A North American Mentality

Just over a decade ago, Monterrey-based Grupo Imsa was a small regional steel company and car battery producer. It had no exports and posted just $45 million in annual revenues. Imsa was technologically backward and largely disconnected from world markets.

Today, Imsa is a partner in several international joint ventures and its revenues have quintupled. Half its earnings come from exports. Three years ago, the company competed directly with the largest US maker of car batteries – Johnson Controls – in Argentina and Brazil. Imsa now jointly produces and sells batteries with Johnson in the US and Latin America. Alliances like these have enabled Imsa to upgrade its technology to meet the requirements of the US car industry, which it had previously struggled to do.

“Our business has had a dramatic change,” says Eugenio Clariond, Grupo Imsa’s president and CEO, from the company’s headquarters in a sleek high-rise in Monterrey. “We had to reinvent ourselves when Mexico opened itself up, first with its participation in GATT and then through Nafta.”

The same could be said for Mexico as a whole. The North American Free Trade Agreement, which came into effect in 1994, has reshaped Mexico’s corporate world and consumer markets. In the last seven years, Mexico has produced some of Latin America’s most adventurous and successful companies. These include Cemex, the cement company with operations on four continents, Grupo Carso with interests ranging from retailing to telecommunications in the US and Latin America, and Grupo México, the mining company with subsidiaries in the US and Peru.

Trade between Mexico and the US has tripled to nearly $150 billion a year since 1994.The US is by far the largest export market for Mexican companies, taking about 85% of the country’s exports. Nafta, which includes Mexico, Canada and the US, will phase out all tariffs over a 15-year period. The agreement is intended to eliminate restrictions on the flow of goods, services, and investments in North America. The treaty also aims to eliminate non-tariff barriers and safeguard intellectual property rights. The pact includes provisions on trade rules and dispute settlement, and a parallel labor agreement seeks to ensure full protection of workers’ rights.

Nafta marked a turn in once acrimonious Mexican-US relations and has become the basis for a stronger, more equal relationship between the two countries. According to the State Department, “A stable, democratic, and economically prosperous Mexico is fundamental to US interests.” A firm diplomatic framework further encourages Mexican-US trade, investment and business ties. More than 2,600 American companies have operations in Mexico. The US accounts for 60% of all foreign direct investment in Mexico. Foreign investment more than doubled in 1994 and has since grown to $13.5 billion in 2000. Citigroup says its $12.5 billion acquisition in May of Banamex, the second-largest bank in Mexico, was prompted in large part by the growth in cross-border trade. That acquisition alone was equivalent to a year’s worth of foreign investment.

Much of the trade between Mexico and the US consists of complementary, intra-industry activities that show an emerging pattern of specialization in manufactured goods. This is particularly evident in the manufacturing, textiles, electronics and auto part industries. The border region has spawned hundreds of maquiladoras, assembly plants that import components and export finished products to the US. European, Japanese and Korean companies invested in Mexico, using it as a bridgehead for exports to the US.

Mexico’s top companies, which grew in a highly protected market, have had to rethink everything they do. Grupo Imsa had to sell or shut down businesses that could no longer compete in an open market. Instead it concentrated investment in others, and formed alliances to help it gain access to technology and world markets. Clariond adds that, “Nafta opened doors for companies like Imsa because companies in the US looked at Mexico more seriously and that gave us access to the US market and the ability to work hand-in-hand with US corporations.”

Ricardo Salinas Pliego, chief executive officer of Grupo Salinas, whose companies include TV Azteca, the retailer Grupo Elektra and cell phone company Unefon, says the world now views Mexico in a different way. “Nafta is a great opportunity for our country,” he says. “It has really made a big difference in repositioning Mexico from an emerging market in a Latin American market into becoming part of North America.” Mexico’s two largest television companies, Televisa and TV Azteca, both plan assaults on the US Spanish-language entertainment industries. The US Hispanic market of 32 million people is largely Mexican in origin and its aggregate purchasing power is greater than that of Mexico’s population of 100 million.

Uneven Benefits
The incomes gap between Mexico and its two Nafta partners remains large. Business leaders see this as an opportunity to sell more goods and services to a young country where employment and incomes have grown rapidly in the last six years. The growth in employment is concentrated in the northern states close to the US. The state of Nuevo León and its capital Monterrey, the business capital of the north, has become one of Mexico’s most dynamic regions.

Still, Mexico remains a poor country and the post-Nafta boom has not benefited everyone. Indeed, poverty is particularly marked in the south of the country, the region that produced the Zapatista rebellion in January 1994 as a protest against Nafta. Mexico’s highly regulated agricultural system has suffered under Nafta, which opened the country to US farm exports. President Vicente Fox has attempted to pacify the south by withdrawing army units, releasing prisoners and increasing infrastructure investments there. However, Subcomandante Marcos, the Zapatista leader, broke off peace talks with the government.

Many of Mexico’s leading industrial conglomerates are also struggling. Most of them have failed to make the transition from a ramshackle collection of disparate businesses into focused, well-capitalized companies with professional management. Grupo Alfa and Desc, two of Mexico’s top conglomerates, have suffered over the years. Alfa’s shares have lost three-quarters of their value over the last five years and Desc’s share price has fallen by two-thirds.

Alfa, which has $2.75 billion in net debt, has begun restructuring, by selling off non-core businesses like its Total Home retail chain and 25% stake in Akra-Teijin, a fiber company. Analysts at CSFB say that selling Hylsamex, its 82%-owned steel subsidiary, would allow Alfa to double its share price: “The implied value of Hylsamex in Alfa is negative, on the order of $757 million,” according to CSFB. This incipient process of restructuring is likely to intensify as import competition increases and Mexico sinks into recession.

However, a successful restructuring at Alfa and other conglomerates would allow the company to gain scale economies enabling it to defend its local and US market, boosting revenues and profits. Although economic deceleration in the US has had a heavy impact on Mexico, this is likely to be a short-term phenomenon.

“Nafta has been the engine of the economy for the last seven years. Every economic statistic points to this,” says Manuel Medina Mora, chief executive officer of Banamex.

Integration with the US has also led to a shift in consumer patterns. The increase in variety and quality of consumer goods has made Mexicans more demanding and selective than before. “People used to come in and say, ‘I want to buy a boom box,” says Alvaro Rodríguez, chief financial officer of Grupo Elektra, an appliance retailer and consumer finance company. “Now they come in and say, “I want a Sony boom box with these features, this many amps and in this color.”‘

Jorge Lara, chief financial officer of Kimberly-Clark de México, says, “We have to offer the best products on the market. We have products for every tier – premium, value and economic. We must compete in every category. We have to offer something better than the competition, something with added value.”

Lara says that in addition to inspiring clever marketing and product development, Nafta has created intense price competition. “The US is the largest producer of paper goods and it is very easy to bring them into Mexico, and sometimes companies dump paper in our market,” he says. “We have to watch prices very closely and keep our prices very close to international prices.”

The success of its free trade experiment has encouraged Mexico to sign similar pacts with governments around the world. Last year, Mexico signed a free trade agreement with the European Union in the hope that with time, this will help reduce its dependence on US markets.

Washington and several Latin American governments also want to create a free trade area throughout the Americas. The US government has committed to achieving this by 2005, but has so far failed to win fast-track negotiating authority from Congress. However, Mexico is far less enthusiastic about the idea, fearing that a Free Trade Area of the Americas would diminish its appeal to international investors.