US Petrochemical Firms Reluctant to Invest in Mexico

OVER the past five years, the Mexican government has changed its rules regulating the petrochemical industry in the hope of attracting foreign investors. So far, though, United States companies aren't biting.Henry Gordan, director of international business development with the petrochemical firm Hoechst-Celanese, says US firms fear that Mexico's state-owned oil company cannot produce enough raw materials and that the Mexican government may return to its old restrictions on foreign ownership. The "biggest item," says Gordan in a phone interview from his company's New Jersey headquarters, is that foreign ownership of secondary petrochemical plants is limited to 40 percent. Fernando Mota, editor of the influential business daily Boletin Financiero, says restrictions on foreign ownership stem from the long-standing belief that "for Mexico, oil means sovereignty." Those restrictions began in 1938 when Mexico's leftist president, Lazaro Cardenas, nationalized foreign oil holdings. When the petrochemical industry started up in the late 1950s, the government gave the state-owned oil company PEMEX exclusive right to manufacture many primary petrochemicals and restricted foreign ownership of others classified as secondary. Petrochemicals include a variety of substances derived from oil and natural gas that go into the making of plastic, polyester, nylon, and other products. Since 1986 the government has modified its old concept of sovereignty in hopes of attracting foreign investment. It hopes to modernize existing plants and encourage construction of new factories with state-of-the-art technology. In 1986 and again in 1989 the government reclassified the 34 "primary" petrochemicals so that today only 19 must be produced by PEMEX. Others are either imported or can be manufactured by foreign companies. In early September, government Energy Minister Fernando Hiriart Valderrama said the government is now studying further reclassifications aimed at attracting foreign investment. Nevertheless, US companies have not flocked to Mexico, pens poised on checkbooks. The US Government Accounting Office surveyed 20 American petrochemical firms and issued a May 1991 report citing a number of reasons: * An excess of petrochemical production worldwide. * PEMEX's monopoly over oil can mean shortages of raw materials. * New production techniques are not adequately protected under Mexican patent law. * Mexican administrative changes in classification of petrochemicals could be reversed. Andres Milla Lopez, government relations director for the 51 percent-foreign-owned Celanese-Mexicana, Mexico's largest private petrochemical company, says the climate for foreign investment is now improving. He points out that Mexico recently passed an intellectual property law that will protect US patents. "We don't see any signals in the direction" of reversing the recent reclassifications of petrochemicals, he adds. His company has undertaken an aggressive five-year, $600 million investment plan to build new plants and update technology at existing ones. If the US-Mexico free trade agreement currently under negotiation is passed, "it will have long-term positive impact," says Mr. Milla. "It will force us to be more efficient and rationalize our industry." Without tariffs, US companies could in the short run dump their products in Mexico at prices below the cost of production, he says. Several cases of alleged dumping by US firms are currently under appeal to Mexico's Commerce and Industrial Development Secretariat. If US companies "export only 3 percent of their production" to Mexico, says Milla, "they will flood our market." Dave Cummins, joint venture manager at Chevron Chemical, expresses similar concerns about his company's Mexican operations. In a phone interview from his office near San Francisco, he explains that Chevron's Mexican subsidiary will face stiff competition from US-based petrochemical firms if the free trade agreement passes.