Mexico and the World
Vol. 7, No 5 (Late Fall 2002)
http://www.profmex.org/mexicoandtheworld/volume7/5latefall02/mexican_steel_industry.html

Changes In The Mexican Steel Industry After Privatization: The Case Of Altos Hornos De Mexico (AHMSA)
 
By Nadima Simón Domínguez
     Isabel Rueda Peiro

 
This paper presents the main results of the first stage of a collective project aimed to study the changes in the Mexican steel industry after privatization, particularly in Altos Hornos de México, S.A. (AHMSA), the largest steel producer in Mexico until 1998,  and the evolution of its links with firms that integrate the productive chain located in Monclova, Coahuila.
 
We tested a hypothesis we had set forth in a previous paper: a firm’s efficiency does not depend on it is private or public nature, but rather more importantly on the way it is managed [1] . One of the most important factors that explains AHMSA’s financial crisis is its inadequate management  of the credits it received for modernization. Another factor is that after privatizing the steel industry, micro, small and medium firms in Monclova found it even harder to remain as its sources of supplies or outsourcing.
 
This piece of research was mainly based on primary sources: AHMSA’s financial statements, a survey applied to a representative sample of 66 firms established in Monclova that are linked to this steel plant as clients or as suppliers of goods, services or outsourcing, supplemented by interviews to managers or owners, top executives of the steel plant and various business associations.
 
Were used statistics of the National Chamber of Steel, Cámara Nacional del Acero (CANACERO), the Latin American Iron and Steel Institute, Instituto Latinoamericano del Hierro y el Acero, (ILAFA), as well as statistics made by public, national and international institutions related to our object of study. We also used secondary sources, such as articles in specialized journals and books.
 
The purpose was to learn the opinions held by the managers or executives of firms linked to AHMSA regarding the advantages, disadvantages and difficulties they face in their relation with AHMSA, the changes that have taken place in this relationship after the privatization of the steel industry and the support they may receive from AHMSA and government offices.
 
We came to the following main conclusions:
 
The slow growth of the world economy, more intense international competition, technological and administrative modernization and transformations in the industrial structure and the States’ economic policies have created changes in world trends in the steel industry that affect its workers. The weak increase in steel consumption in the world makes supply greater than the demand, thus forcing prices down. Technological and administrative changes plus privatization have repercussions on a decrease in employment in this industry.
 
Changes can also be seen in international sources of raw materials, in an increase in international trade and in the relative importance of the role countries play in steel production. The decrease of former Union of Socialist and Sovietic Republic’s  participation and the increase corresponding to China are the most noteworthy. Strategic alliances at a worldwide level were also intensified, thus contributing to the restructuring of the steel industry and to a change in the foreign direct investment patterns.
 
In regards to the international division of labor in the steel industry, the developed countries tend to concentrate production in higher added value steel and to import semi-finished products and common steels from developing countries.
 
Technological change has had deep repercussions on the steel industry in terms of its productivity and structure. New processes have improved production timing thus saving energy and other inputs, reducing costs and increasing product quality. Besides, industry has diversified, thus decreasing the scale of production and initial investment requirements.
 
The steel industry in Latin America, particularly in Mexico and Brazil, has experienced considerable growth and has increased exports, mainly when economic activity recoils. Since privatization, Mexican private entrepeneurs have taken over leadership in this industry and at the same time have established strategic alliances and co-investments with foreign companies.
 
Latin American steel plants, in the face of greater internal competition and the need to face global competitors, have had to develop different strategies for growth, market positioning, technological and organizational modernization and financing based on the search for greater operational efficiency.
 
All this enabled regional steel industries to reach an important competitive level in the nineties, which has allowed them to enter extremely demanding markets, such as the United States, facilitated by open markets and trade agreements. Such is the case of Mexico with NAFTA, Argentina and Brazil with Mercosur and various bilateral agreements. An interregional space for steel trade has also been opened, representing an important window of opportunity.
 
In the nineties, the steel industry in Mexico experienced important changes alike those observed in almost all steel producing countries with similar development levels. Steel production increased at a higher rate than apparent consumption, thus creating a surplus for exportation, which increased substantially as from 1995 due to the seriousness of the economic crisis in Mexico and to the peso devaluation in December 1994. This made the domestic market contract and forced steel firms to look for new spaces in the world market in a time in which steel prices were on the increase.
 
All semi-state steel plants in Mexico were sold in 1991. AHMSA was purchased by the Grupo Acerero del Norte (GAN), which had been formally created only a few months before and had no experience in this field.
 
The arguments the Mexican government used to justify the sale of the steel plants was to make them viable, preserve sources of employment and avoid the State’s having to use its resources for this industry’s much needed modernization.The fact that AHMSA was sold for under 11% of its countable capital meant public resources were being transferred to private hands and that although GAN invested more than it had committed itself to invest at the time of the sale, this investment was done via mostly foreign credit, which semi-state AHMSA could have negotiated to start with, without the need to privatize [2] .
 
As a means to support its market strategy, privatized AHMSA invested 941 million U.S. dollars in technology and in projects geared to reduce costs, improve operational efficiency and product quality and manufacture goods with greater added value. The firm can be said to have achieved great technological progress in relation to its situation in 1991, but financial difficulties forced privatized AHMSA to sell its more modern lines of production thus making its modernization process recoil. Besides, as from AHMSA’s privatization, it started treating its micro, small and medium suppliers unfairly, freezing the price of the goods and services they sell and delaying payments.
 
Although once it was privatized, AHMSA made important investments that enabled it to increase productivity and reduce costs, since they were mainly based on credits that were not entirely allocated to the technological modernization program, they produced an excessive leverage that led AHMSA to suspend payments and announce a drastic cut in personnel for the months to follow.
 
Modernizing large firms and increasing productivity and competitiveness, which are so badly needed, must not be based on such high levels of indebtedness that may lead to insolvency.  They must be sustained not only on technological improvement, but also on efficient and effective management committed to complying with its duties towards the public sector, their creditors, suppliers, workers and society as a whole. Private firms of course aim to make profits. However, profits should not be made at the cost of not complying with their duties. Profits should not be sustained on unfair treatment to micro, small and medium firms that provide them with supplies or outsourcing. When this happens the firms cannot modernize nor capitalize and remain under extremely difficult conditions or on the verge of going bankrupt.
 
Mismanagement of privatized AHMSA was an important cause of its financial crisis, which led the firm to an absurd situation of having to sell the productive processes that generated greater added value.
 
Competitiveness of the Mexican productive apparatus must be achieved in an integral way. Not only larger firms must be assisted, but also and mainly smaller companies and the work force as a whole. In a country like Mexico, with a fragmented productive apparatus, enormous inequalities, a high percentage of the population in extreme poverty and in which micro, small and medium firms constitute over 99% of the country’s firms, it must be top priority to assist and support these firms not only to create new sources of employment and preserve existing jobs, but also to increase competitiveness of the country’s productive apparatus. These issues must not be left to the discretion of the market forces, since they favor the strongest. Although it is not convenient for the State to control all aspects of economic and social life, it must not remain aside either. It is essential to find an appropriate balance between control and indifference.
 
Although open trade has abruptly increased Mexico’s export of manufactured goods, as the economy grows, imports in this same sector have also increased, which translates into a deficit in the balance of trade and draws foreign resources to level it. When foreign resources do not meet the requested levels, the peso inevitably devalues, thus leading to a crisis. To avoid this scenario, exporting companies should use domestically produced inputs and temporary barriers to the importation of industrial products that are made in Mexico that are of acceptable quality and price.
 
Although open trade made Mexican firms geared to the domestic market go through a serious crisis, particularly micro, small and medium enterprises, the large Mexican firms managed to increase their exports. This increase was furthermore favored by the drastic devaluation of the peso in December, 1994.
 
Micro, small and medium enterprises must receive support to increase their competitiveness, particularly those in key sectors that can use this support to increase productivity (thus helping to increase global competitiveness in Mexico) and support import substitution or increase exports directly or by inserting into productive chains geared to foreign trade.
 
Industrial policy must aim to promote global competitiveness in the productive apparatus and not only among large companies in order to avoid recurring crises such as the crises experienced in the last two decades. It is not harmful to stimulate exports; the domestic market however must not be neglected. For the domestic market to expand in a sustainable way, the economy needs uninterrupted growth. The State must not be discarded as a generator of employment via the construction of public works (infrastructure) since this may turn out to be more fruitful than encouraging or cornering people into self-employment. Improved infrastructure and a broader domestic market favor micro, small and medium enterprises so long as they move towards market niches where they can compete in better terms and get support for this.
 
The Foreign Trade and Industrial Policy Program, which aims to respond to the objectives in the 1995-2000 National Development Plan, states that it is difficult for a small number of highly competitive firms to be able to sustain exportation efforts. They need to be supplemented by efficient import substitution and a stronger domestic market. To achieve this, it is indispensable to integrate highly competitive industrial groups with Mexican suppliers capable of increasing the national contents of Mexican exports and successfully competing in the open domestic market. For this purpose, the Program states that it is indispensable “to create a more highly qualified labor force, to lay down an efficient and competitive communications and transport infrastructure, to introduce information systems that make the best technology and management practices available to firms and to have efficient financial bodies. They must also ensure that the regulatory framework promote economic activity and that the judiciary proceedings be transparent, expeditious and low cost.”
 
We agree with these objectives. However, it is not a question of just stating them. Although the Mexican government has carried out some of these actions, they have been partial and isolated. The interviews to the managers of small firms in Monclova revealed that there is still much to be done. Industrial infrastructure is still insufficient, there is a lack of efficient financial bodies addressing the needs of micro, small and medium enterprises, these firms do not have the information they need nor appropriate technological support. Besides, the regulatory framework does not promote the stregthening of small enterprises since it is difficult to comply with tax provisions as they are complex, imply a lot of red tape and have a high cost.
 
The privatization of the steel industry promised similar actions to those in the Program. Ten years later it is obvious they were just good intentions. If they were put into practice, they would prove to favor micro, small and medium firm competitiveness and would also generate employment thus reducing the need an increasing number of Mexicans have of joining the informal market or creating self-subsistence companies, a high percentage of which soon disappear.
 
Altos Hornos’ evolution as a private firm proves the hypothesis we set forth in a previous paper: a company’s efficiency or inefficiency does not depend on whether it is private or public, but on a whole other series of elements including the way it is managed and the context within which it operates. Public policies must not aim to privatize at all costs or to nationalize out of principle. Each case must be studied without dogmatism, aiming to increase competitiveness in the national industry as a whole, have the interests of the majority of the population prevail and strengthen national sovereignty.
 
Competitiveness in micro, small and medium firms must not be based on paying lower wages than larger firms, skimping on workers’ social benefits, lengthening the working day or infringing environmental standards. When competitiveness is based on any of these elements, as often happens, it is sustained on workers’ social and economic conditions as well as on the deterioration of the environment, which generates negative competitiveness. However, when competitiveness is based on developing supply and oursourcing networks geared to promote producivity based on technological and administrative improvements in micro, small and medium firms, high quality products and environmental conservation, it can help them successfully join the productive chains of the larger firms. This competitiveness can be considered to be integral with a large scope of action and based on inter-firm cooperation.
 
Comparative advantages based on low wages or cheap raw materials are ephemeral. Nowadays, technological progress is extremely accelerated and threatens to leave the firms that do not incorporate into it out of the scene. Micro, small and medium firms need to access these advances with truthful information and support from public institutions at a national, regional and local level and from business chambers, universities, technological institues and large firms. Large firms benefit from increases in the productivity of micro, small and medium firms, since they are either direct or indirect clients or contractors. Equity must therefore rule these relations.
 
Micro, small and medium enterprises must improve management and gear it to the clients’ needs, to high quality and timely delivery. This implies involving workers, employees and executives in creating and committing themselves to permanent improvement. Continuous training, labor relations that are free of conflict and moral and economic stimuli for the workers are also needed. Micro, small and medium enterprises also need information and support to achieve this.
 
Cooperation among micro, small and medium enterprises or their associations can be of great use to them [3] . They can thus obtain different services that are out of their reach or are too costly for each firm to buy individually, such as technological, design, promotion and marketing, training, information, publicity, administrative, legal or fiscal services as well as advice as to whether to export or import, how to get funding and take advantage of industrial waste, different aspects of production and environmental conservation. They can also carry out common activities together such as sales, meeting orders or expanding the market, getting training geared to workers, employees or executives, implementing programs to increase productivity and improve quality, joint purchasing of raw materials, spare parts or machinery, advice to perform studies to raise funds, and so on.
 
The association of micro, small and medium enterprises will succeed if the members themselves come up with this initiative and it responds to their interests. Although it is convenient for different public institutions to publicize the advantages of coming together or associating, they must not create false expectations nor exert pressure for firms to join. On the contrary, the companies must be given all the information they need as well as different forms of support.
 
It is also of great importance to promote links between technological institutes and universities with companies, particularly micro, small and medium enterprises and their associations.
 
Last, but not least, the economic policy must pursue sustained economic growth and fairer distribution of its results. It is true that cyclic crises are inherent to capitalism, but an economic policy can either mitigate or aggravate them. It can also either promote a fairer distribution of income or aggravate inequality. It is essential it move towards the former with responsibility. This would favor the creation of jobs and an increase in real wages, strengthen the domestic market and the smaller companies would therefore have better conditions for development. By incorporating an increasing number of Mexicans into formal activities, the treasury’s income would increase, particularly if a fiscal reform is implemented at the same time so that those that make more, both companies and workers, actually pay more, thus restraining social unrest and its consequences. Would not it be worth it to try this alternative out with resolution, rather than leave it on paper as beautiful statements only?

[1] Rueda Peiro, Isabel (coordinator), Tras las Huellas de la Privatización. El caso de Altos Hornos de México, México, Siglo XXI Editores-Instituto de Investigaciones Económicas de la UNAM, 1994, p.19.

[2] Simón Nadima and Ramírez Dulce Janeth, “Evolución financiera de Altos Hornos de México y su crisis actual” in Rueda Isabel and  Simón Nadima (coordinators, De la Privatización a la Crisis: el caso de Altos Hornos de México, México, 2001, Miguel Ángel Porrúa Editores-Instituto de Investigaciones Económicas-Facultad de Contaduría y Administración-UNAM, p.

[3] Rueda Peiro, Isabel (coordinator), Las empresas integradoras en México. México, Instituto de Investigaciones Económicas, Siglo XXI Editores, 1997.