Eye on Monterrey; Northern industrial center poised to benefit first from U.S. manufacturing rebound.

When Jim Houlden, president of aerospace company Wyman-Gordon, searched for the right place to build a US$50 million factory, he chose Monterrey, the industrial hub of northern Mexico.

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The city offered low-cost labor and is less than a three-hour drive from the Mexico-U.S. border. More importantly, during its more than 100-year history of heavy industry, Monterrey has built up efficient infrastructure, a deep base of suppliers and top universities that pump out well-trained workers. "We found talented people who are very well-educated," Houlden said, "It was very easy to get good, qualified engineering help."

Houlden also discovered Grupo Frisa SA, a Monterrey-based producer of rolled rings, as a joint-venture partner to help them make parts for gas turbines. "Wyman-Gordon brought the aerospace experience and Frisa brought the operational experience," Houlden said "Between the two of us, it was a perfect fit."

Monterrey, home to large exporters such as steel and petrochemical maker Alfa, glassmaker Vitro and steel processor Grupo Imsa, was hit hard by a U.S. manufacturing slump at the end of 2000 that cut demand for Mexican goods. Companies laid off thousands of workers to make up for a drop in sales. Foreign investment dried up as U.S. companies cut back on production.

Just as Monterrey was one of the first cities to feel the pinch from the manufacturing recession in the United States, it will likely be one of the first to benefit from a U.S. rebound, economists said.

MANUFACTURING PROMISE

The signs that U.S. manufacturing is already beginning to rebound will quickly pull Mexico out of a three-year industrial slump, said Alfredo Thorne, an economist with J.P. Morgan Chase in Mexico City.

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U.S. durable goods shipments are at levels not seen in two years and prices of copper--a key raw material for industrial production--are at their highest level in two-and-a-half years.

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Investment, such as the plant Wyman-Gordon inaugurated last month, is key for the state of Nuevo Leon (where Monterrey is the capital city and home to 3.2 million of the state's 3.8 million residents) and should help recover the 50,000 manufacturing jobs lost in the last three years.

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An increase in demand is already creating employment in Nuevo Leon. The number of manufacturing jobs increased in September for the first time this year, said Guillermo Dillon, director of the Nuevo Leon Industrial Chamber. The state gained 1,000 manufacturing jobs after losing 3,000 in the first eight months of the year, he said.

"Nuevo Leon is the first state to recover when the U.S. economy recovers, just as when the U.S. economy falters, it's the first state to fall," Dillon said. "We have a very high concentration of exporters to the U.S."

Nuevo Leon's manufacturing workforce dropped to 335,000 today from 385,000 at the end of 2000 when U.S. manufacturing fell into recession. The recovery isn't strong yet, according to Dillon, but the slump in manufacturing activity hit bottom earlier this year and has nowhere to go but up. "It's a small recovery so far," he said. "It's not something immediate."

HELPING CONFEDERATES, MAKING BEER

Monterrey was founded in 1496 when a band of Spanish soldiers and colonists led by Diego de Montemayor settled at the spring waters nestled at the foot of the towering Sierra Madre mountains. Arid land, extreme temperatures and hostile Indians made life difficult, creating an ethic of hard work that regiomontanos, as Monterrey residents call themselves, claim sets them apart from the rest of Mexico.

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"On a national level, the work ethic is higher in Monterrey," said Marcelo Canales, the chief financial officer of Imsa, which has several plants around the country. The city slowly gained prosperity as a trading hub because of its strategic location between Dallas and Mexico City, which remains the principal trade corridor for the North American neighbors. Real wealth came to Monterrey during the American Civil War, when the city's businessmen helped Confederate states avoid Union naval blockades to sell southern cotton through the Mexican ports at Matamoros and Tampico.

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The city's position as a trading center was threatened in the late 1880s when the arrival of the railroad offered more efficient transportation to Mexico's major cities. Mexico's prominent families--the Muguerzas, the Garzas, the Calderons, the Trevinos and the Sadas--reacted by investing in heavy industry.

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Isaac Garza, Jose Muguerza and Francisco Sada, with the help of Joseph Schnaider, a brewmaster from St. Louis, founded a brewery in 1890, which is now Fomento Economico Mexicano, Latin America's largest beverage company. Besides quenching the thirst of parched regiomontano throats, the brewery spawned demand for glass bottles, steel bottle caps, packaging and other materials. Soon after, Vitro, Mexico's largest glassmaker, steel maker Hylsamex and Empaques Titan, a packaging company, were founded. Other companies, such as Cemex, the world's third-largest cement maker, were established at the turn of the century.

PANCHO VILLA WAS THIRSTY

It was a rocky start. The 1910-1917 Mexican Revolution left the economy in shambles, prompted many Monterrey businessmen to seek refuge in the United States and drove rebel leader Pancho Villa to raid the beer brewery. After the bloody conflict that claimed an estimated one million lives, Monterrey businessmen lived in uneasy tension with the post-Revolution central government. The socialist and anti-clerical policies of the generals who ran the country for almost three decades after the Revolution clashed with the vision of Monterrey's conservative capitalists.

Luis Sada, the son of the brewery founder Francisco Sada, started an advocacy group for business owners, known by its Spanish initials Coparmex (Confederaction Patronal de la Republica Mexicana), to safeguard the interests of companies. Today, Coparmex remains one of Mexico's more important business chambers. Monterrey's captains of industry continue a tradition of independence from the central government and often are the most strident critics of policies that hurt business.

Executives from Monterrey's largest companies--known as the Group of Nine--harshly criticized the central bank's tight monetary policy in 2001 and 2002, because it kept the currency too strong. They are now urging members of Congress to pass reforms to increase investment in electricity, improve tax collection and make labor laws more flexible. Monterrey industry flourished as the U.S. military buildup ahead of World War II pulled both the U.S. and Mexican economies out of the Great Depression.

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CULTIVATING YOUNG MINDS

During Monterrey's boom years in the 1940s, city business leaders recognized the need to create a top-quality university to train business executives without sending them abroad. At the time, the only option for a first rate business education was to matriculate in the United States or Europe.

Eugenio Garza Sada, the son of brewery founder Isaac Garza and a prominent businessman who was kidnapped and murdered in the early 1970s, created the Monterrey Institute of Technology and Graduate Studies in 1943. He modeled the school after the Massachusetts Institute of Technology, his alma mater. The Tec, as the school is known, graduated its first group of eight students in 1947. The school now has 33 campuses and 91,000 students throughout Mexico, with Monterrey remaining as its flagship school.

Monterrey Tec, along with the University of Monterrey, the Regiomontana University and the National Autonomous University of Monterrey, has turned Monterrey into the education center for northern Mexico. The Tec attracts students from all over Latin America and the United States and was recently named by the Wall Street Journal as having one of the top three M.B.A. programs outside the United States.

Cemex chairman Lorenzo Zambrano is now president of the university, ensuring the school's close relationship with business. "We live in a global environment where we need to have students and executives prepared to compete with the United States, Europe and Asian countries," said Francisco Garza Zambrano, director of Cemex's North American operations. "To do this, we need direct communication and programs between the universities and the private sector."

IMPACT OF NAFTA 

Mexico abandoned its import-substitution model, which called for making most products in Mexico and protecting against imports with high tariffs, with its membership to the General Agreement on Tariffs and Trade (GATT) in 1986. Mexico is now one of the most open markets in the world after signing Nafta in 1994 and entering into trade agreements with 30 other countries.

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Monterrey companies had to quickly modernize their factories or face being driven out of business by foreign competitors. Alfa, Imsa and other companies invested heavily to introduce the latest manufacturing processes to their factories and sought out partners to gain access to new technology. "In the north, there's a cultural environment among workers and businessmen that's more advanced and more open to change." said Imsa's Canales.

Roberto Salinas, a Monterrey engineer, was one of the first in Monterrey to offer computer-controlled equipment to automate manufacturing processes in 1986. Now, there are about 70 firms that sell equipment to even small businesses, he said. "The proximity and familiarity with the U.S. helps us adopt technology faster," Salinas said. For example. Hylsamex, the steel unit of Alfa, developed patented technology to process iron ore into pellets for making steel that is being used in companies by countries as far away as Venezuela and India.

POLITICAL OPENING

Monterrey has also been a leader in Mexico's political change. San Pedro Garza Garcia, a suburb of Monterrey and one of the wealthiest municipalities in Latin America, elected a mayor from the National Action Party (PAN) for the first time in 1964. By the mid1990s, most of the state's largest cities, including Monterrey, were governed by the PAN. In 1997, Fernando Canales, a member of the PAN, was elected governor, breaking the Institutional Revolutionary Party's seven-decade grip on the state's top office.

Jose Natividad Gonzalez Paras won back the governorship for the PRI this year, alternating power and bringing an unprecedented level of political transparency to the state.

Monterrey is now positioned to attract the technology-based jobs Mexico needs to replace labor-intensive jobs that are moving to Asia and Central America in search of everlower labor costs. A highly educated workforce and proximity to the United States gives the city an advantage over Asian cities to reel in investment from more companies like Wyman-Gordon.

"It's a friendly place of doing business from the point of view of geography and culture." Houlden said.

RELATED ARTICLE: * Fact Box: Monterrey, Nuevo Leon

Monterrey is capital city of Nuevo Leon, one of six Mexican states that shares a border with the United States. The Monterrey metropolitan area has a population of 3.2 million out of the state's 3.8 million residents and consists of seven municipalities: Monterrey, Guadalupe, San Nicolas, Apodaca, Escobedo, Santa Catarina and San Pedro Garza Garcia.

* The state of Nuevo Leon averaged US$1.7 billion of foreign direct investment from 1998 to 2002 that created 66,000 jobs over that five-year period.

* In 2002, the state's Gross Domestic Product was estimated at US$40 billion, which accounted for 6.5% of the nation's US$620 billion GDP that year. Nuevo Leon has less than 4% of Mexico's total population.

* 96.6% of Nuevo Leon residents 15 years and older are literate, compared with an average of 90.5% for Mexico. Nuevo Leon ranks second behind the Federal District, which has a 97% literacy rate.

* 91.7% of Nuevo Leon households have a refrigerator, compared with 68.5% for Mexico. 57.5% of Nuevo Leon households have a telephone, compared with 36.2% for Mexico. 14.5% of Nuevo Leon households have a computer, compared with 9.3% in Mexico.

* The average wage per hour in Nuevo Leon was 28.4 pesos in 2002, compared with 18.6 pesos nationwide. Nuevo Leon ranks No.2 among states in wages per hour behind Baja California, which had an average hourly wage of 32 pesos.

Sources: Inegi, State of Nuevo Leon

Juan Moreno Cruz is a freelance writer based in Monterrey.