As Canada, the United States, and Mexico continue to debate the North American Free Trade Agreement, companies are scrambling to position themselves to take advantage of the emerging North American market. Many have come to focus on Mexico. With its plentiful and inexpensive labor force and expanding middle class, Mexico presents ample opportunities both as a manufacturing site and as a vast new market for competitors to exploit. Those searching for a way to navigate the many changes in Mexico would do well to study Vitro, Sociedad Anónima, an 84-year-old Mexican company. No organization exemplifies the newly revived spirit of Mexican competition better than this holding company with roughly $ 3 billion in sales and 44,000 highly trained and well-educated employees. Through subsidiaries like Anchor Glass Container Corporation and joint ventures with Ford, Corning, Samsonite, and Whirlpool, the company manufactures everything from glass bottles and plastic yogurt containers to suitcases and washing machines. Some of these products are destined for the Mexican market, and some are exported to the United States and overseas. One of the largest companies in Mexico today, Vitro is run by Ernesto Martens-Rebolledo, a charismatic executive who was first brought in to head the company’s container division in 1977. A chemical engineer by training, Martens studied in Canada and Germany and was CEO of Union Carbide Mexico before joining Vitro. In a major break with tradition, Martens became Vitro’s first nonfamily CEO in 1985. During his eight years in office, Martens has made some controversial decisions, including laying off 3,000 workers in 1992—a first for a company that used to claim that it wasn’t giving workers a job but was giving them a way of life. And while Martens excels in a culture that values consensus building, he also led the only hostile takeover of a U.S. company by a Mexican company when Vitro took over the Anchor Glass Container Corporation in November 1989. Martens is a rare example of a new breed of manager in Mexico, one who is equally versed in tradition and technology, culture and competition. HBR Senior Editor Nancy A. Nichols conducted this interview in Monterrey, a midsize city located 140 miles south of the Texas border, and in the country’s capital, Mexico City. HBR: How has NAFTA helped shape your strategy? Ernesto Martens: NAFTA has never really shaped our strategy; it simply confirms the trends we have seen coming for some time. We started to implement our market-oriented strategy in 1985, when the Mexican market began to change from one that did not allow any imports to a market that is open and competitive. NAFTA will make that change permanent and, in that sense, stabilize our strategy, but NAFTA does not change our strategy. The course for Mexico is set with or without NAFTA, and Vitro has few options if it wants to survive. What are the challenges Vitro faces? In 1988, when Mexico’s economy was still mostly closed, exports to Mexico from the United States of float glass, the large sheets of glass used in the construction and automobile industries, totaled $ 900,000. In 1991, exports of float glass to Mexico totaled $ 30 million. So in four years, exports grew 30-fold. In the wake of NAFTA, it is possible that exports to Mexico will grow even faster. There are more furnaces to make float glass in Texas alone than there are in all of Mexico. If U.S. producers decide to ship only the last 10 % of their production to our country, they can flood our market and drive us out of business. Sometimes I think that they break more glass in the United States than we make in Mexico. In the wake of these changes in the Mexican economy, our growth, indeed our survival, will depend on two things: how successfully we penetrate the U.S. market and how fast the Mexican market grows. Right now, for example, only 60 % of the Mexican population has washing machines. In the United States, that number is closer to 97 % . More than 50 % of the Mexican population is under 20. Now, if their income grows and their purchasing power increases, we will have a significant market to serve. How are you preparing Vitro to compete? One of the most difficult things to do in a successful company is to convince people that they must change. My challenge is to convince the people here that we can no longer be complacent in the face of world competition, that we must change and we must do it swiftly. So Vitro continues to change, making many transitions at once. We used to be a closely held company, but now we are a publicly held company listed on the Mexican Bolsa, and we recently began trading on the New York Stock Exchange. We have transformed ourselves from a Mexican company to an international company, and from a complacent competitor to an aggressive one. Vitro is a study in paradoxes. It is a company caught between the demands of Mexico’s emerging free-market economy and a corporate culture steeped in tradition. It has one foot in the old world of Mexico and the other in the new competitive global environment. For example, our workers use the most advanced German machinery under the watchful eye of Our Lady of Guadalupe. And here in our corporate headquarters, you see the heavy dark woods and whitewashed walls that were common in eighteenth-century Mexico, but our mind-set is twentieth-century capitalism. “My challenge is to convince the people here that we can no longer be complacent in the face of world competition.” We don’t want to lose our identity as a Mexican company with a unique culture and relationship with our employees, but we don’t want to be battered in the world marketplace either. And that is the tightrope that Vitro must walk. Our challenge is to change who we are without losing sight of what we are all about. How are you making the transition from the old world to the new world? Both very quickly and not fast enough. When I came here in 1977, Vitro had about $ 1 billion in sales. While we did export some to the Caribbean and to Central and South America, we were primarily making bottles and plastic containers for the Mexican market. Since the market was closed at that time, demand was fairly steady. In a closed economy, it was possible to do everything for everybody, to make everything to satisfy everyone. Just being competitive was not very relevant because the market was right there for you. In an open economy, you can’t do everything for everybody. The Mexican market doesn’t have the volume to make a company as cost competitive as it needs to be in order to compete against foreign companies that come into Mexico. We needed to go out and acquire Anchor and form joint ventures like the ones with Whirlpool and Corning. If you look at our company today, more than 50 % of our sales and more than 30 % of our assets are located outside of Mexico, and we are beginning to position ourselves to take advantage of the emerging North American market. So Vitro wasn’t well positioned when you came to the company? When I first joined the company, we were well positioned to serve Mexico’s closed economy. It was the height of the oil boom, and we were growing by leaps and bounds. We doubled capacity in a couple of years, and we branched out into plastic containers and pharmaceutical glass. We were trying to satisfy a market that appeared to have endless growth possibilities; the Mexican economy was growing by 6 % to 8 % every year. Like many other Mexican companies, we borrowed heavily—about $ 750 million—to expand. Then, in late 1981, there was a significant slowdown in demand for our containers. We couldn’t understand why. It was the first signal that something was wrong. We talked to the best economists in the country, and they said, “Well, you are just nervous because you have expanded.” We said, “No, there is something wrong.” And that’s when we decided to start looking into other markets for our products. What were the major challenges you faced in entering the U.S. market? The physical border dividing the two countries was one thing, but there was also a huge psychological barrier for us to jump over. We had to prove that we were not mañana Mexican managers and that we could produce a consistent, high-quality product. To do this, we had to get our processes under control, install the proper machinery, and find distributors in the United States who would help us get orders. We had to give samples to these distributors, but, most important, we had to prove that they should buy from us. And we had to do it all without creating too much of a stir in the United States. Why did Vitro need to be so cautious? U.S. glass producers are huge compared with Mexican producers, and they were intent on keeping imports out of their market. When we started producing glass for the U.S. market, a few of the American producers, including Anchor, waged a “Don’t Buy Mexican Glass” campaign. Instead of taking on the U.S. producers in head-to-head competition, we decided to go into returnable soft drink bottles, a dying market that U.S. glass manufacturers were abandoning. In 1960, 94 % of the soft drinks sold in the United States came in returnable bottles, but by the time we were looking at the market, that number was down to around 6 % . Aluminum cans and nonreturnable bottles accounted for the rest. “Even though we knew that the returnable market was dying, it was an opportunity for us to get into the United States without making waves.” Not surprisingly, U.S. manufacturers weren’t interested in making returnable bottles. They wanted to make single-serving bottles, which you use once and then throw away. But even though we knew that the returnable market was dying, it was an opportunity for us to get into the United States without making waves. It was a niche where we could go in and still not be a dramatic threat to the major glass producers. And we could get a reasonable price on what was, for us, a huge volume. So this was a major launch? It was a major learning process. We knew that if we wanted Vitro to be a growing company that was not completely dependent on a closed market, we had to have competitive products, competitive costs, and a small image outside of Mexico. But all this didn’t come easily. Bottles were broken during shipment, and products were held up at the border. Most important, we didn’t know how to communicate with our customers about product specifications. We had a whole combination of challenges, including finding warehouses. But our real problems began in 1982. What happened then? Overnight the peso went kaboom. It went from 25 pesos to 70 pesos against the dollar. Instead of needing $ 18.7 billion in pesos to pay our bankers in the United States, we needed nearly three times that number, or roughly $ 52.5 billion. We had the pesos, but because of currency controls, we couldn’t get them out of the country. We couldn’t pay our suppliers either. We had an executive studying at MIT, and we couldn’t pay his tuition. It was traumatic because we hadn’t failed in running our company, our country had failed. Many Mexican companies went bankrupt during this period. How did Vitro survive? The difference between Vitro and other companies was that when we borrowed the $ 750 million I mentioned earlier, we invested it in fixed assets to increase our capacity. A glass furnace burning day-in and day-out at 1,200° to 1,500° centigrade lasts 10 to 12 years before it literally burns out and must be replaced. So we invested in plant and equipment when others might have borrowed for working capital or to diversify. The other key element is that we never allowed our holding company to be in debt. Holding companies have only one source of income: dividends from their operating companies. But if the operating companies aren’t making money and paying large dividends, then there’s no way to service the debt on the holding company. Luckily, we weren’t in that position. We were able to refinance our bank debt within 2 to 3 weeks of the devaluation. That gave us the financial flexibility to acquire Anchor in 1989. Why did you acquire Anchor? We were a strategic buyer, not a financial player. Anchor has a 24 % participation in the U.S. glass container market. We saw this acquisition as an excellent opportunity for us to expand. We paid $ 900 million for Anchor in 1989 in a heavily contested hostile takeover that took more than four months. I can remember a group of us standing on the 54th floor of the World Trade Center at 6:00 a.m. on the morning we were going to launch our bid. We were surrounded by lawyers, bankers, and accountants. We looked out over the canyons of Wall Street and started to laugh. Wall Street, after all, is a long way from Monterrey. Both psychologically and physically? Psychologically, it was an enormous step for us. In general, business in Mexico is done on a consensus basis, very genteel and sometimes slow by U.S. standards. But there we were sitting across from the Anchor management team, and they wouldn’t even say good morning. Just six years before Vitro bought the company, these very same managers had heavily leveraged Anchor’s assets in a buyout. As a result, when we acquired Anchor, the company was $ 500 million in debt. Glass is a commodity product differentiated only by price. Because of the leverage, Anchor’s cost structure had gotten way out of line, so it was no longer the lowest cost producer. The company’s previous owners didn’t invest in the machinery necessary to keep its cost structure competitive. These were the same managers who wouldn’t say good morning to us. What did you do to make Anchor’s cost structure competitive? The first thing we did was a sort of triage. We had to decide which plants were most productive, had the best quality, and were the most cost conscious. Then we had to decide which facilities could be fitted with new technologies. Some of this came down to determining which plants had access to the least expensive energy—making glass is very energy intensive—and which were closest to our customers. After studying this for some months, we decided to close four plants and lay off 2,055 workers. Then we decided to upgrade the existing technology in the remaining 17 plants. How did you do that? One of our earliest strategies was to team up with people who had equity to invest as well as the best technology. In glass, that meant getting state-of-the-art technology from Owens-Illinois. As a rule, our licensing agreements allow us to use these technologies in Mexico only. But in this case, we were able to put Owens-Illinois technology into our Anchor plants and actually compete against them using their technology. This joint venture was a major opportunity to make Anchor more competitive, but it also represented over $ 300 million in sales for Fabricación de Máquinas. FAMA is our subsidiary that makes the machinery and molds used in making glass containers. This venture was just one way in which being vertically integrated paid off. Overall, we took Anchor from a $ 44 million loss in 1989 to a $ 20 million profit in 1990. This was a successful turnaround, but it was still just one piece of your strategy to go from a closed economy to an open one. Absolutely. The acquisition of Anchor was important for Vitro, but the most difficult and probably the most crucial thing we needed to do was change the mind-set of the managers, which is next to impossible to do in a successful company. We needed to get them to understand that this was a dramatic change and that we would have many challenges as we went forward. It was like trying to tell Little Red Riding Hood that she is in trouble. I kept running around saying, “The wolf is coming! The wolf is coming!” And Little Red Riding Hood just went merrily on her way. It wasn’t until the economy opened up, the peso began appreciating in value, and imports became cheaper that the realization came, “My God, that isn’t grandma; that’s a wolf.” You could actually feel it sweep through the company, this realization that the world was becoming a different place. That awareness really hit home last year when we laid off 3,000 people. Now everyone knows this isn’t a child’s game, that world competition will have an effect on everyone in this company. “You could actually feel it sweep through the company, this realization that the world was becoming a different place.” One of the things we are now working on is an incentive compensation plan that makes that concept concrete. In a closed economy, a variable compensation plan doesn’t work. We used to have one, but since no particular manager was responsible for any of our gains, it was almost impossible to know whom to compensate. Now we are trying to create a compensation plan that works for all our managers and really drives home the point that we are competing in a new environment. What else has to change in order for the company to make the transition from a closed economy to an open economy? In a closed economy, you become complacent, and you forget how to do many things. For example, in a closed economy, you don’t sell, people buy. You eventually forget how to sell and market your products, and you start overstaffing like crazy. You forget that your company needs to have the proper structure. But most important, managers’ mind-sets become distorted. For example, one manager called me at 7:00 a.m. and said, “I have a fantastic idea that will make us lots of money.” So the gentleman came up to my office and explained his idea, which revolved around my giving him two secretaries and three telephones. He thought that all you needed to do to sell glass containers was answer the phones. He wasn’t going to take any initiative. Indeed, he didn’t think it was necessary for him to call on customers. It was only necessary for him to have the correct number of secretaries to answer customers’ calls. Today we know that we can no longer take our customers for granted. Traditionally, a glass plant in the United States will run one color and one bottle style for 5 to 6 years. Here at Vitro, however, we do smaller runs and work with different colors to meet our customers’ needs. We’ve had one huge success already with the Clearly Canadian bottle. Clearly Canadian is the ultimate North American product: it is made of Mexican glass, filled with Canadian water, and sold to consumers in the United States, where it has been a big seller. “Clearly Canadian is the ultimate North American product: it is made of Mexican glass, filled with Canadian water, and sold to consumers in the United States.” The Monterrey Group: A Mexican Keiretsu by: Nancy A. Nichols Some of the best economic thinkers of our day have stopped focusing on countries and started focusing on regions as the most important vehicle for economic development. New York City has long been known for its financial acumen; Milan and Paris dominate the fashion industry; and Silicon Valley is famous for its concentration of high-tech equipment makers. Vitro, Sociedad Anónima, sits in the middle of a region that is well-known for its industrial and entrepreneurial capabilities. Based in Monterrey, Vitro is commonly included in the “Monterrey Group,” an informal collection of independent companies in northern Mexico engaged in various businesses, such as beer, steel, and chemicals. Monterrey began to bloom in the late nineteenth century, when Francisco Sada started a brewery, known as Cervecería Cuauhtemoc, to make Carta Blanca beer, now one of the most popular brands in Mexico. Sada invited his brother-in-law, an accountant named Isaac Garza, to join the company. This partnership marked the beginning of a dynasty that endured for nearly a century. Vitro’s first glass plant…the beginning of a dynasty But in the early days, Garza and Sada were short on both capital and materials. So the two entrepreneurs, in conjunction with other local families, turned adversity into advantage by integrating their company vertically. If the brewery couldn’t import bottle caps, they would start a steel company to make them. If they couldn’t get bottles for their beer, they would form a company to make the bottles. Toward that end, in the early 1900s a group of 60 investors from different areas of the country, including merchants, bankers, landholders, and small manufacturers, gathered the 600,000 pesos needed to purchase bottle-making machinery. Vidriera Monterrey was born. It was run by the grandson of the brewery founder, Don Roberto G. Sada, an MIT-trained engineer who carried on the legacy of the Sada family. As the glass business grew during the 1950s and 1960s, the company diversified and began making flat glass, dinnerware, and household glass products, followed by fiberglass. All those divisions are now consolidated into Vitro. Other local companies also expanded during this period. Throughout the mid-1970s, the steel and beer industries grew together under the auspices of one holding company named Visa. This company, together with other Monterrey-based businesses, was a dominant force in Mexico until 1973, when industrialists became a target for Mexico’s leftist movement. Guerrillas assassinated the acknowledged leader of the Monterrey Group, Eugenio Garza Sada, during a botched kidnapping attempt. In the wake of the tragedy and as part of Visa’s transition from a parochial Mexican company to a global competitor, his descendants split the company in two. Alfa, a company that started out making bottle caps, grew into Mexico’s largest private steel producer, while the brewery—still operating under the banner of Visa—became one of the largest beer producers in Latin America. Today the Monterrey companies continue to share many common business and community interests and more than a few board members. Vitro is traded publicly on the Bolsa Mexicana de Valores and now on the New York Stock Exchange. Currently, some of its directors, which include a number of Francisco Sada’s descendants (one of whom is the present chairman of the board), own approximately 20 % of the common shares outstanding, and a consortium of international investors owns another 20 % . However, the transition from a closely held company to a publicly traded company has not come easily. Vitro did not escape the insider trading violations that were common during the takeover transactions of the late 1980s. During Vitro’s acquisition of Anchor Glass Container Corporation, one Vitro executive was accused of insider trading violations. The executive’s dismissal demonstrated to the world that Vitro had completed the transition from a closely held Mexican company to a publicly traded global company ready to uphold international standards. So part of the strategy is to become a niche player? No. Our decision to enter the returnable market in the United States was a decision to become a niche player. Our strategy today is to get as close as possible to our customers and learn as much as possible from them. For example, because we worked with the Clearly Canadian people, we learned a lot about working with colored glass. Getting close to the customer allows us to exploit the market for specialized glass. The customers and the intelligence we gather from them drive the strategy. The strategy doesn’t drive what we offer our customers. That is the main difference between competing in a closed economy and in an open one. In a closed economy, you make what you want and develop a strategy to get rid of it. In an open economy, you listen to the customers and let them dictate your strategy. Since the walls have come down, we’ve had to reevaluate the way we do business in almost every way—culturally, strategically, and structurally. The only constant has been the customer’s needs. Our currency has fluctuated wildly; the technology has changed rapidly; and 50-year-old barriers that separated us from fierce competition have fallen. But our focus on the customer has remained constant. How have you changed Vitro’s structure to allow it to operate in a competitive environment? The mind-set of the manager who wants three phones and two secretaries can create overstaffing problems. One of the small ways I am trying to change the company is by creating pools of secretaries, which are very common in the United States but almost unheard of in Mexico, where there is a tradition of personal service. I hear from my managers that secretaries who have joined the pools are being taunted by the other secretaries, who say, “Why are you working for seven people and getting paid for serving only one?” So I must tell these new secretaries not to get coffee for anyone, write checks for managers’ wives, or type their children’s homework. I tell them they are professionals. It is all part of changing the mind-set of the people in our company from one of loyalty to a particular manager to one of loyalty to the customer. I have had to convince each and every one of our employees that it is the customer who feeds them and it is the customer to whom they owe their loyalty. And, by the way, this isn’t something that only Vitro must accomplish; it is something that every Mexican company must do. Part of the challenge for Vitro, however, is completing the change from a traditional Mexican company, run mainly by family members until the 1960s, to a publicly run company. Yes, in part. Many of the people here are second-or third-generation employees whose loyalty is to particular individuals or managers. Part of making Vitro competitive is going to be teaching these people how to work in an environment where their allegiance must be to the customer, not just to certain individuals or businesses. For example, it used to be very difficult for me to get managers to do succession planning, to sit in a room and say that one person is doing well and another person isn’t. It just wasn’t considered polite or politic in Mexican society to criticize people openly or even talk about their weaknesses. We’ve changed that, and we now do succession planning once a year in a room with all our division presidents. We no longer hide our talent or our problems from each other. For years, we were very secretive around here. We used to hide our mission statement among confidential papers. Can you imagine that? What good does it do to hide your mission statement from the people who must carry out the mission? Now we’ve had our mission statement printed on large cards and placed on easels in the front entrance of our building where everyone can see them. Can Vitro change faster than Mexico? We must change faster than Mexico. We must change Mexico’s infrastructure. We must change its railroads. Railroads are more expensive in Mexico than in the United States, but they run at one-third the speed of U.S. railroads. This won’t change overnight, but now that the economy is open, we must overcome that setback and still compete. But hasn’t your country put you in a very difficult situation by forcing you to compete without adequate infrastructure? That’s right. There are a number of problems in Mexico that affect our ability to compete: high interest rates, the unavailability of long-term debt, and the premium that we must pay to borrow dollars because Mexico is still considered a high risk. There is a four-hundred basis point surcharge for us to borrow in dollars, and that is still cheaper than trying to borrow in pesos. When the Swiss lend to a Mexican company, for example, they have to put 65 % of the money they lend into a special reserve. As a result, our cost of capital is outrageously high. Still, if we make the most of Mexico’s competitive advantages, we should be able to find a significant number of products with which we can increase our exports to other parts of the world. One logical market is the United States. What are Mexico’s competitive advantages? I would say that Mexico’s key advantage is being close to the largest market in the world. It is very expensive to ship glass bottles, since what you are really doing is shipping air. Most of the major glass producers are within 200 miles of a major brewery and population center. That’s why our company was built in Monterrey, after all: to be as close as possible to the brewery. In addition, Mexican workers are highly productive. You can talk to General Motors, and they’ll tell you that their most productive plant is in Saltillo. If you talk to Ford, you’ll discover the very same phenomenon. Ford’s plant in Hermosillo is one of the most, if not the most, productive facilities that they have. This is because Mexican workers know no limits. I remember when I was at Union Carbide overseeing the production of carbon for batteries. Headquarters thought we should be making 45 units per shift, but our workers didn’t know that. Soon they were producing 118 in each shift. They didn’t know that they weren’t supposed to make that many. Productive, however, is different from cheap. You’ll notice that I’m not counting labor costs as a competitive advantage for Mexico. That is only a temporary element. In time, wage rates in Mexico will get close to the rates in Japan and Germany. But it isn’t just a question of wages. There are many unique benefits that you give your workers. Yes. Many of our workers are very poor by U.S. standards; 90 % do not own cars. As a consequence, we give our workers access to wholesale food goods delivered directly to their homes, and we also subsidize their midday meals at the plants. And as I’ve said, Mexican workers are extremely family oriented. The mobility of Mexican workers is very limited, because they do not want to go far from their families. So we have created a club where 14,000 families can come together and swim or play tennis. And we also provide cultural facilities, such as a glass museum. During this transition period, when we are trying to move from the way we have done things in the past to the way we will do things in the future, one of the most critical decisions we must make is what elements of our culture we must respect and which we must try to change. There is a great deal of value in the moral and spiritual way in which business is conducted in Mexico. So there are a number of important cultural elements that we must be sure to carry into the future. Our strategy for many years has been to grow from what we know. And our knowledge is not just technical, it is linked to very strong beliefs about how to conduct ourselves in the world. There is no question that a significant number of Mexican companies will not be able to make this transition. They will need to change the way they operate, or change the products that they create, or both. I think that there are many Mexican companies that will not survive. They will disappear just like foam in beer. Indeed, one trade association estimates that only 30 % of Monterrey’s plastics companies will still be viable in 5 years. What roles have joint ventures played in your survival strategy? We started our joint ventures about 30 years ago. When Mexico’s economy was closed, we wanted to make sure we had the best technology. Naturally, we looked for companies that were either number one or number two in the world. For example, we have the right to use British technology from Pilkington Brothers to create float glass. Then, over time, our strategy changed. In 1979, we joined forces with Ford to gain access to technology and to be close to the markets. Not only did we learn how to make auto glass, but also we learned a lot about the U.S. markets. Most recently, we have created joint ventures with Corning and Whirlpool. In these ventures, we are producing both for the domestic market and for export, but we are also using these alliances to import products for the growing Mexican market. So instead of manufacturing products to sell in the United States, the purpose of the joint ventures is to bring products into Mexico to sell? It’s a two-winged concept. First of all, we take advantage of Mexico’s productive labor force to create economical products for world markets. But at the same time, we use these joint ventures to bring high-end products to the growing Mexican market. So we are also fulfilling a need in Mexico. Then, when the demand in Mexico is large enough for this type of product—say top-of-the-line refrigerators and washing machines—we can justify manufacturing them here. That’s why we need a country with a healthy economy, where people can grow into more significant jobs with more earning power. We can come up with modern marketing techniques to get people to buy our products, but we cannot increase the purchasing power of the Mexican people by ourselves. Are these the kinds of strategies that have made people say that you were on the road to NAFTA before there was a NAFTA? We have been anticipating the NAFTA agreement for some time. The one thing that has become clear to me throughout this transition is that the competitive forces shaping the world’s markets are now stronger than any government policy. In that way, the transition that Vitro is going through is hardly unique. In an open economy, everything is driven by global competitive forces, and very little is driven by a country’s policies. All that managers can do is respond quickly and efficiently to the competitive forces shaking their companies and their countries.
