Lloyd Mexico Economic Report - April 1999
CONTENTS:
PROMISING ECONOMIC OUTLOOK
With monthly inflation down to 1.34% in February, there is a growing sense of confidence about Mexico's economic health among investors, analysts, and the private sector. The domestic economy is expected to grow almost 3% this year. According to a press release from the National Association of Supermarket and Department Stores, Antad, Mexico's largest grouping of retailers, same-store retail sales in January were 6.8% higher than a year ago.
The sales increase reflects greater consumer confidence stemming from lower interest rates and a strong peso. The retail sector is optimistic about the near future and Antad reports that 80% of its 4,000 members intend to expand or modernize their stores this year.
SALE OF PACIFIC AIRPORTS
Eleven corporations are reported to be interested in bidding for the twelve airports in the Pacific Group, the next block of airports to be auctioned off in the government's privatization of airports. Of the eleven, four are Mexican: Aeroplazas de México, Servicios Aéreos del Centro, Grupo ICA and Banco Invez. The remaining seven are international. They include Ogden (U.S.), Airport Club International (Canada) and Aeropuerto y Navegación Aérea (Spain), as well as companies responsible for the airports in Milan and Rome (Italy) and Paris (France). The bidding is scheduled to be completed by August this year.
The twelve airports in the package are Aguascalientes, El Bajío (near Silao, Guanajuato), Morelia, Guadalajara, Manzanillo, Puerto Vallarta, Hermosillo, La Paz, Los Mochis, Mexicali, Tijuana and San José del Cabo.
MAJOR RETAIL STORE ACQUISITION
Grupo Elektra, the largest specialty retailer in Latin America, has acquired a 94.3% stake in Grupo SyR for 78 million dollars. Operating under the name Salinas y Rocha, Grupo SyR has 3 distribution centers, 21 warehouses and 96 stores, including 10 department stores. Coincidentally, Ricardo Salinas Pliego, the current president of Elektra, is the great-grandson of the founder of SyR.
Elektra specializes in electronics, household appliances and furniture, serving customers through a network of more than 800 stores in 291 cities in Mexico and elsewhere in Latin America. Its stores cater to a lower income segment of the population than Salinas y Rocha. Elektra is expected to sell off the 10 department stores and concentrate on making the remaining Salinas y Rocha outlets profitable, investing 50 million dollars in upgrades, training and operating systems.
One of the likely bidders for the department stores is Grupo Carso, which two years ago bought 85% of Sears Roebuck de México. Carso would like to add several new Sears stores to its existing chain of 40. Other possible bidders include Liverpool, Palacio de Hierro, OfficeMax, JC Penney, Dillard's and the Dutch chain, C&A, which recently opened its first store on Mexican soil in the city of Puebla.
FIRST NYLON 6.6 PLANT
Alpek (1998 sales: 1.36 billion dollars), the chemical division of Grupo Alfa, and Dupont, the multinational chemical firm, are about to inaugurate a joint-venture plant producing high strength nylon 6.6 in the port city of Altamira in the northern state of Tamaulipas. The 160-million-dollar plant is Mexico's first for nylon 6.6 and will have an initial operating capacity of 8,000 metric tons a year, eventually rising to 35,000 tons. Although 95% of the first year's production is destined for export, several companies, including Guilford Mills and Burlington, have announced their intention to begin manufacturing clothes using nylon 6.6 in Mexico in the near future.
One of the principal uses of nylon 6.6 is in sports gear such as swimming costumes. In order to keep pace with growing demand, Alpek-Du Pont are also expected to make additional investments within the next eighteen months in order to triple their production of nylon 6.
INSURANCE-BIOTECH MERGER
Mexico's leading agro-biotechnology firm, Empresas La Moderna, is to merge with the insurance corporation Seguros Comercial América forming a new conglomerate named Savia. The combined company will have estimated annual sales of 2.7 billion dollars, 61% from insurance, 30% from agro-biotechnology and the remainder from other former La Moderna divisions such as packaging. Savia's agro-biotechnology division, Seminis, is a world leader in its field and supplies 22% of the global output of genetically altered fruit and vegetable seeds, including disease-resistant tomatoes and coffee bushes that produce caffeine-free beans.
Some scientists have expressed concern about the possible long-term risks of growing genetically altered crops. As a consequence, both Seminis, which recently made an initial public offering on the New York Stock Exchange, and U.S. biotech giant Monsanto, the world leader in genetically altered grains, face an uphill battle in some countries to gain approval for the sale of their genetically-engineered seeds.
TRENDS IN BEER
For many years, the Mexican beer market (1998 sales: 3.3 billion dollars) has been totally dominated by two giant companies. Grupo Modelo (main brands: Corona, Negra Modelo) supplies slightly less than 55% of the domestic market, and Fomento Económico Mexicano, Femsa (main brands: Carta Blanca, Superior, Sol, Dos Equis), the majority of the remaining 45%.
An Associated Press-Dow Jones report highlights some of the changes currently occurring in the industry. It points out that as population and purchasing power increase, there is more room for small, specialist newcomers. As evidence of this trend, the article identifies the success of two independent regional brewers: Cervecería Mexicana, based in Tecate in the state of Baja California, and Monterrey-based Especialidades Cerveceras. The latter brewery, begun by a nephew of one of Femsa's founders, has reached an agreement with Femsa allowing its beer to be sold in restaurants where Femsa previously enjoyed exclusivity.
Especialidades Cerveceras' premium brand, Casta, sells for twice the price of regular Modelo or Femsa brands. Cervecería Mexicana's main brand is Mexicali but it also makes the Azteca brand, as part of a contract with Anheuser Busch, which holds a 50.2% share in Grupo Modelo. Beer industry analysts are convinced that the local market has enormous potential for continued expansion. The annual per capita consumption in Mexico is only about 48 liters, half the U.S. figure. With half the population under the age of 21, demand for beer is expected to increase by at least 4% a year for many years to come.
STEEL ALLIANCE
Mexico's leading steel producer, Altos Hornos de México (AHMSA), a subsidiary of Grupo Acero del Norte (GAN), has announced a strategic alliance with Lámina y Placa, the sheet steel division of Grupo Villacero, based in the northern industrial city of Monterrey. AHMSA will purchase up to 49% of the shares of Lámina y Placa as well as provide it with all the 600 million tons of raw steel it requires annually. This amount represents about 18% of AHMSA's annual output.
COFFEE GROWERS - AND DRINKERS
The U.S. is by far the world's largest consumer of coffee, importing some 18 million 60-kilogram sacks each year in order to satisfy its internal demand. As a result, what's happening in the U.S. market is crucial to Mexico's 250,000 coffee producers. Almost half of U.S. consumers claim to be coffee drinkers but the U.S. per capita consumption peaked back in the 1960s at 3.1 cups per day. It has since fallen to about 1.4 cups per day, according to the U.S. National Coffee Association. The main area of growth is in the specialty, or gourmet, coffee sector, which includes espresso-based drinks and iced coffees.
According to the Specialty Coffee Association of America, the gourmet market now accounts for about 12% of all the coffee consumed annually in the U.S.. Specialty coffees are gaining a growing foothold in Mexico. For example, the Mexican chain, Coffee Station, now has 44 establishments, including 39 franchise operations, most of them located in Mexico City. Mexican growers face a tough year. While the price of coffee has finally begun to rise on the New York commodities market, the 1998/9 coffee harvest is unlikely to exceed 4.2 million sacks, well below the 97/98 season. At least 500,000 sacks were lost due to the severe drought in the first half of last year.
DESALINATION PLANT IN COZUMEL
The heat emitted from a new diesel-fired electricity-generating station in San Miguel on the island of Cozumel, south of Cancún, on Mexico's Caribbean coast, is to be used to desalinate sea-water, rendering it potable. Wartsila NSD, a Finnish company, has the construction contract for the 25-megawatt San Miguel plant, as well as a similar contract for an additional plant in Cancún.
AIRPORT BUSINESS CENTER
An international business center is due to open later this month at Mexico City's airport. Linked to the Hilton hotel, the 2,300-square-meter, 3.5-million-dollar project is located between the national and international terminals. Its facilities include a lounge, secretarial pool and conference room for up to 150 people, with state of the art communications systems, including video-conferencing, digital satellite links, computers and cell phones.
TWICE AS MANY CAMERAS
Eastman Kodak Company is to invest 40 million dollars in its plant in Guadalajara. The Guadalajara plant produces films, compact discs and single-use "disposable" cameras, exporting 85% of its output. Most of the new investment will go towards expanding output of graphics film and doubling the production of single-use cameras from 20 to 40 million a year.
ADDITIONAL AUTOPARTS FACILITIES
Delphi, the world's largest autoparts manufacturer, first came to Mexico in 1978 to take advantage of lower labor costs. Today, Delphi employs 72,000 workers in its 53 plants here, producing 5 billion auto-components a year worth 8 billion dollars, equivalent to 70% of Delphi's worldwide operations. Delphi's clients include every major vehicle manufacturer from BMW and Chrysler to Ford, General Motors, Nissan and Volkswagen. The company is proud of the education and innovative skills of its Mexican workforce and, several years ago, located its largest research and development facility in Ciudad Juárez.
Delphi is bringing three new plants on stream this year, including one in Monterrey and one in Querétaro. The company hopes to develop more local suppliers of raw materials. At present, Delphi purchases 300 million dollars worth of raw materials from domestic suppliers but would like this figure to exceed 1 billion dollars by 2002.
LOCAL TELEPHONE COMPETITION
Telmex's monopoly in supplying local telephone services has ended. In the border city of Tijuana, Pegaso PCS is now deploying the first 100% digital wireless network in Mexico, catering to both mobile and fixed telephones. The company, whose partners include Grupo Pegaso, Grupo Televisa, Leap Wireless (San Diego), Citicorp, LAIF (Latin America Infrastructure Fund) and Nissho Iwai Corp., will begin local service in Monterrey, Guadalajara and Mexico City later this year. Within five years, its 1.3-billion-dollar project may add as many as 1.6 million new lines to those already existing. Carlos Ruiz Sacristán, federal Transport and Communications Secretary, anticipates that more than 9.5 million new lines will be installed between now and the year 2004.
SPACE FOR LARGER EXHIBITIONS
Construction has begun on an 11,365-square-meter addition to Guadalajara's main exhibition center, Expo Guadalajara, one of the country's largest. The center already captures 35% of all exhibition space sold in Mexico. The 12-million-dollar extension will add 80% to the existing exhibition area and should be completed within a year.
MEGAPROJECT IN PUERTO PEÑASCO
Mexican, Spanish and U.S. entrepreneurs have announced three tourist megaprojects, with a combined investment totaling 1.69 billion dollars, for Puerto Peñasco in the state of Sonora, 90 kilometers south of the U.S. border. The three projects are Laguna del Mar, La Pinta and Playa Norte. Between them, they involve the construction of 10,600 luxury hotel rooms as well as several golf courses, commercial centers, residential zones and aquatic parks.
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© 1996 Operadora de Fondos Lloyd, S.A.
© 1996 Allen W. Lloyd, S.A. de C.V.