MEXICO’S FINANCIAL CRISIS : Helping Mexico Is Investing in Tomorrow

In the midst of global panic over Mexico’s financial situation, President Clinton acted with a cool head Tuesday, rushing in an emergency loan package from the U.S. Treasury and international financial institutions.

Action was necessary not to bail out mutual fund investors and fat cat financiers, as critics charged, but to help an important current and future customer and ally. Panic puts a premium on cool heads. With calm analysis we can assess why the rescue had to be rushed, the importance of Mexico to the U.S. economy--especially to Southern California--and what lies ahead for all.

The official figures are impressive: In merchandise trade alone, Mexico takes more than $50 billion of U.S. goods--$7.5 billion worth of computers and other electronic and industrial equipment from California. But that’s only the rind of the orange. The deeper reality is a fluid and growing commerce between Mexico and California--including more than $5 billion in cross-border tourism.

Undersecretary of Commerce Jeffrey Garten was in Southern California on Monday and Tuesday, meeting with business people from San Diego to Santa Monica. They told him the important question about Mexico is not today’s business but tomorrow’s, the joint ventures that would go forward if the Mexican economy didn’t stall out and reverse its new openness to foreign investment.

But the economy was stalling. Banks in Mexico had stopped making any loans at all, said a Mexico City businessman. Before they stopped, they were asking for 60% interest that was driving businesses into default anyway. Ironically, business people in Mexico City said the peso at more than 6 to the U.S. dollar was way undervalued, but that assessment cut no ice with currency markets that had lost confidence in Mexico.

Had the Mexican government been left to work with its creditors, without U.S. help, the result would have been a default on the order of 1982 “and a lost decade of recession and worse,” said Garten.

But it’s not surprising that Mexico needs help from its much larger neighbor. It is, after all, a fledgling economy, with annual output one-twentieth that of the United States, half that of California.

To understand Mexico’s level of development, it’s useful to look not at textbooks but at two companies in the Los Angeles area: Gruma Corp., owner of Mission Foods in Commerce, and Casa Herrera in South Los Angeles.

Gruma, which makes Mission brand tortillas at a big plant in Commerce and 11 other locations around the United States, is the U.S. subsidiary of Gruma in Monterrey, Mexico, a company that invested in Los Angeles 17 years ago. The investment paid off: Gruma Corp. has become the world’s largest tortilla maker, with about 4,000 employees and sales of $400 million worth of tortillas and taco shells in U.S. supermarkets.

But its parent company sells almost no tortillas in Mexico because there, the staples of Mexican meals are made fresh three times a day in shops on every street. Gruma sells them the corn and wheat flour. Its subsidiary in the industrialized United States turns out 15 million tortillas a day at the Commerce plant.

But with the spread of supermarkets, different work schedules and mealtimes, shopping habits are changing in Mexico, and that may mean business for Casa Herrera, a 44-year old company now run by eight children of the late founder Frank Herrera. Casa Herrera, with $15 million in sales and 160 employees, makes tortilla manufacturing equipment, which it has sold all over the United States and in China and Mexico.

Before the present crisis, Casa Herrera was discussing a new venture with a Mexican company, but the peso’s fall put negotiations on hold.

What will happen to Mexico now? Mexico will sell state industries to private investors and use the proceeds to retire debt, says Garten. Then it will encourage long-term foreign investment in banking, insurance and other fields. And it will step up the reform of its one-party political system.

“They will have to . . . think about privatizing (state oil company) Pemex too,” says Douglas Campbell of the Santa Monica investment firm D.A. Campbell Co., which brought Telefonos de Mexico to the attention of U.S. investors in the 1980s.

Garten, an investment banker on Wall Street before coming to his current post heading the International Trade Administration, sees Mexico producing more auto parts and automobiles--and that, too, holds out opportunity for California computer and software businesses.

Right now, Mexican industry is still so unproductive that $16-an-hour labor in Tennessee produces auto parts cheaper than $2-an-hour labor in Mexico. But with modernization through computing and software systems, Mexican factories can become a link in a North American production system. “The U.S. and Mexican economies will become more intertwined,” says Garten.

That prediction reflects the U.S. policy behind Clinton’s move of support. The vision is that the big developing countries of China, Mexico, Brazil, Indonesia, India and Poland will be the export markets that will fuel U.S. economic growth and job creation.

Within six years, Garten points out, the large developing countries will be buying more than $200 billion in U.S. goods, or as much as Western Europe and Japan do now. And by 2010, the now-developing countries will be buying far more.

To have let Mexico default would have been to slow worldwide development. And it would have been to forget history, says Garten, who recalled the 19th-Century United States in speeches here. Then, British and Dutch investments financed U.S. railroads, steel mills, canals and cattle ranches, he said, even as this country went through the Civil War, stock market panics and currency crises.

Cool heads profited from taking a long view of that emerging market--and they’ll do the same with Mexico today.

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Viva Trade

Trade with Mexico on the national and local levels has increased markedly in the past several years. Trade statistics, in billions of dollars:

Exports to Mexico

National: $41.6

Southern California: $4.9

Imports From Mexico

National: $39.9

Southern California: $5.6

Sources: California Department of Finance, Economic Development Corp. of L.A. County, U.S. Department of Commerce, U.S. Census Bureau

Researched by ADAM S. BAUMAN and JENNIFER OLDHAM / Los Angeles Times