How Mexico Is Holding Off Asia's Assault
In the wake of Asia's crisis, pessimists painted a gloomy scenario for Mexico. Asian countries, exporting their way out of recession, flood the U.S. market with cheap goods and grab vital market share from Mexican products. Mexico's three-year export boom fizzles, putting its vulnerable economy in a severe bind.
Well, guess again. Mexican exporters are holding their own north of the border, and even making gains. Sales to the U.S., which takes more than three-fourths of all Mexican exports, rose to $7 billion in January, up 12.6% over the same month in 1997. The Asian crisis, it turns out, is the key test highlighting Mexico's spectacular export performance under the four-year-old North American Free Trade Agreement (chart).
What the trade deal has locked in place is a hard-to-beat pattern of North American production in which Mexico provides not just cheap labor but also fast delivery and low transport costs. "NAFTA has created durable, long-term relationships between Mexican exporters and U.S. buyers," says Mexican Trade Secretary Herminio Blanco.
Proof of that can be found in Guadalajara. At first glance, its electronics and electrical equipment makers would seem to be prime candidates for battering by head-on competition from Asians. But California's Hewlett-Packard Co., for example, is shifting contract work to Guadalajara from manufacturers in Asia to supply the U.S. "The market has regionalized into Asia, Europe, and America," says Jaime Reyes, director of HP de Mexico's manufacturing and design center in Guadalajara. "The base of suppliers here in Guadalajara gives us long-term security." HP expects exports to the U.S. of its copier products to reach $400 million this year, up 25% from 1997.
The same goes for IBM de Mexico, which is pushing its Asian suppliers to set up joint ventures in Guadalajara. "We reduce the cost by producing in Mexico, and we eliminate inventories," says Alfonso Alva, director of IBM's Guadalajara plant, which assembles laptops, desktops, and hard drives. Philips Consumer Communications, which employs 7,300 in its Guadalajara plant, exported telephones, answering machines, and pagers worth $274 million in 1997 and expects a new line of phones to lift sales to $617 million in '98.
While Mexican exporters are looking strong so far, inroads by Asians can't be ruled out. A study by the Institute of International Finance, a Washington-based research arm of the U.S. banking industry, estimates that the Asian crisis could cost Mexico as much as $5 billion of its exports to the U.S., which totaled $86 billion last year. But even the study notes that the credit crunch in Asia and Mexico's close U.S. ties will make it hard for Asian producers to take business from Mexico.
OVERTAKING OIL. A key insulator for Mexico against Asian competition, says Gray Newman, chief Latin economist for HSBC Securities Inc. in New York, is the vast network of almost 3,000 assembly plants, known as maquiladoras, that exported goods worth $41 billion last year, mostly to the U.S. Maquiladora products "are an integral part of the manufacturing process" in North America, he says.
One example: Elamex, a contract manufacturer in the border city of Ciudad Juarez. It shipped $132 million in electrical parts to the U.S. in '97. Long-term contracts--essential to the business--depend on Elamex' closeness to U.S. customers, who can quickly fly engineers down to make changes. "We try to operate as though the border doesn't exist," says Treasurer Jorge Torres.
The maquiladora system also shields the huge consumer-electronics industry along the U.S. border. Last year, Mexico exported $3 billion in TV sets. "When you take into account the freight costs, we're still very competitive" against Asia, says Juan Manuel Hernandez, comptroller of Tijuana-based Sony Mexico Manufacturing Center, which shipped $1 billion worth of TV sets and other products to the U.S. last year.
Even more insulated from Asian competition is the auto industry. Passenger-car exports to the U.S., worth $8.2 billion last year, have overtaken oil as the leading export north of the border. At Sanluis Corp., which supplies suspension components to Detroit carmakers, executives are unconcerned about Asia. Sanluis gets a lift from NAFTA, which allows duty-free exports within the bloc if at least 50% of a car's components are made in the three NAFTA countries. But Sanluis isn't counting just on NAFTA, says Hector Amador, investor-relations director. "The Big Three don't want inventories," says Amador. "You're practically supplying by the day."
BEYOND NAFTA. Now, Mexican producers are challenging Asia's longtime strength in textiles and even garment-making. By eliminating quotas for garments produced with North American fabric, NAFTA has turned Mexico into the world's leading exporter of clothing to the U.S. "The whole industry has been reconfigured," says Salvador Lozano, planning director at Compania Industrial de Parras, which sold $108 million worth of denim in the U.S. last year. "We're so close to the customer. We can fill deliveries. We know the market."
Still, Mexican exporters are wary of being overconfident. Already, customers are using the threat of Asian competition to squeeze prices. A Japanese buyer recently warned Samsung executives in Tijuana that he could buy speakers more cheaply in Malaysia. "We have to work hard to improve our productivity," says Young M. Kwon, president of Samsung Electro-Mechanics America. Some analysts say competition could heat up later, especially in products where Asian countries have a technology edge.
But even pessimists can't deny Mexico's newfound export power. The next step: turn this manufacturing strength to markets beyond NAFTA. Ignacio Rivero's small specialty chemical manufacturing company, Tekchem, buys raw materials in the U.S. and sells to European as well as U.S. customers. "We have learned to be efficient," Rivero says. It has taken a crisis on the other side of the world to prove him right.