MEXICO CITY - For Mexican auto parts suppliers, the global economy has arrived with a vengeance.
For most of a decade, Mexico has steadily dismantled the economic wall that protected the nation's parts makers from outside competitors. The North American Free Trade Agreement, which took effect in 1994, sped the opening of Mexico's supply base to U.S. and Canadian competitors.
When Rassini Autopartes SA de CV saw that wall begin to crumble, the company began a massive program to secure its competitive footing. The supplier of suspension and brake parts formed joint ventures in emerging markets, expanded its production capacity in Mexico and worked hard to boost its North American market share.
Its strategy is paying off. In recent years, for example, Rassini has won important new business with Ford Motor Co. and General Motors to supply leaf springs. At the beginning of the decade, Rassini drew less than 20 percent of its leaf-spring sales from exports to the United States and Canada. By next year, the company expects leaf-spring exports to its customers north of the border will represent more than 60 percent of revenue.
Rassini also is quoting business for GM in Europe and South Africa for the first time. For Manuel Fregoso Franco, a Mexico City-based sales executive with Rassini, 'now the global economy is a reality.'
It is also unforgiving. When Mexico devalued the peso in late 1994, it triggered an economic crisis that bottomed out the domestic car and truck market. Now, four years later, the country is only approaching the level of domestic light-vehicle sales it had before the devaluation. The crisis also underlined the need for Mexican-owned suppliers to diversify their operations beyond Mexico's border.
For more than a decade, Mexican parts makers have coped with a worldwide consolidation of the auto parts industry. While Mexico's largest suppliers are generally prospering, many in the second and third tiers are 'doing very poorly,' says Oscar Vejar, vice president of Mexico's Automotive Parts Industry Association in Mexico City.
'Mexico is not living in a different world,' he says. 'Auto parts manufacturers are very realistic about what is happening.'
Many smaller Mexican suppliers lack the production capacity or the technology to keep pace with the global competition, says Isabel Studer, a professor of international studies at the Instituto Tecnologico Autonomo de Mexico, a Mexico City university.
What's more, because Mexico has liberalized its foreign ownership requirements, outside competitors from the United States and Canada that may have needed a Mexican partner in the past can now set up their own operations or acquire a local company, Studer says.
Thus, Mexican suppliers need to compete on the same terms as other North American suppliers with top quality, cost and delivery performance. To attract an alliance, a Mexican supplier must offer more than low-cost labor or a local production site.
'These (Mexican) companies have to face a much more competitive environment, and not only because of the opening of the market,' Studer says. 'That makes a very big difference.'
Mexican parts makers that do not keep up with the pace of change in the global supply business could face a 'very large displacement' by U.S., Canadian and European suppliers with strong engineering and design capabilities, says Markus Franke, an analyst with Roland Berger & Partner GmbH, a management consulting firm in Dusseldorf, Germany.
Mexican suppliers need to find product niches where they can succeed and volumes that make them bigger regional players, Franke says. Outside competitors will also increasingly look at Mexico as a base from which to expand into Central and South America.
'Mexico is an ideal bridgehead for both the domestic market and exports to Latin America,' Franke says.
General Motors views its Mexican supply base as an integrated part of a worldwide purchasing network that last year did $70 billion worth of business with suppliers. Parts makers that meet the automaker's requirements for quality, cost and delivery have 'an excellent opportunity' to expand their business globally, says Cesar Garcia Verdous, director of purchasing for GM Mexico.
GM purchased $1.02 billion worth of components last year from 180 Mexico-based suppliers. That figure does not include the purchases the automaker made from its extensive Delphi Automotive Systems operations in Mexico.
In years past, the strategy in Mexico was to build parts with high labor content and export them, Verdous says. Now Mexican suppliers must produce more highly engineered, value-added parts, because the domestic industry's advantage in labor costs is bound to be temporary, he says.
Although the process of change has been painful for many Mexican companies, the opening of the market was essential to creating an automotive supply base that can compete globally.
Says Stefaan Peeters, an analyst with Acciones y Valores de Mexico SA de CV, a Mexico City brokerage: 'The results are going to be very, very positive for Mexico.'