Nafta Eases The Way

The disastrous state of Mexico's auto industry these days hasn't taken the edge off Philippe Mellier's biting wit. Looking at the spectacular view of distant volcanoes from his sixth-floor office in Mexico City, Ford of Mexico's president quips: "If you didn't have a sense of humor, you would commit suicide."

Things aren't as bad as all that for Ford in Mexico, but they're far from what Mellier expected when he arrived to take up his new post in November, 1994. An energetic 40-year-old Frenchman, Mellier, who had been Ford's boss in New Zealand, thought he'd be presiding over a dramatic surge in Ford's business as a result of the North American Free Trade Agreement. Of Detroit's Big Three, Ford had moved first to capitalize on NAFTA, restructuring one of its Mexican plants to produce the Mystique and Contour cars as well as some light trucks for both the domestic and export markets. Imports from Ford's U.S. plants would meet the rest of demand in Mexico, which was expected to boom.

Then came the devaluation, which thrust Mellier into the role of crisis manager. His answer: do whatever was possible to sell some cars in Mexico while boosting exports and cutting costs to contain losses. Ford's strategy is being repeated across Mexico by companies in the auto and other industries. But Ford has managed to do somewhat better than its rivals: Its domestic sales have fallen about 50% this year--vs. 70% for the industry as a whole--while its exports have jumped 22%.

In the midst of the financial crisis, Mellier took a series of emergency steps. To help his dealer network weather the credit squeeze, he persuaded Ford headquarters in Dearborn, Mich., to provide credit so dealers could buy cars with a 150-day grace period on interest. He stopped importing Ford Escort sedans from the U.S. and started selling Mexican-made Escorts instead.

Mellier and his team also scrambled to slash the sticker price of their popular Ford Mystiques. They took out CD players, leather seats, sunroofs, and other goodies that were popular when Mexico was booming. Such moves have brought the average price down about 20% in dollar terms, although peso prices have shot up about 70%. The lowest-priced Mystique is now $20,255, including taxes. "The goal is to maximize sales in a very depressed market," Mellier says.

BIGGER CHUNK. As a result, Ford's share of the Mexican market has climbed from 14.2% in September, 1994 to 18.6% in August. The improvement comes at the expense of such rivals as Volkswagen. Ford has solidified its lead as No. 1 in sales. Even so, Mellier says: "It is going to be difficult to make money" this year.

Ford's dealers give Mellier good marks for keeping them above water. "Compared to the rest of the auto firms, Ford has done the best," says Andres Ocejo Gmez, a Mexico City dealer and chief of the country's Ford dealer association. Only two of Ford's 127 dealers have folded. Meanwhile, NAFTA has helped Mellier persuade Ford U.S. to shift some of its auto-parts business to Mexico, which helped him minimize layoffs. Ford has only slashed about 900 of its 17,000 workers, which includes those at its parts factories. That compares with layoffs of 20% at Nissan.

Despite this year's travails, Ford is still committed to Mexico--for now. The company is going ahead with investments of $450 million to retool plants and boost production of components.

INCENTIVES. But looking ahead, Ford executives see reasons for concern. They worry the market may not recover until the end of the century. If Mexico's policymakers aren't careful, Mellier warns, auto companies will shift investments to countries such as Brazil where demand is much higher. "We cannot survive only by assembling things and exporting them," says Mellier. "We need a strong internal market and local revenue."

For that reason, Mellier has joined other auto executives to lobby the government for tax incentives to boost car sales. They want the government to cut the special new-car tax that, when combined with the value-added tax, adds as much as 50% to the price of a new "luxury" car. At least for now, Finance Minister Guillermo Ortiz is likely to reject such moves because they stray from his goal of maintaining strict fiscal discipline. If Mexico's recovery doesn't pick up, however, Mellier will have to find more new ways to keep Ford's operations going--or watch the company's investments flow elsewhere.

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