Mexico Attracts Japanese Investors

UNTIL recently, Mexico was little more than a smudge on the Japanese corporate map. Not even the prospect of a few days of whacking golf balls at a Cancun resort was enough to lure Japanese CEOs in Tokyo to visit Mexican subsidiaries. Total Japanese investment in Mexico was a mere $1.7 billion by March of 1990, placing a distant fourth behind the investments of the United States, Britain, and Germany in Mexico.

But the prospect of a Mexico-US-Canada free-trade agreement by 1992 is starting to put Mexico on the map.

"The CEOs are coming now and they've got their hands in their pockets. They haven't pulled the checkbooks out yet, but they are showing more interest," says Dr. Gabriel Szekely, a senior research fellow at the Center for US-Mexican Studies, University of California, San Diego.

Few are better qualified to review Japanese investment in Mexico. Dr. Szekely's just published book - "Manufacturing Across Borders and Oceans: Japan, the United States, and Mexico" - includes original case studies and substantial research on Japanese investment.

Szekely and a team of researchers visited 93 of the 179 Japanese plants in eleven Mexican cities, conducting surveys and interviews on management and labor practices, investment, and joint ventures.

The economic reforms of President Carlos Salinas de Gortari, coupled with the prospects of Mexico becoming part of the North American market are focusing new attention on Mexico, says Szekely. But the free-trade negotiations are also provoking some concern among Japanese executives.

The main worry, especially for the in-bond assembly or maquiladora plant operators, is the prospect for tighter rules on origin of parts. Japanese firms currently operate 70 maquiladoras, mostly electronics and auto assembly plants, in Mexico. Some import up to 90 percent of their parts from suppliers outside of Mexico or the US, notes Szekely. Products assembled in these Mexican plants for the US market pay a lower import duty than goods sent directly from Japan.

The percentage of local input should be in "the 50-60 percent range," said Robert Pastorino, the US Embassy's economic counselor in Mexico. It will be important to define precisely what is Mexican-made or US-made, he said, so that "third countries" don't use the free-trade pact unfairly. "Canadian and American negotiators are going to be very tough on this," predicts Szekely. "They're concerned Japanese investment is going to Mexico instead of to the US or Canada."

MEXICO sees the free-trade pact as an opportunity to prod Japan into using more Mexican suppliers. At the same time, Mexico doesn't want to scare off Japanese investment. On Feb. 23 Japan's ambassador to Mexico fired what appeared to be a warning shot. When asked if he thought the free-trade pact would produce more Japanese investment, Tsuneo Tanaka told the newspaper Excelsior: "It all depends on the contents of this agreement. We don't want to set any conditions because we're not participating in the free-trade agreement." If the agreement isn't discriminatory, he added, Japan will be investing more in Mexico.

Apart from the maquiladoras, Szekely predicts, Japanese firms will find the free-trade agreement advantageous. Japanese trade officials, for example, have complained that Mexico's foreign-investment laws are still too vague, too subject to a less favorable interpretation when the government changes.

"One of the main complaints of Japanese management is the lack of security and continuity in Mexico's fiscal policies," says Szekely. "But I think the free-trade agreement will introduce a degree of continuity and certainty in trade and economic policies the Japanese will appreciate."

The US-Mexico-Canada pact may also open up Mexico's banking and financial-services sector further. So far, Mr. Salinas' sell-off of Mexico's banks has attracted little interest from US or Japanese banks because the terms prevent a foreign owner from gaining a controlling interest.

In the wake of the Gulf war, Szekley expects Japanese officials will once again court Mexico as an oil supplier. And, he notes the petrochemical industry, recently opened to foreign investment, offers one of the most promising investment opportunities once Petroleos Mexicanos, the state-owned oil company, is restructured and becomes viewed as a more reliable supplier.

Szekely predicts total Japanese investment will more than double to $4 billion by 1994. Nissan, for example, recently committed to a $1 billion expansion program which includes a new manufacturing plant to build cars for the US and Japanese markets.