Mexico's Paradox

Back when Mexico was still a colony of Madrid, Monterrey was frontier--much like America's Wild West, more than 200 years later--settled by a rugged cast of characters, including unmoored Jews and some in trouble with the Spanish crown, whose present-day descendants are fiercely proud of their heritage and the modern metropolis they developed. Monterrey is the most important business center in the country after Mexico City. It's as if San Antonio, Texas, went on to become Pittsburgh, Pa., skipping the Rust Belt phase. This city of nearly 4 million, often confused by Americans with its California namesake, is, after all, still in its ascendancy, and--like Texas, its closest American kin--it has tall ambitions that may prove critical to how Mexico as a whole develops. Or maybe not.

Monterrey is home to many of Mexico's largest companies, some now in the vanguard of going global. They benefited from their proximity to the U.S. and from imitating its business culture. (The Dallas Cowboys count about 1,400 Monterrey fans as season-ticket holders.) They also bulked up on Mexico's earlier import-substitution policies, which positioned them well for the challenges and opportunities when the North American Free Trade Agreement (NAFTA) came into force in January 1994. The lion's share of $200 billion of foreign investment that has rolled in since then--two-thirds from the U.S.--went to the north, both to maquiladora assembly operations in border towns and to Monterrey and nearby Saltillo, also known as Little Detroit for the sizable auto investments there, especially by the U.S.'s Big Three. Thirty percent of Mexico's GDP comes from manufactured exports, 80% of that auto related, and the U.S. accounts for 60% of that.

Yet Monterrey may be getting less competitive, as is Mexico itself. The country needs tax enforcement, regulatory reform, a deregulated oil industry and agricultural reform--in the U.S. also--if it is to maximize the potential that NAFTA offers. If not, the U.S. can expect an even larger flood of new arrivals, to whom a fence installed by Congress may as well be made of cardboard.

Grupo Industrial Saltillo, with eight business units, shows the link and how NAFTA's market access is accelerating this corporation's global evolution. More than half its roughly $1 billion in sales last year went to the U.S., Canada, Japan and Australia, and 84% was auto parts. That will expand when a $136 million engine factory, a joint venture with Caterpillar, opens next year. Saltillo's building-products division, on the other hand, is 90% dependent on the domestic market. Within five years, this proportion is projected to be evenly split between domestic and foreign sales, a feat that may not prove feasible for other business units, which would then be more likely to be sold off. "Mexico is a country in transition, and much of that change has been forced by NAFTA," says Robert Bryant, Saltillo's executive vice president of corporate strategy and business development. "In a protected economy, conglomerates made a lot of sense because there were synergies across business units. Well, in a worldwide economy where you have to be globally competitive in each of your business units, those domestic synergies aren't as relevant."