Northern star: Having overcome last year's natural gas crisis, monterrey is still carrying the torch of Mexican business. (Regional Report).

These days, everything about Monterrey, Mexico's northern industrial powerhouse, is hot. Baking in the unforgiving desert sun of Nuevo Leon, the state capital's economy is as hot as ever. Like a phoenix rising from the ashes of last year's potentially devastating hike in gas prices and the economic woes of the United States, Monterrey's companies are back in the saddle.

According to State Department of Economic Development figures, 9.4% of Mexico's manufacturing output comes from this prospering northern state. Foreign investment in Nuevo Leon last year reached US$2.4 billion, representing 18.4% of the national total.

Victor H. Faucheret, the Nuevo Leon director of Foreign Investment, says there are three reasons for the higher-than-expected level of investment in 2000.

"First, was the continuing dynamism of the United States economy," he says. "Second, international recognition of Nuevo Leon as a first rate place for investment. And a third reason was the investment by two European companies in Nuevo Leon."

The Dutch company ING bought US$810 million worth of shares in Monterrey-based Seguros Commercial America, and the Spanish company Iberdrola pumped US$550 million into a new electricity generating plant.

Monterrey is an oasis of airconditioned office buildings, new hotels and sprawling residential areas. The prestigious and well-guarded San Pedro area has more millionaires per square meter than in all of Latin America. Many of Mexico's wealthiest and most influential families reside here.

Among them are some of Mexico's most respected businessmen, including Alfonso Romo (Grupo Pulsar), Dionisio Garza Medina (Alfa group), Eugenio Clariond (IMSA), Sergio Gutierrez (Deacero) and Jose Antonio Fernandez (Femsa).

Thanks to the leadership of these industrialists and the strong work ethic of the city's labor force, Monterrey has maintained its reputation as a business leader in Latin America. Beginning with education, the ITESM (Technological Institute of Monterrey or "Tec") leads the way with a new US$25 million graduate school for business management.

EDUCATION: A PARTNERSHIP

Carlos Zambrano, the Secretary of Economic Development for the Nuevo Leon state government, says that ITESM and its Graduate School of Business Administration (EGADE) are models of the hard-work ethic and entrepreneurial spirit of Nuevo Leon. "In Nuevo Leon. we've never been followers, we're leaders ... ITESM is striving to be the best graduate school in the world, and this is the spirit of Monterrey."

Dr. Rafael Rangel Sostman, the President of ITESM, spoke to BUSINESS MEXICO from Houston, Texas. According to Rangel, foreign companies are drawn to Monterrey because of ITESM's reputation.

"Companies in Monterrey need well-educated specialists and the Tec supplies that need," he says. "Companies here are more global than in other parts of Mexico, and foreign companies invest here because of the Tec's reputation as a top graduate school."

ITESM has integrated itself with the local business community in a partnership based on mutually beneficial collaboration. ITESM's board of directors includes important members of Monterrey's business community. Dr. Rangel estimates that over 80% of executives in Monterrey's top firms like Cemex are graduates of ITESM.

Small high-tech start-ups in Monterrey are also tapping ITESM's supply of young information technology specialists. Portal Blocks is a local company that provides infrastructure and service platforms for telecommunications operators like Alestra.

Of Portal Blocks' 38 employees, 18 are graduates of ITESM's Masters in Information Systems. Guillermo Gower, Portal Blocks' chief operating officer, praises ITESM's global vision.

"ITESM has been a key player in the new Mexico, and many of our leaders came from their classrooms. ITESM's vision and social commitment have reached far beyond Mexico's boundaries, to place our country in the new economy as a serious player."

For all its reputation and lofty ideals, however, Gower feels ITESM graduates, while "very aggressive in their personal and professional goals," still may have a way to go in being prepared for the demands of industry.

"ITESM has been developing aggressive programs to create social conscience. However, these programs still need to prove their efficiency at this level," he says.

Zambrano is confident that ITESM graduates can satisfy the demand for engineers and information technology specialists in Monterrey. However, companies in the automobile and steel industries also need trained technicians, and, increasingly, they are having to look elsewhere.

"We do have a shortage of technicians because the culture in Monterrey is that children should grow up to be professionals, architects or engineers, and not machine workers," he says.

Stan Zwick, president and general director of Caterpillar Mexico, agrees: "There is an adequate number of well-trained engineers available but a shortage of trained technicians like programmers, welders, machine repairmen, tool makers and other related areas.

In response to this shortage, two technical colleges opened last year. Still, Zambrano says that this problem is not unusual for a developing country like Mexico.

"It's a typical problem of an industrial society in growth," he explains.

CITY OF WORKER BEES

Zambrano and others claim that despite the lack of manual laborers, what sets Monterrey apart is the quality of its workers.

"The labor force is well trained, and dedicated to productivity, quality and competitiveness," he says.

Not only does Monterrey have a pool of talented professionals to offer companies, but they are also less expensive to hire than their U.S. counterparts. Gower estimates that entry-level salaries are anywhere from 20% to 30% less in Monterrey than in U.S. cities like Austin, Texas.

Does that mean that professionals in Monterrey are less well-off than their U.S. colleagues? Gower argues that the lower cost of living in Monterrey means that Portal Block's employees enjoy a relatively high standard of living compared to the lifestyle they could expect in the United States.

Rodrigo Plancarte, general director of the Nuevo Leon division of Coparmex, the nation's employers' association, agrees that top companies choose Monterrey for its low labor costs and impressive work ethic.

"The attitude of workers here is excellent," he says. "We have not seen a single labor strike in Monterrey for over two years.

Caterpillar's Zwick also stresses the importance of good worker relations: "This is an area of vital importance to manufacturers as it helps to maintain productivity at proper levels."

LOCATION, LOCATION, LOCATION 

Another advantage that Monterrey has for manufacturing companies, according to Zwick, is evidently its proximity to the United States.

"As they say in the real estate business, three things are very important: location, location and location. Being next to the world's largest economy is an excellent advantage," he says. "There is perhaps no other place in the world that can manufacture and deliver products to the United States at a lower cost."

Monterrey's transport and communications infrastructure is the best in Mexico. The city's international airport, Mariano Escobedo, has 220 flights daily and is expanding to serve more destinations. There is also a toll-highway linking Monterrey to Mexico City in the south and Laredo, Texas in the north. About 3,300 cargo trucks lug their wares across the Columbia Bridge between Nuevo Leon and Texas every day.

According to State Department of Economic Development Statistics, Mexico produced US$5.3 billion worth of manufacturing exports in 2000,85% of which went to the United States. Nuevo Leon was responsible for 5.5% (or about US$300 million) of Mexico's year 2000 exports.

Could an economic slump north of the border mean a crisis for a country that depends heavily on exports to the United States?

No, says Carlos Zambrano.

"Exports to the United States have only dropped 3% since January 2001, compared with 18% for China and 12% for Germany," he says.

Nevertheless, the rising value of the peso is not good news for Monterrey's exporters. Fernando Banchs, current president of the AMERICAN CHAMBER OF COMMERCE/MONTERREY and audit partner at KPMG Cardenas Dosal, the Swiss-based accounting firm, says that the strong peso is a mixed blessing.

"We have a strong peso, which is not making a lot of exporters happy, but it's also a reflection of the strong Mexican economy ... the peso's floating and there's confidence," he says.

Zambrano explains that the recession has only hit a few sectors. "Some jobs have been lost in the automobile industry and the maquiladoras, but Nuevo Leon has maintained a steady level of employment," he says.

Indeed, between April 2000 and April 2001, government statistics show that overall employment in Nuevo Leon has actually gone up slightly from 963,000 to 965,000.

GAS PRICE CRISIS

Nevertheless, the statistics hide a tough year for Monterrey's big steel and glass companies. Pemex's higher-than-expected natural gas prices in the second half of 2000 caused a 25.6% decrease in steel exports to the United States.

In September 2000, steel giant Hylsa announced the suspension of operations in three iron-ore mines due to rising gas prices. Around 4,600 workers lost their jobs when these and other plants closed in Monterrey.

Upon taking office in December last year, president Vicente Fox promised to end Pemex's monopoly on natural gas prices. However, despite his good intentions, Fox lacked the two-thirds majority in Congress necessary to pass constitutional reforms on natural gas.

As a compromise, Fox, with the support of Monterrey's glass, steel and mining industrialists, negotiated a gas price coverage agreement with Pemex. By this arrangement, industrial users signed a contract for three years to purchase gas at a fixed rate of US$4 per million British thermal units (MBtu), less than half the official price of US$9 per MBtus, which is tied to Texas rates.

Thanks to the price coverage arrangement, Hylsa reopened one of its plants in Monterrey. However, Monterrey's big industries have found themselves with tight profit margins, paying gas prices that are nearly double what they were at this time last year.

Still, it appears the worst is over and Monterrey's steel and glass companies have emerged relatively unscathed. Meanwhile, other companies not dependent on natural gas have reported record profits.

Cemex, which recently expanded its international presence with the acquisition of Sariburi Cement in Thailand, announced record sales of US$5.7 billion at the end of 2000 and a 19% increase in net sales for the first quarter of 2001.

In an effort to lend a hand to smaller businesses, the state government is helping promote their interests abroad. Local incentives include tax breaks and a special program called "State Program of Business Promotion" that helps entrepreneurs manage their own businesses. Even so, the recession and dot-com fall-out in the United States have hit Monterrey's e-business startups.

DOT-COM DILEMMA

Portal Blocks' Guillermo Gower says that dot-coin companies in Monterrey have had to revise their e-business strategies due to the recession.

"Many of our clients have suspended their e-business operations until next year," he says.

Nevertheless, Gower is confident that as the number of Internet users in Mexico rises, the number of companies in Mexico with an Internet presence will grow rapidly.

"The current number of 100,000 brick-and-mortar Mexican companies with an Internet presence is expected to jump to 1.3 million over the next three years," he says.

Gower suggests that the recent boom in Monterrey-based e-businesses is ahead of its time. Monterrey's leading companies, such as Cemex and Femsa, have invested millions of dollars in e-businesses, although some claim they haven't reached their intended customers.

For example, Cemex began two major projects this year, Latinexus and Neoris. Neoris was conceived as a way to integrate the different Cemex acquisitions in Latin America, and today it implements e-business solutions throughout Latin America. According to Gower, however, Neoris is failing to connect with its potential market base because it hasn't taken the time to get to know its customers.

"You really must know your customer and not just by an account number or buying behavior," says Gower.

MONTERREY 2020

In cooperation with EGADE and the Center for Strategic Studies, ITESM has developed a plan called Monterrey 2020. This plan profiles Monterrey's ideal business of the future. EGADE Dean Jaime Alonso Gomez explains that small, high-tech companies are what's in store.

"The most successful new companies will be leaner, dynamic and more flexible," he says.

Deterred by the shortage of blue-collar workers in Monterrey, Zambrano predicts that companies involved in labor intensive industries such as the garment industry will move to other cities or neighboring states.

Will this create an unemployment problem in Monterrey?

"No, because we don't want labor intensive industries that pay low wages ... manual laborers should be re-trained to work as technicians, or re-located to other cities," says Zambrano. "What we want here are businesses that are capital intensive, that use the talent from our universities, and pay high salaries."

THE GRAND PRIX AND BEYOND

Monterrey 2020 also predicts rapid growth in Monterrey's tourism industry.

The Grand Prix, held in March this year, was hailed as a great success for the city and injected US$31 million into the local economy. Even so, while no one is complaining about the event or its immediate economic benefits, it only lasted for one weekend.

Fabricio Casado Gonzalez, general manager of the city's Crowne Plaza Hotel, says it will take more than the Grand Prix and the new convention center, Cintermex, to change the image of Monterrey as a "Monday to Friday" business destination.

Hotels, like the impressive 403-room Crowne Plaza, were filled to capacity during the Grand Prix but overall revenues this year are down, and Casado is concerned.

"Our occupancy rate is down 2,500 rooms from what we were at the same time last year," he says. "Guests prefer the smaller hotels because they are cheaper."

According to Casado, the problem is that U.S. companies have tightened their belts and the result is less demand for high-end business accommodations. While 20% of the Crowne Plaza's guests are from the United States, Casado would like to see that percentage double.

"Businesspeople used to stay for a week about once a month, now they just come for two days every two months," he says. "They're still coming to Monterrey but staying for less time and with less frequency."

To fill up the hotels the rest of the time, Casado claims the state government must follow up the success of the Grand Prix with investment in tourist attractions.

"Before we were just an industrial city, but now we are ready to attract a different kind of tourist," he says. "We have to look seriously at recreational tourism.

Contrary to the disparaging comments found in most tourist guidebooks, Casado says that Monterrey does not lack in natural attractions. The nearby Huasteca canyon attracts rock climbers from around the world. Also, Casado is confident that the half-completed sports arena in the newly renovated Fundidora Park could be just what Monterrey needs.

"It could be used for international competitions, and there's even talk of an NBA team coming to Monterrey," he says.

Still, with US$25 million needed to finish the complex, Casado admits it might be a while before the LA Lakers are seen checking into the Crowne Plaza.

DOUBLE-EDGED SWORD

If Monterrey is to become the city that government officials and business owners want, there are several problems that cannot be ignored. Namely, water shortage, traffic safety and population growth.

Though INEGI statistics indicate very little population growth since 1995, Coparmex's Plancarte warns that population growth could be a problem in the future if it is not managed properly. Linares, a municipality 120 km from Monterrey, is being developed as an alternative business center to take some of the pressure off Monterrey.

Being a first-world city in a developing country has its costs, admits EGADE's Alonso.

"Water shortages will be a major problem in the next few years and traffic is getting worse everyday," he says.

Still, Alonso argues that these detractions are actually a sign of economic development: "These are good problems because they show that the city is prospering."

Zambrano agrees: "Some say there are too many cars, but the reality is that citizens of Monterrey have more purchasing power than ever before now almost every family can own a car and some can afford two or three."

THE HEAT IS ON

As the summer sun beats down on the cobblestone streets in the Barrio Antiguo (Old Quarter), shade is a luxury and cold water even more precious. But the locals grin and proudly tell you their city is one of the hottest in Mexico. And they're not just talking about the weather.

Having recovered from rising gas prices and a slumping U.S. economy, this industrial juggernaut is burning up the competition. Home to Mexico's most prestigious graduate business school and a surplus of well-trained managers and information technology experts, it seems that nothing can stop this city from claiming the title of Latin America's business Mecca.

As Zambrano says, "We've never been followers, we're leaders."

Julian Dowling is a Monterrey-based freelance writer.