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Mexican manufacturing on the move.

Explosive growth in Mexican industry and diminishing trade barriers represent both an opportunity and a threat for US manufacturers.

A former resident of Tucson, AZ, home on vacation recently for the first time in several years, saw one major change he hadn't expected. Driving around town sightseeing, he was surprised to have to wait for a freight train at a crossing he never even slowed down at before. This time he was held up 15 minutes by a long train of open rail cars loaded with new automobiles heading north out of Mexico. Mentioning the incident later to friends, he learned there are several trainloads like it every day.

In his earlier Arizona days, the big traffic from Mexico was in leather goods, pottery, tequila, silver jewelry, and, of course, oil.

Welcome to Mexico--a country in the midst of rapid, full-scale industrialization. And, as usual, machine tools and tooling are at the core of the modernization.

Situation report

Along the Mexican border from Texas to California are strung more than 2500 maquiladora plants, dozens of them General Motors. The maquiladoras are 100% foreign-owned assembly facilities that came into being as a result of changes in Mexican investment and export laws in the mid-1960s. While a huge industrial enterprise in revenue and employment, these plants have up to now been used mainly for assembly work and do not figure largely in metalworking. Most assemble automotive, electronic, appliance, or clothing parts into complete units. The North American Free Trade Agreement (NAFTA), however, may be changing the focus of the maquiladoras from assembly to more intensive manufacturing as tariffs are reduced or eliminated on a wider variety of goods.

The new wave of industrialization really picked up speed with the opening of the border and cutting of tariffs a few years ago by Mexican president Carlos Salinas de Gortari. Additional impetus developed when President Salinas privatized most of Mexico's heavy industry, as well as banks, insurance companies, and other financial institutions and eliminated or reduced import tariffs.

In the metalworking industries, Mexican manufacturers almost universally need to invest heavily to reach world-class quality levels. They already have a competitive edge with labor rates of $10 to $15 a day, minimal environmental costs, and no EEOC-type monitoring. But many of them have a long way to go.

"Manufacturers here used to be able to sell their metal products for twice what they were worth because of the protective tariff," one Monterrey metalworking plant executive concedes. "With that now cut from about 150% to about 15%, they just can't compete with goods from Taiwan and Korea, and they are laying off workers." Mexican machine shops also are struggling, he adds.

"Many metalworking companies just got sluggish during the days of protectionist tariffs," says Charles Cutting, manager in Mexico City for Toyoda Machinery USA, Chicago. "Some are reorganizing. The Mexican government has told them not to run to the government for money. So they are getting Exim loans from the US at reasonable terms of 8% to 10%."

The cut in border tariffs and the coming of NAFTA are already forcing machine shops in Mexico to decide whether they will pack it in or try to upgrade. For many small ones that don't have the money, there isn't much choice. But larger machine shop operations, especially those clustered around the 19 major US, Japanese, and European auto plants, are upgrading.

Help wanted

The need for a massive infusion of new machine tool technology has helped make Mexico the second largest export market (behind Canada) for US builders of machine tools and tooling. Exports of machine tools to Mexico in 1991 jumped 14% to $124.9 million. And in the first quarter of 1992 they increased 55% over a year earlier, while those to Japan and Germany dropped, according to data from the Association for Manufacturing Technology (AMT), McLean, VA.

A good indicator of the interest in machine technology was the CME/Mexico machine, tool, and manufacturing show in Monterrey in October. The show drew thousands of attendees and featured exhibits from 202 companies--90% of them US-owned, according to CME director of marketing Kevin Pyles.

"The attendees were very serious buyers, and they knew exactly what they were looking for," he says. The show was the first experience in the Mexican market for many of the exhibitors, who were pleasantly surprised by both the quality and quantity of those in attendance.

The demand for machines and tooling should get a push with final approval of NAFTA. The treaty will create a market of 360 million consumers with annual production of $6 trillion--the largest market in the world when the accord goes into effect.

Some US machine tool builders, however, have a deep concern stemming from NAFTA: that Mexico could become a conduit for Asian and European builders to ship machines into the US and bypass country-of-origin regulations and existing Voluntary Restraint Agreements. That view, however, is not shared by Paulo A Wendler Jr, Latin American coordinator for Cincinnati Milacron, Cincinnati, OH.

"Mexico does not have an indigenous industry. Whoever goes there will have to start from scratch," he says. Mr Wendler believes there will always be builders who try to bypass country-of-origin regulations, but he doesn't think the incidence of that will either increase or decrease as a result of NAFTA.

One major difference US machine tool builders are finding in trying to sell equipment in Mexico: despite the low labor rates, Mexican shops look for an extremely rapid payback on their investment. "The Mexican plant managements figure on a machine paying for itself in labor savings or higher productivity in as short a time as two years, compared to five or seven in the US."

Auto-driven expansion

The growing presence of US, Asian, and European auto plants in Mexico has been the trigger for a large portion of the surge in machine and tooling purchases. The Mexican automotive industry produced a million autos in 1991, and that number is expected to double by the year 2000.

General Motors built over 500,000 engines last year at two Mexican plants and assembled 142,000 cars at another. Of these, 43,000 were sold in Mexico, 81,200 were sent to the US and Canada, and the rest were exported elsewhere.

Chrysler has two auto assembly plants and two engine plants in Mexico totaling almost 10,000 employees. The company recently appointed its Mexican manager a vice president of the parent US company, a rare move. Ford's Mexican output is also huge.

One of the main drivers of machine tool upgrading is the need to achieve high levels of quality for the auto industry, according to David Lopes, sales and marketing manager for the Madison Cameron Div of Sandvik in Lincoln, RI. "The level of quality the auto companies in Mexico are getting in cars is phenomenal," he says. "Most of the machining lines in their new plants are carbon copies of successful Detroit lines. They are continually shuttling in high-level manufacturing engineers from Detroit. Local tooling companies, however, are struggling to meet the auto quality standards."

Another executive agrees. "The Mexican auto plants are some of the best in the world," says Kenneth Rasimas, Latin American senior export manager for Okuma Machinery Inc, Charlotte, NC. "One GM plant has not had an engine failure in three years. And the Ford engine plant received top quality ratings in competition with Ford US plants."

Tooling, too

Whether or not NAFTA will override the special customs break for maquiladoras, tool and die shops in the US Southwest are not worried about an invasion of low-priced tooling for some years.

"The Mexican tool and die industry is in its infancy right now," says an AMT spokesman. "When it comes to dies for presses and large tools, it's still being sourced from other places. But when you talk about toolholders, inserts, jaws, and other tools that need to be replaced, they're quite capable of handling that."

Ray Shaw, executive vice president of Versa-Tool Mfg Inc, Dallas, TX, agrees that many Mexican tool and die shops have good basic capabilities. "We do some tooling and machining work for a few food plants in Mexico and have talked about having their local shops do the standard work while we do the critical parts. But it will take years for regular machine shops in Mexico to catch up."

Selling tooling in Mexico, though, is still a far cry from the US. For one thing, having a local manufacturing plant for support is a big plus.

Carlos Velazquez, a sales representative for Sandvik de Mexico in Mexico City, says his company enjoys a major advantage because it has had a plant in the Mexico City area for 25 years. It employs 285, includes a training center, and was recently expanded with tooling from a closed Sandvik plant in Montreal.

"Tooling suppliers without local support facilities have a difficult time penetrating the Mexican market," Mr Velazquez says. "If a new machine tool comes in from the US and is equipped with tooling from a company without a Mexican plant, the Mexicans will often pull off the tooling and replace it with sets from a vendor with local facilities."

Having the right distributor with connections is also important in Mexico, where an "old boy network" is still very much in place. "There's still a lot of (inside dealing) as well as corruption," says one Ohio consultant to a Mexican firm. "Middle managers make so little salary that money under the table is their only way of keeping up a decent living standard. But younger managers are more sophisticated and less likely to get into bribery or old boy networking," he adds.

Given the need for "connections" when doing business in Mexico, most US tool builders use Mexican distributors rather than southwest US distributors from border states. One company has even put in a US-style technical center at its distributor's place of business.

Okuma has one of the few technical centers in the country in Monterrey. The busy facility includes a showroom with 18 machines under power, classrooms, customer service reps, and spare parts.

Labor pains

Employee relations in Mexican metalworking and other plants could take up several volumes. Mexican plants are heavily unionized by a national organization. The unions furnish workers from the equivalent of a hiring hall.

Low Mexican labor rates discourage automation, and the government bases its incentives for locating industries on the number of jobs created. Auto companies, for example, have been known to "de-automate" some operations to create more jobs in a plant. The main factor determining whether or not a particular operation is automated is quality.

Differences in culture also affect relations between management and labor, Mexican and American. One difference in Mexico is that people have little conception of the role of middle management. Modern management methods are being adopted, however, as a new generation of Mexican managers, educated in foreign schools or top Mexican institutions like the Monterrey Institute of Technology, come to power.

Another cultural difference in Mexico, as in all Latin American countries, is a sharp division between management and labor. Much like the US until recent times, workers' opinions or suggestions are rarely asked or offered. But this too is changing.

One company started forming work teams, which were given a problem and asked to identify all the contributing causes plus possible solutions within three weeks. According to the plant manager, workers were eager and proved very capable of solving the problems given them. "No one had ever asked their opinion before. And to top it off, they had worked out a solution which had not occurred to our managers," he says.

Mr Rasimas of Okuma agrees that employees at many Mexican metalworking and machine shops can come up with ingenious solutions to problems if given the chance. "By and large the Mexican machine shop and manufacturing people are tremendously creative," he says. "US and other visitors see this when they visit, and they are surprised. The Mexican shops do tool and die cutting and reworking with machines so old we wouldn't use them (in the US). But the work is accurate."

? Necesitas informacion ?

If you're considering trying to take advantage of export or investment opportunities in Mexico, you might be wondering how to get started. Depending on the kind of information you're after, sources--from local and regional development organizations to the US government--abound. Here are a few that might be the most helpful:

* The International Trade Administration of the US Department of Commerce runs a trade information center for businesses that are interested in exporting. By calling the center's toll-free number, 800-USA-TRADE, companies can get information on Mexican markets, competition, and trade policy.

* The US Small Business Administration provides a similar service through its Office of International Trade. The SBA also provides loans to qualifying businesses to help them begin exporting. The office can be reached at 202-205-6720.

* The Mexican Investment Board (MIB) is a not-for-profit organization set up to help potential foreign investors explore business opportunities in Mexico. Jointly sponsored by Mexico's private financial industry and the government and based in Mexico City, MIB has US offices in Dallas, Los Angeles, and New York. Interested parties also can get information by calling MIB's Faxline, 602-930-4802. Once connected, users follow prompts to receive a listing of documents. Using the four-digit codes on the listing, they can then order up as many of the documents as they want.

* The United States-Mexico Chamber of Commerce has headquarters in Mexico City as well as US offices in Los Angeles, Dallas, New York, and Washington. Founded in 1973 to promote trade between US and Mexican companies, the organization works mainly by helping companies on both sides of the border network. One way it achieves this is by sponsoring missions to expose members, which are split about evenly between US and Mexican companies, to trade and investment opportunities across the border. For information on membership in the chamber, US companies can contact the nearest office.

If you're interested in investing in a particular location, a good place to start is the local chamber of commerce in the area where you plan to invest. Local and regional development organizations abound on both sides of the border, and are especially prevalent in Mexico.
COPYRIGHT 1993 Nelson Publishing
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes related article
Author:Rohan, Thomas M.
Publication:Tooling & Production
Article Type:Cover Story
Date:Jan 1, 1993
Previous Article:Grob bets heavily on people power, training.
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