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Plant Sites in Mexico
Area Development / August 1996

By Larry Luxner

WASHINGTON -- After 18 months of uncertainty, the Mexican economy is finally beginning to turn itself around -- and by all accounts, the country's crucial manufacturing sector is leading that recovery.

According to government statistics, Mexico's Gross Domestic Product during the first quarter of this year declined by only 1%, compared with a 6.9% drop in 1995, and 3.5% growth in 1994. And during the first two weeks of June, inflation came to only 0.86%. That's the lowest it has been for comparable periods since Dec. 19, 1994, when incoming President Ernesto Zedillo decided to let the Mexican peso float, sparking a massive devaluation and Mexico's worst economic crisis since the Great Depression.

"Provided there is no precipitous fall in the peso over the next few months, inflation is likely to decline because of seasonal factors through the summer months before rising again later in the year," said the U.S. Embassy in Mexico City, in a recent Commerce Department cable. "Inflation for the year is still projected in the 30% range, although it could be slightly lower than that if there are no unexpected shocks."

Goldman Sachs, which recently opened an office in Mexico City, predicts GDP during the second half of 1996 will climb 4-5%. The brokerage house is urging its clients to invest now "before everyone climbs on the bandwagon during this transition year."

Other observers take a less enthusiastic view. Cautions the editor of Mexletter:"While we would like to share Goldman Sachs' public optimism completely, we continue to have reservations about Mexico's economic recovery. Not all the news is good, and not everyone shares that view that "la crisis" is ending. The recovery is taking longer than anyone predicted; problems of unemployment and underemployment do not yet show indications of improvement; robberies and violent crimes have escalated; the credit crisis continues, and the banks' problems have not been solved by the first wave of government assistance. Also, domestic markets remain depressed, while inflation remains stubbornly high. So while most would agree that Mexico's economic recovery has begun, it must still be considered precarious."

Indeed, Mexican Finance Minister Guillermo Ortiz recently told stockbrokers that the country's economy probably won't recover 1994 production levels until later this year.

"Despite indicators showing that policy goals are being met, the majority of the population has not yet seen any improvement in their living conditions," Ortiz conceded during the annual convention of the Mexican Stock Exchange. "Growth will come in the first place thanks to the impulse of the export sector. The recovery of the domestic market and internal consumption will come in a second stage."

There's one thing no one can dispute, however: Mexico is by far the United States' most important trading partner in Latin America, and the region's second-largest country in population (after Brazil). A 1995 census conducted by the National Statistics Institute showed that Mexico has 91.1 million inhabitants, with 46% of them in cities of 100,000 or more. More than a quarter of the country's population now lives in the three largest metropolitan areas -- Mexico City, Monterrey and Guadalajara -- with Mexico City alone now boasting a population of 16.4 million.

Last year, U.S. imports from Mexico came to $62.8 billion, while exports to Mexico were valued at $46.3 billion, giving Mexico a $16.4 billion trade surplus. A year earlier, both imports and exports came to around $50 billion each. According to Mexico Business Monthly, a newsletter published in Maplewood, N.J., "the sharp reversal in 1995 resulted from the depreciation of the Mexican peso, causing a drop in purchasing power in Mexico, and lower costs for production of export-oriented goods."

Between January and April 1996, total Mexican exports rose by 20.3% to $29.65 billion, while imports rose by 16.9% to $27.07 billion. "High international petroleum prices have helped to boost exports," noted the U.S. Embassy, "but by far the single most important factor has been manufactured exports, which continue to be the most important source of growth in the Mexican economy."

Despite the overall GDP drop in the first quarter of 1996, certain sectors of the economy did quite well. Agriculture, forestry and fishing saw 0.8% growth, rebounding from a decline of 3.8% in the first quarter of 1995. Likewise, industry saw growth of 2.4%, compared to an 8.1% tumble in 1995. Within industry, mining jumped by 6.2% (versus -0.9% in 1995), and manufacturing rose by a healthy 4.2% (versus -6.6% a year ago).

Within manufacturing, the strongest growth was registered by the apparel industry (up 9.6%), basic metals (up 14.9%) and other metal products and machinery (up 8.5%). Other sectors registering some growth compared to last year include transport and communcations (up 1.15), financial services (up 3.1%) and electric consumption (up 2.9%). On the other hand, Mexico's retail and restaurant/hotel sector dropped 7.0%, and construction fell by 6.8%, though in both cases, the drop was a lot less than compared to last year.

"Mexico's GDP performance during the first quarter of 1996 was much better than either private-sector or government economists had been predicting," observed the U.S. Embassy. "The strength of the manufacturing sector, in particular, came as a surprise. While there was previously widespread skepticism that the government's 3% GDP estimate could be achieved, it now appears possible."

Other positive signs are beginning to emerge as well. Financing by Mexico's commercial banks to the non-banking public and private sectors has risen 19% in the past 12 months. As of April 1996, total financing stood at 734.7 billion pesos (of which 726.1 billion was to the private sector and 8.6 billion pesos was to the public sector).

"The small positive real growth of M-1 and the lower rates of contraction of M-4 and the monetary base are all signs of remonetization of the economy and a greater willingness on the part of the public to hold liquid assets," an embassy official said. "Perhaps the most striking data was the modest rise in financial savings, which through March had been sharply negative in real terms. Even the rate of decline in commercial bank loans has been subsiding in recent months."

Perhaps nowhere is Mexico's economic recovery more visible than in its booming manufacturing sector. The country's peso devaluation -- from 3.43 to the dollar in November 1994 to around 7.5 to the dollar today -- has made Mexican labor cheaper in dollar terms, and as a result, dozens of apparel companies have relocated their factories to Mexico from neighboring Guatemala and other Central American nations.

Statistics bear out this trend dramatically. During the first three months of 1996, Mexican apparel/textile exports to the United States jumped by 34.9% to a whopping $684 million, making Mexico the third-largest source of apparel of imported apparel after Hong Kong and China. In textiles alone, Mexican exports across the Rio Grande surged by 54.8% to $181 million, while in the apparel sub-category of Item 807, Mexican shipments soared by 93% to $73.3 million.

The Mexican automobile industry is also making an impressive comeback. Recent data from the Mexican Automotive Industry Association show that during the first four months of 1996, car and light truck exports increased 11.6% and 184.4% respectively over the same period last year. This represents an annualized sales volume of nearly one million export units -- turly a record for Mexico. Domestically, car and light truck sales were up by 30.9% and 52.6% respectively, while Desc -- the country's largest auto-parts manufacturer -- saw its stock rise by 49% since the beginning of this year.

Another company, Navistar International, announced it would build a factory in Monterrey to produce buses. Navistar's planned investment: $300-400 million.And for the first time, Ford Motor Co. announced June 10, the Detroit automaker plans to build pickup trucks in Mexico for export to the United States and Canada.

All along the U.S.-Mexican border, some 2,000 export assembly plants known as maquiladoras turn out everything from textiles to television sets. The plants employ about 620,000 workers, with 150 factories expected to open this year. According to industry statistics, 26% of these border plants are involved in electronics production; 22% in automotive products; 18% in data-processing services; 13% in apparel or textiles; 11% in electrical appliances; 6% in wood products and 4% in chemicals.

The biggest of all the maquiladoras is an RCA factory in Juarez, employing 8,000 people; other large employers include AT&T, Hewlett-Packard, Sony and 3M. Industry observers say between $400 million and $600 million has been invested in such plants in recent years -- a trend likely to continue as these low-wage factories draw business away from traditional manufacturing sites like Puerto Rico and the Dominican Republic.

In fact, business along the border is so good that Tijuana has now eclipsed its sister city, San Diego, in overall manufacturing importance. One reason is that the starting salary for a Mexican factory worker is 345 pesos (about $50) for a 45-hour week, or about 90 cents an hour -- compared to $9 an hour anywhere in the United States. On Mar. 29, the Korean giant Samsung inaugurated its $212 million assembly plant in Tijuana, which will produce 1.5 million color TVs this year. Some 70% of the factory's 2,300 worekrs are young women who dropped out of school before completing the sixth grade. Other large Asian TV manufacturers in Tijuana include Video Tech (7,738 employees); Matsushita (6,867); JVC Industrial (608); Hitachi (600); Tabuchi Electric (452) and Tocabi (267).

"A milestone was reached in September when Tijuana's 118,000 manufacturing jobs exceeded San Diego's 114,900 manufacturing jobs," said researcher Charles E. Nathanson, writing in the San Diego/Tijuana Economic Review. "The rise of manufacturing employment in Tijuana is the result laregly of growth of consumer electronics and the cost-effectiveness with which these goods can be manufactured in Baja California under the North American Free Trade Agreement."

Despite Mexico's attractiveness as a low-wage manufacturing site, leading officials say their country's economic health shouldn't be tied to the peso. Finance Ministry spokesman Alejandro Valenzuela recently told The Journal of Commerce that other factors -- such as industrial production, inflation, interest rates and consumer demand -- will ultimately be more important in determining how quickly Mexico gets back on its feet.

"When the economy recovers," Valenzuela told the newspaper, "consumption will recover and everyone will be paying less attention to the peso."

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