Free-Market Spirit Washes Over Mexico : Trade: The country’s change from a protected, state-run economy to an open system is beginning to generate entrepreneurship at all levels of business.

When they graduated from college a decade ago, Javier Romo and Enrique Vidal landed jobs that were the dream of the Mexican middle class--secure, respectable positions in the bloated government bureaucracy, the sort of jobs people keep until retirement.

But not these men. Bored--and dissatisfied with salaries that did not keep up with inflation--they started making plastic place mats two years ago. Last fall, their nine-employee company landed its first big client: the country’s largest retailer.

It’s the kind of story heard a lot in the United States, but--until recently--rarely told in Mexico. Nice people just did not quit government jobs to start small businesses. And they certainly did not say they wanted to own their own companies in order to make more money.

But that is changing as Mexico switches from a protected, state-run economy to a free market system, infecting all levels of business with a spirit of entrepreneurship.

“Mexico was a country where to be successful was a sin. You were taxed and regulated and threatened with expropriation,” said Jesus Oyervides, general manager of the commercial division of Grupo Corvi, a $500-million-a-year wholesaler and chocolate maker that began in a market stall. “Entrepreneurial talent--the ability to organize--was never considered among the production factors, just labor and capital.”

Besides those who quit government jobs, well-educated people are leaving comfortable positions in industry to start their own shops. And a new generation of owners is transforming once-stodgy family businesses into aggressive, growing companies.

The government is supporting the changes with new programs designed to create a competitive, entrepreneurial class of small businesses that will grow into major companies. It is also implementing policies that are forcing companies to change.

The 1980s, with sharp devaluations of the peso and an international debt crisis, made credit virtually unavailable. The government remedy for the crisis was to open the economy--tearing down four decades of trade barriers and allowing foreign competition. The government also cut back spending, bringing the federal budget into balance and causing inflation to drop from over 100% in 1988 to less than 20% last year.

While those changes were positive for the country overall, they were a rude shock for businesses accustomed to operating in a protected, high-inflation environment.

Grupo Corvi, for example, had been a cozy family business for most of its 51 years, beginning as a stall in Mexico City’s central market. The company had an initial burst of energy, expanding into wholesaling and buying a chocolate factory, but quickly settled into complacency.

The drop in inflation, however, forced the firm to adopt a new strategy for distribution.

“Before, we could make a profit sending a truck (of merchandise) from Mexico City to Tijuana,” Oyervides said. By the time the truck arrived at the border city, he explained, prices would have increased enough to pay the transportation costs and still allow Corvi to realize a profit. Once inflation fell, that cushion was gone.

In addition, new, low-overhead competitors sprang up. And imports grabbed nearly one-third of sales in the chocolate business, forcing domestic companies to sell out or become more competitive.

Corvi, in response, cut costs by setting up distribution centers all over the country. The company also took advantage of the trade opening by setting up contacts with suppliers worldwide to provide products when less sophisticated local wholesalers ran out.

Recently Corvi opened a state-of-the-art factory in Toluca, north of Mexico City, and is renovating its Mexico City plant. “We are automating everything,” says Oyervides. “Now, labor is cheap. But tomorrow, it will not be.”

Corvi employs 3,080. In five years, the company moved from 20th place among Mexican chocolate makers to second, topped only by Azteca, which recently sold out to a foreign corporation.

This kind of reshuffling is evident throughout Mexican industry as aggressive, entrepreneurial companies take over from businesses that cannot adapt to the changes of the past decade.

“The crisis of the 1980s has affected this generation of Mexican business people as profoundly as the Great Depression of the 1930s affected a generation of Americans,” says Claudio X. Gonzalez, president of Kimberly-Clark Corp.’s Mexican subsidiary.

Kimberly-Clark de Mexico is among the hundreds of subsidiaries that under Mexico’s old system gave international corporations access to a protected market. As tariffs and other trade barriers fall, these corporate units are redefining their roles.

During the past eight years, Kimberly-Clark has begun making consumer paper products in Mexico for export to the United States. As the company entered the international market, Gonzalez and his team demanded higher standards from their suppliers, such as Ideas y Promociones (Ideas and Promotions)--a graphic arts company that provides packaging.

Antonio Simon, grandson of the company’s founder, recognized his customers’ need for more sophisticated packaging. So in 1982, in the midst of Mexico’s worst economic crisis in 50 years, he invested heavily in new equipment--scanners, presses, laminators and adhesives--to produce flashy labels and flexible packaging.

“We had to increase our production capacity and market share to keep our traditional customers and to gain new ones,” Simon says.

Since then, the company’s sales have tripled to $41 million. These days, its client list includes Mexico’s top consumer products companies. Simon labels appear on Corona beer and Gamesa cookies (recently acquired by Pepsico), and the company makes packages for Bimbo bread and Colgate-Palmolive products, along with those of Kimberly-Clark.

While Simon was able to make the necessary investments from company funds, many of the small companies that do business with Mexico’s top corporations do not have such resources.

So major industries, in an effort to bring their suppliers and distributors up to international standards, are offering them technology, marketing and even financing. Incentive programs measure their quality and productivity against other small companies that do business with the corporation.

The goal is to dramatically improve the competitiveness of Mexico’s small enterprises--and to encourage a new sophistication among Mexican entrepreneurs.

Indeed, linking entrepreneurs with major corporations that can provide such support is the cornerstone of the Mexican government’s effort to help small business--about 98% of the country’s companies--survive the national economic transformation.

“We want to encourage feeder corporations that can nourish small subcontractors and suppliers,” says a high-ranking official at Nacional Financiera, or NAFINSA, Mexico’s development bank.

As part of that strategy, NAFINSA is making small-business loans through major corporations. Entrepreneurs that supply participating corporations receive a revolving line of credit, guaranteed by their orders from the corporation.

The NAFINSA program has created opportunities for entrepreneurs such as Javier Romo and Enrique Vidal, the two former bureaucrats who own Sybel, a plastic place-mat manufacturer in southern Mexico City.

Romo and Vidal found their jobs in state-owned banks unsatisfying. “I knew I could do more than sit down at my desk every day and go over papers,” Romo says.

So, on Valentine’s Day, 1989, they joined Vidal’s father in founding Sybel. The elder Vidal later sold his stock to Romo.

The company received a major boost in October, when the Aurrera self-service discount chain subsidiary of Cifra, Mexico’s largest retailer, placed its first order with Sybel. “We had been banging on their door for two years when they started ‘Grow With Mexico,’ ” a NAFINSA-backed program for small suppliers, Romo recalls.

Before Cifra’s first order--for 22 sets of place mats--Sybel had been producing 70 sets a month. Now the business with Aurrera has increased to the point that some of the retail chain’s 36 stores are ordering 100 sets every two weeks. Sybel has added three employees and a delivery van.

Without the Grow With Mexico program, that kind of explosive growth would have strained the resources of a firm such as Sybel. In Mexico, the only credit available to small business is accounts-receivable financing at 55% interest.

But with Cifra’s support, Sybel persuaded ink and plastic suppliers to modify their terms from cash on delivery to payment in 90 days--in effect giving the young company a no-interest loan of $33,000. This spring, Sybel will be eligible for the NAFINSA financing program, permitting the company to borrow at corporate interest rates--about 26% now.

“Our association with Cifra has allowed us to reach higher-status customers and to put our product in more stores,” Vidal says. “We have been able to grow more quickly.”

The trend toward stronger ties between entrepreneurs and big corporations is particularly evident in Guadalajara, the nation’s second-largest city and the center of Mexico’s nascent computer industry.

There, IBM is turning mattress makers into manufacturers of devices used in hard disk drives and manning a marketing pipeline that delivers connectors made by start-up companies to an IBM plant in Rochester, N.Y.

Those suppliers include Electronica Pantera (Panther Electronics), a 6-year-old company started by Robert Verbosh and Maria Luisa Lozano. The couple, now married, met at the Unisys subsidiary here. H was a general manager from Detroit; she was hired locally--and ended up running everything from production control to purchasing.

In eight years, starting in 1976, they took the subsidiary from nothing to a $42-million-a-year enterprise employing 2,400.

In 1985, they decided to do it again--this time for themselves.

With $300,000 in backing from a group of U.S. investors, they hired four assemblers and a secretary and began making wiring assemblies for computers.

That first year, Pantera had sales of $10,000. Last year, they reached $6.5 million, and the company had 400 workers.

Now, Verbosh and Lozano have a new partner. Their major supplier, the Mexican copper company Condumex, bought out the U.S. investors’ 60% interest for $1.4 million.

“They’ve encouraged us to grow,” Verbosh says.

Pantera built its market by first supplying Mexico’s expanding computer industry, then by using contacts here to develop customers in the United States and Japan. For example, local IBM managers were so impressed with Pantera that they recommended the company as a direct supplier for IBM Rochester. Exporting Pantera’s products helps IBM gain a sort of export credit with the Mexican government that smoothes the way for company imports into Mexico.

IBM has also been instrumental in the success of another start-up company, Compuworld, a subsidiary of Grupo Wendy--a mattress maker that became an IBM packaging supplier in 1986.

The owners of the 40-year-old family-owned company, a leading mattress and bedroom furniture supplier, became convinced during the financial crisis of the 1980s that they needed to diversify. After several unsuccessful attempts to export their traditional products, they decided to go into a new high-technology business.

Wendy began selling polyurethane foam packaging and wooden pallets to high-tech businesses here to establish a track record as a reliable supplier. In 1989, Wendy executives wrote IBM a letter, asking for a crack at manufacturing a product in the electronics assembly industry.

After studying the company for a year, IBM came back with an offer: Would Grupo Wendy like to learn how to make hard-disk actuators, a product that would require a higher level of technology and quality than anything IBM had ever made in Mexico?

“We never expected that,” confesses Manuel Lopez Castillejos, the executive in charge of the new division.

Wendy put up the $4-million investment needed to build a clean room to IBM specifications and went to work, at first under strict supervision in the IBM plant, and then--two months later, in June, 1990--in the company’s own new factory.

By August, Compuworld was running the plant with its own supervisors. Last April, it began making a more sophisticated device. This spring, it expects to start producing a third, all for export.

Compuworld still accounts for only 5% of Wendy’s revenue. But the subsidiary has added growth to a once-stagnant business.

For many Mexican business people, the prospect of leaving the guaranteed market they have enjoyed since World War II is frightening. But those who already are adapting--such as chocolate-maker Corvi’s Oyervides--say change is necessary.

“It’s like not wanting your child to leave the house because there are bullies waiting outside,” he says. “He may get a bloody nose the first couple of times, but he will learn to defend himself.”