German design: Germany's post-Nafta trade with Mexico is delivering some powerful punches.

German companies from Bosch to BMW are thriving in Mexico under Nafta, but they say their own free-trade agreement with Mexico has yet to make its mark and Europe's trade officials should do more to promote it.

Germany, as a member of the European Union (EU), is party to the most sweeping

free-trade deal signed by the EU outside its region and the first of its kind between the EU and a Latin American country. The commercial pact signed in March 2000 between the EU and Mexico, has cut tariffs and spurred business in Mexico and Europe. But the accord, say German trade officials, remains completely overshadowed by Nafta.

"If you asked people in Germany, 'Have you heard of the European free-trade agreement with Mexico?' 99 people out of 100 would say they had no idea," says BMW de Mexico General Director Franz Jung.

In April, BMW launches a completely remodeled edition of that archetypal British car, the Mini Cooper, on the Mexican market. The Bavarian automaker says it expects to sell 1,600 of the sporty motor cars this year for around US$25,000 apiece. Jung says the European free trade deal helped make importing the cars from Oxford, England, "a little cheaper." What he would like to see is more active EU lobbying on behalf of German companies here.

"They (the European Union) are not making enough noise. They have to do much more advertising in both countries to push that free-trade agreement," says Jung.

More must be done, concedes Manfred Hoffman, director of the Germany-Mexico Chamber of Commerce and Industry (Camexa).

"Some 85% of Mexico's external trade is with the United States and Canada, and barely 5% to 7% is with the whole European Union," he says.

"These are such extreme figures that we think we need to work to diversify a little."

"What worries us is that in recent years the trend has accentuated. Trade with Europe has fallen while trade with the United States and Canada has increased even more," he adds.

Germany's share of Mexican trade with the rest of the world fell from 2.8% in 1993 to 2.3% in 2001. In the same period, Mexico's trade with the United States rose from 75.2% to 77.7%, according to preliminary figures produced by the Economy Secretariat.

Gloomy headline trade figures, however, belie the fact that the boom in commerce between Canada, Mexico and the United States has been a bonanza for German companies too. Nafta gives German manufacturers in Mexico a launching pad to attack the North American market, as President Vicente Fox noted during Chancellor Gerhard Schroeder's visit to Mexico in February. The European country's carmakers and autoparts producers will be among the main beneficiaries in 2004 when Nafta removes all barriers to trade in the market for new cars in Mexico, Canada and the United States.

PIGGY-BACKING NAFTA

On Jan. 1, 2004, Nafta abolishes a decree requiring automakers to build a certain quantity of Mexican-made parts into their vehicles thereby completing a 10-year phase out of restrictions to commerce in autoparts between the three countries.

"It (Nafta) is of great importance because it has generated exports to the United States and Canada" thanks to reduced customs duties, says Guillermo Sartorius, a spokesman for Robert Bosch S.A. The German company's Mexican subsidiary sells nearly all its production of ignition systems and other electrical autoparts to assembly plants in North America, and only a fraction to Europe and Brazil.

Other major players in the sector are similarly eulogistic.

"We didn't sell anything to the United States before (Nafta), now we sell 45% of our products there," says Eckart Miessner, general director of Grupo Hemex, the Mexico subsidiary of automotive lighting manufacturer Hella K.G. Hueck & Co.

German parts producers like Hemex have integrated themselves into the wider North American auto industry. They are moving outside their traditional customer base to serve U.S. and Japanese carmakers too. Hemex's sole customer when it arrived in Mexico in 1962 was Volkwagen's factory in Puebla. Now it supplies to BMW's Spartanburg plant in South Carolina as well as DaimlerChrysler, Ford, General Motors and Nissan. It recently invested US$12 million on the expansion of its Tlalnepantla, State of Mexico plant, to prepare for the advent of the unified auto market.

A more recent arrival, Remscheid, of Germany-based Edscha Gruppe, chose San Luis Potosi as its Mexico manufacturing center in 1997 because of the city's location on the highway to Laredo, Texas.

"The plant has acted as a platform for the group to penetrate the North American market," says Manuel Estandia, director of Edscha Mexico's San Luis Potosi plant. Edscha Mexico makes door hinges and door checks for BMW, GM, Ford and VW assembly lines in Mexico and the United States.

Germany's giant industrial conglomerates such as BASF have long recognized Mexico's potential as an export platform to regional markets.

"We've been here since 1989 and have invested US$400 million in five different production plants," says Frank Zeller, BASF Mexicana's head of corporate communications.

The chemicals company started additional construction on its plant in Altamira, Tamaulipas, which will make styrolux, a plastic polymer used to make medical instruments.

"Most of our exports go to the United States and Latin America. We're not much involved in trade with Europe," he says.

Another German giant, engineering company Siemens A.G., has been involved in the modernization of Mexico's state-run oil company, Petroleos Mexicanos (Pemex). Siemens installed the electrical control systems for Pemex's refinery at Cadereyta, Nuevo Leon. The upgrade will nearly double the refinery's production of gasoline, diesel and kerosene by 2005, Pemex has said.

Pemex's tortuously slow move toward greater refining capacity is expected to benefit other companies. Ferrostaal Mexico, for example, is a German mechanical engineering firm that supplies steam and gas turbines to Pemex for crude oil production but hopes to find new refinery business with the company.

"Pemex is living off its primary production: exporting crude but importing gasoline. They will have to modernize more of their downstream output," says Miguel von Oppen, general director of Ferrostaal Mexico.

OLD WORLD CHARM

Not all German firms in Mexico are behemoths seeking to carve themselves a slice of North America. Many are medium-sized and still look to Europe.

Joaquin von Dewitz came to Mexico 30 years ago from northern Germany and in 1978 started making medical instruments. Today the company he founded employs nearly 200 people in Mexico and has annual sales of US$15 million.

Von Dewitz says profits are rising as the European free-trade accord lowers duties on imported surgical equipment. "Tariffs have fallen from 23% to between 2% and 10% depending on the products," he says.

"We should make the possibilities of the free-trade agreement with Europe known to Mexican industrialists," says Grupo Hemex's Miessner.

Part of the problem, it seems, is that the EU's executive body, the European Commission, sees itself as a neutral arbitrator between the bloc's member nations and is unwilling to promote trade on their behalf. Another is that it's arguably still too early to judge. While some bilateral tariffs, such as those on beer, have already been abolished, others like car import duties won't be entirely gone until January 2007.

Even so, some Mexican companies are doing well despite the nation's traditional wariness of the European market. Jose Pares, director of investor relations at beer maker Grupo Modelo says selling the famous Corona Extra beer to the notoriously demanding Germans has been "no problem."

Still, obstacles remain, says Camexa's Manfred Hoffmann.

"There is the distance, the mentality, different languages and so on. It's absolutely logical for Mexican business that when they move outside their country, they move to Texas or California, not to Italy or Germany or Greece. All of that is very distant, very exotic and very complicated," he says. "But it's a big challenge for us to work at."

Andrew Watson is a freelance writer and a finance reporter for a Mexico City daily.