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Mexico: Investment Continues Despite Global Meltdown
Area Development / November 1998

By Larry Luxner

WASHINGTON -- Mexican President Ernesto Zedillo says his country will maintain its current fiscal and monetary policies to cope with the impact of the world's growing financial chaos. Finance Minister Jose Angel Gurria, meanwhile, says Mexico is not in crisis at all.

"You have to watch your language," he told reporters Sep. 24, "because crisis is what is happening in Russia, where there are real political, financial and social crises." Gurria added that the "financial instability" which Mexico has been going through recently is "a result of the worldwide volatility which was transmitted to Mexico through stock and capital markets, and which has been combated by the authorities using the tools at hand."

He said the Zedillo government favors the creation of an international authority which would monitor financial systems in each country in order to avoid further crises, though he added that Mexico cannot restrict capital flows, as has been suggested by the International Monetary Fund -- which views the restriction of speculative capital as a valid means of forestalling the damage caused by capital flight in times of international crisis.

"The Mexican economy keeps growing in spite of a reduction in oil income and unstable international financial markets," says the Mexican Embassy in Washington.

In his State of the Union address on Sept. 1, President Ernesto Zedillo forecast an average growth rate of 5% a year for the 1996-2000 period, which he said implied around 4% annual growth in 1999 and 2000. In the context of a slowing U.S. economy, weak oil prices and high domestic interest rates, says Santander Investment, "this number now looks optimistic."

A few weeks after Zedillo's address, Mexico's Finance Ministry revised its 1998 growth estimate to 4.4%. That's less than the 5% GDP growth it was predicting before the crisis, but more than the 3% expected by analysts. In addition, the ministry says Mexico will end the year with inflation at 17%, interest rates below 23.5% and the peso at 10.1 to the dollar. It adds that growth next year will be around 3.4%.

Interestingly, during the first half of this decade, Mexico received half of all foreign investment in Latin America. Over the past few years, however, Brazil has taken over as the leading recipient of foreign investment, and in 1997 captured 36% of all foreign capital; Mexico, meanwhile, got 20%. Analysts say that's because in the early 90s, privatizations generated massive income, but that the "second wave" of privatizations has failed to appear in Mexico. Brazil, meanwhile, has entered that second wave, while Mexican authorities debate the merits of the issue and money goes elsewhere.

On the plus side, Duff & Phelps Credit Rating Co. plans to maintain its favorable credit ratings for Mexico. DCR says Mexico has a sufficiently strong basic economy to withstand the current crisis, and "has made a lot of effort this year to reduce the risks of foreign debt and to ensure that it reaches its macroeconomic goals."

According to the Mexican Secretariat of Finance and Public Credit, Mexico's industrial production rose 7% in the 12 months ending June 30, 1998. Output by domestic man-ufacturers increased by 7.9%, while output by export-oriented maquiladoras rose by 9.5%. Due to higher energy use by companies, homes and the government, utilities grew 7.3% in June 1998, while construction activity rose 3.4% and mining activity was up 3.3%.

Mexico currently ranks as the 10th biggest exporting nation in the world, with total 1997 exports exceeding $110 billion, and exports so far this year reaching $67 billion.

Personnel employed in Mexico's all-important maquiladora export industry was up 11.5% in June vs. the same month of last year, and has increased 13.8% in the first six months of 1998 to 981,302, says the National Statistical Institute. The number of production technicians increased by 16.7%, administrative employees by 14%, male workers by 15.6% and female workers by 11.9%.

During the first half of this year, Mexico was the only Latin American country to rank among the United States' 10 most important trading partners in the electronics sector, and in fact was the second-most important worldwide, after Japan. The Electronics Industry Alliance says Mexico sold a record $9.7 billion worth of electronics goods to the United States from January to June 1998, a 24% increase over last year, and bought almost $2 billion from the U.S., a 17% increase.

Mexico is also an increasingly important buyer of U.S. goods -- a trend likely to continue as long as the Mexican economy keeps growing.

The United States actively encourages the export of U.S. goods to Mexico. In fact, the U.S. Embassy in Mexico City will soon inaugurate the Ronald Brown Business Center. This facility -- part of the $2.5 million renovation of the U.S. Trade Center in Mexico City -- offers U.S. exporters of goods and services having more than 50% U.S. content all the comforts of home, without the prices and aggravation normally associated with new office startup in a foreign country.

The Ronald Brown Business Center has 10 standard offices, two executive offices and two conference rooms. All options are available for either short or long-term lease. New clients receive a complete business briefing and commercial intelligence overview by U.S. Foreign Commercial Service staff.

In addition to the U.S. Embassy, 26 individual states have trade offices in Mexico City, while two others offer trade management services. In mid-September, New Jersey Gov. Christine Todd Whitman led a trade mission of 78 executives from AT&T, Lucent Tecnologies, Bristol Myers-Squibb, Merck & Co. and other New Jersey-based multinationals -- all of them hoping to boost trade between Mexico and the Garden State.

"Mexico is a critical market to the United States and to the state of New Jersey," said New Jersey Commerce Secretary Gualberto Medina, adding that his state's exports to Mexico have jumped from $650 million in 1993 to $993 million last year.

But the relationship between Mexico and the United States -- which along with Canada are the three members of the North American Free Trade Agreement -- aren't without problems.

In late September, Mexico requested the creation of an arbitration panel to resolve the two-year-old controversy derived from the Clinton administration's refusal to allow Mexican trucks access to California, New Mexico, Arizona and Texas, as well as for Mexicans to invest in cross-border transportation services within U.S. territory.

The Mexican Embassy in Washington says that as of Dec. 18, 1995, the United States should have allowed such access to U.S. border states and, starting on Jan. 1, 1997, Mexican investors were supposed to have had access to this sector. However, despite numerous meetings held between officials from both countries, the United States has still not eliminated the restrictions which it unilaterally adopted.

"In spite of its decision to continue these procedures to resolve the dispute," says the embassy, "Mexico is still open to finding a negotiated solution that allows the parties to fulfill their commitments under NAFTA."

On a separate issue, U.S. and Mexican officials are still negotiating a Mexican request to increase import levels of garments made without fabric formed in North America.

Mexican importers have saturated the amount of supplies allowed in under the so-called tariff preference levels for the first time since NAFTA took effect in 1994.

Allan Grant, a senior trade analyst at International Development Systems Inc. in Washington, says one type of tariff prference level, which includes all types of cotton or man-made fiber apparel, was filled Sep. 11, when supplies reached 45 million square-meter equivalents. Another category -- this one for garments sewn in Mexico of pieces cut in the U.S. but with fabric made outside of a NAFTA country -- was filled at 25 million square feet on Sep. 3.

Once the limits are reached, importers will have to pay higher tariffs when the goods cross the U.S. border. According to Grant, more and more Asian garment manufacturers are taking advantage of Mexico's low labor costs and the favorable tariffs given to Mexican-made products by setting up factories in Mexico itself.

"The first couple of years of NAFTA, they were underutilized, but last year they started to be used up," Grant told The Journal of Commerce. "This year, they're filled up and it's a nightmare for people."

Despite the problems, U.S. and foreign investment in Mexico's manufacturing sector continues unabated. Typical of new manufacturing investments is Alabama-based SCI Systems Inc. which announced in September that it's building a 100,000-square-foot "greenfield" facility in Apodaca, Nuevo León. The plant, to complement existing SCI facilities in Mexico City and Guadalajara, will make direct broadcast satellite receivers for a large European multinational, as well as electronic subassemblies for a family of medical products for a U.S. company.

SCI says it selected the Monterrey area "because of its growing importance as an industrial center in Mexico, its readily available and skilled labor, and its transportation proximity to the United States."

In addition, Dupont will invest $300 million in Mexico to build a polyester, short fiber plant. During 1997, Dupont's Mexican sales were $1 billion

Meanwhile, the Coca-Cola bottling plant in Toluca, to be operating at full capacity by year's end, represents a $50 million investment. The facility's first three production lines went into operation in the summer, and will have a capacity of about 2.5 million cases of Coke per month when in full operation.

Not all the so-called maquiladora operations are located along the U.S.-Mexican border. In early October, a Mexican-Japanese auto-parts joint venture said it would become the first firm to set up maquila opera-tions in the southern state of Chiapas, which has been plagued by sporadic fighting between government troops and leftist rebels. Axa-Yazaki Monterrey plans to build a factory in the state capital of Tuxtla Gutierrez. Initial investment is $5 million, with production set to begin by November 1999.

The plant will produce cables, harnesses and other auto parts destined for the North American market, for such clients as Nissan, Ford, Chrysler, GM, Toyota, Subaru, Isuzu, Mitsubishi and Mazda. Chiapas is one of Mexico's poorest states, with a very limited industrial base. The factory -- with its expected employment of 2,300 workers -- is therefore welcome news for the Mexican government.

Here's a look at some other recent manufacturing investments in Mexico:

* Jeans manufacturer Jordache will soon begin building an apparel plant in the southern Yucatan city of Valladolid. Jordache will make jeans at the factory, which will operate as an in-bond manufacturer. It isn't known how much capital the company is investing, though the amount is considerable -- given that the plant will employ at least 2,000 people.

* U.S. toy giant Mattel plans to open its fourth factory in Mexico, following a $25 million investment. Mattel, which among other things manufactures the Barbie and Disney lines, expects production at the new plant to complete supply in Mexico and end imports of its own toys, while saving local consumers money.

* Switzerland's Nestle will have invested $100 million in Mexico by year's end -- 25% of that in its milk processing division. Nestle, with 7% of the Mexican milk market, has seven processing plants in Mexico; it now plans on increasing production at its Chiapas plant by 40% in an effort to boost exports to Central America.

* Germany's BASF is building a 130-ton polymer facility in its Altamira chemical complex in the northern state of Tamaulipas. ABS is used to mold telephone apparatus, computers and vacuum bodies, components, panels, board frames and auto parts.

* Singapore's Nat Steel Electronics plans to spend $57 million for the acquisition of new plants and equipment in Mexico and elsewhere. The company opened its first electronics plant in Guadalajara in 1996, investing $20 million.

* French glass fiber manufacturer Vetrotex-America says it'll invest $110 million to set up a glass fiber plant in the state of Tlaxcala, in central Mexico. The company is a unit of Saint Gobain, which produces fiber and plastics for the electronics industry, and which owns 17 factories in Mexico under another subsidiary, Mexalit.

* Sweden's Volvo AB is negotiating the acquisition of part of MASA, Mexico's largest bus manufacturer. The deal -- whose dollar value is unknown at this time -- would be carried out jointly with Henlys PLC, Volvo's British partner.

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