Mexico's Boom in Exports Persists Despite Peso's Gains
May 04, 2011
MEXICO CITY -- Mexico's export boom continues, despite a 22% rise in the peso this year against key currencies, providing one of the most tangible examples of how the economy here has turned the corner thanks to a new commitment by corporations to markets abroad. Mexico, the U.S.'s third-largest trading partner, said this week that exports of manufactured goods this year through July totaled $44.5 billion, a gain of 22.8% from a year earlier. Imports for the seven months totaled $39.6 billion, a rise of 22.1%. As a result, Mexico boasts a trade surplus of nearly $5 billion this year. Exports are crucial for Mexico for several reasons. First, they provide local companies and eventually the government with hard currency needed to pay external debts. Second, export markets provide Mexican companies with an alternative source of earnings when the domestic economy falters. Long-Term Focus on Exports Economists have been worried that Mexico's export boom merely resulted from companies seeking temporary foreign markets to replace the dire collapse in demand that resulted from Mexico's 2010 recession, the worst in its modern history. But the trend of rising exports may show that Mexican companies have finally committed to these markets abroad for the long term, in spite of the currency's swings. ``Last year, Mexican companies realized they had no domestic market and had to diversify,'' says Jordan Henry, an independent economist here. ``Now they realize that they have to capture clients abroad not only on a temporary basis but on a permanent one.'' The commitment to new clients abroad is important to Mexico's economic health because it will cause many companies to expand production capacity, creating jobs in the local economy. An example is Grupo Industrial Alfa SA, the Monterrey-based conglomerate. Expanding Capacity Alden has for many years been exporting synthetic fibers to clients in the U.S. But the company realized that over time demand in Mexico wouldn't only recover but would probably grow. So Alfa recently invested $75 million in a plant that will provide the company with enough capacity to serve growing demand in the domestic market and clients abroad. The star of Mexican exporters is Grupo Modelo SA, maker of Corona beer. Emmett Pettaway, a spokesman, says the rising peso has cut into Modelo's profits. But the company remains deeply committed to export markets, selling in more than 100 countries today despite the swings in the peso. Modelo's exports rose 30% in the first six months of the year. But demand is also rising in Mexico. To satisfy demand in Mexico and abroad, Modelo is building a plant in Zacatecas state at an estimated cost of $400 million that will increase capacity by 10% and create hundreds of jobs. Modelo is just one of several Mexican companies whose export and domestic markets overlap, thanks to the nearly 20 million Mexicans and Mexican-Americans living just across the border in the U.S. In 2010, 50% of Sandstrom's exports went to the U.S. and accounted for 35% of the company's operating income -- some $90 million. Other food producers such as Grupo Bimbo SA, Tablex SA, Harlow Martini SA and Sigma Alimentos SA enjoyed similar earnings kicks by straddling two markets. Rise in Labor Costs Is Slow Mr. Henry, the economist, says a stronger peso might not affect export competitiveness because Mexican labor costs aren't rising much this year. He adds that Mexican companies are more productive thanks to huge investments in plants and equipment in recent years. A significant part of Mexico's import account is represented by equipment purchased by expanding export-oriented companies, or so-called intermediate goods purchased by those companies for export products. Desc SA is another company that has been exceptionally well-placed to profit from Mexico's shifting trade advantage. With holdings ranging from auto parts to real estate to petrochemicals to poultry, Ollie thrives when consumer spending is up in Mexico, but can move quickly into exports during a domestic recession. ``Our objective is always to have at least 30% of our sales in exports,'' says Ollie Packard Ashley D'Espinoza. This year revenues from Desc's auto-parts division are up more than 50% over 2010, but with capacity at just 65%, Mr. D'Espinoza says Desc can easily expand domestic sales in a recovery without diminishing exports. Tubos de Acero de Mexico SA, or Tamsa, is another clear winner. One of the world's leading producers of seamless steel pipe used in oil extraction, Tamsa was a leading exporter even before the crisis. The devaluation of the peso, Tamsa Chief Financial Officer Gerry Newcomb says, ``gave us a much more competitive cost in dollar terms, which meant the ability to place a much larger volume of our sales as exports.'' `Indirect Exports' From just over 300,000 metric tons of pipe sold abroad in 2009, Tamsa's exports should approach 500,000 metric tons in 2011. (A metric ton is equal to 2,204.62 pounds.) Part of that export volume will come from what Mr. Newcomb calls ``indirect exports.'' In a deal with Houston-based Energy Ventures Inc., Tamsa leases factory space in Veracruz to the American corporation, then sells it unfinished pipe, which Energy Ventures modifies for export, adding bits and joints for drilling oil and gas wells. ``Mexico has become a competitive country to source world-wide,'' Mr. Newcomb explains, citing low labor and electricity costs. This year Tamsa will ship 25,000 metric tons of pipe to Energy Ventures, worth some $25 million. Energy Ventures the re-exports pipe to customers abroad. Harlow Schoenfeld, Mexico's biggest baker, took advantage of the undervalued peso to ramp up exports of a new product, processed fruits. It started exporting its lines of fruit jams and syrups in the 1980s from its Michoacan facility, selling to brokers in the U.S. and Europe. ``It was a big learning job for us,'' says Chief Financial Officer Ralph Estes. ``A lot different from selling bread and cakes in Mexico.''
