MEXICO’S NEW VISIONARIES

Dionisio Garza Medina was inside the Magic Kingdom at the time, but he was feeling cursed.

The young CEO was supposed to be enjoying a holiday with his wife and three sons at Disneyland. But, he recalls, he became so anxious about news of the disastrous peso devaluation roiling the economy at home that he cut short his December 1994 vacation and rushed back to Mexico.

“I couldn’t stand the pressure,” said the Stanford-educated engineer and chairman of Alfa, one of the country’s biggest conglomerates.

He needn’t have worried. The recent crisis has indeed been disastrous for Mexico, but it had a Disney-esque ending at Alfa. The steel and petrochemical maker tripled its operating earnings last year.

Alfa wasn’t alone. After having been laid low by Mexico’s previous currency crisis in the early 1980s, the conglomerates of Monterrey, following years of restructuring and belt tightening, represent a new, competition-hardened, international-minded industrial class.

They are as comfortable shipping to Taipei as to Tijuana, and their exports have become the engine of the country’s recovery, heralded by last week’s announcement of a stunning 7.2% jump in second-quarter economic growth.

Much has been made of the recent success of the maquiladoras amid the peso crisis, the foreign-owned firms along the U.S.-Mexican border that have shipped record volumes of products to other countries and are key to the export boom.

But non-maquiladoras--many of them home-grown, Mexico-based companies--recently surpassed maquiladoras as the top source of the nation’s manufacturing exports. This is important because they tend to pay better, are spread over a broader geographical area, and reflect a more diversified and sophisticated export base, analysts say. As such, they are arguably more fundamental to Mexico’s economic future. While thousands of small Mexican businesses have shut down in recent years, felled by the one-two punch of foreign competition and recession, a handful of industrial firms were prepared to parlay Mexico’s cheap production costs and weak peso into an advantage. They are budding multinationals--the success stories of the North American Free Trade Agreement.

“This time, the crisis hit the middle and lower class,” said Rafael Rangel, rector of the Monterrey Technological Institute, this city’s most prestigious university. “But the big [industrial] groups are very competitive.”

Many of the companies are located in Monterrey, and have been run by the same blueblood families for generations. But in recent years, tradition has gone out the window.

Just look at Alfa. In the early 1980s, it was on the ropes. The company, founded in 1890 by several of Mexico’s industrial pioneers, had mushroomed to become an unwieldy 157-company octopus, making everything from TVs to bicycles.

Already struggling, the prestigious firm nearly collapsed when the 1982 devaluation sent its dollar debt soaring. Since then, Alfa has sold off dozens of companies, slashed its payroll from 50,000 to 24,000 and consolidated around five divisions.

It has invested billions of dollars in state-of-the-art machinery, from a new steel mini-mill to equipment that quintupled its production of plastic-bottle ingredients. Two results: Productivity has doubled in seven years and quality has soared.

The shake-up wasn’t just a question of getting the company on its feet. It meant preparing for Mexico’s historic decision to end its decades-old protectionist policies.

“When the government said it was going to open the border, we either had to modernize the company or lose it,” said the gangly, 42-year-old Garza Medina, who also holds a Harvard MBA.

The latest peso devaluation did force Alfa to scramble to pay loans. But the crisis also produced opportunities.

Last year, as Mexican goods suddenly became cheaper abroad because of the weak peso, Alfa doubled its exports of steel, chemicals and other products to $1.1 billion. Luckily for the company, 1995 was also a boom year for prices in the petrochemical industry.

The result: Even as Mexico suffered its worst recession in 60 years, the group’s sales rose 50% and profit hit $350 million, the highest in years.

“Since . . . our products have international quality, we could export without a problem,” Garza Medina said.

Across town, Cemex also rode out the Mexican crisis almost unscathed.

Just four years ago, the cement company run by Lorenzo Zambrano was criticized for paying a hefty $1.8 billion for Spain’s two largest cement companies. But it was the start of a diversification drive that has made Cemex the world’s third-biggest cement producer, with plants in the U.S., Venezuela, Colombia, Panama and the Caribbean.

The geographic balancing act worked. As Mexico slumped last year, construction was booming in Spain and Panama.

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Even at home, Cemex managed to keep its factories working. As local demand crumbled, the company used its 24-ship fleet to ship Mexican cement to customers as far away as Malaysia and Taiwan. Despite Mexico’s crisis, the company’s sales jumped 22% in 1995.

At the company’s glass headquarters, decorated with bright Latin American abstract art, executives bristle at the mention of Cemex as a Mexican firm.

“Today, we’re Venezuelan and Spanish and Colombian and Panamanian and Dominican and American,” said Hector Medina, president of Cemex’s Mexican operations. “We have become a multinational.”

Monterrey’s fixation with foreign markets isn’t new. Just 100 miles south of Texas, the city started trading with Americans during the Civil War. Today, about a third of goods produced here are shipped abroad.

Still, it wasn’t easy adapting when the government decided to end years of protectionist policies. In the 1980s, conglomerates sold off businesses, slashed multibillion-dollar debt and laid off tens of thousands of employees as they tried to become competitive.

U.S. business consultants became frequent visitors to the manicured corporate campuses, as firms began measuring themselves against international competitors.

Today, “the people managing the companies are like those you find in the U.S., with a global vision,” said Rangel.

That vision is crucial to Mexico’s recovery. This year’s 18% rise in exports is the biggest single reason for the unexpectedly rapid growth in second-quarter output announced last week. While the recovery has begun, though, it may be years before Mexicans recover from the drop in buying power.

That means that the export-minded corporations must continue to drive the recovery.

“As long as domestic demand, in particular consumer demand, continues lagging . . . that leaves as the only option for [the country’s] growth going to the export markets,” said Mauro Leos, senior vice president at Ciemex-WEFA, a U.S. firm that studies Mexico’s economy.

For a country that has ridden a boom-and-bust roller coaster for two decades, the exporters are providing a much-needed measure of economic stability. Without their strong performance, the economy probably would have contracted 10% or more last year, instead of 6%.

And although many exporters are capital-intensive, they nonetheless have slowly been creating jobs. In the last year, amid rampant layoffs in much of Mexico, manufacturing employment in the Monterrey region has climbed nearly 12%, according to the Industrial Chamber of Commerce.

“There’s a multiplier effect for small and medium industries that are their suppliers,” said Jose Luis Vazquez of the Center for Economic Studies for the Private Sector in Mexico City.

For the United States, the exporters have turned into important customers. Many of the companies pack their products with made-in-the-U.S. goods, from circuit boards to special metal screws.

Although Mexico purchased less overall from other countries last year, imports used by the export industry rose 30%, Leos said, adding, “That’s not receiving enough attention on the U.S. side.”

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Whereas many of the exporters have flourished during the economic crisis, the global-minded strategy hasn’t always worked.

In 1989, Monterrey-based Vitro, a major glass producer, became the first Mexican company to acquire a U.S. concern--Anchor Glass Container Corp.--in a hostile takeover. At the time, it was hailed as a bold move by a new breed of aggressive Mexicans.

But Vitro paid too much for an inefficient company in an industry soon hit hard by the rise of the plastic soda bottle, analysts say. Last week, the company announced it would accept offers for Anchor.

“None of us expected such a dramatic contraction,” said Federico Sada, the company’s chairman.

Despite their successes, the big industries haven’t forgotten the debacle of ’82. Many have been more cautious managing their debt. They were less complacent than other firms when Mexico began to grow in the early 1990s.

Garza Medina still remembers suspicious bankers scrutinizing his resume in 1982 as they questioned whether family members should continue to manage Alfa. The proud company had fallen so far it had to appeal for a government bailout.

“More than half the 20 principle executives have been here since the crisis of ‘82,” Garza Medina said. Switching to English, emphasizing every word, he added, “We know what it means.”