Tortilla Plants in Shanghai? Warming Trade Relations Between Mexico and China

Maybe this helps to explain why inflation is only 4 percent in Mexico. They must be importing lots of inexpensive apparel and electronics just like the U.S.

This story from yesterday's WSJ is mostly about the growing trade relations between the two countries, but it's hard not to notice the dramatic increase in goods imported from China and the growing trade deficit.

Mexico has viewed China as an economic rival for more than 10 years, more so after losing significant market share to China in electronics manufacturing in the late 1990s. China surpassed Mexico as the second leading exporter to the U.S. in 2003, behind Canada. Shortly thereafter, Mexico's attitude started to change.

In 2005, the two sides began trade-development talks and, with their government's urging, Mexican companies started trying to reposition themselves.

"China is an important market today, and tomorrow will be a more-important market for exporters all over the world. Mexico has to start developing that presence" there, says Roberto Zapata, director general of Multilateral and Regional Trade Negotiations in Mexico.

While Mexico remains competitive in textile manufacturing, the government is encouraging investment in products of higher value, as other competitors such as Japan have done.

"We have come to the conclusion that we cannot compete with China in labor costs," Mr. Zapata says. "The lesson, I believe, is very clear -- to move to the upper end of the value chain."

Luis de la Calle, who was Mexico's negotiator for China's World Trade Organization bid, says Mexican companies are beginning to feel more confident they can compete with China, invest successfully there and even attract Chinese investment.

At the lead are companies like tortilla-maker Gruma S.A.B. de C.V., which opened a $20 million tortilla plant in Shanghai in September to better sell to Asian markets. Auto-parts producer Nemak -- a subsidiary of Mexican concern ALFA S.A.B. de C.V. -- said it would build a plant in China but scrapped those plans and took a shortcut, announcing in November it would acquire a company that owned a parts-production facility there.

"The Chinese market has the greatest potential for growth, given its current underdevelopment and the possibility to manufacture cars for the export market, particularly with Asia," says Enrique Flores, an ALFA spokesman. The company already has a contract with GM Shanghai to produce engine heads for cars sold in the Chinese market.

Tortilla plants in Shanghai - there is irony in that somehow.

While they're getting the kinks worked out with the new tortilla factory, all those imported TV sets will help to offset the rising price for corn and other food staples at home when they tally the official inflation statistics.

Comments

[Dan Harris:]

I am also aware of a couple of Latin American fast food restaurants that have gone into China. In many ways, this makes sense because these companies are used to operating at a lower cost structure than American companies. The WSJ just did an article the other day on how so many South African companies are doing so well in China for the same sorts of reasons.

chinalawblog.com

2007 Feb 13 09:47 AM

[Jameswg:]

I would really love to hear how Mexico can possibly compete with the likes of China on going up the value chain. How can their government on one hand promote how to illegally emigrate to the U.S. and then also say stay and build high-value added companies in Mexico? Mexico will continue do as well as the price of oil does, in my humble opinion.

2007 Feb 16 12:47 PM

[kikkik:]

Jameswg,

I think your approaching your analysis with a rather simplistic economic frame of mind.

As you may be aware, Mexico is the 12th largest economy in the world as measured in gross domestic product in purchasing power parity, according to various sources. It is also firmly situatuated as an "upper middle-income" country, and as such is able to be a player at that level.

Moreover, Mexico is highly stratified in terms of class, which allows for two very distinct economies of sorts. It is Mexico's upper economic class that is able to position their multinational and national companies higher up the value chain in terms of international business operations. This same class is the one that is well-positioned to stay in Mexico to pursue economic advantages that lower-economic-class Mexicans are just not able to tap into, for reasons too long to elaborate on here.

Your comment seems to have a vitriolic undertone, instead of providing us with an economic analysis that might shed light on how we investors could position ourselves to profit from Mexican companies' moves within the world economy. Investing is the name of the game here, after all.

I'm not blaming you completely, however, as the "Tortilla plants in Shanghai - there is irony in that somehow." quip by the author could easily lend itself to related tangents.

My Analysis:

Both Nemek and Gruma's move seem promising given the growth being experienced within Asian economies, most notably China's. Gruma's move to establish a manufacturing plant in the area will help strengthen it's operations in the area. According to BNET, Gruma's move will accomplish the following for the company

* Allow it to produce 15 Thousand Tons of Wheat Tortillas Annulaly, 7 Thousand Tons of Corn Tortillas and 6 Thousand Tons of Snacks;

* Total Business Investment in Asia Adds will add up to $100 Million U.S.

* This will be a First Stage move for the company, the New Plant Will Supply the Continental China Market but Progressively Will Widen Its Range to the Middle East.

Given an increased focus on emerging markets and Gruma and Nemek's (including Nemek's parent company, ALFA) position as strong players in these sectors, these would seem like good companies to diversify global investment holdings. My one question is if Nemek's performance will be substantially affected by the current downturn in US car sales, and if this downturn in demand is also being experienced in the Chinese market.

I do wonder what effect the current market dynamics brought about by the US sub-prime crisis, and the ensuing credit market freeze, will effect the performance of these Mexican companies in the near and long term.

Any economic insight related to investment is welcome.

Thank you.

Disclosure: This is a personal investor providing my individual analysis; not affiliated with any company.

2008 Oct 15 08:05 PM