Opening Up in Mexico Is Still Apt to Be Risky : Commerce: The free trade agreement won’t solve problems with infrastructure, worker productivity, bureaucracy and red tape south of the border.

Lured by Mexico’s cheap labor and the prospect of relaxed trading rules resulting from a proposed North American Free Trade Agreement, many U.S. businesses are considering a run for the border.

But even if the agreement is ratified, setting up operations in Mexico will remain fraught with obstacles and risks, international business experts say.

Problems with Mexico’s infrastructure, worker productivity, bureaucracy and red tape are being addressed by Mexican officials and may improve with increased foreign investment. Nonetheless, these obstacles--along with vast cultural and language barriers--could make U.S. firms think twice before rushing into Mexico headlong, they say.

What’s more, the image of a low-cost work force may be something of a mirage once lower worker skills are considered.

Indeed, for every success story there is a tale of a U.S. company that has moved to Mexico only to find the going rougher than expected.

“Because Mexico is so close to us . . . many people forget that it is indeed a foreign country with a different language and culture,” said Leslie K. Browne Cazas, director of the international trade group for the accounting firm Arthur Andersen’s western region.

“There have been a lot of companies that have gone down there and crashed and burned because they haven’t faced it as if they were setting up a foreign operation,” she said. “They acted like they were setting up a branch in Texas.”

A classic story is that of Lionel Train, the little company that couldn’t as far as Mexican production was concerned.

In 1983, Lionel, then owned by General Mills, closed its Detroit factory and began production in Tijuana. But the factory had quality and production problems, and several key delivery dates were missed.

A Detroit investor and toy train enthusiast bought the company, closed the Tijuana factory in 1985 and moved production back to the Detroit area, rehiring many of the company’s laid-off workers.

Although wages are much lower in Mexico than in the United States, worker productivity also is lower due to lack of training and job skills, said Raul Hinojosa-Ojeda, assistant professor of urban planning at UCLA.

“The productivity differentials are pretty close to the wage differentials in most sectors of the economy” in Mexico, he said. “As productivity closes in, wages should also rise.”

“The talk about pure wage rates is deceptive,” said Browne Cazas. “There is an investment in unskilled and semi-skilled labor” that a business must make.

U.S. businesses must learn that what motivates Mexican workers is not necessarily the same as what drives U.S. workers, she said. Workers south of the border, for example, may be more interested in time off with family, help with transportation to work and even access to showers, she noted.

One company, for example, used a mobile chalk board that showed individual productivity increases as a way of appealing to workers’ pride, Browne Cazas said. “That worked better than just throwing more pesos at them,” she said, noting that it did improve productivity at the factory.

Also, Mexican workers tend to respond more to oral directions than written directions. “In Mexico you can’t assume that just because something is in writing that someone is going to read it, especially if it’s in English,” she said.

Rachel Mullens, executive director of the Pacific Chapter of the U.S.-Mexico Chamber of Commerce, agreed that lower wages are only one thing that U.S. businesses must consider.

“Just because there’s a difference in the wage rate doesn’t mean that that’s the one thing a company is going to look at and move,” Mullens said. “It truly isn’t that easy.

“While it is easier to do business (than several years ago), it’s still international business,” she said. “Small and medium businesses especially . . . have quite a learning curve.”

Mullens said Mexico has made great strides in easing the entry problems for foreign companies. “The things that Mexico has done to be more competitive and to try to make their laws more responsive to business . . . over the last six years have been tremendous,” she said. “Business people have found doing business in Mexico is much quicker and easier than they would have eight or 10 years ago.”

Mexico’s privatization of many industries has smoothed the way because U.S. firms now are dealing with private companies rather than the government, Mullens said.

One obstacle to business is Mexico’s serious infrastructure problems, from the development of roads to the improvement of its telephone system, said Coleen Lassegard, assistant director of studies and programs at UC San Diego’s Center for U.S.-Mexican Studies. However, “that is being addressed” and will improve even more with foreign investment, she said.

“You hear people say they’re doing fine with the government and in getting their permits, but it takes three months to get a telephone, to get it really operational,” Browne Cazas said. “That will change with foreign investment.”

Mexican President Carlos Salinas de Gortari has also worked to reduce the bureaucracy and red tape that businesses encounter and to allow full U.S. ownership of many types of companies that previously required Mexican co-ownership, Lassegard said.

Companies will find that marketing their products is much different in Mexico--telemarketing doesn’t exist--and that basic distribution systems are lacking, she said.

What’s more, “there are many different cultural things you need to know, from dress to business hours to relationships,” Lassegard said. “Business relationships are everything, establishing that confianza. “

The experience in Mexico has been a mixed bag for U.S. firms, with some finding it positive and others encountering difficulties.

Mattel, which has manufactured toys in Tijuana and Monterrey since the early 1980s, has done well with its Mexican operations, spokesman Glenn Bozarth said. Mattel employs about 2,500 in Mexico.

“There is no question that manufacturing in Mexico has been very good for us,” Bozarth said, praising the high quality and low costs of toys produced there.

Trilogy Magnetics, a small company that repairs computer parts, hit a few bumps as it set up a four-person operation in Guadalajara nearly two years ago.

“Setting up a business anywhere is kind of a pain,” said S. Michael Nero, vice president of the Quincy, Calif.-based firm. “But it really wasn’t too bad, honestly.

“The (Mexican) lawyers were the biggest problem,” Nero said. “Because everything was so new, they didn’t really know the rules and kind of botched things up and we’re still trying to straighten them out.” The Mexican government challenged the firm’s articles of incorporation as inaccurate; in Mexico, such documents must be more precise than in the United States.

Otherwise, “it went fairly smoothly for us, and we’re very happy with it now,” Nero said. Finding skilled employees was not a problem thanks to Guadalajara’s highly regarded technical schools and university, he said.

“It wasn’t a nightmare. It took a lot of patience, but we knew that going in,” he said. “It just took a little more than we thought.”

But “nightmare” is how James Flores describes his attempts to set up a parasailing business on Baja’s Rosarito Beach.

Armed with assurances that he could own 100% of his tourism-related business, Flores said he and some small investors bought boats and kites and headed south. Then the Mexican government ruled that parasailing was a “coastal transportation” business and would require a major Mexican partner, to which Flores refused.

“I would have given up half the company if somebody would put up half the money, which nobody would do,” he said. “But I’m not too crazy about giving away 51% of the company.”

“I put in $43,000, and I lost a house because of that,” the East Los Angeles resident said, noting that he never got to open his operation and is sitting with several unused boats and kites. “If Mexico were a car dealership, they would be shut down for bait and switch.

“I lost my shirt down there, and it’s a nightmare come true.”