Pact Forces Progress on Mexico

GENARO HERNANDEZ MORALES runs a journeyman's finger over a soldered seam.

The cacaphony of automated metal cutters and hand-held electric sanders is making conversation impossible in the work yard of Nacional Carrocerias, a small manufacturer of steel tanks for liquid-transport trucks in one of this mammoth city's northern industrial zones.

But Mr. Hernandez, who for 21 years has overseen his company's progress, has something to say about the effect on Mexico of the North American Free Trade Agreement.

``Even with the hardship it's causing smaller companies like this, I have to say that, over the long run, NAFTA will be very positive for Mexico,'' he yells, moving closer. ``It will require an enormous effort, but one that will make us a more productive and more prosperous country.''

A year after the United States and Canada became the first wealthy countries ever to open a free-trade zone with a poor industrializing neighbor, one can find about as many opinions in Mexico on NAFTA as there are clauses in the complex agreement. Mexico's financial crisis, touched off with last month's 40 percent devaluation of the peso, has put some life into a slow-heartbeat debate over Mexico's readiness for a competitive world market.

Little protest this year

But even as small manufacturers close in the face of giant US and Canadian competitors, and local mom-and-pop shops bow to the onslaught of Wal-Marts and expansive discount club retailers, the first anniversary of NAFTA's implementation is passing with little protest. That could be partly due to shell shock over the peso devaluation. As the tough measures of an emergency economic plan announced this week by President Ernesto Zedillo Ponce de Leon begin to be felt, more Mexicans could focus the blame on the country's drive to open up its economy - a drive crowned by entry into NAFTA.

What most Mexicans seem to accept, however, is that the profound economic and social changes Mexico is experiencing, while partly due to NAFTA's adoption and, no doubt, accelerated by it, were coming anyway. Since the mid-1980s, Mexican leaders have promoted and embraced apertura - the opening of a fiercely protected national market to participation in the international marketplace.

``NAFTA and apertura go hand in hand,'' Hernandez says. With NAFTA promising a gradual transition to tariff-free trade and offering investors confidence-building investment guarantees, the no-nonsense businessman adds, ``One wouldn't make sense without the other.''

The Mexican government is trumpeting both rising exports to the US (up 22.7 percent through October 1994) and increased foreign investment (often topping in a month what Mexico used to get in an entire year) as indisputable signs of NAFTA's success. But even that enthusiasm has been tempered by the crisis and acknowledgment that total foreign investment, while still relatively high, was considerably lower last year than in 1993 and not enough to offset the country's ballooning trade deficit.

Mexico in transition

In this context, most business analysts play down the importance of first-year results for a country engaged in long-term economic remodeling.

``NAFTA represents a transition of such magnitude in Mexico that we can't fairly evaluate its results in the first year,'' says Cesar Flores Esquival, president of the National Association of Bus, Truck, and Trailer Producers. ``What we can say is that it is forcing companies to either manufacture with higher productivity, higher quality, and higher competitiveness - or perish.''

The Mexican truck-manufacturing sector has been particularly hard-hit by US competition, Mr. Flores says. Successful companies are those teaming up with US or other foreign partners to ensure a flow of investment dollars and new technology. ``Those that think they can survive by hiding their heads and doing things the old way,'' he adds, ``aren't going to make it.''

Grupo Aloymex is one Mexican company that confronted the NAFTA dragon and survived. But, as president Manuel Alvarez y Loyzaga explains to the clang of presses molding chassis parts and truck underbody supports, success has not come without a cost.

``Today, we have 440 employees, but two years ago we were closer to 600,'' he says. ``Our new machines have allowed us to boost quality and cut costs.''

The giant, robin's-egg blue stamping machines came with the 50-50 joint venture that Aloymex struck with SKD Company, an auto-parts firm headquartered in Milton, Ontario. The partnership company, EASA (Estampados Automotrices S.A.), runs a new 160-employee plant here. EASA has allowed Aloymex to grab a firmer foothold in the lucrative North American automotive market. So far, its increased sales are being made only to Mexican subsidiaries of Detroit's Big Three automakers. But next year, the company will begin exporting directly to the US and Brazil.

Echoing business leaders across Mexico, Mr. Alvarez says joint ventures are necessary because they permit the acquisition of new technology and because they are a source of badly needed investment when Mexican interest rates on loans are staggeringly high - 25 percent to 30 percent before the devaluation, and 40 percent to 45 percent now.

Still, the improvements in quality and sales that Aloymex has experienced haven't allowed the company to fulfill two NAFTA goals: job creation and improvement in the Mexican standard of living. ``Everything we've done, including an increase in productivity, is still not reflected in higher salaries,'' says Alvarez, pegging the company's average wage at about $3 an hour, including benefits. ``With an emphasis on cutting costs and pricing in order to compete, the only thing that will make [higher pay] possible is higher volume and continued productivity gains.''

Higher volume is also something Hernandez says Nacional Carrocerias will need to survive. And like Alvarez, he says the peso devaluation will help achieve that goal: ``We're going to be in a better position as exporters.''

He describes the task facing him. ``We produce 20 high-quality tanks in a month, fit to carry everything from milk to molten sulphur,'' he says. ``But compare that to the 100 tanks a day a big US company produces, and you realize there's only one way to survive in this expanded market.''

That comparison helps explain why some experts estimate that up to 40 percent of Mexico's small manufacturers are in danger of closing.

To make sure his company isn't one of them, Hernandez is on the lookout for a US partner. But he worries that, with most potential partners requiring a controlling interest in a joint venture, one long-term effect of NAFTA will be that chunks of Mexican industry will be taken out of Mexican hands. He also complains that the US has thrown up unfair, arcane regulations as tariffs on Mexican products have come down. That's discouraging his company and other Mexican firms from boosting their sales in the three-country, 365-million-consumer market.

Still, as he walks around the plant that originated on a plot of rented ground, Hernandez expresses confidence that NAFTA will benefit Mexico in ways still unfathomed. He points to the North American competition and new joint ventures fostering higher production norms, sometimes in sectors that before had none, that will boost Mexican quality and make the country's products competitive not only among NAFTA nations but also in the global market.

And Hernandez cites the effect the pact is having on Mexico's mostly family-owned firms - like his - which, he says, traditionally have been happy to ensure personal wealth without focusing on improvement and growth. ``Mexico is a country of rich company owners but poor companies,'' he says, ``but NAFTA is forcing that to change.'' As many companies take on partners to survive, he says, emphasis is being placed on creating more wealth, and in a competitive, free-trade world, that means finding new ways to grow.

Such examples stress what Hernandez and others here repeat often - that for Mexico, NAFTA's most important effect will only be felt over time. ``NAFTA is just the seed,'' Alvarez says, ``but we still have much work to do before we can eat the fruit.''

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