Latin American Supplement -- One Market, Split Personality

Whether you are in New York or Los Angeles, Monterrey or Mexico City, if you operate a recycling company, chances are the U.S. and Mexico are both part of your markets. Whether you are a collector, processor, or end user of recovered materials on any side of the border, you may have also benefited from skilled Mexican low-cost, hard working labor.

Recyclers know the benefits of why it is politically correct to have good relations on both sides of the U.S./Mexican border. Mexico supplies the U.S. with Chrysler minivans, IBM ThinkPads and Whirlpool refrigerators, among other products. However, now that the U.S. economy isn’t hot anymore, Mexicans are adapting to the negative aspects of having industrial integration with sectors of the U.S. economy. What industrial integration means for a recycler is that any closure of the production chain in one country is likely to disrupt production in the other country.

Since 1993, annual bilateral trade between the two nations has grown from $81.5 billion to $250 billion for 2000. Intermediate goods used to make finished products, heavy machinery and tools, and chemicals dominate U.S. shipments to Mexico. Mexico’s sales to the U.S. are led by petrochemicals, steel, apparel and farm produce. On the other hand, by weight, the largest single group of commodities being transported from the U.S. to Mexico are scrap materials.

TWO COUNTRIES WITH A REGIONAL CLIENTELE

When President George Bush hosted Mexican President Vicente Fox for the first official head of state visit to Washington in his administration, both men knew a new road lies ahead. Both men were elected in an era of tremendous economic ties. Challenges such as immigration, drugs, trade, energy and the environment are now being debated as regional issues.

The Bush and Fox relationship is seen as potentially the best in the history of bilateral relationships. They are pragmatic, unconventional leaders who understand each other’s countries. While Mexicans yearn for development and prosperity, many companies doing business in Mexico call the growth rate of the last half a decade “too much of a good thing.” Mexico has a long history of boom-bust cycles, particularly ones in which powerful expansions lead to high trade deficits, inflation and economic crisis.

As Governor of Texas, Bush was seen as a good friend of Mexico. Under Bush, Texas did half of its trade with Mexico—$42 billion in 2000. President Fox, a former governor of the state of Guanajuato, has close ties with Texas through a long history of trade and immigration. He was responsible for creating an export entrepreneurial attitude for small businesses during his term as governor.

 Bush and Fox have experienced on how beneficial NAFTA can be. Nevertheless, they must realize that NAFTA should have bigger ambitions than just trade, such as the economic stability of the region. Less than a decade ago Laredo, Texas, and Nuevo Laredo, Mexico, were just two typical border towns with very little to offer in terms of economic development and business opportunities. Today, the Laredo region is the envy of the 43 crossing border towns the U.S. and Mexico share. Current census figures indicate that during 2000, more than $45 billion of cargo was being transported to and from Laredo, Texas, alone, making Laredo/Nuevo Laredo a hot NAFTA trading place. It is the nation’s largest inland port, handling 70% of all trade between the U.S and Mexico.

Most of the $250 billion in goods traded between Mexico and the U.S. travel by truck but are transferred within a commercial zone along the border from one national trucking fleet to another. The volume of trade equals about five million truckloads a year, by U.S. industry estimates. About 3,500 trucks cross the border daily at Laredo alone. Projections by the Texas Department of Transportation call for NAFTA related truck traffic to increase by almost 30% by 2006. In spite of all the trading activity, why do the majority of American and Mexican businesses—large, medium, or small—apparently turn their back on trade?

The reason, as I am told by interested parties is, “fear of the unknown.” According to the U.S. Department of Commerce, currently only 1% of small and medium businesses export, and of those, 63% only export to one country. On the Mexican side the picture is much similar. Both governments agreed that NAFTA has not benefited the small and medium size companies as much as the larger players. Much anti-NAFTA sentiment focuses on the support of the agreement by large, multi-national corporations. The governments continue to promote a greater understanding of the critical importance and the benefits derived from NAFTA.

THE CHALLENGES—THE DIFFERENCES

The size and complexity of the U.S. and Mexican markets and culture impacts the way business is conducted. Americans are commonly seen by Mexicans as wealthy and stable, and therefore having more to spare. Americans often see Mexicans as having a higher level of financial insecurity, both in their companies and households.

Many U.S. companies interested in exporting to Mexico have a unique concern regarding payments and credits. U.S. companies have a past incident or know someone who was not able to collect payment or had to renegotiate price as the only option to minimize the loss. When the domestic market is depressed, Americans are known to look at Mexico to get rid of their non-quality or high inventories.

Whether or not those statements are valid, the necessity of expanding abroad prevails. Many American and Mexican companies have been successful working in each other’s territories. For American businesses, fact-findings and pinpointing market accuracy are well-established practices, while in Mexico such research still faces shortcomings. Mexican government manipulation of commercial and financial information and facts has been a problem in the past.

For instance, the way economic recession is defined in the U.S. is two consecutive quarters of no economic growth, while in Mexico it is more of a government math calculation. Often, Mexican businesses work with market information from the U.S. to design their strategy. For U.S. businesses, the best information on Mexico is based on good relationships or qualified counseling. Qualified counseling is not just legal counsel, but I am also referring to mentoring. It is a great way to prevent a crisis and expand on opportunities available.

When Mexicans seek to do business in the U.S., they have to be aware that Americans are more formal and orderly. Honoring this will bring them respect. On the other hand, while conducting business in Mexico, Americans should be flexible on time. It is difficult to get things done being rigid; elasticity without compromising company guidelines and personal standards can still be achieved while conducting business in Mexico.

MEXICAN-U.S. SCRAP TRADE HISTORY

For approximately three quarters of a century, Mexico has been consuming recovered materials as feedstock to fulfill their industry manufacturing needs. As the Mexican economy became involved in global trade it needed to find new sources of raw material.

America has been and continues to be a top producer of all kinds of scrap, and Mexico has learned to depend more on it. Government trade figures suggest that last year Mexican companies imported 1.7 million tons of recovered fiber and approximately two million tons of scrap metals from the U.S. Recovered paper and metals have been progressively crossing the U.S./Mexican border since the seventies.

Mexican companies have long been attracted to the quality, quantity, proximity and prices that American companies have provided. Proportionally, the Mexican metallurgic and paper manufacturing industry consumes a higher amount of recovered materials, a two to one ratio, compared to the U.S. However, U.S. companies are using more recovered scrap to fulfill industry raw material needs. Long term, this trend could have tremendous implications for Mexican producers that depend on imported U.S. scrap.

THE MAQUILADORA SCRAP EFFECT

The maquiladora program allows foreign companies to set up manufacturing operations in Mexico and import raw materials duty-free, paying taxes only on the value added to the finished product, which is then shipped abroad.

 According to a Federal Reserve Bank El Paso Branch study, El Paso/Ciudad Juarez has carved an important niche in serving the maquiladora industry, especially in plastic injection molding. This demonstrates that border cities such as El Paso and Juarez—which have traditionally lacked a sophisticated industrial base—can nonetheless attract investments using their formidable advantage with the lucrative maquiladora market.

In addition, with the arrival of IT companies, Microsoft, Dell, Cisco, GE, Tyco International, and automobile assembly factories, electronic scrap generation has been growing at a rapid pace. Conservative Mexican industry estimates suggest that from 800,000 to 1.2 million tons of electronic scrap is currently being generated by maquiladoras. States like Jalisco and cities like Tijuana are centers of electronic scrap generation.

In conclusion, democracy, government privatization efforts and market driven policies are still a work in progress. With more than half a billion dollars of merchandise crossing the U.S-Mexico border each day, there is now a vast network of business relationships. Bush knows that Mexico is quietly emerging as an industrial power that manufactures many of the goods that compose the fabric of American life. There is risk, but there is opportunity as well.

The author, who has worked in the recycling industry on both sides of the U.S.-Mexican border is an appointed member of The US Department of Commerce Export Advisory Council and a Board member of INARE, the Mexican Recycling Association. He can be reached at crovelo@aol.com .