November 1, 2014

International Business: Mexico's Risks And Rewards

David Poppe | 2/1/1996
Imagine living in a country that one year enjoys 3.5% growth in Gross Domestic Product, unemployment of 3.2% and a 7% inflation rate. The next year, after contentious national elections, Gross Domestic Product shrinks 7%. Inflation soars to 55%. Unemployment more than doubles to 6.8% as one million people lose their jobs. The national currency loses half its value.

It's a nightmarish scenario, but it is also Mexican President Ernesto Zedillo Ponce de Leon's reality. So is this: in December, there were by some estimates an average of five demonstrations a day against the government. The Paseo de la Reforma, a wide, tree-lined boulevard in Mexico City's central business district, shuts down frequently for protests.

Demonstrators complain they can't find work and can't keep up with their bank loans. Or they complain about the systemic government corruption Zedillo is trying to address. Despite what Jerry Haar of the University of Miami's North-South Center calls an "Aztec fatalism," the country these days seems unstable.

"I think that (1995) was the worst in our whole life," says Ruperto Flores y Fernandez, vice president of the National Chamber of Commerce in Mexico City.

And while many in Mexico put on a brave face and say things can't get any worse, few experts believe things will improve much this year. "The fashionable thing to tell you is that things are going to get better," says John M. Bruton, executive vice president of the American Chamber of Commerce of Mexico, in Mexico City. "But we're not looking for (1996) to be significantly better."

For the U.S. in general and Florida specifically, that prognosis is worrisome. Mexico is trying to climb out of its economic hole by exporting more, particularly in agriculture. Florida farmers will feel heavy pressure from cheap Mexican produce for years to come.

Already, an abundance of Mexican winter tomatoes flooding into the U.S. has threatened many Florida farmers' existence. Last winter, wholesale tomato prices dropped as low as 12 cents/lb., less than one-third normal levels. And the Florida Tomato Exchange, a growers' cooperative, says Mexican tomato acreage was up 31% in 1995. Florida farmers complain Mexico not only has currency and labor-cost advantages, but also lower costs for environmental and safety regulations.

Guillermo Lopez Escamilla, general director of the government's Trade and Industrial Development Ministry, says Mexico hopes to export more oranges, guavas, avocados and watermelons to the U.S. in coming years. Lopez, who brings his family to Orlando for vacation every year and is knowledgeable about Florida, suggests the state's orange groves would be better converted to malls and housing tracts once Mexico's citrus industry matures.

Overall, Mexico exported roughly $80 billion worth of goods and services in 1995, up from $61 billion in 1994. Through October, Mexico had a positive 1995 trade balance of $6.2 billion, compared to an $18.5 billion trade deficit for 1994, according to the American Chamber of Commerce.

Much of that turnaround has come at American expense. The U.S. posted a $1.4 billion trade surplus with Mexico in 1994 but suffered a trade deficit estimated at $15 billion in 1995, a major reason why the North American Free Trade Agreement (NAFTA) no longer seems like such a good idea to some.

It was Mexico's trade deficit combined with its heavy reliance on dollar-denominated short-term debt -- called Tesobonos -- that led to the fiscal meltdown of late 1994. When Mexico devalued its currency to slow trade deficit growth, foreign investors dumped their Tesobonos, draining the economy of some $30 billion almost overnight. Although it has 95 million people, Mexico's economy is roughly the same size as Florida's. So losing $30 billion was a huge blow.

But the Zedillo administration -- often derided for its methodical approach to everything -- has not hedged in its commitment to free markets. "We have learned very quickly from our mistakes," says Lopez Escamilla. "Now we are trying for sustained growth based on production, not financial stimulation."

Despite alarming social unrest, Zedillo has resisted calls to raise tariffs and appears unwavering in his commitment to streamline the government bureaucracy and loosen the autocratic grip exerted over the country by his own PRI party. He's also committed to privatizing state-run enterprises such as electrical and petrochemical plants and even airports.

And Mexico's new emphasis on exports isn't all bad for Florida; Mexico depends on American suppliers for many of the materials it assembles into finished goods. For all its troubles, Mexico bought more U.S. products in 1995 than any country save Canada or Japan.

Bruton suggests Americans underestimate Mexico's importance as a trading partner. In 1982, during Mexico's last economic crisis, U.S. sales to Mexico dropped 85%. In 1995, they dropped 9%, from $51.4 billion in 1994 to about $47 billion.

Of that reduction, Bruton says, consumer goods were off 60%. But sales of so-called intermediate goods, or the raw materials that are manufactured or assembled into finished goods, were up. "What we're selling (to Mexico) is all the stuff you don't recognize as a product," says Robert W. Miller, director of the U.S. Commerce Department's Mexico City Trade Center.

And there are opportunities still, even in agriculture. Lopez says Mexican farmers must import American machinery and expertise to stay competitive. Mexican farmers need joint venture partners to help them turn oranges and guavas into juice and other export-ready products. Lopez can rattle off lists of other products Mexico must import: educational equipment, computers, software, machine tools and military equipment, to name a few.

Miami's Ryder System Inc.'s experience in Mexico in 1995 offers a good example of a company that has capitalized on opportunity. In November 1994, Ryder announced plans to invest $250 million to develop its leasing business, maintain commercial truck fleets and offer logistics services to businesses that need help moving freight.

Devaluation dried up the market for new truck leases, but it also created demand for logistics aid, as exporters needed to find ways to move products from the factory to the border. Little more than a year after deciding to expand into Mexico, Ryder has 100 employees there and solid relationships with several large Mexican companies and with the Mexico divisions of U.S. giants like Procter & Gamble. "I would say Mexico might be about six months off our business plan but looking pretty good," says Dennis M. Custage, Ryder's vice president for international marketing and sales.

Custage also says commercial truck leasing shows signs of improving in 1996. "They still need to modernize their fleet," he says.

Peter R. Harrison, a senior director with real estate giant Cushman & Wakefield in Miami, worked in Mexico City from early 1994 through August 1995. He sees plenty of interest in Mexico from commercial banks, investment banks and telephone companies, among others, despite peak rents in prime Mexico City locations of $45 per square foot, down from $65 in 1994. That's about double the Miami rate and does not include any landlord services.

"The reality is, you still have a country with somewhere between 90 and 100 million people that has never had services," he says.

Lopez and others, however, say European and Japanese companies generally seem more willing to cope with the volatility in Mexico than Americans.

"I have this feeling that some or all of the opportunities in Mexico are being taken by other countries," Lopez says. "The American firms look very short term. I think it's a problem."

"I can tell you there are more Asian companies wanting to invest in Mexico (than U.S. companies)," says Arturo Casarin Alcivar, a government-authorized distributor of military equipment. Currently, Casarin is trying to import materials to make bulletproof vests for the Mexican military. He says English and French suppliers seem more interested in the business than American firms.

In fact, many Mexican officials who spoke with Florida Trend complain that American business doesn't take the Mexican market seriously. Mexico, after all, buys 60% of all its imports from the U.S. "People think that because of NAFTA the enemy is Mexico," says Lopez. "That's not true. America's enemy is Asia. We have an economic crisis in 1995 and we still import about $50 billion from the U.S. Is the trade deficit in the U.S. because of NAFTA? No, it's because of Asia."

Bruton, of the American Chamber, says U.S. businesses may indeed underestimate Mexico. "This is still a relevant market, as proven by the trade flows. You may have thought it was gone, but it's there," he says.

Nevertheless, Mexico's current instability is frightening. Harrison, the Miami real estate broker, left Mexico City not because of the business climate but because of the soaring crime rate. Business people in Mexico City casually describe robbers invading their homes and being mugged at gunpoint.

Zedillo has broken tradition by cracking down on corruption inside the administration of former President Carlos Salinas de Gortari, whose brother Raul apparently squirreled away at least $84 million in Swiss bank accounts. This has made him unpopular with the old guard within his PRI party, which has run the country for 79 years.

Meanwhile, his free-market policies and the feeble economy make him unpopular with working people. But Zedillo doesn't waver.

"They are not populist," says Bruton. "They are professional. They are pursuing economic and political change without regard for popularity."

Ruperto Flores, of the Mexican National Chamber, believes Zedillo will be the president who transforms the country into a more democratic, enterprise-oriented society. "That situation will be good for Mexico in the long term," he says, "but right now we are suffering."

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