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Mexican Makeover


International Business: MEXICO

MEXICAN MAKEOVER

NAFTA creates the world's newest industrial power

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 (NAFTA), 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, makes up 7% of Mexico's 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 that were 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 in foreign investment in Mexico. 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. Just as important, however, NAFTA guarantees foreigners the same rights as Mexican investors and reassures them that Mexico will continue on its free-market course. "When we invest, we consider political stability," says Young M. Kwon, president of Samsung Electromechanics in Tijuana.

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. NAFTA "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 huge problems. Indeed, it seems there are really two 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. 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.

Nevertheless, Mexico is laying a solid foundation for economic growth and employment in the years ahead. Increasingly, Mexican engineers are designing products and testing them in multimillion-dollar research and development centers. NAFTA has also given a boost to more traditional industries. Agribusinesses are exporting 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. clients that once farmed out such work to India.

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. Half a million Mexicans make parts and assemble vehicles for eight of the world's 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. In Puebla, 70 parts makers cluster around Volkswagen's sprawling plant, which produces 600 Beetles and 900 other VW cars per day.BEETLE POWER. One supplier 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. "We were only supposed to be 130 people, but VW has thrown so much stuff at us, and we took it," Reithofer says. "It's miraculous."

Similar explosive growth is happening in Guadalajara, the country's second-largest city. A joint government-business effort has lured 25 foreign suppliers to set up there 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 IBM complex nearby, workers produce magnetic readers for computer hard-disk drives. The parts used to be made in Singapore, Taiwan, and Malaysia. Now, IBM ships them from Guadalajara by air each day to 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."

Mexico's textile industry is also bringing factories and jobs back from Asia. NAFTA rescued Mexico's 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, U.S. mills are rushing to invest. In 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. In Puebla, several Mexican families set up a venture, Skytex, that is turning out two million yards of polyester fabric per month. Half of it goes 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."

As the border becomes more porous, many top Mexican 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 U.S., it makes insulated panels and ladders, and it has merged businesses with Johnson Controls to manufacture and sell batteries in Mexico and South America. "For us, NAFTA is a single market--we feel we're an American company," says General Director Eugenio Clariond Reyes.EDUCATION GAP. In Mexico, though, free trade is 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.

Still, Mexico has achieved a lot in five years. The country's new efficiencies and export mentality should help diversify its trade beyond NAFTA to new markets in 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 think tank in Mexico City. 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.By Geri Smith in Guadalajara, with Elisabeth Malkin in PueblaReturn to top


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