MEXICO’S FINANCIAL UPHEAVAL : From Feast to Famine for U.S. Firms Dealing South of Border

Jojo’z Enterprises of Walnut says that since the peso was devalued, shipments of its food products to Mexico have dropped 80% from an average of $500,000 a month. To cut costs, the company laid off two of its 16 workers this week.

Half of San Antonio-based Custom Forest Products’ customers in Mexico can’t pay their bills for hardwood and have asked for extensions. O.H. Kruse Grain & Milling of Ontario has stopped extending credit to its Mexican clients altogether, anticipating a 50% drop in cattle feed sales south of the border.

The 2-week-old peso devaluation is already jolting U.S. businesses that until last month were riding a rising tide of Mexican trade. The same companies that quickly learned how to feed Mexicans’ insatiable demand for U.S. products now face an extended period of withdrawal and shock. Sales are down and bills aren’t being paid.

*

“Business has dried up altogether since the beginning of last week,” said Jojo’z Enterprises controller Steve Gomez, who runs the company with his father and two brothers. “This has really hit us, though it will work itself out. We’ve been through a devaluation before.”

It’s not just small regional companies that are being whipsawed by forces beyond their control. Retail giants J.C. Penney and Wal-Mart have postponed expansion plans in Mexico, and Mattel says it will take a charge of $20 million on its first-quarter earnings because the value of toy inventories destined for sale in Mexico have suddenly lost value.

Los Angeles-based home builder Kaufman & Broad, asked if it was going ahead with plans to develop a 187-unit subdivision on the outskirts of Mexico City, said through a spokesman that it is “evaluating the situation. . . . We don’t need to make any quick decisions.”

While some bemoan the drying up of Mexican markets, athletic shoe maker Nike disclosed that it might shift some production south of the border to take advantage of the weaker peso.

Nevertheless, most U.S. manufacturers will wait for stability to return before expanding there, said Tony Ramirez, vice president of San Diego-based Made in Mexico, a consulting firm. “You can’t plan when there’s that much uncertainty,” he said.

The main problem posed by the devaluation is that it has made U.S. products more expensive by about 40%--the value the peso has lost against the dollar over two weeks. As a result, Mexican products will become more price-competitive. And cuts in U.S. retailers’ expansion plans mean it will be harder for U.S. companies to get their products to Mexican consumers.

U.S. exporters, particularly producers of equipment and raw materials, could also be affected indirectly by the Mexican government’s wage and price controls and spending cutbacks, said Blaine Roberts, a La Jolla consultant. He said the measures will have a dampening effect on the economy and reduce factory output and expansion.

“We handle agricultural products and raw materials coming from the United States, like cattle, food and cement,” said Jonathan Diaz at Eximin Customs Broker in Mexicali. “But the Mexican companies aren’t buying anymore. They’re looking around to see if they can replace them with Mexican substitutes or to see if the peso gains value.”

U.S. exporters’ short-term problem is simple: collecting on outstanding accounts. Many Mexican businesses are saying they can’t or won’t pay until the peso has a chance to regain some of its value in dollars, which is what most U.S. creditors demand in payment.

“We wonder when our customers will be able to pay their bills,” said Steve Stewart, president of Interwest Commodities Co. of Dana Point, an agricultural commodity merchant. “They are waiting to see a more favorable exchange rate, and that could take a period of time. One customer has asked to wait 30 days to pay.”

Eric Weissgarber, head of Custom Forest Products, said he is sympathetic to his customers’ plight. “These are long-term relationships. We’re not in this to make one sale, so, of course, we are going to give our Mexican customers more time, up to two weeks in some cases,” he said.

The trauma has also raised bitter memories of the 1982 devaluation, when some U.S. exporters didn’t receive payment for months, and then only in severely devalued pesos. U.S. government officials see an off-year ahead for U.S. exporters but no replay of 1982.

*

“I don’t think we’ll see anywhere near that impact of 1982,” said Donald Schmoll of the U.S. Export Assistance Center in El Segundo. “This time around, the Mexican economy is fundamentally sound. In the early 1980s, Mexico was living off bank borrowings. It’s so much stronger than it was back then.”

Still, most U.S. companies interviewed see their sales in Mexico shrinking by 50% or more in 1995.

“We’re going to lose about $1 million in sales because of this,” said Sam Bakhit, chief executive of Aviation Distributors, an Irvine-based seller of airplane parts.

Weissgarber, whose company sells wood used in cabinets, spoke for many business people in predicting that Mexico will bounce back and that U.S. goods will regain their appeal.

“Over time, this will be a short-term blip,” he said. “The market will adjust. I don’t like the news, personally. But the long-term . . . forecasts relating to what we have and what they need are so great that we will work around this.”