Cheap peso threatens trade

The devaluation of the Mexican peso is more than just a blip on the trade radar screen. How quickly it can be righted will decide the economic landscape of that nation and the look of its auto industry.

Down nearly 40% against the dollar since Dec. 20, the plunging Mexican peso means spiraling inflation, expensive imports and a decline in living standards.

The emerging middle class -- already hooked on imports -- will be the hardest hit. Many have gone in debt to buy more conveniences believing the economy was stable. Now they face job loss and consequently won't have the money to buy more, much less pay for what they've already bought. Angered by unkept pledges made by their political leaders, this middle class may decide to form a new political party. If that happens, some in the auto industry fear unrest and an even more uncertain economy.

Because of the growing concern about political instability, all current opposition parties have agreed to wide-ranging political reforms that govern elections.

Meantime, those who originally opposed the North American Free Trade Agreement (NAFTA) are stirring up a political hornet's nest in the U.S. by saying, "I told you so." They claim the peso should have been devalued in late 1993 to pull Mexico out of its economic slump. That wasn't done because then-president Carlos Salinas feared it would give the protectionists what they needed to block NAFTA in Congress.

Now, some analysts say they expect Mexican companies to ask for some renegotiation of NAFTA to try to protect their local industry. That could include slowing or suspending tariff phase-downs and enacting less liberal trade regulations.

Still, economic relief may be in sight. The U.S. government pledged to "do what is necessary to restore confidence" in the Mexican economy, including making up to $40 billion available in loan guarantees.

Most automakers, however, say the current situation doesn't affect their long-term view of the market. The peso devaluation is expected to take its toll on shipments into Mexico, at least short-term. However, U.S. vehicle exports to Mexico grew to more than 60,000 units in 1994 -- up from fewer than 10,000 in 1993. Yet automakers say the weakened local market likely will mean zero growth or worse for 1995.

Timothy D. Leuliette, president of ITT Automotive, points out that there are two businesses in Mexico: building for the Mexican market, which will slow down, and producing parts or vehicles for north of the border, which should become more profitable because of the peso's fall. What's worse, he says, is that work on modernizing the Mexican infrastructure will slow. "When the peso devalues, you don't build roads," he says.

The immediate effect of the sinking peso and the resulting devaluation of wages puts a crimp in vehicle production in Mexico and is likely to turn off the flow of U.S.-built cars and trucks into that country. Pedro Ruiz, executive vice president of Comdux Automotive, a Mexican supplier, says auto sales in Mexico could drop 25% this year, and sales of American-made imports could fall 50%. Dana Corp., while confident of long-term opportunity in Mexico, will take a $15 million charge against first quarter earnings because of translation losses. Dana owns 49% of Spicer SA de CV. Dana Chairman Southwood J. Morcott offers a philosophical note: "Currency fluctuations will always be a part of the risk and reward of doing international business."