Mexican Industry Eager to Make Its Imprint on International Market

MONTERREY, Mexico —  Don’t tell Ernesto Martens that Mexico has nothing to offer U. S. industry but cheap labor.

Martens is president of Vitro--the Mexican conglomerate that bought Anchor Glass Container Corp. for $800 million in 1989, the year the Tampa-based glassmaker lost $40 million.

After a reorganization that included closing three plants, installing $76 million worth of Mexican-made equipment and refinancing debt, Anchor turned a profit in March, 1990. It has been making money since.

Vitro, with $3.5 billion in annual revenue, is part of a select group of Mexican corporations whose performance challenges predictions that free trade with the United States and Canada will turn Mexico into little more than a nation of low-paid workers assembling goods for the export market in foreign-owned factories.

In fact, these companies audaciously assert that they can help northern partners win back markets from Asian and European competitors.

At the same time, however, they illustrate the sophistication that other companies in Mexico must achieve if they are to thrive under free trade. By that measure, many of the nation’s businesses fall short. These corporations--most headquartered in this northeastern industrial city--own major U.S. manufacturing companies, issue stocks and bonds on U.S. capital markets and use the money they raise to increase their exports, mainly to the United States.

With the prospect of free trade, they are intensifying their strategic alliances in the United States and Canada to jointly conquer the continental market:

* Vitro’s domestic appliance arm divvied up product lines with Whirlpool Corp. so that they complement rather than compete with each other. Vitro, for example, agreed not to make the most upscale refrigerators made by Benton Harbor, Mich.-based Whirlpool; Whirlpool, in turn, agreed not to manufacture the more basic refrigerators made by Vitro. The two companies also agreed to reciprocal distribution arrangements in each other’s country.

* The giant Alfa Group is looking for U.S. and Canadian companies to distribute its industrial products in the north. In exchange, the Mexican company is offering its distribution networks to deliver U.S. and Canadian products to remote Mexican villages where distribution has historically been difficult.

* Cydsa, a petrochemical conglomerate, has teamed up with Toronto-based Royal Plastics Inc. to make window frames in the border town of Mexicali for the California market.

“We have a different horizon now,” said Ivan Becka, vice president of Cydsa’s plastics division. “More and more, we are seeing our markets beyond the border.”

Those dollar-based revenues give the corporations a major advantage over other Mexican companies: access to international capital.

In the past year, Mexican private-sector companies have placed $1.4 billion worth of bonds on international markets. Besides the highly publicized $1-billion offering of stock in Telmex, the Mexican telephone company, other Mexican corporations have sold $264 million worth of new issues to U.S. investors this year, mainly through special offerings to institutions.

The ability to go to the international market is crucial because of high domestic interest rates.

“The cost of (raising funds) for capital-intensive companies such as ours is a significant factor, one that has been driving the strategy of the company,” said Peter T. Hutchison, senior vice president of corporate finance and planning at Alfa, a conglomerate that relies on steel and petrochemicals for two-thirds of its revenues.

Significantly, most of the money these companies are raising is being used for acquisitions, plant expansions and modernizations designed to increase their export potential as well as make them more competitive in their traditional domestic market.

Mexico’s economic opening--which began when the country signed the General Agreement on Trade and Tariffs, obligating it to lower trade barriers--left them little choice.

“Ours is an industry that has been concentrating very fast,” said Gustavo Caballero, chief financial officer at cement-maker Cemex. “In the U.S. over the last 10 years, 70% of the capacity has been bought up by the Japanese and Europeans.”

When Europeans bid on Mexico’s second-largest cement company, Cemex had to make a quick defensive move to buy its former competitor. “If not, we would have ended up like U.S. companies that had to sell to Europeans,” Caballero said.

“That was $750 million that we had to raise in the peso markets at very expensive rates of around 50%,” he said. At the same time, the company began making strategic acquisitions in the United States, concentrating on the Southwest.

Cemex ended up $1.5 billion in debt--a debt it has been restructuring from short-term peso bonds to long-term dollar bonds--but the company has remained independent and even expanded to serve 14% of the North American market.

Other Mexican corporations believe that they too must move into U.S. and Canadian markets, claiming market share that otherwise would go to Asian or European companies.

Cydsa is going after the acrylic sweater market, now dominated by Far East producers. Under the proposed free-trade agreement, the 34% import tariff on sweaters is expected to drop for Mexico, giving it an advantage over other countries, said Roberto Rodriguez, the company’s fibers division vice president.

Cydsa said it will be ready.

For the past 18 months, the company has been exporting 500,000 sweaters a year to U.S. customers from a pilot operation in the central Mexican city of Guadalajara.

Based on that project, Cydsa will decide whether to build a larger plant, a series of small plants or to divide the work between a large knitting operation in Guadalajara and several small cutting and sewing centers on the border. The company is also studying the possibility of a joint venture with a U.S. producer.

However, questions remain about how many Mexican companies have the resources to be competitive. Even these large corporations are still fighting major obstacles:

* Vitro’s acquisition of Anchor was marred by a $1.2-million insider-trading suit that the U.S. Securities and Exchange Commission brought against former executives. The company also had to delay its first effort to enter the U.S. stock market because of market uncertainties surrounding the Gulf War.

* Cemex lost the early rounds of a dumping suit in which U.S. cement companies charged Mexican cement makers with unfair pricing. Cemex must pay compensatory tariffs so high that the company can no longer supply its U.S. subsidiaries.

* Cydsa was one of the first companies to win a suit under Mexico’s new anti-dumping law, but the effort took a team of lawyers and mountains of paperwork.

Companies unable to defend even their home market will find the task of conquering the U.S. market daunting. They will need extensive investment to bring their factories up to international standards.

Foreign Earnings Major Mexican companies generate significant sales outside the country, through exports and sales by foreign subsidiaries. Revenues (in billions of dollars) Percent of revenues made by foreign sales Vitro: 53% Alfa: 19% Femsa; 6% Cemex: 33% Cydsa: 23%

Bond Offerings Placements on international markets by Mexican private-sector companies.

Amount Company Date (millions) San Luis Oct., 1988 $52 Cemex Oct., 1989 150 June, 1990 100 May, 1991 300 Tamsa April, 1990 30 Ponder May, 1990 22 Hylsa Nov., 1990 59 April, 1991 50 Sidek Dec., 1990 50 Telmex Dec., 1990 568*

* Telmex also made previous bond offerings as a majority government-owned company.