>From Business Week
Surfing for clients on the Internet, a Mexican entrepreneur in Monterrey has
turned a small metal-working company into a $10 million-a-year exporter to
General Electric Co. and Siemens in just five years. In Guadalajara, a
26-year-old high school graduate earns more than $500 a month inspecting
silicon components that will help power IBM computers around the world.
Across the country, in the city of Puebla, 15,000 Mexican workers churn out
Volkswagen's new Beetle for export to the world, including Germany.
Mexico's economy is undergoing a stunning transformation. Five years after
the launch of the North American Free Trade Agreement, it is fast becoming
an industrial power. Free trade with the U.S. and Canada is turning the
country from a mere assembler of cheap, low-quality goods into a reliable
exporter of sophisticated products from auto brake systems to laptop
computers. Since 1993, exports have more than doubled, to $115 billion.
Manufactured goods now make up close to 90% of Mexico's sales abroad, up
from 77% five years ago.
Oil, by contrast, is now 7% of exports, down from 22% in 1993. Mexico's
manufacturing sector pulled the economy along at 4.5% growth this year--even
though the government still depends on oil for 35% of its budget revenues.
President Ernesto Zedillo has been forced to slash spending and raise taxes
to make up for the shortfall. That squeeze could slow growth to 2.5% next
year, economists say, and helps explain why Mexico's bolsa is down 40% this
year in dollar terms. Still, NAFTA has helped protect Mexico from both the
plunge in oil prices and the fallout from the global emerging-markets
crisis. ''This is a completely different economy than Mexico had a decade
ago,'' says sociologist Federico Reyes Heroles.
Mexico's industrial surge also means that North America is winning back
thousands of jobs that had been lost to Asia as U.S. and Canadian companies
shifted production to lower-cost production sites in the last decade. Now,
for example, IBM is making computer components in Guadalajara formerly made
in Singapore. And clothing retailers such as Gap Inc. and Liz Claiborne are
increasingly buying garments from Mexican contractors, who can offer faster
delivery than Asians. The shift back from Asia is just part of a boom of
foreign investment in Mexico. Not only American and Canadian companies but
also European and Asian multinationals have been pouring billions into
Mexico's economy. As companies from Samsung to Daimler Benz to DuPont open
factories or expand existing operations, foreign direct investment has
soared from $4 billion in 1993 to an average $10 billion per year. Moreover,
the foreign units are
no longer mainly maquiladoras, assembly plants huddled along the
U.S.-Mexico border. Now, many are more sophisticated factories scattered
throughout the country.
The foreigners are attracted by Mexico's low-cost labor--averaging $1.60 an
hour in manufacturing, compared with $6.11 in Taiwan and less than 40 cents
in China--and by duty-free access to the U.S. market. But just as important,
NAFTA guarantees foreigners the same rights as Mexican investors and
reassures them that Mexico will continue on its free-market course. That's
one reason foreign investors kept coming even after the peso collapse of
1994. ''When we invest, we consider political stability,'' says Young M.
Kwon, president of Samsung Electromechanics in Tijuana. Adds
Commerce & Industry Secretary Herminio Blanco: ''Now, Mexico is viewed by
the world as a strategic place to invest.''
SCATTERED BENEFITS. But the makeover of Mexican industry goes far beyond
export and investment numbers. From small entrepreneurs to executives of the
country's new multinationals, Mexican managers are becoming more confident
as they respond to heightened competition at home and to the tough demands
of foreign customers. Through joint ventures with foreign companies, Mexican
executives are becoming more accountable to shareholders. ''The North
American Free Trade Agreement has given Mexicans a new vision of the
world,'' says Clemente Ruiz Duran, an economist at the National Autonomous
University of Mexico.
To be sure, Mexico still faces tremendous problems. Indeed, it seems there
are really two Mexican economies, with free trade benefiting only one.
Despite a sharp increase in manufacturing employment, Mexico still suffers
from a chronic shortage of jobs, with millions subsisting on part-time work
in the ''informal'' economy. That's partly because the 1995 recession wiped
out 2 million jobs. Mexico needs to generate 1 million new jobs each year
just to absorb young people entering the job market. To achieve that will
require even more investment and better training. ''We're still waiting to
feel all these benefits from NAFTA,'' says Francisco Hernandez Juarez, a
prominent labor leader who initially supported NAFTA but now feels
disappointed.
Nevertheless, Mexico is laying a solid foundation for economic growth and
employment in the years ahead. Around cities such as Guadalajara and Puebla,
where protected industries once turned out goods strictly for the local
market, new factories are humming. Many plants are producing high-quality
versions of goods Mexico had already been known for--auto parts and
electronic components, for example. But increasingly, local engineers are
designing the products and testing them in multimillion-dollar research and
development centers. NAFTA has nurtured an elite new class of skilled
Mexican workers who earn up to two-thirds more than the average $13 per day
for Mexican factory workers.
NAFTA has also given a boost to more traditional industries. Furniture
exports, for example, have risen by more than 25% annually since 1995.
Agro-industry is gaining momentum, with exports of frozen products to
markets as far away as Sweden. And Mexican service businesses are
processing U.S. credit-card data and airline tickets as well as creating
custom-made software for U.S. corporations that once farmed out such work to
programmers in India.
MASS MIGRATION. But the auto industry stands out as Mexico's single most
important manufacturing business. It has become integrated with the U.S.
industry as parts and vehicles shuttle back and forth across the border.
More than 500,000 Mexicans now make parts and assemble vehicles for eight of
the world's biggest auto makers, including Detroit's Big Three. NAFTA's
rules of origin, requiring high North American-made content in cars, have
forced European and Asian auto makers to bring their foreign parts suppliers
to Mexico as well as buy from local companies. That has given a boost to
cities such as Puebla, 125 kilometers east of Mexico City. There, 70 parts
makers cluster around Volkswagen's sprawling plant, which produces
600 new Beetles and 900 other VW cars per day.
One major supplier is Sommer Allibert Duroplast, a French-Mexican joint
venture with $70 million in 1998 sales. It employs 950 workers producing
plastic instrument panels, consoles, and doors for the Beetle. General
Manager Faustino Franco Rech, a Spaniard, says his goal is to ''nationalize
our suppliers to the maximum--the more we buy in Mexico, the better.'' Next
door is Refa Mexicana, a metal-stamping plant started by Canada-based
entrepreneur Klaus Reithofer four years ago with a $4 million investment.
Today, he employs 1,300 people working three shifts and generating $57
million in annual sales to VW and others. ''We were only supposed to be 130
people, but VW has thrown so much stuff at us, and we took it,'' he says.
''It's miraculous.''
Similar explosive growth is happening in the electronics belt around
Tijuana on the U.S. border. South Korea's Samsung plans to spend $150
million to expand production of color picture tubes at its 4,500-employee
complex, which currently makes TV sets and computer monitors worth $900
million annually, mostly for export to the U.S. Samsung and other TV makers
have brought some 45 Korean suppliers over the past four years to the border
area. These days, much of the electronics production is spreading south to
Guadalajara, the country's second-largest city. A joint government-business
effort has lured 25 suppliers to set up shop in the city since 1995.
Taiwan's Universal Scientific Industrial Co. (USI) this year began
producing 2,900 computer motherboards daily for IBM in a new plant
employing 270 people. Before, the boards were shipped in from Taiwan.
At the huge IBM complex nearby, 26-year-old Ivette Cruz peers into a
microscope, searching for defects in silicon wafers that are part of
magnetic readers for computer hard-disk drives. A high school graduate, she
hopes to participate in an IBM program that will pay her tuition to earn an
industrial engineering degree at night school. ''I always saw this as being
a career with a real future,'' she says. More than 7,000 employees of IBM
and its subcontractors work at the plant. The parts used to be made in
Singapore, Taiwan, and Malaysia. Now, IBM's Guadalajara plant produces and
ships them by air each day to a plant in San Jose, Calif., where hard drives
are assembled for IBM's laptops, desktops, and servers worldwide. Plant
Manager Alfonso Alva Rosano says NAFTA helped persuade IBM to shift some
operations from Asia to IBM de Mexico, which in five years has boosted
exports from $350 million to $2 billion. ''If we weren't making the
subassemblies here,'' Alva Rosano says, ''chances are
the whole process would have moved to the Far East.''
SHORTER JOURNEY. Textiles are another Mexican industry bringing factories
and jobs back from Asia. NAFTA rescued Mexico's outmoded, declining textile
makers by eliminating U.S. tariffs and quotas on fabric and garments made
with yarn produced anywhere in the three member countries. In 1996, Mexico
overtook China as the largest supplier of textiles and garments to the U.S.
Now, Mexico is going a step further by producing not only garments but also
high-quality textiles--and U.S. mills are rushing to invest. In the port
city of Altamira on the Gulf of Mexico, for example, Guilford Mills Inc.,
based in Greensboro, N.C., is building a $100 million knitting, dyeing, and
finishing plant. DuPont and Mexican partner Alpek are building a polyester
plant nearby.
Far from being crushed by the invasion of foreign investors, many Mexican
textile makers are staying competitive by investing in technology. The
change is visible in Puebla, Mexico's traditional textile center. Skytex, a
company set up by several Mexican families to make polyester fabric in a
factory financed by a Japanese equipment supplier, exports half of its
monthly production of 2 million yards to the U.S. ''This plant was conceived
for NAFTA,'' says Deputy Sales Director Alberto Serur. ''I can ship to the
border in 18 hours, while the Asians take 21 days.''
NAFTA's rules favoring North American-made garments are helping some
economically depressed areas. More than 140 plants, mostly garment makers,
have located in Yucatan and Oaxaca states, which previously had little
industry. But for many small Mexican companies, high borrowing costs are a
barrier to upgrading technology. Big corporations with access to cheaper
foreign financing have reaped the lion's share of the benefits of Mexico's
industrial surge. ''You're clearly concentrating power in the top producers
that have financial power,'' says Raul Hinojosa, a professor of public
policy at the University of California at Los Angeles. A NAFTA study led by
Hinojosa found that the top 50 companies account for one-half of Mexican
exports and for the bulk of recent export growth.
Still, there are signs that smaller companies are learning how to sell
their wares abroad. Before NAFTA, 21,000 Mexican companies exported their
goods. Today, that number has risen to 33,000, says Commerce Secretary
Blanco. Industrial de Fosfatos, a producer of fire-extinguisher chemical
powders with 100 employees in Ciudad Victoria in the northern state of
Tamaulipas, is one company that has carved out a global niche. Exports to
the U.S., Europe, and Asia account for 85% of sales, which rose to around
$13 million this year from $8.5 million in 1993. General Director Fernando
Macedo Balboa estimates that Fosfatos has 18% of the world market. Although
tariffs on Fosfatos' products were low even before the free-trade accord,
Macedo believes NAFTA has created greater confidence in
Fosfatos among prospective overseas buyers. ''We've noticed a big
difference in their perception of Mexican companies,'' Macedo says.
In fact, Mexican managers are now seeing themselves differently. In the top
ranks of Mexican businesses, many executives say they now consider their
companies to be North American corporations. Take Monterrey-based Grupo
IMSA, a $1.5 billion maker of steel, auto parts, and construction products.
In the past few years, IMSA has bought four plants in the U.S. and is
building a fifth. It makes auto batteries with Johnson Controls, ladders
with a unit of St. Louis-based Emerson Electric, and prefabricated building
components with Varco-Prudem, a division of steelmaker LTB. Forty percent
of the group's sales now come from its manufacturing operations outside
Mexico plus exports. ''For us, NAFTA is a single market--we feel we're an
American company,'' says Eugenio Clariond Reyes, Grupo IMSA's general
director.
WAGE GAP. Today, polls show that most Mexicans--even leftist politicians who
opposed the free-trade treaty--believe that NAFTA has benefited the country.
But free trade is also exposing more starkly than ever some of the failures
of Mexican society, particularly in education. Many analysts believed NAFTA
would generate years of demand for Mexico's masses of unskilled, poorly
educated workers, who average only 5 1/2 years of schooling. Instead, many
employers are leapfrogging to high-tech operations that require a high
school education even for assembly-line operators. Since 1993, the gap has
widened between wages at local manufacturers and those at top export
manufacturers, which are up to 67% higher.
For the coming decade, labor-intensive assembly tasks will have to provide
employment for many of Mexico's millions of job-seekers. But ''for Mexico to
prosper, it's not enough to be a manufacturing country,'' says Jaime Reyes,
50, who heads Hewlett-Packard Co. in Mexico. ''There's no better way to be
viable than by designing our own products with our own technology.'' That's
what his team of 30 engineers is doing. They're in charge of designing paper
input mechanisms for HP LaserJet printers worldwide. The next step will be
for more Mexican-owned companies to do more R&D with their own resources.
No doubt, Mexico has achieved a lot in five years. It already exports twice
as much as Brazil with an economy half as big. Its new efficiencies and
export mentality should help diversify its trade beyond NAFTA, with Latin
America and the rest of the world. ''Businesspeople are looking outside the
country and into the future,'' says political scientist Luis Rubio of the
Center of Research for Development, a Mexico City think tank. For companies
that have succeeded in Mexico's open market, ''it's no longer, 'Those darn
gringos,''' Rubio says, ''but 'How can we beat them at their own game?''' In
a dog-eat-dog global economy, that kind of attitude should serve Mexicans
well.
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