Yankee pulled south by Mexican magnet

Electronic scrap dealer opens outpost in Guadalajara, pursuing NAFTA-era suppliers in 'Silicon Valley del Sur'

To people in Guadalajara, Mexico's booming number two city, Larry Manhan must have cut an odd figure. The founder of BCS Inc., an electronic-scrap business based in a Los Angeles suburb, flew 1,300 miles deep into the Mexican heartland in August to visit the so-called Silicon Valley del Sur. Mexico and Manhan, 63, a self-described workaholic who speaks no Spanish and favors loud Hawaiian shirts, aren't a natural fit. Yet in touring Guadalajara's bustling industrial sectors, he recalls, "I was absolutely overwhelmed by the size of the plants and the number of people they employed."

So overwhelmed was Manhan that two months later he started BCS Electronic Recovery Service, in Guadalajara, the Mexican counterpart of his company in Canoga Park, Calif.

Manhan was pursuing his source of supply. Many computer, telephone, and circuit-board manufacturers, including such giants as Hewlett-Packard and Solectron, have been expanding their plants in Mexico more quickly than in California. A major reason for that is NAFTA, the North American Free Trade Agreement, adopted by Canada, Mexico, and the United States in 1994 to dismantle all remaining, substantial trade barriers among the three countries over 15 years.

As large companies shift their manufacturing facilities to Mexico, seeking lower wage rates and less regulation, entrepreneurs like Manhan are following on their heels. He's part of an influx of American start-ups--particularly in the consulting, component-manufacturing, telecommunications, and electronics industries--that in many cases are "providing support services to the assemblers and big manufacturers," says Andrew Wylegala, a commercial attachÉ at the U.S. embassy in Mexico City.

Manhan is new to Mexican ways, and he's also operating his company long-distance from California. That has meant some cultural adjustments. On his second trip to Guadalajara, in September, he scouted for rental space in a warehouse. The five real estate agents who schlepped him around town didn't always know what they were doing. One, for instance, handed her card to the cab driver and asked for leads. "When I cross the border, I don't act like a Yankee," says Manhan. "I slow down."

Undaunted, Manhan returned to Guadalajara later that month. He rented a warehouse, paying $30,000 up front for one year--customary in Mexico. With the help of the local electronics manufacturers' association, he hired a general manager and a marketing director. And he paid a lawyer $20,000 to incorporate BCS Electronic Recovery Service as a Mexican company. All told, getting the business off the ground cost $100,000.

Much about the Mexican venture looks promising. As the sole electronics recycler in Guadalajara, Manhan has an abundant supply of scrap. He sells to his network of Asian customers, especially the Chinese. His costs are low--the salaries he pays his Mexican employees, for example, are about a third of what he'd pay in the United States, he estimates. He's already projecting a small profit in 1999, on revenues of $600,000.

In an economy as historically unstable as Mexico's, of course, some risks are inescapable. The economic turmoil that's already roiling emerging markets could slow Mexico's economic growth and batter the peso, says Sidney Weintraub of the Center for Strategic and International Studies, in Washington, D.C. For Manhan, whose Asian customers pay him mostly in pesos, weakness in the currency would eat into profits.

Manhan must contend, too, with the complexities of absentee ownership. At a cost of $1,000 he flew his general manager to California for tutelage about the scrap business. But, Manhan says, when the general manager delayed having the Guadalajara warehouse cleaned and its telephones connected, Manhan fired him.

In adapting to Mexico, Manhan says he'll go only so far. In meetings with officials and suppliers, he wears khakis instead of his trademark California-casual jeans. But he says that learning Spanish--beyond burrito and tequila--is another matter.

Bite losing teeth
La mordida, the bite--the wry Spanish euphemism for bribery--is to Mexico's business life what cornmeal is to its diet, no?

Actually, no.

Cornmeal remains the national staple, but the culture of la mordida appears to be waning in Mexico, say some experts. "It used to be nearly impossible to do business in Mexico without paying a bribe," says Jorge Gonzalez, chairman of the economics department at Trinity University, in San Antonio, and a Mexican-affairs specialist. "Now, many companies are doing fine without paying."

Deregulation of the economy is removing the opportunity for corrupt officials to demand bribes, says Gonzalez. Opening a store in Mexico City 15 years ago, for example, might have required 25 permits, compared with 3 or 4 today.

A second reason for the retreat away from la mordida is the growing revulsion felt by a new generation of Mexican business and professional people now coming into their own, says Nancy Oretskin, director of the U.S.-Mexico Conflict Resolution Center at New Mexico State University, in Las Cruces, N. Mex. "Young people understand," Oretskin says, "that Mexico will be rebuked by the international business community if corruption isn't attacked."

What lurks beyond Rio Grande
A leading expert on the opportunities and risks for U.S. companies in Mexico is Stephen Blank, a professor of international business and management at Pace University's Lubin School of Business, in New York City, and the director of its Center for International Business Development. He spoke recently with Inc. staff writer Marc Ballon.

Q: How has NAFTA changed the business environment in Mexico since the treaty took effect, in 1994?

A: NAFTA represents the culmination, not the beginning, of a period of trade liberalization between Mexico and the United States that began in the early 1980s. NAFTA, in effect, told investors that they could have confidence that there would be no backsliding in Mexico.

Q: Did the large devaluation of the peso in 1994 and 1995 shake investors' confidence in the Mexican economy?

A: Many businesses were decimated, especially those selling to the Mexican market. But some big companies changed their strategies. Automotive-industry executives, for instance, no longer thought so much about the Mexican market but instead focused on exporting to the United States. Mexico became a place where U.S. companies went to take advantage of cheap labor and the low cost of assets, such as factories and land. Mexico has become, in a sense, an export platform within North America.

Q: Is there a danger of another major devaluation?

A: If the Brazilian economy collapses, the effect on Mexico could be devastating. However, one hopes there won't be another massive devaluation.

Q: How politically stable is Mexico?

A: The Mexican Congress is now dominated by opposition parties. This has never happened before. Many of the new members of Congress are economic nationalists. As the system becomes more democratic, the danger is that there will be policy instability and chaos.

A sampler of companies started by U.S. citizens south of the border

Global Communication Consultants/ Mexico City 1996 Kim Jurmu and Mary Ellen Colon Provides cross-cultural training and consulting
Imagenes Digitales/ Ciudad Obregon 1996 Richard Coleman Provides data processing
Parque Industrial Benito Juarez/ Benito Juarez 1997 Eric W. Gustafson Operates industrial park
Conexion Mundial/ Mexico City 1998 R.C. Schrader Provides telecommunications
Problem Solvers/ Mexico City 1998 Pete Palmer Provides security consulting