STR'A T.EGY
MEXICO BECKONS MID-AMERICAN
SMALL BUSINESS: PROSPECT FOR
UNIVERSITY CENTERED EXPORT

TRADE ASSISTANCE~

Joe Singer
University of Missouri - Kansas City

Ray Siehndel
Washburn University

ABSTRACT

Midwestern small businessftrms are being aggressively beckoned to enter the rapidly
growing Mexican economy. With the recent passage of the hlomh American Free Trade
Agreement (NAFTA J, Mexdco is ready to start spending to upgrade its quality of life. Small
business firms with products that can help with these improvements are being urged to scour
Mexico for trade leads.

This study reports on a survey of j,l04 midwest-central small and medium size manufac-
turing firms who find it dificult to take advantage of the export opportunity that Mexico may
oper them. Among the respondents, 287firms are in industries classified by the US. Department
of Commerce as having the greatest potential for rapid growth in export to Mexico.

Characteristics of survey firms are presented along wi th their manogerial ond technical
assistance needs. The prospect for a university-based export assistance centeris explored along
with the operan'onal dimensions for such an agency partnership.

INTRODUCTION

Since the inauguration of Mexican President Carlos Salinas de Botali in 1989,Mexico has
made significant modifications in the operation of its national economy. State-owned companies
have been sold to private investors. The government has taken steps to reduce its budget deficit.
Inflation has been brought under control. Foreign investment has been permitted in many
industries. And, the North American Free Trade Agreement has been negotiated with the United
States (U.S0 and Canada. These developments have generated a great deal of enthusiasm among
North American investors and business leaders.

v The autlvors of this paper were invited to subnu'tan anicle for publication in thejournal. Thc article was not review cd
by the JSBS Editorial Advisory Board.

65



As a result, the United States'xports to Mexico doubled, growing from $ 12.4 billion in
1986 to $28.4 billion in 1991.Consumer goods exports from the United States to Mexico uipled,
rising from $ 1 billion to $3 billion. Capital goods exports went from $5 billion in 1986 to $9.5
billion in 1990 (NAFI'A, 1992).

Mexico joined the General Agreement on Tariffs and Trade (GATf) in 1986, reducing its

highest ad valorem duty from 100 percent to 10percent. Duties currently vary between zero and

20 percent, with the average tariff on goods imported from the United States averaging 10percent.
In addition, Mexico reduced its 11,000import licensing requirements to 53, mainly on electronics,

expecially super computers.

Freer trade with Mexico has led to trade and is in the best economic interest ofboth the U.S.
and Mexico. The Mexican economy grew at an annual rate of4.8 percent in 1990-1994and is the
fifteenth largest economy among the nations of the world (NAFI'A, 1992). The United States had

a merchandise trade surplus of over $2 billion in 1992 with Mexico, after a merchandise trade
deficit with Mexico from 1982 to 1991.Currently, the citizens of Mex ico import more goods per
capita from the United States than do the citizens of the European Community (NAFI'A, 1992).

President Salinas instituted a liberal revision of the foreign invesunent regulation law in

May, 1989. Consequently, more than two thirds of Mexico's economy is now open to 100percent
foreign ownership of firms. United States business invesunent in Mexico not only expands its
markets but also helps strengthen a company's ability to meet global compeutive challenge. For

example, Mexico sold a 20.4 percent stake in Telefonos de Mexico, the nauonal telephone

company, to Southwestern Bell Corp, France Telecom, and Grupo Carso for $ 1.76 billion.

Southwestern Bell feels this is so important to the future of its operations that it is moving its
headquarters to San Antonio, Texas, from St. Louis, Missouri. Edward Whitacre, Ir., the
company's chairman, said, 'This move will put us closer to more of our major growth markets

and customets... San Antonio serves as the gateway to Mexico." Southwestern Bell's investment
of approximately $950 million in Mexico is currently valued at approximately $2.4 billion.

Privatization activities continue in Mexico, as 886 government-owned businesses have

already sold from the 1,155 held in 1982. These businesses include petrochemical, pharmaceu-

tical, steel, tourist industries, and the national airlines, Mexicans and Aeromexico. Also, Mexico

is returning the nation's largest banks to the private sector,

New regulations require no government approval of invesunent proposals in many areas
and formal responses within 45 days in the remaining areas. In 1992, the United States'irect
invesunent in Mexico had risen to $ 10.2 billion, a dramatic increa e from levels well below

$6 billion before 1989.

It is important to note that Mexico remains a nation controlled by one political party. The

Partido Revolucionario Inetitucional (PRI) dominates Mexican politics; and, President Salinas,

elected in 1988 with 50.4 percent of the vote, is the leader of the PRI. The potential for political
and economic instability continues in Mexico as the country is not a true democracy. Regular

elections are held, but results are widely believed to be fraudu! cnt. The atutudes of other political

parties toward foreign trade and invesunent are not clear.

66



Mexican Presidents serve one six-year term, and President Salinas will leave office in 1994.
He views NAFI'A as a way to lock his liberal economic reforms into an international agreement
that will hamper future Mexican Presidents from making fundamental changes in the country'
economic order.

THE NORTH AMERICAN FREE TRADE AGREEMENT

In August, 1992, President Bush announced that negotiations were complete on the North
American Free Trade Agreement. The agreement, as passed by Congress in 1993, phases out
tariffs and licensing requirements over a period of years. Approximately 650 of the United

States'ndustrial

and agricultural exports will be eligible for duty-free shipments to Mexico within five
years. The new agreement also eliminates barriers to service trade, reduces or removes investment
restrictions, and helps protect intellectual propeny rights.

NAFTA was the culmination of a long process beginning with Mexico's entry into the
GATI'nd continuing through a series of negotiations. Business groups and economists have
generally supported the agreement on the basis that the removal of barriers will incmase access
to an important market for U.S.exporters and provide consumers with lower prices. Many private
citizens have accepted this position and supported NAFI'A. NAFfA created the largest free
market in the world and placed the United States in the middle of over 360 million consumers
whose output is in excess of $6 trillion (NAFf A, 1992).

NAFf A causes some concern in Mexico over the possible loss of sovereignty because the
regulations are enforceable by multi-national bodies. Objections have also been raised by
businesses producing in industries once protected from imports by tariffs and licensing barriers.
However, the majority of the Mexican people supported NAFI'A based on the belief that it will
offer greater prosperity to Mexico and increased access to United States styled consumer goods.

Risks do exist with the implementation of the agreement. Mexico has undertaken major
structural change in its economy. The North American Free Trade Agreement is the capstone of
that process. The agreement is likely to contribute to the prosperity of Mexico; however, if it fails,
an anti-United States backlash could result. Such a backlash could devastate United States
exports, particularly if combined with renewed tariffs and other barriers. On a second level, a
failed NAFI'A could cause invalidation of the liberal market-centered reforms of President
Salinas and the unstable one party system may shake on its foundation.

TARGET EXPORT INDUSTRIES

Table I shows the major midwestern industries targeted by the United States Department
of Commerce as having the potential for greater United States'xports to Mexico. Small- and
medium-sized manufacturing firms, located in the midwest, that produce within these industries

were identified and surveyed.

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Table I

High Growth Targe[Industries

INDUSTRY 1993 MARKET 1990-1993 1993 IMPORTS
SIZE GROWTH RATE FROM THE U.S.

Apparel $ 1.8 billion 209i) $397 million

Plastic Materials and Resins $ 1.713billion 12.9%o $360 million

Computers and Peripherals $649 million 119b $218.5 million

Telecommunications Equipment $322.7 million 10% $219.8 million

Computer Software and Services $416.4 million 129i) $ 174.2 million

Household Consumer Goods $563.8 million 129n $ 170.1 milhon

Sporung Goods $525.8 million 129i) $72.3 million

Pollution Control Equipment $480.0 million 209i) $92 million

Business Equipment
(non-computer) $ 189.1 million 89o $98.8 million

Management Consulting Services $ 141.7 million 10% $ 123 I million

Food Processing and

Packaging Equipment $233.9 million 99o $79.1 million

Agricultural Machinery

and Equipment $260 million 129b $83 million

Building Products $94.7 million 209i) $42.4 million

SURVEY DESIGN

The survey of potential export clients was conducted by the Henry W. Bloch Center for
Small Business and Enterpreneurism during May, 1993. Thirteen industries were chosen from
the United States Commerce Department's "Hot List". Published &firectories of manufacturers
were used to locate 1,485 companies located in the central midwest United States that produce

goods within these indusuies. Fourteen hundred and twenty-seven of these firms were surveyed
regarding their general export experiences relative to Mexico, capacity to fill orders, current sales

efforts in Mexico, belief regarding management assistance, whether a manufacturer's represen-

tative would augment their efforts, and interest in university-based t&ichnical assistance related to

their exports to Mexico. Eleven hundred and four firms (77 percent) responded.

68



In addition, 103 Mexican companies were identified that import and/or distribute goods in
these industries. The National Trade Data Base and other United States Department of Commerce
sources were used in this effort. The vast majority of the importers and exporters who identified
themselves to the Foreign Traders Index of the Department of Commerce were located in Mexico
City. The concentration is probably due to the large percentage of Mexico's population and
economic activity that is concentrated in the capital, plus the close proximity to the center of
federal government power. It is also easier for Mexican im porters and distributors to contact the
United States Department of Commerce when they are located in the same town as a Consuhte.

INCREASING TRADE WITH MEXICO

The survey of potential export clients has identified 287 qualified leads for managerial and
technical assistance. They indicated the ability to ship orders within 30 or 90 days. These firms
do not have company personnel selling their pmducts in Mexico nor do they have a representative
in Mexico. Finally, 89 percent of these firms believe that the time and effort of a university-based
export program, including a manufacturers representative, would benefit their sales efforts in
Mexico. Ten percent of the firms indicated that they were in need of university-based technical
assistance related to their Mexico exports.

Figure I depicts the qualified leads from the various industries. Figure 2 indicates 95
companies produce household consumer goods, 85 make building products, while 43 produce
computer components and 4 make plastics. Twenty firms operate in the pollution control industry
and 21 make sporting goods. Fifty-three companies operate in other industries.

Figure 1. Potential Expon Clients Qualified Leads

Qmliftcd Lcttdn

Other Rcspondcnts
74%

Figure 2. Qualified Leads by Industry

Poauuon Conrnd

6% 6%

Plsstlcs Other Industncs

12% 16%

Consumer Goods

26%

Ccmputers

12%

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The firms are small to medium size, as depicted in Figures 3 and 4. Firm size was

determined by its listing in published directories of manufacturers. One hundred seventy-four of

the qualified leads had annual sales under $4.9 million. Seventy-four achieved sales between

$5 million and $9.9 million. One hundred twenty-eight of the companies were found to be

employing between one and nine persons. Fifty-two of the companies employed between 10and

24 people while g6 others employed between 25 and 99 people. Twenty-one firms had a work

force over 100 people.

Figure 3. Qualified Leads: Annual Sales

174

74

12 10
0

1 lo 4.9 5 lo 9.9 10 w 19.9 20 to 29.9 30 to 100 Ovo 100

88 Millions

Figure 4. Size by Number of Employees

250 snd Attovc 5

100 to 249 )6

25 to 99 86

10 to 24 52

1 to9 128

Figure 5 shows that among the qualified leads who are currently exporting, 159 of the firms

are selling their goods outside the United States while 12g are not. Forty-two of the leads are

exporting to Mexico at this time (see Figure 6).

Figure 5. Qualified Leads: Current Export Stains

159

70



Figure 6. Qualified Hadst Expons to ltfexfco

Estss» Io Mos)s» ~2
(l5%)

N 0 Esp csls Io M»tlso 245
(85%)

The qualified leads appear to have excess capacity as demonstrated by their ability to ship
orders within 30 or 90 days. Figures 7 shows the number of firms that could fill particular dollar
amounts of orders. Forty-three companies could ship orders between $250,000 and $500,000
within 30 days, while 159 companies could ship this volume of orders within 90 days. Seventy-
four companies indicated that they could fill orders worth between $50,000 and $250,000 within
30 days and 106 firms indicated that they could meet this amount of orders in 90 days. One
hundred and seventy qualified leads reported that they could fill orders between $0 and $50,000
within 30 days. This number fell to 22 firms at the 90 period as companies reported that they could
meet even larger orders.

Figure 7. Ability to Ship an Order Within 30 or 90 Days

E3 30 Days I 60 Days
170

)59

106

74

43
22

0 Io 50,000 50,000 Io 250,000 250,000 io 500,000

Many of the leads identified several areas where they are in need of technical assistance
related to their exports to Mexico (see Figure 8).

~ 149 said that they needed help in the identification of partners,
~ 148 others indicated that international sales were an area of need,
~ 138 responded that they were in need of market research,
~ 138 specified tariffs and regulations as an area where they are in need of assistance,
~ 28 mentioned financial arrangements and collections, and
~ 117 identified uanslation and interpretation as an area of need.

71



Figure 8. Managerial and Technical Assistance Needs

Tarins k Rcgulaucn 4g%

Pins&&i ~1 Arracgcmcnu 4 Ccaccucns 44%

Translaucn gr m acrprnsuar 40%

Icicmaucnal S&lca sr%

idccuTicaucn nf Psnncra st%

Mar&a Res&arcs 4g%

Of all 1,104 responding firms, 220 respondents export to Mexico (20 percent) and 178

companies export to countries other than Mexico(16 percent). The remaining firms do not export.

Table 2 offers data on the sales volumes of all respondents that export to Mexico, the firms
that export to other countries, and the companies that do not export.

Table 2

Sales Vofume Characteristics of Firms that Expotx to Mexico

RESPONDENTS EXPORTERS OTHER
(nm1,104) TO MEXICO EXPORTERS

(nm 220) (n=178)

$ 1 - 4.9 MM 629 579o 77 35% 76 43%

$5 - 9.9 MM 220 209o 51 23% 59 33%

$ 10 - 19.9MM 77 7% 26 12% 9 5%

$20- 29.9 MM 99 99o 33 159o 18 10%

$30-100 MM 55 5% 18 8%o 16 9%

Over $100 MM 22 2% 15 7% 0 0%

NOTE: Sales information was obtained from published directories of firms and not from the
survey.

This information suggests that current exporters are larger than I irms in general and that this

tendency is particularly strong in the case of exporters to Mexico.

Figures 9 and 10 address the number of responding companies who export particular
volumes of their goods to Mexico. One hundred and seventy-eight firms do not export to Mexico
(16 percent) and 220 do export their products to Mexico. Figure 10 considers only those
companies who export to Mexico. One hundred and forty of these fi mls export less than $250,000
annually. Twenty-six companies send between $250.000 and $500,0t)0, and 54 firms export over
$500,000 a year to Mexico.

72



Figure 9. Volume of Exports to Mexico
Over 500 (5%)

250 to 500 n%)

0 to 250 (13%)

No Ea pats (64%)

No aapans to Meairo (16%)

$$ Hundred Thousands

Figure 10. Export Volume of Firms Exporting to Mexico
Over 500

24%

250 w 500
12%

$$ Hundred Tlteusenda

One hundred and sixty respondents expected exports to grow at a faster rate than their
domestic sales while 944 did not. Given the slow growth (3.50percent) and projected growth of
the United States economy, the emphasis on international business, and the higher growth rates
of other nations, these results are surprising.

Table 3 examines the number of employees of the 160 firms that are bullish on their exports.
Table 4 looks at the sales volumes of these groups of companies while Table 5 considers their
export volume.

Table 3

Number of Employees of Export Bulls

RESPONDENTS ALL EXPORTERS EXPORT GROWTH )
(n=1,104) (n=39&) DOMESTIC SALES

GROWTH (n=160)

1-9 386 35% 32 89o 11 79o

10-24 243 229o 68 179o 21 13%

25 - 99 298 279o 135 34% 43 27%

100 - 249 122 119o 103 269o 53 33%

250 and Above 55 5% 60 159o 32 20%

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Table 4

Sales Volume of Export Bulls

RESPONDENTS ALL EXPORTERS EXPORT GROWTH &

(n=1,104) (n =398) DOMESTIC SALES
GROWTH (n=160)

$ 1 - 4.9 MM 629 579o 151 389o 32 20%

$5 - 9.9 MM 220 20% 111 299o 32 20%

$ 10- 19.9 MM 77 7% 36 99o 32 20%

$20 - 29.9 MM 99 9% 52 139o 23 14%

$30- 100 MM 55 5% 36 99o 21 139o

Over $100 MM 22 2% 12 2% 20 13%

Table 5

Export Volume of Export Bulls

ALL EXPORTERS EXPORT GROWTH &
(n =398) SALES GROWTH

(n=160)

$0 - 250 MM 212 53% 32 20%

$250 - 500 MM 44 119o '20 139o

Over $ 100 MM 142 369o 108 67%

The survey suggests that respondents who believe that their exports will grow faster than

their domestic sales tend to be larger companies than other exporters and the respondents in

general, both in terms of sales volume and number of employees. A higher percentage of these
"export bulls", export over $500,000 per year, more than the exporters in generaL

MANAGEMENT AND TECHNICAL ASSISTANCE

The North American Free Trade Agreement ensures that procedures will become simpler,
but these changes are scheduled to take place gradually. A significant need revealed by this

research is the establishment of university-based technical export assistance serving as the sales
agent for Mid-American firms'xports to Mexico. The assisumce would determine the
marketability of a firm's products ihrough an analysis of manufacturing costs, transportation
costs, remaining tariffs, sales commissions, and resulting price. The examination would compare
the firm's products relative to Mexican consumers'references and buying patterns.

74



A university-based technical export assistance center would invoke a process of bringing
suppliers and buyers progressively closer together. It would obtain the sales catalogue of
potential supplier and published and personal company information to determine if the products
merit further attention. The center staff would meet with the supplier to discuss the potential for
the company's product in Mexico and begin identifying distribution channels. These discussions
could be the impetus for market research teams to analyze products'ales potential in Mexico.

Initially, the university-based technical export assistance center would not be acting as a
representative. However, if the discussions with distributors were positive, a sales agent contract
would be established with Mexico as the service territory. The university export assistance center
would develop agreements with representatives, who would work in partnership with the
company for the sale of goods in Mexico. The center would earn a fee on sales made in Mexico.

The center would identify a representative to promote products in Mexico and establish
working relationships with those agents. The center would assist and coordinate the sales contract
between the supplying firm and the end buyer. It would assure that irrevocable leuers of credit
are obtained through reliable banks and would advise on arrangements for the shipment and
delivery of goods. The center could not purchase goods or hold title to them; however, they would
collect fees based on sales.

This same service could identiTy Mexican firms that have potential for exporting to the
United States but lack a distribution channeL The center would help those firms determine the
marketability of their products and serve as their sales agent in the United States. The pattern of
operations would be tailored to meet opportunities in the market and the needs of panicular
customers. For example, some firms might be in need of only a portion of the services that a
university-based technical export assistance center could provide. In such cases, the center might
only handle the sale of the goods, leaving other considerations to the seller. On other occasions,
they would accept market research assignments for firms who wanted to study potential in the
Mexican or North American markek

Other university-based centers could help a Mexican firm establish a network of represen-
tatives throughout the United States and collect a fee on all sales. As the center develops trading
relationships, it could make some sales directly to final buyers and expect suppliers to pay some
fees as part of the cost of entering the international marketplace. These costs would vary based
on particular cases but they would include translation and legal review of liability.

A major function of a university-based technical export assistance center would be the
maintenance of continual communication with representatives, buyers and other participants in
the markets of Mexico and the United States. The center would be reduced expenses for the
supplier and would maintain a data base with accurate and current information regarding
distribution opportunities, representatives, and other mauers. The center could also function
openly as a representative "head hunter" to market its capacity to identify quality representatives
for a particular fum's products. to Mexico.

SUMMARY AND CONCLUSIONS

Approximately 650 of survey respondents did not export and only 20 percent had general
experience relative to Mexico. The most significant finding is that approximately 90 percent of
the firms believe that external managerial-technical assistance would best benefit their sales

75



efforts in Mexico. The concept of a university-based technical export assistance center is not

unique. The U.S. Small Business Administration has sponsored the Small Business Institute

program and the Small Business Development Centers for over 20 and 13 years, respectively. The

U.S. Department of Commerce has its Minority Business Development Program and University

Centers For Economic Development. The U.S. Department of Defense funds its Procurement

Assistance Centers on university campuses throughout the nation.

The number of qualified leads suggests that no agency or individual firm is completely

fulfilling the needs and opportunities revealed in this study. The research identified three

individuals who broker trade between Mexico and the United States, but none represent large

numbers of small-to medium-sized businesses in Mexico. Two of the firms did express interest

in panicipating in ventures that could grow out of this research.

Export agents are limited in the number of firms they can effectively represent, A clear and

substantial demand appears to exist for this service, as many businesses whose products could

have a market in Mexico do not have representatives.

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77