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Why Japan Inc. Is Steering Clear Of Mexico


International Business

WHY JAPAN INC. IS STEERING CLEAR OF MEXICO

Walk through Japan's small enclave in Mexico City, from the Japanese embassy to the Hotel Nikko, and you'll hear mostly grumbling. Japanese bankers grouse about the hit they took on Mexican debt. Japanese trading giants wrestle with sour investments in Mexican steel. Other Japanese lament collapsed deals and confusing laws. They complain about corruption, unskilled labor, and pothole-ridden highways. Says one Japanese executive: "We've had bad experiences here."

When Mexico opened its market six years ago, Mexicans expected -- and Americans feared -- a rush of Japanese investment. But Japanese companies are barely dipping a toe into Mexican waters. Far from home in a land that has dealt them nasty surprises in the past, the Japanese still wonder if Mexico's modernization is for real. "There's a basic lack of trust," says Mitsuo Sakaba, a Latin America director at Japan's Ministry of Foreign Affairs in Tokyo. "It's a very cold atmosphere."

Three years into Mexican President Carlos Salinas de Gortari's administration, no big new Japanese player has arrived. Japan, with less than 5% of the foreign investment in Mexico, still trails Britain and Germany and holds only one-twelfth of the U. S. total, which tops $21 billion. It all could change, but at least for now Japan's slow approach to Mexico suggests that U. S. manufacturers and policymakers may be overestimating the threat of Japan using Mexico as a cheap manufacturing platform. Instead, Mexico is one place where the U. S., with its strong cultural ties, still enjoys an advantage. "The Japanese are way behind the curve on Mexico," says a Western diplomat in Mexico City.

While Americans are busy positioning themselves in Mexico in anticipation of a free-trade deal, the Japanese are waiting. They want to see a done deal before committing. And they know that a big investment rush south could spark anti-Japanese fears in Washington. That, in turn, could lead to high North American content requirements in the free-trade agreement (FTA), forcing Japanese manufacturers to obtain more parts locally. But even with low barriers to trade, Japanese investment in Mexico is likely to be slow and incremental. Certainly, there will be no stampede. "The FTA does not guarantee trustworthiness," says Sakaba.

HARD SELL. Japan's reluctance mystifies Mexican officials, who privately complain that the Japanese are backtracking. Throughout the 1980s, Sanyo, Hitachi, Matsushita, and others set up assembly plants on the border. Salinas began trumpeting Mexico as a Pacific Rim country. As he moved Mexico toward a free-trade pact, the hope was that the Japanese would deepen their presence in low-wage Mexico. Now, even Salinas admits frustrations. "I told them that if they continued to wait, they would end up waiting forever," he says. "That would benefit neither them nor us."

The only big Japanese investor in Mexico is Nissan Motor Co., which arrived 30 years ago and now represents nearly half of Japan's Mexican business and government circles favor Americans who have long been active there stake. Nissan Mexicana President Shoichi Amemiya says that despite an impending free-trade agreement, Mexico is a hard sell in Tokyo. "People back home still don't believe in Mexican quality," he says. Frustrated by the Third World conditions in Mexico, many Japanese companies still put their North American investments north of the border. Sony Corp. considered Mexico for its $370 million TV plant but opted for Volkswagen's shuttered facility in Westmoreland County, Pa. "Labor cost is only one factor," says Koichi Kawakyu, the president of Sony's San Diego-based company, Display Products of America. "We need more high-skilled workers and technicians."

The Japanese also worry about Mexico's political volatility. While U. S. investors trust that Mexico's market opening is definite, the Japanese aren't sure. American investors enjoy the company of Mexico's young Ivy League-educated rulers and marvel at how good Mexican workers are once they're trained. By contrast, the Japanese dwell on how much training workers require. They look at Mexico's record trade deficit and worry about inflation. They wonder who will follow Salinas in 1994. "Many Mexican Presidents have been terrific for the first three years and then, whoosh, they change," says the president of a Japanese trading company in Mexico City.

CLUB MEX. The Japanese don't easily forget history, particularly one that has left them with bruises. In the late 1970s, for example, oil-hungry Japan forged an alliance with Mexico that guaranteed crude shipments to Japan, while the Japanese invested in Mexican steel works. Mexico's booming oil monopoly, Petroleos Mexicanos, seemed to have a limitless appetite for steel pipes. But Pemex bought its pipes elsewhere, and delays at the state-run steel mill pushed up costs at the Japanese mills. Then the 1982 debt crisis shriveled local demand. Today, government steel mills are on the block, but the Japanese aren't nibbling. "Mexico's not in the picture," says a spokesman for Kobe Steel in Tokyo.

Only two years ago, Japanese bankers took a big hit in the U. S.-sponsored Brady debt-reduction plan, which forced banks to forgive debt or lend anew. Japanese lenders lost some 60% of their Mexican portfolios in 1990, or about $4.3 billion, according to Japan's Foreign Ministry. Mexico's Ambassador to Japan, Alfredo Phillips, has been knocking on doors in Tokyo. But unlike U. S. banks such as Morgan Guaranty Trust Co. and Citicorp, which have rushed new loans into Mexico, Japanese banks are not convinced. "Our bitter experience in the past discourages us," says Yukihiro Fujiwara, senior managing director at Sanwa Bank Ltd. "We cannot forget the bloodshed."

Although the Japanese understand opaque decision-making in places such as Indonesia or Thailand, Mexico often stumps them. In a much-ballyhooed deal in 1988, Pemex reached a preliminary agreement with Mitsui Co. for a $450 million aromatics plant near Monterrey. Mitsui would build the plant for Pemex and receive payment in product. Finally, big Japanese cash was on line. But when the Mexicans brought the agreement home, Pemex accountants rejected it as too generous for Mitsui and reopened bidding. France's Spie Batignolles rushed in, and Mitsui, bitter and confused, has nearly dropped out, say Mexicans close to the deal.

The postmortems on the Mitsui deal spread the blame all around. U. S. oil-company executives say Mitsui, knowing how eager Mexico was for Japanese investment, crafted a sweet deal and got called on it. A Pemex official says the deal is proceeding, but slowly. And Mitsui is waiting "for Pemex to clarify their intent," says a Tokyo-based official.

But Mexicans say that with the right contacts and knowhow, the Japanese could have driven the deal home. In Mexico's clubby business and government circles, agreements often need the right follow-up: a mixture of cajoling and hardball threats. What's more, insiders add, Mitsui worked through a Mexican representative whose political contacts were passe. Such intrigues of dealmaking in Mexico favor Americans who have long been active in Mexico.

SUSHI RUNS. For now, the Japanese are sticking close to their maquiladora base along the U. S. border. Sony, Sanyo, and others have transformed Tijuana into the TV-making capital of the world. Japanese managers live a comfy California life in Chula Vista and Coronado, a short drive from San Diego's sushi bars.

But even in their border stronghold, the Japanese feel threatened. Country-of-origin rules in the free-trade pact, they fear, could punish them for using Asian parts. Currently, the companies import components to Long Beach, Calif., and truck them unpacked and duty-free to Tijuana. There, they assemble TVs, refrigerators, and other appliances and ship them back to the U. S. Japanese executives in Tijuana were rattled last year when a visiting Mexican Cabinet secretary remarked that with free trade, the maquiladora industry would disappear. It was just an off-hand joke. But the Japanese didn't think it was funny.

Other than maquiladoras, there's Nissan. The auto maker is plowing $1 billion into Mexico, $400 million of it into a new export plant to assemble compact Sentras in the city of Aguascalientes. Nissan says it does not plan to ship cars to the U. S., where the company already builds Sentras at a plant in Smyrna, Tenn. Instead, the new plant will export to the rest of Latin America and, in a bold gamble starting late next year, back to Japan. Nissan Mexicana President Amemiya is betting he can match Japanese quality. But judging from the mood in Mexico City and Tokyo, Nissan will have to score a spectacular success before the rest of the Japanese bet their money on Mexico.Stephen Baker in Mexico City and Karen Lowry Miller in Tokyo


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