Eye on Jalisco: strengths and weaknesses examined across transportation, manufacturing and food sectors. (Regional Report).

During a time of international political uncertainty, great market volatility and mixed economic indicators, the Jalisco region in western Mexico has, for the most part, remained remarkably resilient.

The post-9/l1 world continues to experience wide-ranging unpredictability. Clouds of conflict continue to hang over the political landscape while the world economy limps along hoping that interdependency will eventually bring greater strength

And although Jalisco--and western Mexico in general-have not been immune to these complex realities, some distinctly positive trends continue to grow in this region. For in the midst of multiple pressures, the regional economy continues to manifest a strong resilience and in certain key areas has shown signs of growth and development.

The investment picture in Guadalajara, the capital of Jalisco, has continued to remain strong during the past year. As Mexico's second-largest city with a metropolitan population of over 4 million people, Guadalajara remains the economic engine for the area's stability and growth.

While it is difficult to evaluate the precise relationship between government efforts to stimulate foreign investment and actual results, the state of Jalisco has made significant efforts to maintain a positive investment climate. Through state initiatives sponsored by the Economic Promotion Secretariat, the government continues to play an important role in both retaining current investment levels in Jalisco as well as spurring new investments.

According to Victor Hugo Orozco, an economist with the statistics arm of the state's Economic Promotion Secretariat, the outlook for 2003 remains positive.

"Because we are less dependent than the north on the U.S. economy, we have been able to maintain our growth," said Hugo, who cited steadily rising monthly employment figures as reason for optimism.

INVESTMENT FROM HEAVY HITTERS

The presence of key industry leaders such as Hewlett-Packard, IBM, Solectron and Kodak continues to send out positive messages to the investment community that Guadalajara remains a safe, stable and profitable center for doing business. A quick look at some key statistics shows the results of this confidence.

In 2001, of the nearly US$940 million total investment in Jalisco, foreign investments in the state totaled almost US$348 million, with the electronic and telecommunication industries receiving a substantial portion of this investment. For 2002, the figures remained strong. Overall investment totaled just over US$1 billion, while foreign investment rose by almost $34 million dollars to $381 million dollars.

Investment from the United States remained a driving force in the region. In 2001, U.S. companies invested almost US$235 million in Jalisco, accounting for some 25% of total investment. A similar picture emerged in 2002, with U.S. investment increasing to US$339 million. Again, this figure represented a substantial portion of all investment in Jalisco, increasing in 2002 to nearly 34% of the total investment.

BATTLING THE RED MENACE 

In 2002, the Jalisco electronics sector rode the corporate roller-coaster of highs and lows. Following the trend of the nation's maquiladoras, some electronics companies left Mexico to manufacture their product out of China. Flextronics, producer of the Microsoft video-game system X-Box, was one of those firms.

The recent influx of foreign electronic corporations to Guadalajara has countered the departure of others. The arrivals of electronic giants Hitachi and Technicolor in Guadalajara are indicators that western Mexico is still an attractive investment location. Hitachi has entered into a joint venture with IBM to produce electronic components.

Federico Lepe of Hewlett Packard suggested that a "mind intensive" focus has led to the arrival of new electronics companies, as well as the launching of new projects among the older.

"Guadalajara has the telecommunications infrastructure and human resources to provide customer service support for all the Americas, both in the area of corporate applications and financial transactions," Lepe said.

LOGISTICS TRAMPO LINE

The transportation and logistics sector also comprises an important part of the regional economy. Efforts are under way to establish a better gateway between western Mexico and the United States, and opportunities are being explored by the air, sea and land ports in and around Jalisco.

"It is important that all industries and companies handle their cargo under this new infrastructure, in order to assure adequate volume and initiative," Lepe said.

Nevertheless, headway is being made. At the much-anticipated Asia-Pacific Economic Cooperation (APEC) meeting in Los Cabos at the end of last year, Cemex president Lorenzo Zambrano announced the construction of a new trade corridor. Specifically, a trade route between Colima and Kansas will be opened and heavily promoted.

Zambrano brushed off the comments of some who say western Mexico lacks the necessary infrastructure to serve as a big-time importer and exporter of goods.

"The railroads are already there, and the ports just need a little investment to bring them up to standards. If we use Veracruz as an example, you can see that with even a small investment, efficiency levels go through the roof," the Cemex leader was quoted as saying. "We can't use the lack of infrastructure as an excuse for non-growth."

A giant step for Mexican importers and exporters, the new trade line will "unite Asia with Latin American and the United States," said David Eaton, the director of business facilitation for APEC Mexico.

Because of recent difficulties with expanding the international airport in Mexico City, these ambitious plans for the western region take on even greater significance and will continue to add to the importance of these burgeoning ports.

However, roadblocks remain a problem for some transportation players, as large companies have complained of nebulous entry regulations in the sector. Several firms are demanding a firmer government regulatory hand to ensure a level playing field for competing transportation firms.

"Some smaller U.S. transportation companies are not establishing operations legally and are providing services at a much lower cost," said Armando Beltran, vice president in Mexico of Schneider National, an international cargo transport company. "It is important to establish a certification mechanism to ensure a common standard for the provision of transportation services in Mexico."

BY AIR AND BY SEA

The recently privatized Miguel Hidalgo airport in Guadalajara and the port of Manzanillo in Colima represent crucial components in a regional effort to develop a successful national and international transportation center.

An important part of the successful privatization of Guadalajara's airport was a commitment by the concessionaires to invest heavily in modernizing what had become an overcrowded and increasingly dowdy, inefficient airport. Not only was the airport not in keeping with the increasingly sophisticated nature of the region--dubbed by the local government the Silicon Valley of Mexico--it was simply unable to deal effectively with increasing business and passenger demands.

According to the most current information, the Grupo Aeroportuario del Pacifico plans to invest more than US$180 million over five years in the modernization of passenger terminals and associated facilities at the twelve airports it oversees. However, the work in Guadalajara has been plagued by delays and funding shortages.

It is important to note that the business community in Guadalajara has been instrumental in establishing the Guadalajara World Trade Center at the Miguel Hidalgo airport, in an effort to ensure that there is sufficient infrastructure to handle a sophisticated array of products and materials passing through customs. The concession services include better control of merchandise, closed circuit cameras, and greater security.

TOURISTS KEEP COMING

In terms of passenger traffic, both Miguel Hidalgo and Jalisco's other international airport--Puerto Vallarta's Gustavo Diaz Ordaz airport--continue to maintain strong, steady traffic. While the state airport authority does not break passenger traffic down into national/international categories, passenger figures remained strong. While statistics of visitors were down for the last quarter of 2001, 2002 showed a significant rebound with increases in each of the last three months of the year.

Prominent carriers in the air market, such as Continental Airlines, have implemented cost-reduction measures to deal with the tougher climate.

"We have reduced the size of the equipment and have increased the frequency of our flights. This has helped strengthen our sales at a time when most of our competitors are hurting," said Victor Rodriguez, head of the Guadalajara sales office for Continental.

It is clear, however, that if Guadalajara is going to maintain an efficient, world-class airport, it will have to iron out the problems that are slowing the pace of vital improvements.

Puerto Vallarta continues to promote itself a popular international tourist destination, despite the difficulties of last year's hurricane season and a heightened fear of travel. While statistics are not yet available for all of 2002, March is a representative month. March 2001 showed over 97,000 international arrivals prepared to relax on Jalisco's sunny coast. March 2002 showed a slight increase to 99,398 arrivals.

All of these statistics underscore the point that the western region of Mexico still maintains its place as an important player in the international and national logistics and travel picture. But, complementing these regional airport transit sites is the port city of Manzanillo, which plays an important part not only in the western Mexico logistics picture, but on the national scene as well. Because of its already well-developed infrastructure, Manzanillo serves as an important transit point for Petroleos Mexicanos (Pemex). But as the third largest port in Mexico in terms of shipping volume, Manzanillo plays a significant role for general cargo as well.

While for many tourists as well as Mexicans, Manzanillo conjures up visions of a vacation idyll, it is in fact a heavy-duty port city that does more than its share as the premier Mexican west coast transit point. The statistics themselves are impressive. In 2002, almost 10 million tons of cargo moved through this otherwise small city and more than 1,100 ships, excluding oil tankers, passed through the city's port. Of course, containers play a major role in shipping a wide range of materials, and Manzanillo is no exception. The port handled over 500,000 containers in 2002, a 10% increase over 2001.

NEW REGULATIONS ON FOOD

The food industry in Jalisco remains a strong sector, and it has recently been hit by new guidelines that may affect the way it does business.

New guidelines mandated by the United States Department of Agriculture (USDA) and the Food and Drug Administration (FDA) are designed to ensure food products imported into the United States have not been tampered with and turned into weapons of chemical or biological terrorism. The new regulations will have serious impacts on both Mexican exporters and U.S. importers.

The new regulations require all transporters of food to submit a plan of arrival before arriving at the border. The "prior notice," which must be submitted via Internet, needs to include port-of-entry, an itemized list of products and where they originated from as well as an estimated time of arrival. The food items are then required to arrive within three hours of the submitted time. If the transporter fails to fulfill these or any of the other numerous obligations, the goods are transported and stored in FDA-approved facilities, all at the importer's or exporter's expense.

Dulces Vero, a candy manufacturer in Guadalajara, is one of the many food corporations that will be affected by the new FDA regulations, and the firm--which exports around 65% of its products to the United States--is concerned about the financial repercussions or me new rules.

"The new rules include a series of requirements that will complicate the importation process," said Dulces Vero international sales representative Alejandro Silva.

It is difficult to determine, however, what economic impact these regulations will have on local manufacturers. According to Angela Emerson, U.S. consulate Public Affairs Officer in Guadalajara, the consulate recently gave a standing room-only presentation to members of the local community, so interest is high, but the economic impact at this time is unclear.

In general, Jalisco and western Mexico appear to be coping with an economic downturn that has hampered industry throughout the country. However, the challenges--ranging from the increased competitive threat of Chinese manufacturers to new food regulations imposed at a time of looming U.S.-led war with Iraq--will continue to test the strength of one of Mexico's most productive regions.

Christian Andersen is a writer and educational consultant with The Princeton Review in Guadalajara.

BUSINESS MEXICO intern Mark Gudmastad contributed to this report.