When Chicago-based Navistar International Corp. needed to expand its new truck assembly operations in 1998, the company selected Monterrey suburb Escobedo in Nuevo Leon, Mexico, for the same reasons that have catapulted the Mexican economy to the forefront of Latin America.
Factors like a strong work ethic, an abundant supply of highly skilled manufacturing employees, a cooperative government and the necessary infrastructure to support a growing automotive industry not only make corporate real estate executives smile; they make Mexico one of the Western Hemisphere’s leaders in foreign direct investment (FDI).
With more than US$78 billion in foreign direct investment since 1994, Mexico is averaging $11 billion a year in FDI since the Peso Crisis. Mexico set a record in the first half of this year with an estimated $6.6 billion in FDI.
Automotive manufacturing companies like Navistar are one reason why the Mexican economy is booming. Two years ago the company spent upwards of $200 million to open an 863,000-sq.-ft. (80,173-sq.-m.) truck assembly plant in Escobedo. Since then, Navistar has captured 21 percent of the heavy truck market in Mexico.
Why did the company choose Mexico, and how did the deal pay off? Jim Bruce, principal of Fluor Global Services and a site selection consultant who advised Navistar on the project, says the move made sense for a number of reasons both strategic and logistical.
“The site in Escobedo was right along the Highway 57 corridor from Mexico to Laredo, Texas, which meant that Navistar would have a clear path for transport of these trucks to the United States,” says Bruce. “And when the company considered a number of locations in Mexico, the Monterrey area emerged as the clear leader in several categories. It had the best transportation infrastructure and labor market, and its international airport offered direct flights to Chicago, the headquarters of Navistar.
“But the bottom-line reason Navistar chose Mexico was that it was building a high-quality product and it needed a high-quality work force, and Mexico has a proven track record of producing high-quality products for a variety of automotive manufacturers, including Mercedes and other truck and bus makers,” explains Bruce.
Accessibility to rail, water and communications infrastructure also helped sway the deal in favor of Escobedo, Bruce adds, noting that the local government was instrumental in convincing area private property owners to donate land for an easement clearing the way for a new rail line, high-voltage wire and natural gas pipeline.
“While the government agreed to dedicate this right-of-way as a public road, it also required the participation of a number of private landowners,” says Bruce. “Also, since this site was not prepared as an industrial park, the local government had to change both the zoning and the master plan from residential to industrial.”
The move has paid off in a big way for Navistar. By capturing a sizable percentage of market share in Mexico, the company is now positioned for further expansion into Central and South America. In fact, the company is now ramping up its operations in Escobedo to increase its heavy truck capacity.
Work Force: The Classic Catch-22
Taking advantage of available, skilled Mexican labor is nothing new for American auto and truck makers. The maquiladora program, launched 35 years ago, has long served as an engine driving the growth of the U.S. automotive manufacturing industry. Maquiladoras are Mexican plants that perform manufacturing and assembly operations for multinational companies and then ship back to the United States or other nations semi-finished or finished goods.
In the past two years, Mexico has seen the construction of 25 major facilities serving some facet of the automotive industry. The largest of these, a $2 billion automobile manufacturing factory for DaimlerChrysler, opened this year. Other major projects include a $1 billion investment earlier this year by Volkswagen and a $100 million truck transmissions plant by the Eaton Corp. in 1999.
The challenge for Mexico, however, is to find a way to keep attracting FDI in a country where workers are wanting higher pay but not necessarily getting it. With the average hourly wage still hovering under $2 an hour, Mexican workers — even those in high-skilled manufacturing jobs — find it difficult to enjoy the fruits of middle-income life taken for granted in the United States.
A recent article in Latin Trade profiled the lives of one middle-class family of five in Mexico. Between the father’s job as a perfume salesman and the mother’s job as a schoolteacher, the family earns $2,000 per month. Today, the family lives in a modest, three-bedroom home and drives a 15-year-old Ford Topaz. But, like most working-class families in Mexico, they are still trying to pay off their debts incurred in the Peso devaluation crisis of 1994.
Francisco Javier Mancera, minister for trade affairs for the Mexican Embassy in Washington, D.C., reports that “the most important challenge facing Mexico is our investment in human capital — particularly our education and health systems. At the end of the day, those investments determine where the Mexican economy will go in the future.”
Mancera is also concerned about the plight of small and medium-sized companies in Mexico. While the economic transformation of the country has lifted the boats of the international conglomerates, Mancera says that the vast majority of Mexican business owners — who are small business operators — have not yet entered the modern economy.
Economic Indicators Paint Rosy Picture
Still, the future looks bright for the Mexican economy and its prospects for continued gains in FDI. By almost any leading economic indicator, the Mexican economy is robust.
In the second quarter of this year, Mexican gross domestic product increased by 7.6 percent in real terms in comparison to the same period in 1999, according to the Latin Focus 2000 Report by The Dismal Scientist (www.dismalscientist.com). While this sudden surge has raised concerns that the Mexican economy may be overheating, the Central Bank has taken the appropriate precautions of tightening the money supply and calling upon the federal government to control public spending.
In other positive news, retail sales increased 12.5 percent in May, while consumer prices increased just 0.39 percent in July, making July the lowest inflation-rate month reported in 28 years. Today, the average annual inflation rate for Mexico stands at 9.1 percent, the lowest mark since the onset of the Peso Crisis.
The Latin Focus 2000 Report also indicates that the Peso is strengthening against the US dollar while the trade deficit continues to widen. As consumers in Mexico acquire more purchasing power, they are buying more imported goods.
Hoping to capitalize on this turn of good fortune, Mexican President-elect Vicente Fox is visiting other Latin American nations as part of an initiative aimed at dispelling concerns that Mexico has become too dependent upon the United States. Specifically, Fox is targeting free-trade efforts with Argentina, Brazil, Uruguay and Chile. He has also announced plans to provide tax incentives for companies that build factories in the slower-developing southern states of Mexico.
As the unemployment rate in Northern Mexico continues to shrink toward zero, more companies from the US and other nations will be forced to look to the South for expansion opportunities. Overall in Mexico, the jobless rate dropped to 2.0 percent in July, according to the National Statistical Institute of Mexico.
This one fact is driving more of the maquiladoras toward Southern Mexico. Of the 1,405 maquiladoras that have been built in the country since 1994, about two-thirds are in the six Mexican states bordering the US, but that is quickly changing. According to Mancera of the Mexican Embassy, “Today, most of the maquiladoras are opening south of the border area. Southern states are getting more of the manufacturing investment, as the North gets more of the high-technology investment.”
One industry that is moving southward is the automotive sector. The Yucatan, for example, was largely an agrarian economy 10 years ago. The Southern Mexican state today has several state-of-the-art power plants and more than 170 maquiladoras.
Despite Political Change, Business Is Still Local
Even though the Mexican people have elected a pro-business national leader in Fox, business deals on the ground must still be forged at the local level, say the experts who advise corporate real estate executives.
“So far, the wave of political change in Mexico has not filtered down significantly to the local and state level,” says Angela Lockman, senior manager of state and local tax issues for KPMG in the US. “And that means companies from the US still need help in navigating the local and state political waters.”
Such issues as negotiating financial incentives packages, for example, still must be resolved in the halls of local public officials in Mexico. In Mexico, those incentives can range from grants for training programs to tax abatements and even free land.
“At the state level in Mexico, you will see such things as land offers and training grants,” says Lockman. “There can also be payroll tax deductions, fee waivers for land registration, reductions in property taxes and assistance in obtaining needed permits.”
Lockman notes that the major industries poised to take advantage of these incentives in Mexico are the most labor-intensive sectors such as automotive manufacturing, the textile industry and electronics manufacturing. Today, Mexico is the largest apparel supplier to the US — up from fifth in 1994. In the automotive sector, Mexico exported more than 1 million finished vehicles to the US in 1999, accounting for more than $24 billion in exports. In the electronics sector, Mexico exported $37 billion in goods to the US in 1999 — three times its total from 1993.
To put this growth into perspective, consider this: In 1999, Mexico exported some 52,000 television sets per day to the US. That’s more TV sets than Hong Kong delivers to the US in an entire year. Computers, ranging from IBMs to Hewlett Packards, are now delivered from Mexico to the US at the rate of 6,200 per day. And today Mexico ranks as the number one supplier of car radios to the US.
Forecast for Mexico: Still the Land of Opportunity
Despite the twin concerns of an overheating economy and an over-dependence upon U.S. trade, the outlook for corporate real estate opportunities in Mexico remains positive.
Robert Ordorica, head of J.P. Morgan Real Estate Investment Banking for Latin America, says that the attainment of investment-grade status, the impact of NAFTA and the ongoing bank restructuring in Mexico all bode well for continued corporate expansions.
“The Mexican real estate market is among the markets in the (Latin American) region that have benefited the most from recent reforms,” says Ordorica. “In recent years, Mexico has adopted fundamental structural reforms. Democracy continues to strengthen the performance of the government. Exports have become more diversified. The oil industry today accounts for only 20 percent of the country’s total exports vs. 80 percent in 1990.”
Ordorica added that the recent political changes, coupled with the free-market reforms, have drastically improved Mexico’s prospects for economic growth. “In the past, most Mexican developers and owners typically approached real estate as a means to hedge their patrimony against devaluation and inflation,” he says. “A growing number of developers today are adopting an approach based on current returns. Foreign lending institutions have brought more discipline to the market by limiting financing to income-generating properties, requiring bondable lease contracts, requiring foreign parent lease payment guarantees, lending based on US-customary underwriting, and proper loan and asset management controls.”
What does all this mean for the future of real estate in Mexico? The answer is solid, sustainable growth for every major sector — office, industrial, retail, hotel and residential, says Ordorica.
For companies like Navistar, it means an even greater chance to expand manufacturing capacity and tap into new markets. “Mexico is working very hard to be an attractive business and industrial location and has succeeded in a lot of ways,” says Bruce of Fluor Global Services. “Any notion that Mexico is simply a cheap place to make cheap products quickly is mistaken. What Mexico offers is a high volume of quality workers capable of producing high-quality products.”
The key to sustaining this growth, Bruce says, is the continued democratization of the country. As Mancera says, the more Mexico invests in its supply of human capital, the better positioned the nation will be to compete in the New Economy.
