MEXICO CITY — Mexico's plastics industry is on a roll, and there are hopes that this year it will tackle its greatest challenge: growth.
For the first time in three decades, the change in government is unencumbered by fears of a devaluation or economic instability, allowing continuity. The sound performance of the economy was reflected by the decision of Moody's Investors Service to upgrade Mexico's bond rating at midyear.
Socorro Sedano, director general of Mexico's National Association of Plastics Industries (Anipac), has expressed "full confidence" on the part of the industry in the new president, Vicente Fox, and his cabinet.
Fox hails from a business background, and many on his team are entrepreneurs. They have promised to support small and medium-sized enterprises.
"There is a clamor in Mexico for this much-needed support," said Ricardo Ricardez, owner of Mexico City consulting firm Internacional de Asesoria y Suministros Industriales. "The big drivers in the industry are the monsters, and they need domestic backup."
So will Mexico's processors now be able to shake two persistent problems — scarcity of skilled labor and lack of credit for the manufacturing sector? Consultant Eduardo de la Tijera said those traditional roadblocks to growth are industry issues that must be resolved by the industry itself.
While President Fox has made a firm commitment to raising education levels, a real turnaround will take at least a generation.
"While we are hoping for a financial package which will contribute to the growth of the sector, the industry is also being proactive in increasing worker training," Sedano said.
Lack of credit is a nationwide predicament, due to Mexico's weak banking system. Not only are interest rates high, project financing does not exist, and banks require disproportionate collateral.
The focus of the new government will be on attracting foreign investment and reducing barriers for local investors to reinvest profit and depend less on bank loans. It is too early to say whether the administration will be able to solve the complex banking problem, but to some degree, plastics companies have learned to live without bankers.
"Raw materials and machinery suppliers have filled the gap," said de la Tijera.
Meanwhile, the nation's plastics industry, concentrated in Mexico City, Monterrey and Guadalajara, continues to grow at a steady rate. Anipac has seen new affiliates in regional divisions in Merida on the Yucatan Peninsula, the Bajio area around Guadalajara and Chihuahua on the border with Texas and Monterrey. Sedano reports that markets and operations have consolidated in those areas.
Sedano predicted that plastics consumption in Mexico will grow at least 10 percent in 2001, thanks to free-trade deals and growing international trade.
De la Tijera estimates growth rates could reach the 13-15 percent range "if the economy maintains a 5-6 percent growth rate and manufacturing exports continue growing."
The plastics industry invested about $2.12 billion in new plants and equipment from 1994-99, averaging about $354 million per year, according to Anipac. The Mexico City-based association expects that pace to continue.
Figures from the Mexico City-based De la Tijera y Asociados for spending by Mexico's plastics industry in the past two to three years are higher. He expects investment in machinery to average $600 million to $700 million per year, plus another $300 million annually in tooling.
Mexico's economic crisis five years ago is just a memory. Plastics' domestic consumption bounced back quickly in 1996, thanks to the North American Free Trade Agreement, which took hold just before the crisis, and other trade deals that make Mexico attractive to foreign investors.
"The challenge is to make the most of the advantages that this wider market offers us," Sedano said, noting that Mexico's treaty with the European Union went into effect in July.
"Mexico can now obtain tariff-free machinery and equipment from Europe, and we are seeing European companies eager to seek strategic alliances with Mexican businesses to be able to produce in our country," she said.
Maquiladoras continue to be significant, especially in the electronics and automotive markets. Maquiladoras face tax changes that may cut into their profit, but Sedano said if they "take advantage of the expertise of Mexican companies, they will not be affected." She added that Anipac plans to serve as a link between the maquila industry and its associated companies.
Despite the positive predictions from industry observers, many acknowledged that Mexico's processors and raw material suppliers are running behind domestic demand.
"With domestic demand growing at least 10 percent per year, Mexico needs to build another plastics industry of the same size on top of the existing one, in only six to seven years," warns de la Tijera. "Otherwise, trade balance deficit will continue growing, and above that, market share of local producers will continue eroding."
To meet this challenge, analysts say major changes in management and marketing practices are necessary at the processor level, because such firms have been accustomed to looking only at the markets figuratively across the street and not at markets that require a more aggressive and sustained approach.
The outlook for end markets, such as construction and packaging, depends on economic growth and manufacturing exports.
"Domestic consumption of plastics packaging will continue growing, and packaging for manufacturing export goods may face tough times if the U.S. economy slows down. ... We are watching this process very closely," said de la Tijera.
"What you can really expect in the market is the big companies are where they want to be and they will have to pull up the medium-size ones to get a move on," Ricardez said. "The big tendency is toward outsourcing — we are going to see more companies within companies."
Ricardez added that he is "an optimistic realist" about coming changes in Mexico, noting that the companies who know how to navigate the changing environment are the ones who will get ahead.
"You can't play new games with old rules," he said.