Foreign Interest
Mexico has become a major player in the international business community.
Every year, more and more companies set up shop in this country,
attracted by the possibilities Mexico offers transnational firms.

By Camila Castellanos
Her e-mail.

Globalization and geography have made Mexico the darling of the international business community. As the country struggles to increase modernity and stabilize, foreign firms established here have discovered that the country plays a fundamental role in the world’s economy. This article includes only those transnational firms in the manufacturing, food and technology sectors of the economy, because it’s there where the foreign presence is being most keenly felt.

With direct foreign investment on the rise, an already successful North American Free Trade Agreement (NAFTA), and a free trade pact looming with the European Union, the burgeoning Mexican market has become as seductive to international companies as the deep blue Acapulco night. But investors are not coming to Mexico simply to sip margaritas along the Pacific coastline. Rather analysts and industry insiders say they are looking to capitalize on the more tangible financial attractions of modern-day Mexico, namely its location as a Latin American gateway, affordable primary resources, and increasingly competitive open market conditions.

Mix the nation's positive economic indicators, which President Ernesto Zedillo and his cabinet never cease to trumpet, with hungry international firms looking for global opportunities and what you get is a sexy match.

"We were successful in beating the crises and now we see simultaneous growth, low inflation, job creation and a consolidation of the exporting capacity, all which says that we are heading in the right direction," Jose Angel Gurría, Mexico’s finance minister, said recently. Gurría expects to see direct foreign investment reach more than US$9 billion this year, and around US$12 billion in 2000. Mexico attracted more than US$10 billion in 1998 and almost US$13 billion in 1997, according to the Bank of Mexico.

Mexico's Finance Secretariat said that total investment spending was up 3.9 percent in the first quarter compared to a year ago, while private investment spending was up by 5.1 percent year on year.

Why Do They Come?

In general, foreign investors are hesitant when it comes to trusting money in Mexico's foreign exchange or capitals markets, especially when the Latin American region is on the verge of some volatile swing, according to Héctor Chávez, head analyst at Serfin brokerage. But, while Brazil defaulted on loans and then devalued the real earlier this year in what was dubbed the Samba effect, and shortly thereafter Argentina threw in the towel and threatened to devalue its currency, Mexico stood its ground on solid economic fundamentals. Now that regional economic volatility has subsided, confidence among foreign companies and investors in the country has been freshly reinforced by a US$23.7 billion international financing package for Mexico. Global rating agency Moody's Investors Service recently said it has placed on review for upgrade the long-term foreign currency debt and long-term foreign-currency bank deposits. Although the review does not affect the financial strength ratings of the rated banks in Mexico, which remain at one of the lowest levels in all of America, it was prompted by a recognition of the benefits accruing to the Mexican economy, such as the economic integration of North America.

This, combined with the Mexican government's strict economic policy, seems to have strengthened Mexico enough to resist economic shock waves from other emerging markets. In short, investors see the rating review in itself as a partial testament to the creditworthiness of the country.

Companies themselves, however, keep on coming to Mexico, because the mention of the country means business and opportunities. It’s also a synonym for success in the global economy. “In many senses, Mexico has probably advanced more towards globalization than the United States,” says Samuel Araiza, corporate communications director of Hewlett-Packard de Mexico (HP). “While the U.S. is still considering whether or not to become part of a free trade zone with the European Union, Mexico is on the verge of signing an accord. Mexico clearly understands that going global is the best way.”

When Investment Is Not Enough

Merrill Lynch's Chief Strategist, Eduardo Cabrera, says he believes Mexico's economic activity on the whole is about to accelerate. While a recovery in investment activity in Mexico should be an important driver, the key sector to monitor is consumer spending, which has lagged in the last two quarters. Real wages are rising, unemployment is dropping and the peso remains strong, meaning Mexico has set the stage for a real boom.

Liquidity, however, remains a problem for Mexican companies, as interest rates remain high and credit on the whole is difficult to obtain. Foreign companies, meanwhile, have easier access to a glut of financial wealth (if they can prove its means).

Although some investors may stay away from Mexico due to its economic volatility and unstable peso, the larger foreign companies—who have virtually never stopped investing during the past four years of economic turmoil—remain here for two reasons: the low cost of labor in the in-bound factories (maquiladoras), and the central location of Mexico for import/export purposes to the rest of the Americas.

According to the Commerce Secretariat (Secofi), large foreign companies had a total industrial participation in 1994 of 1.9 percent, which grew to 2.5 percent by 1998. Likewise, investment went primarily to the maquiladora industry.

In 1995, the industry represented 10.8 percent of the nation's total gross domestic product (GDP), while in 1998 the industry grew to 12.7 percent. Pedro Venegas, lead economist at Mexican private sector think-tank Economic Analysis and Projections Center (Capem), said that since NAFTA opened trade in North America, Mexico has seen more foreign investment than ever before.

"The companies that have seen investment opportunity since 1994 have been on the whole large companies that have gone to the maquiladoras and have concentrated on exporting," Venegas said. "These are the companies that represent the majority of foreign investment, and they are what have driven the country's production without internal financing resources."

While the majority of big-money earning companies have been focused on the automotive and textile production industry, Venegas said other opportunities are opening with the upcoming privatization of the energy, telecommunications and transportation sectors.

"There has been strong investment in those areas, but that could die down when the privatizations are over," he said. "In the case of telecommunications, what we have are many small foreign operators and service providers popping up, and it is difficult to estimate how much money they are earning or investing."

Technology Wizards

Foreign companies have been racing to grab a piece of Mexico's recently developed telecommunications and technology industries, sectors that are as modern here as anywhere in the world.

“One may think that Mexico does not use the most advanced technologies when doing business, but to our amazement, Mexican businesses demand the best state-of-the-art technology similar to that used by their U.S. counterparts, “ says Araiza, whose HP firm offers Mexicans almost the same products found in the U.S. market, including those newly manufactured or to be developed. Made up of mostly wireless telephone service providers that depend on radio electric waves and satellites, the technology industry inadvertently boomed as companies sought ways to avoid dealing with Mexico's dominant Telefonos de Mexico (Telmex).

The telecommunications industry in general is garnering more money than ever, according to the National Statistics Institute (Inegi). The industry represents 2.6 percent of the total GDP and about 13.3 percent of the total communications GDP, while it represents about 5.7 percent of the total manufacturing GDP. Mexico's Federal Telecommunications Commission (Cofetel) has said it expects to see investment in the industry reach a total of about US$19.6 billion from the time Telmex was privatized in 1991 through the year 2002, making this sector one of the most dynamic in the country.

Telmex has a limited number of fixed line services and has, in the past, fiercely protected its earnings by charging competitors high fees to use trunk lines. As an alternative, wireless service providers began offering less expensive local telephone service through antenna-equipped telephones, pagers, cellular telephones and trunking services.

According to a study done by telecom leader Ericcson, these service providers are quickly merging. There will be no more than 10 or 15 global operators in the "near future," with about 100 regional operators, while today there are more than 1,000 operators in the world. This means foreign companies in 1999 will be fiercely defending their terrain and competing for more, according to Manuel Guerena, telecommunications analyst at Merrill Lynch.

Foreign companies in the industry, such as the U.S.-based AT&T and MCI Communications, have repeatedly said the industry is unfairly slanted in favor of Telmex, and have blamed Cofetel and other government organizations for not changing regulations fast enough to open the sector to fair trade. This may be true, Guerena says, but added that a newly privatized industry takes time to cultivate. Neither has it stopped foreign companies from coming in and bargaining for a place as one of the nation's internet providers or paging services.

One new company, Convergence Communications, a leading facilities-based operator of broadband telecommunications networks in Latin America, has acquired a portion of MetroNet’s state-of-the-art fiber optic network in Mexico City. Additionally, Convergence and MetroNet entered into an agreement to jointly develop fiber optic networks in the seven largest cities in Mexico, representing over 80 percent of the country's telecommunications market.

Lance D'Ambrosio, chairman and CEO of Convergence Communications, said Mexico has a positive, centrally located base for operations.

"We are very pleased to announce our association with Mexico's leading developer of broadband metropolitan area fiber optic networks," he said . "Our partnership with MetroNet will allow us to accelerate our plan by at least two years and is a major milestone in our goal to be the first operator of broadband networks using internet protocol in Mexico."

Another market niche that foreign companies have been attacking for several years in Mexico is Information Technologies (IT). It’s no secret that Latin America represents the fastest growing market for IT companies. And Mexico is considered to be the market with the best potential in terms of production and consumption. Hewlett-Packard is one global technology company taking full advantage of the potential offered by Mexico. “We have operations amounting to US $1.6 billion in Mexico,” said HP’s Araiza. “While it might sound like a huge figure, our Mexican operations represent a mere 3 percent of HP’s global market. But Mexico is fundamental to HP in terms of strategic importance.”

HP advocates free trade treaties, a position that has enabled the company to take advantage of the proliferation of trade blocs that Mexico has signed recently. “In terms of commercial blocs,” Araiza said, “we want Mexico to become a strategic center to cover all our Latin American operations. We have advanced a great deal and now we are not only exporting technology from Mexico, we are also exporting talent to countries like Brazil, Argentina and Venezuela. Some of our people have also gone to Miami.” Other technologically advanced companies such as Kodak de Mexico are looking to take advantage of Mexico's centrally located gateway between the United States and the rest of the Americas. The company,Kodak, which currently operates an industry center in Zapopan, Jalisco, recently said that next year it plans to turn Mexico into its center of operations for all of Latin America. The centralization program will include all administrative processes in Venezuela, Panama, Colombia and Puerto Rico.

"We did it to continue the globalization process", said Francisco Mora, president and director general of Grupo Kodak de Mexico. "When I talk about centralizing, I refer to locating administrative processes in one place, to help our operations attain higher productivity, help us to be more competitive and invest more in the market, and ultimately have a higher customer satisfaction."

Kodak de Mexico, with 4,000 employees, had sales US $800 million in 1998, 75 percent of which came from sales to foreign countries.

Car Behemoths

Mexico's automotive corridor continues to generate the most employment and has the largest percentage of GDP than any other industry in Mexico. Together, the country's auto giants employ some 400,000 workers and represent about 6 percent of the GNP in the manufacturing sector. This year alone, the National Automotive Industry (INA) has said it expects a production growth of about 3 percent, with a 10 percent production growth by the year 2000.

One of the largest foreign car makers, Germany's Volkswagen, still has the cornerstone on domestic auto production, while ranking behind the other auto giants in sales and exports. Ironically, the company has produced Mexico's namesake national car, the ever-popular Beetle, known as the Vocho. Mexico is home to the world's only remaining factory producing both the Volkswagen Beetle and the hot-selling New Beetle. VW's plant in Puebla alone employs some 16,000 people. The factory averages about 1,470 units per day, including 600 units of the New Beetle, which are marketed to the United States, Canada and Europe. VW sold 55,842 New Beetles in the U.S. last year after its introduction in March, and sales so far this year are up about 226.8 percent at 35,569 units as of May. INA President Oscar Béjar says Mexico's automotive industry will likely see some forthcoming changes with the agreement Mexico is negotiating with the European Union. Through May 1999, 91.2 percent of all auto exports were exported to the United States and Canada. This could change over a long period of time, he said.

More than half of the companies belonging to INA are foreign companies, he noted. "We think foreign investors are a very important complement, indispensable even, to all national investment," Bejar said. "But we probably won't see a real change in the sector's makeup for some time."

Camila Castellanos covers corporate news and financial markets for Bridge News’ Mexico Bureau.

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