a way to minimize border delays for the increasing number of U.S. suppliers doing business with maquiladoras. He is building a new California office and industrial park so close to the border that executives can simply walk across and hail a cab, eliminating a two-hour wait at customs when they return. Most important, attitudes of Mexico's business and political leaders have changed dramatically. Traditionally, the powerful families of the interior who control most Mexican industry have ignored the border economy. & For them the U.S. frontier is as foreign as Yuma and Laredo are to New Yorkers. Sheltered behind high tariffs, they thrived during the 1970s boom years by selling high-priced goods to a government made flush from rising oil prices. Because Mexican-made products are so expensive, maquiladoras buy barely 1% of their raw materials from domestic suppliers, mostly packaging materials and janitorial supplies. Now that the government's purse is emptying and factories are operating at 65% capacity, Mexican businessmen are finally trying hard to get orders from the maquiladoras. ''A year ago there was still very little interest,'' says management consultant Roberto Batres, head of the Arthur D. Little subsidiary in Mexico City. ''Today half our business is teaching Mexican companies how to sell to maquiladoras.'' Political leaders, in the past suspicious of any expansion of U.S. business interests in Mexico, are also at least talking a different line. Recently Mexican President Miguel de la Madrid proclaimed development of the maquiladoras a ''national priority.'' Two decades ago, the Mexican-American border -- the longest border in the world between a developed country and a developing one -- was essentially an industrial desert. Since then, much progress has been made. Despite the problems that remain, maquiladora managers and consultants predict employment in these foreign-owned factories will keep growing at about 10% to 12% a year, possibly faster if Mexico's politicians deliver on pledges of a more open economy. In all likelihood, the boom along the border has only just begun.