Caught in a Price Vise : Mexican Manufacturers Find a Weak Peso Has Them in a Bind With Foreign Suppliers

Antonio Simon Galindo knows that his customers are mad. He does not blame them, but there is little the label and packaging company owner can do to quell their anger over price increases.

“Everyone understands but no one wants to accept it,” he said. “Many are reluctant, and I have apparently lost some contracts.”

His family company, Ideas y Promociones, is one of those Mexican firms that was supposed to benefit from the 40% peso devaluation that has plunged this country into an economic crisis. A weaker peso would make his products--labels and packaging for various Mexican-made consumer goods--cheaper and more competitive with foreign rivals.

Nice theory. But the reality is that over the last decade, Mexican companies of all sizes, including Galindo’s, have become dependent on foreign sources for the components and machinery they need. And the prices of those imports and the payments on the dollar-denominated debt they used to buy new equipment just soared, along with their other costs.

As a result, they are raising their own prices--and running into stiff resistance from customers. Even in the best of times, price negotiations between supplier and customer are hard-nosed. When a currency loses 40% of its value in a month, those negotiations can get downright nasty.

When Mexican officials went to Nissan Motor Co.’s suppliers with an offer to pay a moderately higher price for car parts--in keeping with the government’s effort to restrain inflation--key suppliers refused to accept the deal. They halted deliveries, causing parts shortages that forced Nissan to shut down its two Mexican assembly plants until a new price schedule could be negotiated.

Similar scenes are being played out throughout Mexican industry, creating anger and consternation and crippling production. Suppliers say they cannot hold the line on prices because so many of their raw materials come from abroad--and the materials’ prices have shot up 40%.

“Mexico used to make buttons,” Salvador Garcia, director of the National Institute of Small and Medium Industry, an independent consulting group, said by way of example. “Now we import them from Taiwan.”

“The government policy was to reduce inflation by promoting imports,” he said. “This created a tremendous dependency on foreign suppliers. Now the products no longer exist in Mexico.”

In fact, some of the sophisticated components of products now in demand here never did exist in Mexico. For those goods, manufacturers could not switch to domestic sources if they wanted to.

When Simon Galindo modernized Ideas y Promociones, he imported not only state-of-the-art equipment, but also top-notch materials such as films and papers that Mexico does not produce.

“It is inevitable that we are going to have to bring some things from abroad,” he said.

Although his customers have complained about his plan to for two price increases this quarter, he said no one has been willing to save money by accepting lower-quality labels or packaging.

A Mexican appliance maker could always buy Mexican sheet metal instead of the higher-priced import, manufacturers’ spokesman Garcia said, but their customers--particularly in newer export markets--wouldn’t accept that.

“Mexican sheet metal has a lot of defects,” he said. “It is not competitive.”

In addition, many raw materials can only be bought at world market prices--denominated in dollars.

That is the case with cotton, the basic material used by jeans-maker Coordinados Elite in Tehuacan, an old spa town southeast of here.

“Our costs went up 60%,” general manager Marco Antonio Haddad said, pointing out that the international price of cotton--which affects the price of his cloth, thread and even zippers--went up at the same time the peso was plummeting. In addition, all of the chemicals used at the company laundry--a crucial part of jeans manufacturing--are imported.

True, Haddad’s payroll is unlikely to rise much while wages are being held down under an agreement among businesses, unions and government. But labor is just 10% or 15% of his operating cost.

“We are going to have to produce more in order to live on smaller margins,” Haddad said. “We really have no choice.”