Not Crazy Like A Fox

No election year collapse predicted for Mexico This time it's the U.S. and not Mexico that's stumbling through an election year.

While a history-making voting fiasco delayed the naming of a U.S. president-elect, Mexicans were cruising to the scheduled Dec. 1 inauguration of Vincente Fox with little or no signs of the economic collapse that has accompanied the previous four presidential elections.

Determined to keep the momentum of the late 1990s, outgoing President Ernesto Zedillo has lined up financial support totaling $26 billion, including lengthened debt maturities and contingency credit lines from the U.S., the International Monetary Fund and the World Bank. "It seems to be a smooth transition so far," says Mike Flynn, director of the Office for the Study of Automotive Transportation at the University of Michigan.

With stability apparently guaranteed, motor vehicle sales are predicted to rise 10% to 12% annually until 2003, says Gabriel Renero of Deloitte Consulting in Mexico City, who estimates deliveries in 2000 will hit 700,000 units, up from 682,316 in 1999. Vehicle production also is expected to climb, totaling 2.5 million units annually by 2006 vs. 1.5 million in 1999.

Optimism is sky high in Mexico. Mr. Fox of the National Action Party (PAN) shocked the world in July when he defeated the Institutional Revolutionary Party's (PRI) candidate Francisco Labastida. Mr. Fox's victory ended the PRI's 71-year reign. That's longer than the communists held power in the Soviet Union.

But the enthusiasm is not limited to Mexicans. The auto industry should look favorably upon a Fox administration, analysts say. Mr. Fox, a former Coca-Cola executive and rancher who still wears his cowboy boots, is considered a charismatic pro-business politician, quite a change from the straight-laced economics of the PRI's Mr. Zedillo.

In addition to a conservative agenda, which includes an open border with the U.S. and establishing a European Union-like arrangement in North America where it's much easier for workers to live in one country and work in another, Mr. Fox also has direct experience dealing with automakers. While serving as governor of the state of Guanajuato he lured a General Motors Corp. plant to the region and developed clever incentives, such as financing worker training and paying interpreters working for Asian companies. A supporter of the North American Free Trade Agreement, Mr. Fox's goals include cutting corporate income taxes, doubling direct foreign investment, de-emphasizing the country's dependence on the oil industry and liberalizing industries.

Although he's said nothing of it yet, many analysts expect Mr. Fox will slash levies for new car and truck sales. "He has to reduce taxes on new vehicles," says Mr. Renero. "Right now, 20% to 28% of a new car price is just taxes."

Of course, cutting or even completely eliminating the vehicle sales tax wouldn't help the 40 million Mexicans who live in poverty. Mr. Fox hopes to eradicate destitution by generating 1.35 million new jobs a year and maintaining an annual 7% economic growth rate. It's unlikely he can realize those prospects without the auto industry. "He does believe a lot in the auto industry's ability to improve economic activity and create jobs," says Mr. Renero.

But if automakers and suppliers are a lynchpin to the PAN's strategy, Mr. Fox must do more than cut taxes and offer incentives. Inflation has to be lowered. It is running at 9% to 10% - far below the 52% that prevailed during the 1995 peso crisis, but still much higher than the 3% rate Mexico's top trading partners enjoy. Mr. Fox is aiming to match that figure by 2003.

There is a tight market for skilled laborers, and worker retention is a serious problem. "Let's just say it's competitive," says Michael Hissam, spokesman for Delphi Automotive Systems in Ciudad Juarez.

The banking system, though stable for some time, still has its skeptics, and it must make credit more available. Mexico's nationwide infrastructure lags far behind the road systems in the U.S. and Canada. Labor unions, which for decades were passive due to a close relationship with PRI leadership and businesses, already are showing signs of becoming more independent and militant. "It's a potential rough spot," notes OSAT's Mr. Flynn. One show of strength was a crippling five-day strike in August by the National Workers Union at Volkswagen AG's New Beetle plant.

Mr. Fox also must deal with his enormous popularity. There are expectations that a lot of change is going to happen, and happen fast. But congress already has appropriated nearly 90% of Mexico's 2001 budget. And while Mr. Fox courts automakers, suppliers and other industries with incentives, he must find new tax revenue sources to fund his ambitious social program.

Moreover, some analysts say the economy is growing too fast and is in danger of overheating while the government still faces a massive tab for its $1 billion bailout of the banking sector. However, observers say Mr. Fox is up to the task because of his compromising attitude. "I'm going to be highly tolerant and highly open for negotiating," Mr. Fox says in an interview with Institutional Investor magazine.