“I |
‘m very optimistic about the economy and about what’s happening here in Mexico,” says Steve Ballmer, Microsoft CEO. The software giant announced in August that it plans to invest US$60 million to train 20,000 Mexican software developers. The company will team up with 3,000 computer and technology professors to help Mexico develop a software industry that it can export elsewhere.
In the era of a sluggish U.S. economy, business leaders are hoping trade pulls up the markets in Latin America. The slowdown may be an ideal time for purchasing property in South America and waiting for the upturn. NAFTA (North American Free Trade Agreement) has increased foreign investment in Mexico since the trade agreement’s inception in 1994. The proposed Free Trade Area of the Americas, advocated at the Summit of the Americas in 1994 and led by Mexico and its new president, Vicente Fox, would open up the rest of Latin America to much needed trade. The agreement would unite the economies of the Western Hemisphere into a single free trade zone.
Other firms are waiting for the upturn and putting plans for foreign investments on the back burner. “Simply put,” says Mitch Creek, vice president of Stewart Title de Mexico, “U.S. and foreign firms are putting their plans on hold and waiting the market out.” The lack of growth in the U.S. economy is causing many firms to rethink foreign expansions. Business officials are watching their bottom line closely and keeping an eye on the Latin American markets.
But much of Latin America, Mexico included, is suffering the effects of the economic slowdown in the U.S. Add to that equation the fact that the Mexican peso, thanks to efforts on the part of the Fox government, is holding strong against the dollar, making goods more expensive, and Mexico is in a slump. Fox’s government has revised downward predictions for a gross domestic product growth to somewhere between 1.8 percent and 2.5 percent by the end of the year.
In August, Fox said he was not anticipating a domino effect from the U.S. economy, “But simply there is no dynamism now in the American economy, and therefore no growth,” he said.
Mexican Inflation Down
There may be a silver lining in this cloud for foreign investment in Mexico. Inflation is down and interest rates are at 10 percent, about half as high as a year ago. Foreign investment in the country will exceed US$27 billion this year, roughly twice last year’s figure. Many companies are looking into alternate agreements with Mexican firms to get their foot in the door without making huge capital investments.
Clear View Bag of Albany, N.Y., makers of bags for supermarkets and medical products, entered a shelter agreement with a factory this summer in Juarez. The agreement enables the firm to have a presence in Mexico without purchasing an operation. “It basically removes our operational and labor costs from the picture,” says Joseph Rommer, vice president of Clear View. “It gives us time to see whether we can afford to out on our own down there.”
Government officials have attempted to curtail much of the red tape previously involved with setting up foreign operations in Mexico. Stewart Title de Mexico is one of the first U.S. firms licensed by the Mexican government to underwrite title insurance in Mexico. Traditionally, title insurance in Mexico was required to be underwritten by a local Mexican company. Previously there has been no method for securing loans in Mexico, and consequently there has been a huge shortage of available housing. Creek says that with the new administration and new programs, things are changing.
“It’s estimated that Mexico needs 6 million housing units,” adds Creek. “Companies such as GM and Delphi, when they establish operations in Mexico, they set up programs for housing their employees. Often the company will offer the mortgages on the property. That way the employee can have the note taken out of their salary.”
The availability of housing in areas such as Ciudad Juarez and other border cities will become a big issue in retaining labor. “Even though there may be available labor in an area, site selectors want stable labor, and available housing gives them that,” says Creek. Stewart Title de Mexico is hoping to capitalize on this market by offering residential and industrial title insurance.
Officials say NAFTA will continue to be the economic engine that fuels growth in Mexico. Mexican officials have entered trade agreements with European nations, and business leaders continue to point to cross-border trade as a draw for site selectors in the country. Redwood Systems, a subsidiary of Consolidated Freightways, opened in August a 470,000-sq.-ft. (43,663-sq.-m.) distribution center just north of Mexico City on Highway 57, the so-called NAFTA Highway. The center will be used by Sony to ship consumer electronics to retailers throughout Mexico.
While Mexico continues to suffer the effects of the U.S. slowdown, business leaders on both sides of the border predict increased trade will pull the Mexican economy up. “I predict NAFTA’s future impact will prove ever more advantageous to the U.S and Mexico,” says Dr. M. Ray Perryman, president of the Perryman Group consulting firm in Waco, Texas (www.perymangroup.com). “Economic progress takes time, but NAFTA is moving us in the right direction.”
“Buenos Aires has always been a strong trade lane to and from our Miami gateway.
It makes sense for us to open a branch office.”
Argentina –Back from the Brink
The International Monetary Fund (IMF) agreed in August to an US$8 billion aid package for Argentina, thus allowing the country to restructure its debt and avoid default. This is good news to business leaders in both Washington and Buenos Aires. Both government officials and the business community feared a new debt swap and restructuring of Argentina’s $130 million public debt. Markets across South America feared the default of Argentina’s economy, and affected markets in Brazil and elsewhere registered their concern.
Argentina’s President Fernando de la Rua has proposed sweeping changes including a “Zero Deficit” policy and a 13 percent cut in salaries and pensions. These dramatic changes while painful, should help to slowly right the economy of one of the largest markets in South America. “I forecast in the next few months, both a free-floating of the exchange rate and a friendly restructuring of the foreign debt,” say Horacio Rodriquez Larreta with the Economist Conferences in Buenos Aires.
While the news has hardly been positive for Argentina, business leaders continue to recognize trade opportunities in the market. Phoenix International, a freight forward operator and customs brokerage firm located in Illinois, announced in August they will open a branch in Buenos Aires. It marks the firm’s first office in Latin America. “Buenos Aires has always been a strong trade lane to and from our Miami gateway,” says Gabriel Buedo, Phoenix’s general manager for Miami and Latin America. “It makes sense for us to open a branch office and staff it with our employees.”
In March, NEC Argentina opened a software development center at its plant in Buenos Aires. The firm will employ 70 engineers and plans to invest $100 million over the next five years supplying software to telecommunications, financial and government agencies throughout Latin America.
Brazil –the Lights Are Dim but On
The demand for electric power in Brazil is huge. The country has suffered through a 70 drought, and power production has been curtailed at four of the state’s power generators. Brasilia Power will invest some 15 billion reis (approximately $6 billion U.S.) over the next three years to upgrade the country’s power capacity. Five new power plants have been announced this year alone.
Foreign direct investment in Brazil is expected to exceed $34 billion this year and E-commerce is predicted to be a growing business in the country. “Although plagued by limited hosting and phone access, Latin America will eventually be led online by Brazil, where Net trade will increase by 165 percent between 2003 and 2004, ” says Matthews Sanders of Forrester Research of Cambridge, Mass. (www.forrester.com).
In June, Quebecor World of Canada opened a new plant in Recife, which will employ 200. The facility prints magazines for Editora Abril, Latin America’s largest publisher. “This plant was built and put into operation in less than 10 months,” says Guy Trahan, president Quebecor World Latin America. “Now with two plants in the country with the largest population in Latin America, we are poised as never before to take advantage of significant growth opportunities.”
Ford Motors is building a 1 million-sq.- ft. (92,900-sq.-m.) OEM site. The plant will produce products for local and export use, and company officials say they have integrated suppliers into the building. Companhia Vale do Rio Doce (CVRD) will build a new manufacturing facility in Sao Luis. The site will produce iron pellets and will cost $200 million to build.
