Schedel, Ken K.

English

Research Papers in Economics

Agribusiness' Response  To Globalization:
The Mexican Experience
Ken K. Schedel
Globalization is now one of the buzzwords  of  Working  in  this  environment  involved  the
business,  and  just  like  every  new  buzzword,  it  development  of  standard  operating  procedures
takes  on  a different meaning for different people,  (SOPs) that stressed supply management, low cost
different  national  contexts,  or  different  business  production,  and  schemes  designed  to  get  around
segments.  To begin to understand the response of  government  controls  and  regulations.  For  many
Mexican  agribusiness  to  globalization,  it  must  Mexican  agribusiness  companies,  these  SOPs
first be put into context.  have led to long-term survival and extensive  prof-
Throughout  most  of  the  twentieth  century,  its from operating in the Mexican market.
Mexico's  economy  was  relatively  closed.  At  the  For  foreign  companies,  the  Mexican  market
same time, the state played  an important role, both in  also  proved to be  attractive.  Since  market  develop-
setting economic policy  as well  as in being  directly  ment through  exports was,  in many  cases, not a  vi-
involved  in  production  and  distribution.  In  fact,  able  option,  they  opened  operations  in  Mexico.  To
some observers of the Mexican business scene opine  the extent possible, many  were wholly owned  affili-
that  Mexico's  industrial  sector,  as  it  existed  up  ates focusing on the domestic Mexican market.
through the last decade, was the creation of the post-  What  does  globalization  have  to  do with  all
World War II Aleman presidential Administration.  this?  For  Mexican  agribusiness,  globalization
Whether  that  be  true  or  not (the  purpose  is  means  the  end  of these  long entrenched  ways of
not  to  discuss  the  origins  of Mexico's  industrial  doing business  because  of increased  competition
sector), Mexican  business  grew and prospered in a  and due to radical  change  in the relation between
closed  economic  environment-where,  I  would  the state  and  private sector. the state and the private sector. argue,  one  of the  most  important  functions  was  G,  fr  M  n  ..  .,,  "  .,  Globalization,  for  Mexican  agnbusmess, negotiations  with  the  government  over  a  wide  . ,  . came  about in  the context of a massive  structural
range of issues ranging from minimum wage rate,  . *.  ~ *,~ i.~.  '-~  ~change  reform  in  the  country.  The  challenge  of pnrice  levels, import protection, etc.
price  levels,  import protection,  etc.  Mexican  agribusiness  has  been,  first,  to  under- For agribusiness, as  opposed to other industry  s 
segments, operating in Mexico meant dealing in and  t  po  ent a  competitive
even more restrictive and closed environment. The  foes and then to position itself-that  develop
Mexican  Constitution  placed  strict  limits  on  land  strategies-to survive and prosper.
holdings  and  recognized  distinct  types  of  land-  Among  many  companies,  the  first response
tenure  schemes.  It  did  not  allow  for  corporate  was  one  of disbelief.  That  is,  they  did not  really
farming. Since food represents  an important part of  think that the  government  would  go  through with
the  average  consumer's  total  expenditure,  many  the  proposed  reforms.  Now  that they  see  it  as  a
items were under price controls. Also, imports were  reality,  the  response  of a portion  of them-espe-
tightly  regulated,  not only  to protect local  farmers  cially  the  smaller  companies-has  been  to  apply
but during certain periods,  in an effort  to  attain (at  pressure  to  turn  back  the  clock.  While  not  large,
least on paper) food self-sufficiency.  but  loud,  they  have  argued  for  renegotiations  of
Probably even  more important was  the direct  the  North  American  Free  Trade  Agreement
state involvement  in  the production  and  distribu-  (NAFTA).  Probably  more  realistic,  however,  is
tion of food products. This was not only based on  the pressure not to  open food and agribusiness  in
perceived  political  advantages,  but among  certain  the  negotiations  with  the  European  Union  to  the
policymakers,  there existed  a  deep  distrust of the  extent that took place with NAFTA.
market  system as  a tool  for food  distribution.  In  That, of course, is the political response. What
fact, at one time, there was a freeze  on supermar-  has  been  the business  response?  Probably  one re-
ket construction in the Mexico City area.  sponse is to go out of business. While it may  sound
cynical,  this  is  what  is  happening.  In  the  oil-
Ken K.  Schedel, Rabobank  crushing industry, there were more than 80 compa-18  March 1999  Journal  of Food Distribution  Research
nies  operating  before  the  country  opened up; now  faced with essentially two choices: (1) entrench or
there  are  less  than 20.  This number will even  fur-  (2)  grow.  The  first  was  not  really  considered  an
ther dwindle  to  maybe  less  than  10,  with  three  or  option.
four companies dominating the market.  Originally,  we  had  planned  to  grow  inter-
The response of those left has been  to rethink  nally,  strengthening  our regional  presence.  How-
the way that they  do business. This has resulted in  ever,  we  were  presented  with  an  opportunity  to
a  rapidly  changing  industry  structure,  character-  buy another company  located  in the north  central
ized  by  growth,  consolidation,  and  spin-offs,  city  of  Monterrey.  The  acquisition  of this  com-
which  are  many  times  achieved  through  joint  pany  would  turn us into  the  largest feeder  in the
ventures, mergers, and acquisitions.  country and give us a national presence.
Typically,  M&As  have  been  seen by  corpo-  The  decision  to  buy  was easy;  even  the  ne-
rations  as  instruments  of revenue  growth,  espe-  gotiations were  not that difficult.  The real prob-
cially  by  U.S.  business.  I believe  that,  today,  in  lem was  the financing.  Our  first  option  was  to
Mexico,  M&As-along  with joint  ventures-are  look for bank  financing  and  private  placements.
key  instruments  in  business  positioning  and  de-  To  our surprise  we found that  we  were  not ade-
velopment.  quately  structured  financially.  We  underwent  an
In  order  to  survive,  Mexican  agribusiness  internal  restructuring  and  also  restructured  a
companies  look  to  M&As,  along  with joint  ven-  number  of  credits.  Nevertheless,  we  did  not
tures, as a source for the following items:  count on the banks'  lack of understanding  of the
way agribusiness  is  structured  and  operates.  Af-
(1)  growth to turn them into truly national players,  ter negotiations  with  one of the larger banks  fell
achieving  economies  of  scale  and  product  through,  we  turned  to  other  options-two  in-
segment importance, if not domination;  vestment  funds,  Baring  and  Dalby.  We  got  the
money  and  bought  the  Monterrey  company,  but
(2)  technology,  not only  in  product  production  we  also  gave  up part  of the control  of our com-
but  also  in  management,  marketing,  and  pany to these two funds.
distribution;  The  experience  of the Mexican  oil-crushing
(3)  access  to  new, especialindustry  demonstrates  another  scenario.  The local (3)  access  to new, especially foreign markets;  industry  has  also  been  dominated  by  family- industry  has  also  been  dominated  by  family-
(4)  access  to  capital,  which  becomes  especially  owned  companies.  For  many  of these  same  rea-
important  in  the  high-cost  Mexican  credit  sons,  they  also  looked  for JV  partners.  But, also
market; and  for  these  same reasons,  they  have  not  been  suc-
cessful.  Probably  the main  reason  is  that  they  do
(5)  specialization  and  product-line  expansion, as  not  want,  nor  are  they  willing,  to  give  up  any
the realization  sets in that they cannot, nor do  control.  Also,  as  important,  many  of these  same
not,  have  to  produce  everything  and  espe-  companies  have  not  made  any  necessary  invest-
cially  as they  come  to  understand  that their  ment in equipment and plants nor have they made
distribution  system  management  is  a  source  any  significant  adjustments  to  the  manner  in
of competitive advantage,  which they conduct business.
They have  looked  for JV  partners  as  I said.
Let me expand  on these points  using the pri-  Some large multinational  companies  explored the
mary  example  of a Mexican  cattle  operation,  of  options,  yet  nothing  materialized.  What  has  hap-
which  I  am a partner.  The company  is  located  in  pened,  however,  is  that the  multinational  compa-
the  northwest Mexican  city of Culiacan,  which  is  nies have  decided  to  go it  alone,  or they  are  ex-
also known for being  the center of the traditional  ploring  the  possibilities  of such.  Cargill  did just
winter  export  vegetable  market.  It  began  as  a  that  by  opening  a  large  crushing  plant  about  50
family-run  cattle  marketing  operation  that bought  miles north of Mexico.
and  sold  cattle. As  is typical  with  many Mexican  There are, however, a number of examples  of
agribusinesses,  in  order  to  assure  the  supply  of  successful  JVs.  Many  of  them  have  provided
cattle,  the  company  moved  into  feedlots  and,  fi-  Mexican  companies  with  technical  expertise.
nally,  into  meat  processing.  With  the  changes  VITEP-a poultry group located  in Jalisco-part-
taking place  within the domestic  market,  we were  nered  with  Emery-a  Canadian  company  thatSchedel, Ken K.  Agribusiness' Response to Globalization:  The Mexican Experience  19
supplies machinery to  make egg  cartons. For Em-  Some  areas  of  the  marketing  chain  man-
ery,  this has been  a relatively  "easy"  way to enter  agement  are  still  slow  to  change,  especially  as
into the Mexican  market.  they  refer  to the  relationships  between  producer
The market  for  acquisitions  has  been  active  and  processor.  However,  both  the  legal  and
as  is  evidenced  by  the  following  examples  from  regulatory system have mitigated against  change.
last year:  Contract  law  still  provides  adequate  protection;
also,  the  lack  of  clearly  established  norms  and
*  Choc Milk sold to Bristo Mayer.  standards  limit these  types  of vertical  coordina-
*  Corinter sold to Desc.  tion  arrangements.  For the  animal  industry,  this
*  20 percent Maseca stock sale to ADM.  has  meant  that  processing  companies  are  back-
*  Zwanenberg sold to Kir-Sara Lee.  ward-integrated,  which  guarantees  both  supply
and quality.
This year,  with  the  changing  world  financial  There  is  movement  in  some  of  the  large
situation, the interest to look for business opportuni-  milling  companies  to  work  with  growers  for
ties remains strong. Probably the major difference  is  wheat and  corn.  The schemes  vary,  but they  gen-
that they have become somewhat more selective and  erally  involve  some  form  of technical  assistance
are  driving harder  deals. Nevertheless,  this year has  and  support  for  access  to  credit:  The companies,
seen  Grupo  Quan  sold to Unilever, Mrs.  Birds sold  in return,  purchase the  grains. It  is the buying ar-
to Bimbo, and La Victoria sold to Desc.  rangements  that  have  tended  to  make  this  work,
Probably  the  most  interesting  phenomenon,  stressing  reception  stations  and  agile  payment
which  represents  a  radical  change  in  business  procedures.
thinking, is that  of Mexican  companies  now han-  Also, the  role  of the  central  wholesale  mar-
dling  "like"  products  of foreign  suppliers.  Bac-  ketplace  remains  strong  in  the  market  system.
coco  is  doing  this  with  turkey  products.  Alpura  This  will be  slow  to change for a number  of rea-
distributes  Midland  Farms  products  in  northern  sons: (1) Small-sized consumer outlets still supply
Mexico.  the  majority  of  consumers,  and  small  farms  re-
Moving  away  from  acquisitions  and  JV,  at  main the rule rather  than the exception;  (2) while
the  cattle  company,  we  have  supported  the  the  Mexican  market  wants  quality,  the  quality
dumping  demand  against  U.S.  meat.  I would  ar-  market has not really been  developed;  and (3)  the
gue that  this is  part of our  short-term  strategic re-  central  market  places  an  important  role  on  risk
action  to growing globalization.  It is not part  of a  management-even  if it is sometimes  shifted back
longing  for the past but a recognition of the hard-  to growers.
ball nature of international trade.  Also, the  central  market  reduces the  need to
Our  market  strategies  are  not  limited  to  maintain  an  in-house  distribution  system.  Some
blocking  imports.  We  are  exporting  into  the  companies,  of course,  will handle  their  own  dis-
southern  California  market.  We  do  not  see  our-  tribution;  the  best  examples  are  Bimbo  and  Sa-
selves  as  ever  becoming  major  suppliers  to  the  britas. Most others will do some of it in-house and
U.S. market:  We cannot compete with  companies  distribute  the rest through  wholesalers  or through
like  IBP.  But  we  do  see  ourselves  as  low-cost  a contract-type  relationship.
suppliers  to  this regional  market.  Also,  exporting  To  conclude,  what  can  we  say  about  the
into  the  United  States  has  forced  us  to  adapt  to  Mexican  reaction:  The food  industry  is undergo-
market  disciplines that strengthen  our position  on  ing  a  radical  change  in  the  way  they  operate.
the domestic market.  Of course, having part of our  M&As,  as  well  as joint  ventures,  are  playing  a
income in hard currency does not hurt either.  role  in  (1)  the  acceleration  of the  consolidation
The  other key  part  of our  strategy  is  to de-  process  but  also  in  (2)  the  support  of changing
velop branded  meat. We are now test-marketing  in  business  procedures  and  focuses.  M&As  have
Comercial  Mexicana.  To  the  extent possible,  we  both  strengthened  the  position  of Mexican  com-
have  innovated  in  packaging  by  displaying  meat  panies while, at the same time, they have provided
in a  distinctively colored  tray.  We are  now  in the  a springboard for foreign companies  to move into
process of trying to patent the packaging.  the Mexican market.

AGRIBUSINESS' RESPONSE TO GLOBALIZATION: THE MEXICAN EXPERIENCE

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Research Papers in Economics