Looking for a Silicon Lining

Peso tumble sends Mexico's Silicon Valley searching for overseas customers

THE neatly stacked boxes in the small warehouse all say IBM. But this building standing in an industrial-building strip on a busy thoroughfare isn't likely to be mistaken for a typical campus-like International Business Machines installation.

IBM is but one client of the 100-employee IEP Guadalajara plant here, which assembles personal-computer memory boards, keyboards, and monitors for some of the biggest names in electronics.

''If you don't have people like HP [Hewlett-Packard], Kodak, or IBM to keep you going in these difficult times,'' says IEP President Carlos Ledesma, ''you just might have to close.''

''These difficult times'' refer to the aftermath of the savage peso devaluation that has had Mexico reeling since mid-December. What the Mexican government forecast as a year of 4 percent growth with dwindling inflation and renewed oxygen for small and medium companies has changed like the suddenness of a summer thunderstorm. Now, analysts say they expect growth to scrape 1 percent at best, inflation has roared back and is expected to top 20 percent, while already costly credit has become more so.

It's not a pretty picture for Guadalajara, a city of 5 million people that in the mid-1980s became known as the Silicon Valley of Mexico, as electronics giants settled here and small local tributary companies sprouted up around them.

If there is a silver lining for the local electronics industry, it is that a cheaper peso will mean lower labor costs and lower prices on Mexican products (in United States-dollar terms), and that should make exporting more attractive.

''The national market for electronics has almost dried up for now, but for anyone exporting a quality product or involved in the manufacturing of products for export, the circumstances should be positive,'' says Alberto Sanchez Sandoval, secretary of the regional chapter of CANIECE, the national electronics industry chamber.

Also director of foreign trade for Hewlett Packard's local manufacturing division, Mr. Sanchez notes that HP's laserjet printer assembly operation here used to operate at a competitive disadvantage to the company's sister Singapore operation. ''Now Mexico has shot up in competitiveness,'' he adds, ''and that will benefit our exports.''

State officials expect exports to grow nearly 20 percent this year with the cheaper peso.

Guadalajara first became an electronics center in the early '80s after the government, in a policy designed to develop a Mexican high-tech industry, announced that only companies manufacturing nationally could sell in Mexico's potentially lucrative market. The objective was three-fold: develop a local industry through technology transfer, increase finished exports, and encourage Mexican research and development.

With its central location, access to a well-trained work force and reputable local universities, and a touted quality of life, Guadalajara offered many of the attractions that US electronics companies especially were seeking.

The local industry ranges from large companies such as HP and IBM with on-site research teams, to maquiladoras, or plants that simply assemble mostly foreign-made parts for re-export. ''Maquilas,'' as such plants are called, are usually close to the US-Mexico border. But their growth in Guadalajara has been steady: from 16 in 1985 to 33 in 1989 and around 50 now. Many are linked to the electronics industry.

The first temblor to shake the local electronics industry came in the early '90s, when the government began opening Mexico to freer trade and a more open investment regime. Some companies that no longer needed to be in Mexico to sell here closed up.

''We had to shift to a global strategy,'' says Federico Lepe, HP's director of market development. ''We were no longer justifiable in the Mexican market alone but had to fit as an essential -- and profitable -- part of the company's global plans.''

Now comes the peso devaluation and investor scare. ''The impact on the maquilas especially will be high,'' says Abelino Torres, a University of Guadalajara economist. ''The cost of the imported parts they use has gone up about 50 percent.''

But he notes that Guadalajara's maquilas have boost their ''national content'' to about 10 percent -- well above both the national average for maquilas of 6 percent and the border maquilas' 1.7 percent. This increased use of local components, he adds, should continue with the devaluation and implementation of the North American Free Trade Agreement.

One factor impeding that trend will be the high cost of credit. Mexico's credit squeeze is one reason some Guadalajara manufacturing has dried up in favor of assembly.

''In the current situation we'll seek arrangements where the client provides the materials, and we simply assemble,'' says Franco Arias, president of Compubur, a memory-board assembler.

Mr. Arias says contracts that call for companies like his to deliver a product from scratch -- ''turnkey manufacturing'' -- are less attractive now because they require capital to purchase materials, most of which are imported. ''With the cost of financing at 60 percent,'' he says, ''it's an option we can't afford.''

Arias says Mexico's financial crisis present opportunities for electronics assemblers like Compubur. But he doesn't expect that to translate into much expansion or new employment.

And although a local AT&T plant plans to add positions to handle increased assembly, most companies, like HP, say any additional production will be handled with higher productivity, at least this year.

''The key for a company like IEP is to be able to adjust,'' says Mr. Ledesma, whose work force can vary from 50 to 200 over the course of a year. ''In such unsettled times as Mexico is experiencing now, we have to be flexible.''

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