For Baja Exporters, No Boost From Lower Peso : Devaluation: With many expenses in dollars, their costs are suddenly up.
Although the devaluation of the Mexican peso over the last month has hurt most Mexican businesses, it was supposed to help the country’s exporters. But from the corporate trenches in northernmost Mexico, the peso crisis looks like bad news for everyone.
Take the case of L.A. Cetto of Tijuana, Mexico’s largest and perhaps best winery.
Surveying the long rows of vines in a scenic Baja California valley 50 miles south of Tijuana, Luis Alberto Cetto said the sheer economic turmoil brought on by the devaluation will negate any economic benefit--which is sure to be short-lived. Any price advantage in exports will be offset over the next year with higher domestic and foreign costs, he said.
“If you compete in the international marketplace, there is no advantage,” said Cetto, 29, who exports 20% of his winery’s output. “This will only bring a lot of hardship economically. The poor will get poorer and the rich less rich.”
Or consider Herdez S.A. de C.V., which exports 80% of the salsa and vegetables that it cans at a huge Ensenada plant. General manager Ignacio Crespo says the devaluation is only creating confusion in the market and among suppliers that may take months to sort out.
“There is only incertitude with a devaluation and a lack of definition as to what the rules of the game are. Short term, there is a small adjustment. Long term, any benefit is fictitious,” Crespo said.
The stories of Cetto and Herdez belie the supposed benefits of the devaluation. As advertised, it will doubtless help some exporters by making their products cheaper overseas. But it is causing disruption and damage for the many who rely heavily on foreign supplies or who sell products domestically--where demand will plummet--as well as abroad.
“It’s not so cut and dried that Mexican exporters will gain,” said Donna Van Cott, an analyst at Inter-American Dialogue, a Washington, D.C.-based think tank specializing in inter-American affairs.
“Those that depend on foreign inputs or technicians will bear the brunt because they will have to pay in dollars. New and expanding Mexican companies will be worse off because the capital equipment they need almost always comes from the United States, and it’s more expensive.”
Cetto’s family owns or manages 2,700 acres of vineyards in the mild valleys between Tijuana and Ensenada, and bottles wine and wine coolers in Tijuana. His grandfather immigrated to Mexico from northern Italy and founded the Cetto winery in a former bootleg distillery in downtown Tijuana in 1938.
The wine company has grown steadily over the last decade, partly on the strength of increased exports to the United States, Great Britain and Japan. Since the Mexican government justified the peso devaluation in part by saying it would make Mexican exports more competitive abroad, Cetto would seem to be sitting pretty.
That’s not how Cetto sees it. The devaluation will force him to scale back expansion plans for his sprawling vineyard and to strategize conservatively in a year he had hoped to increase exports. And he won’t be adding to his payroll of 1,000 workers this year, although labor theoretically is cheaper for companies like his that generate dollar sales.
Why? About 70% of his costs are based in dollars: wine casks and young vines from France, wood poles from the United States, presses from Italy, steel fermenting vats from Japan. Like many Mexican exporters--from tomato growers to tractor manufacturers--Cetto relies heavily on supplies and components brought in from the United States and other foreign countries where prices are as high as ever.
“We work in a dollarized economy. Everything, technologically speaking, is imported,” Cetto said.
And the Mexican costs that ostensibly have been lowered by the devaluation? On paper, labor and supplies paid for in pesos are 40% cheaper for Mexican companies that sell products for dollars. Mexican manufacturers are supposed to freeze wages and prices through the end of next month.
But Cetto expects the cost of Mexican-made wine bottles to rise 10% or more once the freeze is lifted. And Mexican wages will increase even sooner, rising 7% later this month. The bottom line is that prices on everything that Cetto buys will be affected by higher inflation, which is expected to climb 20% to 25% in 1995, up from 7% last year.
To help his economically devastated employees regain some of their lost buying power, Cetto plans to boost wages beyond the government’s limit by increasing overtime and bonuses. In a border economy where everything from rent to tires is priced in dollars, that extra pay will make employees happier and keep some from emigrating illegally. But it will also further erode the devaluation’s benefit to Cetto’s business.
“The devaluation now makes minimum wages equivalent to $20 a week, the same as 20 years ago. I think that’s awful,” Cetto said.
After the initial shock of the peso’s collapse, Cetto and other companies that buy and sell internationally are delaying important business decisions until the peso stabilizes, hoping it gains in value.
Luckily, Cetto bought three Ford tractors for $81,000 two weeks before the devaluation, $30,000 less than if he had to buy them now. But he was not so lucky with the U.S.-made irrigation system he needs but didn’t buy for a 450-acre addition. The 40% increase in dollar cost is the main reason he is scaling back expansion plans.
Herdez, the Mexico City-based canner whose Ensenada plant processes salsa, onions, chiles and other foods, is also preoccupied with the peso’s exchange rate, knowing that from day to day, the fluctuating value can make thousands of dollars’ difference to its enterprise.
That’s because roughly 60% of Herdez’s costs--cans, jars and cartons, for example--are paid in dollars directly to foreign sources or indirectly to Mexican suppliers who buy foreign-sourced raw materials.
“We continue to buy things, but we are trying not to pay until the peso’s value becomes more clear,” Herdez general manager Crespo said.
Crespo said Herdez and other businesses saw the devaluation coming, but that hasn’t made it any easier to deal with. “Mexico has experience with devaluations. It’s necessary from time to time. But when it’s done by golpe (big blow) as it was last month, it creates a lack of confidence.” Herdez buys its cans from a local company, Envases de Ensenada. But as that company’s manager, Oscar Garcia Jurado, explained, Envases buys its sheet metal from Japan, its machinery from Switzerland and coatings from the United States.
“We are victims of the devaluation. We buy 92% of our costs in dollars and we sell everything in pesos. That’s the puzzle we have to solve,” Garcia Jurado said.
Even so, Cetto and Crespo maintain that another reputed benefit of the devaluation--attracting investors to develop Mexican sources for some supplies that are now imported--is simply impractical in many instances.
One big reason is the high cost of investing in plants: a plant to make sheet metal to supply Envases would cost hundreds of millions of dollars. Another is that countries are better off doing what they do best in the competitive global economy.
“We can’t think about competing with Taiwan steel plants or U.S. paper manufacturers. Every country has different aptitudes and Mexico has to think about its characteristic products that are considered on a world level to be good,” Crespo said.
Cetto was relatively small until the 1960s when it agreed to manage a neighboring winery for Spanish winemaker Pedro Dome, a deal that gave Cetto international legitimacy. A large Mexico City spirits distributor, El Aguilar, took notice of Cetto and began to sell its wines throughout Mexico.
Cetto makes moderately priced wines from grapes grown on vines from France, Germany and Italy. In U.S. markets, the L.A. Cetto-label wines compete with imports from Chile and Argentina.
Volume has grown steadily ever since to the point where Cetto now produces 2.7 million cases of wine annually, more than any Mexican vintner. The firm, which sells about a third of all the domestically produced wine in Mexico, would rank among the top 15 U.S wine producers.
Ironically, Cetto said the devaluation’s principal benefit may be in helping to boost his company’s domestic market share by driving up the price of imported wine. He said it will “blow away” sales of German, Spanish and Chilean wines, which have come to dominate the Mexican market. But overall, he said Mexico’s economic slowdown means Mexicans will drink less wine.
Under the guidance of Luis Alberto’s father, Luis, who is still chief executive, Cetto began diversifying in the 1970s, making tequila in Jalisco and steel in Tijuana and growing table grapes in Sonora. On the drawing boards is a resort and real estate development in the Guadalupe Valley near the vineyards that would include a golf course and housing.
Exports began in the 1980s and have grown steadily. Unlike the wine industries of other nations, Cetto and other Mexican wineries receive no government subsidies or marketing support, one of the reasons Mexican wines have a low international profile. Although Spanish conquistadors founded the New World’s first winery in Mexico, the nation’s industry is dwarfed by those of Chile and Argentina.
Cetto spurned the distributors who “wanted to market us as a specialty wine, along with Mexican beer and tequila at Mexican restaurants. . . . We want our wine to be thought of in the same way as French and California wines.”