As 1994 drew to a close, executives at Caterpillar Inc. looked south with relish.
In its first year, the North American Free Trade Agreement had helped products race across the border to Mexico-not only mining trucks and excavators from Caterpillar but a panoply of goods big and small from companies all across the United States.
Last year was a rousing good year for American exporters. And 1995, it was universally assumed, would only get better.
That was a very long six months ago. Since then, the Mexico Miracle has gone bust. The peso has plummeted, interest rates have shot up and foreign investment has fled the country.
Most hurt have been ordinary Mexicans who must contend with soaring prices while bringing home shrinking paychecks.
But the effects of Mexico’s economic crisis stretch far beyond its borders, reaching all the way to the Illinois
prairie.
Like Peoria, Ill.-based Caterpillar, many U.S. companies are finding that their best customers in the developing world are out of cash.
Instead of snapping up American-made products, drought-ravaged and debt-ridden Mexico now begs water from Texas and loans from Washington.
Countless U.S. firms have lowered sales forecasts, shelved expansion plans or just strapped themselves in for what promises to be a bumpy and possibly quite lengthy trip back to stability.
After increasing sales to Mexico nearly 60 percent last year, Caterpillar suddenly found itself holding the bag. Since the peso was devalued last December, demand for the company’s big-ticket construction and mining equipment has fallen sharply.
Mexico has gone from being the leader in Caterpillar’s Latin American operation to a laggard. Despite a rise in sales this year in Chile, Brazil, Peru and Ecuador, Caterpillar’s Latin American sales in 1995 are expected to drop by more than a third from $1.15 billion last year because Mexico is suddenly so weak.
Long-term, many business executives remain confident in Mexico, which, in fits and starts, has been modernizing its economy. In fact, the peso’s collapse has been a boon to Mexico’s maquiladoras, which assemble goods for sale in the United States.
“Mexico is a very resilient country, and I think that the people who are backing away because of the crisis are the people who are unfamiliar with Latin America,” said Ricardo Sidor, international vice president for Rust-Oleum Corp., of Vernon Hills, Ill. “As a matter of fact, we said now is the time to come in because everyone else is discouraged.”
Rust-Oleum is close to signing a deal with a new distributor to sell its paints to Mexican industry. Even though Mexico’s construction sector is among those hardest hit, Sidor said that Mexico’s infrastructure needs ensure a market for his product.
“We’re willing to wait for our investment to pay off,” he said.
In the meantime, though, Mexico likely will be a net drag on the U.S. economy.
Last week, for example, the U.S. Commerce Department said American exports to Mexico in April slumped $550 million, or 14.5 percent, from March, resulting in a $1.48 billion deficit with Mexico and contributing to the biggest overall trade gap the United States has ever had in any month.
The dramatic turnaround-the United States historically has posted surpluses with Mexico-can be traced directly to the peso’s demise. Imported goods are more expensive now, while goods made in Mexico cost less elsewhere because of lower wage and production costs in dollar terms.
For American exporters, Mexico went from good to bad virtually overnight. The reverse will not come about so quickly.
The Conference Board, a business-supported research group in New York, projected last December that Mexico would enjoy economic growth of 4.1 percent in 1995 and that consumer spending would rise 3.8 percent.
By April, those projections had turned negative. The board now predicts Mexico’s economy will shrink 4.1 percent while consumption will plummet 5.2 percent.
Now, some economists wonder if even those dire predictions are too optimistic.
Last week the government reported that unemployment in April jumped to 6.3 percent, roughly twice December’s rate. And it’s probably much worse than the official rate.
The minimum wage has fallen by more than a third in dollar terms since the devaluation, from $4.10 to $2.70 a day. Inflation, meanwhile, roars along at an annual rate of more than 80 percent.
And yet, amid the gloom, some Americans continue to wade in. One company’s loss, after all, can be another’s opportunity. Keep in mind that while U.S. exports to Mexico have been falling, they still exceeded $3.2 billion in April, making Mexico the third-biggest market for U.S. goods, behind Canada and Japan.
The American Chamber of Commerce in Mexico said that more than 90 percent of its members who responded to a survey viewed the Mexican market as attractive over the long term.
And the April survey of 374 responding companies produced a surprising result: Planned capital investments in 1995 will increase 5.1 percent from last year to $6.2 billion.
Companies that sell intermediate goods still have steady demand from the maquiladoras, which make products for export. As Mexico tries to pull itself out of the crisis by cranking out exports, its factories need more capital goods from the U.S.
Inland Steel Industries Inc., of Chicago, presents a good example. The construction sector’s slide has hurt Inland, but the slack has been more than picked up by increased demand from Ford Motor Co., Whirlpool Corp. and other multinationals with factories in Mexico.
“There is a depression in Mexico, no question about it,” Earl Mason, Inland’s chief financial officer, said last week. “The construction industry is going down to zero. But the auto industry is ramping up; the maquiladoras are ramping up.”
As a result, Mason said, Inland’s sales are getting better each month and are surpassing last year’s figures. Inland now exports from its plant in Northwest Indiana about $100 million worth of steel a year to Mexico, easily making it the company’s biggest export market.
The American auto industry has been rocked by the crisis, too, but it, too, has salvaged some benefit.
To be sure, car sales are off woefully in Mexico-down 63 percent in the first five months for all makes. Pointedly blaming Mexico’s stalled auto market, Material Sciences Corp., of Elk Grove Village, Ill., said last week that growth slowed this spring in sales of its automotive parts.
But while their sales in Mexico are down, the Big Three of the United States are sending more Mexican-made vehicles back home. The industry’s shipments from Mexico rose 31 percent through May, with Ford being the biggest winner, and those cars have become much less expensive to produce.
Another factor protecting U.S. companies is the free trade pact. Early in its crisis, Mexico moved to prop up its domestic economy by raising tariffs 35 percent on many imported goods. But under NAFTA, Mexico cannot increase tariffs on American goods, leaving U.S.-made products cheaper than competing goods from Europe and Asia.
Still, the tariff breaks may not be enough for U.S. makers of consumer goods and companies that sell them. Retail sales fell 33 percent in April, the fourth straight monthly decline.
A bottle of California wine that cost 15 pesos before the devaluation now costs 30 pesos, while the once similarly priced Mexican version remains under 20. Five cans of domestic tuna can be bought for the price of an imported one.
Wal-Mart Stores Inc. has delayed expansion plans, leading a list of retailers who may be thinking long-term but cannot afford the losses in the short term. Last week, Home Depot Inc. said it is postponing expansion plans for Mexico until at least 1997.
As Marshall Day, Home Depot’s senior vice president of finance, told an investors conference in Minneapolis on Thursday: “We will someday be in Mexico, but it won’t be in 1995 or ’96.”
