Walloped by the "Super Peso"

The currency is crimping the profits of Mexican exporters

Francisco Javier Pietrini is having a tough year. The founder and chief executive of Interfil, a maker of auto parts based in suburban Mexico City, has seen his exports drop 25%. Not only have sales of Interfil's fuel filters been hit by the slowdown in the U.S., but Pietrini is also struggling against a strong peso. "All our components from Mexico--labor, electricity and gas--their costs have all risen," says the 52-year-old CEO. As a result, Interfil, which had sales of $20.5 million in 2000, is losing market share north of the border to Asian and Canadian rivals. "In a global market with so much competition, you're under pressure to reduce prices in dollars," says Pietrini. Yet because costs are rising at home, he cannot discount as much as he wants to keep his foreign accounts.

So far, Mexico's exports have held up surprisingly well: They rose 4.5% in the first quarter of 2001 from the previous year. But the strain of keeping up that growth is showing. Mexican exporters big and small are being squeezed by what the local press has dubbed the "super peso." The strong peso is forcing companies to slash costs, lay off workers, and invest in technology to improve productivity--or sacrifice U.S. market share that took them years to build up.

DOUBLE WHAMMY. The free-floating peso has gained more than 4% against the dollar so far this year. That "has caused export profitability to collapse," says Rogelio Ramírez de la O, who heads Ecanal, an economic consulting firm in Mexico City. Indeed, the strong peso is crimping export competitiveness at a time when demand from the U.S., Mexico's No. 1 trading partner, is cooling rapidly. That double whammy has leading investment banks, including Merrill Lynch & Co. and J.P. Morgan Chase, revising their Mexico growth projections down to as low as 2%, from above 3%--a sharp drop from last year's 6.9%.

The pain inflicted by the peso is most severe in industries where margins were tight to begin with. In the seven years since NAFTA took effect, Mexico has become the leading foreign supplier of apparel to the U.S. But now, with costs of materials and wages rising in dollar terms, Mexican companies risk losing U.S. customers to rivals in Central America and Asia. "Our labor costs are no longer attractive," says Raul García Tapia, director of the National Garment Industry Chamber.

Mexico's apparel industry has already shed 10,000 jobs this year, out of 700,000, says García. And more could go in the coming months. "If the peso doesn't devalue, it's going to become tougher and tougher to conduct business in Mexico," says Dan Berry, president of American Trouser Inc. of Columbus, Miss., which manufactures and subcontracts in Mexico, Central America, and the Caribbean.

Many exporters blame the government for the strong peso. Yet economists see no signs that authorities are propping up the currency, as they did in years past. Instead, they say, the peso has been buoyed by a rising tide of foreign capital. Foreign direct investment totaled $3.4 billion in the first quarter, up slightly from the same period in 2000. Another $2 billion in portfolio capital poured into the country as international investors sought refuge from turbulence in Argentina and Brazil.

Most analysts believe the peso will eventually weaken, as domestic interest rates and oil prices decline. The market consensus is that the exchange rate will move from 9.26 pesos per dollar at present to somewhere in the range of 10 to 10.50 by yearend.

In the meantime, some exporters are working to offset the effects of the stronger peso. Internacional de Cerámica, a tilemaker based in Chihuahua, embarked on a cost-cutting drive last year, slashing 18% of its workforce and investing in new equipment. "With the new efficiencies, we have been able to maintain margins at the same level as 24 months ago," says CFO Jesús Olivas.

Not all have been so lucky. Eureka, a producer of fiber-cement siding for the housing industry, has watched exports drop from 20% of sales in 1998 to 10% now. "We're losing presence," laments CEO Maximiliano García Chabert, whose company registered sales of $50 million last year. So Eureka is now shipping more product to Central America, where competition is not as tight. But nothing can really compensate for the loss of that giant market to the north.

By Elisabeth Malkin in Mexico City

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