MEXICO : Progress and Promise : Market Scene : Free Trade May Spur Import Appetite : * The pact will create jobs, but many experts see a problem in increased foreign investment.

Tomas Gonzalez expected a sharp increase in his exports to the United States when he signed a joint marketing agreement with Whirlpool four years ago.

Instead, the domestic appliances division he runs for industrial giant Vitro has become a major importer, supplying Mexico’s middle and upper classes with trash compactors and two-door, frostless refrigerators made north of the border.

Not that Gonzalez is complaining: His sales rose 24% in 1989 and another 20% last year--the biggest percentage gains of any corporate division. “This just is not what we had planned,” he said.

Gonzalez’s experience foreshadows the kinds of changes economists expect to see under a North American free-trade agreement.

Mexican manufacturers will increasingly turn to imports to expand the lines of products they offer domestic customers, the economists predict.

While Mexican exports to the United States and Canada will increase, the products flowing north overwhelmingly will be made by Mexican subsidiaries of multinational corporations, not by Mexican-owned companies. Successful Mexican exports of beer, glass and cement will continue to be the exceptions.

Mexico will benefit from the agreement because it will create jobs. But the country will also become increasingly dependent on foreign investment, the economists say.

“The free-trade agreement does not mean that now we can export cajeta, “ said economist Rogelio Ramirez de la O, referring to a Mexican-style caramel. “The most dynamic sectors in foreign trade are capital-intensive industries using foreign technology. In electronics, computers, automotive parts and electronic machines, exports are a result of a global strategy, not the local manager becoming clever.”

After the state-owned Pemex oil monopoly that still accounts for over one-third of the country’s foreign sales, Mexico’s top exporters are General Motors, Chrysler, Volkswagen, Ford and the telephone company, which has substantial foreign ownership.

The destination for the overwhelming majority of Mexico’s exports--70% last year--is the United States. Mexico, in third place among U.S. trading partners, accounts for about 7% of U.S. foreign trade.

The Mexican business magazine Expansion reported this month that exports of multinational companies grew 11.8% last year, while those of Mexican private industry shrank 4.2%. Both Mexican and multinational companies continued to increase their imports, according to the magazine, which compiled results from companies that account for over two-thirds of Mexico’s sales overseas.

Expansion attributed the drop in exports by Mexican companies to the nascent domestic economic recovery, which increased local sales, leaving less surplus for export. “This indicates that for many companies and sectors, exports are still opportunistic rather than structural,” the magazine concluded.

Only in the past decade have Mexico’s largest corporations come to realize the need for a permanent presence in foreign markets as a way to develop customers and build world-scale factories, said Santiago Clariond, president of Industrias Monterrey, one of those big businesses. Second-tier companies still see exports as icing on the domestic market cake.

In contrast, foreign factories are built to include export capacity. The result is that 57 multinationals exported nearly $2.3 billion worth of goods in 1990, $27 million more than the 203 top exporters among Mexican private companies. Two dozen of the exporters classified as Mexican are affiliated with foreign firms (although Mexicans own a majority interest), making the figures even more lopsided.

One of those companies is Electronica Clarion, the sole survivor among eight Mexican companies that made car radios a decade ago. Clarion is 40% owned by the Japanese company of the same name, which supplies its Mexican partner with technology and some components.

Clarion has adapted to more open markets so successfully that the company last year exported $60-million worth of tape-player components and radios to the United States and is planning an expansion that will include bringing Japanese component-makers to Mexico, general manager Salvador Sanchez said.

He believes his company is better prepared for free trade than the General Motors and Ford radio assembly plants on the border. They rely more heavily on components from countries outside North America, a practice that probably will be penalized once an agreement is signed.

Economists expect the concentration of exports in multinational corporations to intensify under free trade.

“While the strategic focus in the past was on gaining a strong position in the Mexican market, the future thrust is selected regional or global sourcing and distribution from Mexico,” said Philip Banks, who recently completed an initial study on investment patterns for the Mexican Investment Board, a nonprofit promotional organization.

In interviews with 40 Mexican and foreign companies, Banks found that U.S. and Japanese companies are planning future investment in Mexico based in large part on anticipated sales in North American and other international markets. All the Japanese companies he spoke with are planning to expand their Mexican operations, 60% of them in anticipation of the North American free-trade agreement.

Mexican companies’ plans, he found, are often to upgrade their plants and equipment so they can compete with the expected deluge of foreign-made products.

Even Mexico’s biggest corporations are streamlining operations, dropping some product lines in order to concentrate investment on improving others.

That is true even of experienced exporters such as Vitro, a company that produces 8% of the windshields in U.S.-made cars and makes over half its money from foreign subsidiaries.

Six years ago, Vitro bought Acros, a failing household appliance manufacturer that could no longer compete when Mexico began to allow imports. Put in charge of turning around the new division, Gonzalez looked for niches where Acros was internationally competitive.

He opted to concentrate on producing economical appliances--wringer and semi-automatic washers and refrigerators that must be defrosted--and small specialty items, such as high-quality enamel tea kettles. He would concentrate Acros brand export efforts in developing countries, such as the Caribbean and Central America.

Vitro signed marketing agreements with Benton Harbor, Mich.-based Whirlpool and KitchenAid to buy their high-end products and supply them with specialty products and economical appliances. Those are sold in the United States under the Whirlpool and Kenmore brands.

“We believe that to be competitive, we need to export a good portion of our products to make sure our costs and quality are competitive,” Gonzalez said. As part of the effort, the corporation recently closed the division’s compressor factory and began importing more reliable, lower-cost refrigerator components.

Last year, exports accounted for a respectable 6% of sales; but products that it imported and resold domestically brought in a quarter of the division’s revenues.

The strategy has worked so well that other Vitro divisions have since negotiated similar agreements, most notably the glassware division’s $300-million joint venture with New York-based Corning.

As large Mexican corporations restructure to meet foreign competition, entrepreneurs who initially viewed free trade as primarily an opportunity to export are reconsidering.

“The free-trade agreement won’t be such an abrupt change,” said Luis J. Herrera, general manager of the 42-employee Minarelli bicycle parts firm, in an interview. “We’re already accustomed to imports,” he said, noting that falling import duties had brought in significant Taiwanese competition two years ago. “We just have to work a little more efficiently. We are going to export (bicycle) mirrors, handlebar grips. The Americans are less competitive in these products. They want to make spaceships, not bicycles. We can compete in some segments of the American market.”

But his optimism faded late last month when he attended a trade show in Anaheim where he planned to find a U.S. partner--someone to help him export products to U.S. bike assemblers or provide him with U.S.-made bicycles to sell in Mexico.

“I came back extremely worried about the future,” he said after the trip. “There are American companies waiting with glee to invade Mexico with bicycle parts. I’m afraid they’re going to turn us Mexicans into merchants. They have very high quality and very low prices. They don’t need Mexican partners.”

Herrera is exceptional among Mexico’s half-million small business owners only because he has made the effort to investigate the changing market, said Salvador Garcia, a small business consultant. Mexican entrepreneurs generally do not speak English, do not have an international mentality and own undercapitalized businesses that rely on 30- to 40-year-old manufacturing processes, he said.

“It’s stupid to think they are going to be able to compete with foreign goods,” he said. “They have no basis for competing. It will take at least a generation, maybe two, for Mexico to become truly competitive.”

Businessman Clariond believes that the solution is joint ventures with foreign partners who can provide technology and money. “We no longer consider it useful to distinguish between domestic and foreign capital,” said Alfredo Genel, chief of staff in the Commerce Ministry’s foreign investment division. “Capital is scarce in relation to other resources, such as labor, so we must attract capital.”

That view is shared by an increasing number of Mexican business people and public officials, in a rejection of economic nationalism that coincides with the results of a Times Poll. The poll indicates that Mexicans favor a free-trade agreement even though they believe it will increase U.S. economic influence here.

The ready acceptance of once-suspect foreign capital could be just the start of changes brought by free trade, predicted economist Ramirez de la O.

“The free-trade model is paradoxical because it will destroy a lot of political rhetoric,” he said. “We could begin to question a lot of economic taboos, from communal farms to (private ownership of) oil.”

The Times Poll

MEXICO

If American companies locate in Mexico, how many Mexicans would be discouraged from emigrating to the U.S. for work?

Many: 30%

Some: 19%

Few: 21%

Don’t know: 10%

A great many: 20%

The Times Poll: Views on Trade

MEXICO

The Free-Trade Agreement: the Mexican vs. the American View Totally in favor:

Mexicans: 20%

Americans: 14%

Somewhat in favor:

Mexicans: 41%

Americans: 15%

Somewhat opposed:

Mexicans: 9%

Americans: 5%

Totally opposed:

Mexicans: 6%

Americans: 11%

Don’t know:

Mexicans: 24%

Americans: 55%

Mexicans’ view of amount of confidence they have that they will be treated fairly in business with Americans:

Some: 35%

Just a little: 29%

Almost none: 20%

Don’t know: 7%

A lot: 9%

Mexicans’ view of the likelihood that free trade will give them access to more and better-quality goods and services:

Somewhat likely: 47%

Somewhat unlikely: 12%

Very unlikely: 6%

Don’t know: 14%

Very likely: 21%

* ABOUT THIS SECTION

The principal writers for this special report on Mexico were Marjorie Miller and Juanita Darling of The Times’ Mexico City Bureau, and Richard Boudreaux of The Times’ Managua Bureau. Don Bartletti, of The Times’ San Diego Edition, took the photographs.