VZCZCXRO8131
PP RUEHCD RUEHGD RUEHHO RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHMC #0010/01 0092049
ZNR UUUUU ZZH
P 092049Z JAN 08
FM AMCONSUL MONTERREY
TO RUEHC/SECSTATE WASHDC PRIORITY 2637
INFO RUEHME/AMEMBASSY MEXICO PRIORITY 3501
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHMC/AMCONSUL MONTERREY 7974

UNCLAS SECTION 01 OF 04 MONTERREY 000010 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON ETRD PGOV PREL MX
SUBJECT: MONTERREY: A NAFTA SUCCESS STORY 
 
REF: A) MONTERREY 700; B)MONTERREY 783; C) MONTERREY 801; D) MONTERREY 942; E) 
 
MONTERREY 943 
 
MONTERREY 00000010  001.2 OF 004 
 
 
¶1.  (SBU)  Summary.  The state of Nuevo Leon and its capital 
city of Monterrey have benefited greatly from NAFTA, with huge 
leaps in manufacturing exports and employment.  Nuevo Leon faces 
stiff international competition on basic manufactured goods but 
hopes to move to higher value added products.  In the political 
realm, there is a pro-business consensus between the local PAN 
and PRI politicians, while the left-wing PRD has little 
influence.  Although Nuevo Leon recognizes that there is an 
economic gap between Northern and Southern Mexico, it does not 
see additional aid flowing to the poor states in the South as a 
solution.  Instead, leaders here believe that the South should 
improve its work ethic and business climate to resemble Nuevo 
Leon.  Nuevo Leon is truly an example of NAFTA success, but its 
transformation is remains incomplete;  the state still suffers 
from the common Mexican maladies of monopolies, high energy 
prices, corruption and lack of security.  End Summary. 
 
¶2.  (U)  Nuevo Leon lies in a rugged desert terrain with few 
natural resources.  This area was sparsely populated from Mayan 
times until the 19th century.  The people of Nuevo Leon boast 
that the harsh environment created a strong work ethic that has 
helped them build an industrial economy.  Industrial growth 
began in the 19th century, first when Monterrey served as a 
staging ground for funneling goods to the Confederacy during the 
U.S. Civil War and later through the establishment of a steel 
industry and brewery.  These industrialists furthered 
Monterrey's development by founding the Monterrey Technological 
Institute (Monterrey Tec), a highly regarded private university 
system, to train managers and engineers.  Nuevo Leon is also 
strategically located on trade routes into the United States. 
Therefore, as Mexico has opened its economy, Nuevo Leon was well 
positioned to capitalize on its industrial base and location to 
export goods to the United States. 
 
Nuevo Leon's Economic Success 
 
¶3.  (U)  Nuevo Leon has consistently outperformed Mexico in 
terms of per capita income, economic growth, investment, 
education, and poverty reduction.  According to statistics from 
the Nuevo Leon Secretary of Economic Development (SEDEC), Nuevo 
Leon had a per capita gross domestic product (GDP) of $13,096 
compared to $8,135 in Mexico overall in 2006.  The population of 
Nuevo Leon is 4 million people, of which approximately 80% live 
in the Monterrey metropolitan area.  However, although only 4% 
of Mexicans live in Nuevo Leon, according to data from the 
Mexican Secretary for Economic Development, Nuevo Leon accounts 
for 7.5% of Mexico's GDP, and 9.9% of its manufacturing. 
Moreover, Nuevo Leon's economy has consistently grown faster 
than Mexico as a whole.  Nuevo Leon achieved an average 4.2% GDP 
growth from 2000-2006, compared to Mexico's overall 2.9% overall 
growth rate, calculated by averaging the growth from 2000 to 
¶2006.  Nuevo Leon's manufacturing industry grew 2.8% per annum 
from 2000-2006 compared to the national average of 1.6%.  Note. 
Several Nuevo Leon sources offered slightly different 
statistics, so we used the more conservative figures. End Note. 
 
¶4.  (U)  Nuevo Leon has also captured a robust share of foreign 
direct investment (FDI) harvested by Mexico since the inception 
of NAFTA.  According to the Mexican Secretary of the Economy, 
from 1994 to 2006 the Federal District (Mexico City) received 
57% of FDI, followed by Nuevo Leon with 11%, the State of Mexico 
6% (located adjacent to the Federal District), Baja California 
5%, Chihuahua 5%, Jalisco 3% and the other 26 states received 
13% of FDI.  Nuevo Leon did even better in 2007, attracting $1.8 
billion in FDI, a 26% increase over 2006, and according to state 
officials these investments have reportedly created 13,000 jobs. 
 Moreover, the Nuevo Leon Maquila Association expects 14 
maquilas to invest between $350 and $550 million in Nuevo Leon 
in 2008, emphasizing automotive, aerospace and metals.  The FDI 
investment in Nuevo Leon has long been concentrated in 
industrial manufacturing, although there have also been 
significant investments in financial services.  In 2006, for 
example, 75% of the FDI was invested in industrial manufacturing 
and 16.5% in financial services. 
 
¶5.  (U)  Nuevo Leon has greatly increased its export 
manufacturing sector since 1995, demonstrating the benefits of 
NAFTA.  According to Nuevo Leon numbers, from 1995 to 2006 the 
number of Maquila companies manufacturing for export increased 
from 84 to 208 (147% increase), the number of employees rose 
from 27,116 to 72, 472 (167%), they increased their imports of 
inputs from 6,090,451 to 54,881,488 millions of pesos (801%), 
and their value added increased from 1,646,625 to 23,919,706 
millions of pesos (1,353%).  Interestingly, the ratio of Mexican 
value added to total value (including imported inputs) increased 
from 22% to 29% from 1994 to 2000, but only rose to 30% by 2006, 
 
MONTERREY 00000010  002.2 OF 004 
 
 
suggesting that Mexico has not moved strongly to develop 
supplier industries. 
 
¶6.  (U)  Nuevo Leon's overall manufacturing has also increased, 
although more modestly than export production.  According to the 
National Institute of Statistics, Geography and Information 
(INEGI), Nuevo Leon's overall manufacturing employment increased 
from 142,553 in 1995 to 159,785 in 2006, a modest 12% increase, 
and the value of manufacturing products rose from 56,931,687 
million pesos in 1995 to 248,783,799 in 2006, a 336% increase. 
The small increase in overall manufacturing employment suggests 
either increased productivity or a decline in manufacturing 
production for the domestic market.  INEGI reports that 
manufacturing provided 33% of the formal employment in Nuevo 
Leon, followed by business and personal services (24%), commerce 
(19%), construction (10%), transport and communications (7%), 
social services (7%), and agriculture and mining combined 
provide only 1% of employment.  In the formal sector Nuevo 
Leon's manufacturing jobs are primarily permanent, comprising 
84% of the jobs, but that is slowly decreasing.  In 2006 Nuevo 
Leon created 73,218 formal jobs, but only 42,740 (58%) were 
permanent, so temporary employment is increasing its share. 
 
Educational and Poverty Reduction Success by Mexican Standards 
 
¶7.  (U)  Nuevo Leon also surpasses the national averages for 
education, although the results are still poor in comparison to 
international standards.  The average Nuevo Leon worker has 10.1 
years of formal education, higher than the national average of 
8.7 years.  According to the international test PISA 2006 of 15 
year olds, Nuevo Leon scores the highest of all 32 Mexican 
states in reading, is 3rd in math and ranks 4th in science. 
However, Nuevo Leon's academic achievements are still low.  In 
reading, for example, 29% of students score at levels 0 to 1 
(insufficient to advance in school and work in a knowledge 
society), 32% were at level 2 (the minimum adequate in 
contemporary society), 37% were in levels 3 to 4 (good but below 
the highest cognitive level) and only 1.5% at the highest level 
¶5.  Similarly, in math 45% of Nuevo Leon students were in levels 
0-1, 29% in level 2, 25% in levels 3-4, and only .8% in level 5. 
 The scores were much the same in science, where 37% of students 
were in level 0-1, 37% in level 2, 26% in level 3-4, and only 
.3% in the highest level 5.  Similarly poor results were shown 
in the 2006 ENLACE test, with students performing at 
significantly worse levels in Spanish and math in secondary 
school than in primary school, indicating that students fall 
behind international standards while enrolled in Nuevo Leon 
schools. 
 
¶8.  (SBU)  Nuevo Leon scores higher than the national average in 
technical education, educating 17% of the total of all Mexican 
students (defined as industrial or commercial training after 9th 
grade). However, Nuevo Leon was only slightly above average for 
university and postgraduate studies (6% of Mexico's total), but 
slightly below average in professional technicians (students 
with 2-3 years of education beyond high school), with 3% of the 
Mexican total, and only 621 professional technicians graduated 
in 2006.   The relative lack of professional technicians tracks 
comments from businesses that it is hard to attract highly 
trained technicians, because educated Mexicans aspire to 
business or law degrees.  Nuevo Leon does have several strong 
universities, led by the private Monterrey Tec, the University 
of Monterrey, and the state Autonomous University of Nuevo Leon, 
and Nuevo Leon has over 150,000 university students.  There are 
also several prestigious business schools.  The U.S. firm 
Halliburton has sought to take advantage of the supply of 
trained English-speaking engineers here by outsourcing some of 
its petroleum work to Monterrey.  The Indian software giant 
Infosys told Econoff that they have been pleased with their 
recruits from Nuevo Leon.  Infosys gives all of its candidates a 
test for technical proficiency, and the Mexican engineers have 
tested at a similar level as the engineers in India. 
 
¶9.  (U)  Nuevo Leon's wealth is also reflected in its relatively 
low poverty rates.  Among Mexican states, Nuevo Leon has the 
third lowest level of poverty in Mexico, 27.5%, far better than 
the national average of 47%, and the proportion of poor lacking 
food is even less, with 3.6%, much better than the national 
average of 18.2%.  In Nuevo Leon only 2.77% of the population 
aged 15 years old and older are illiterate, second to the 
Federal District, and a nice improvement over the national 
average of 8.35%.  Similarly, Nuevo Leon is substantially better 
than the national averages in areas such as access to health 
care, homes with water and garbage pick up, and homes with a 
refrigerator.  In fact, weighing all of these factors, the 
National Council for Social Development found that Nuevo Leon 
suffered the least from poverty of all the Mexican states. 
 
MONTERREY 00000010  003.2 OF 004 
 
 
 
Nuevo Leon's Plans to Move Up in the Manufacturing Value Chain 
 
¶10.  (SBU)  Various business leaders believe that Nuevo Leon has 
been successful due to its strategic location, work ethic, 
industrial base, business climate, cooperative unions, and 
relatively high level of education.  Nuevo Leon lies on highway 
and rail networks offering direct access to the United States, 
offering an enormous comparative advantage for transportation 
costs and just in time delivery.  As to work ethic, Roberto 
Cavazos, executive director of the American Chamber of Commerce, 
offered a typical perspective that since Nuevo Leon had few 
natural resources, the people had to develop a strong work ethic 
to survive, and this work ethic allowed Nuevo Leon to build an 
industrial economy.  Andres Franco, the sub-secretary at SEDEC 
in charge of attracting foreign investment, lamented as a 
Mexican that only 5-6 states are truly competitive in seeking 
FDI, and most states are not even in the game.  In 2006 America 
Economia magazine declared Monterrey as the third best Latin 
American city for doing business, after Sao Paulo, Brazil and 
Santiago, Chile.  Many American business contacts have commented 
that the Monterrey business culture feels similar to the United 
States, and they give as examples that meetings start on time 
and people get right to the point.  Indeed, many top Mexican 
business and political leaders have extensive exposure to the 
United States through school, vacations or second homes in San 
Antonio or nearby South Padre Island, Texas.  The unions are 
cooperative, as demonstrated by the fact that Nuevo Leon has not 
experienced a strike in over nine years, many firms have company 
controlled "white unions", and even the local chapters of 
national unions like CTM and CROC work within the local power 
structure. 
 
¶11.   (U)  Nuevo Leon hopes to move beyond its traditional 
manufacturing industries to a knowledge based economy.  Nuevo 
Leon has relatively higher labor costs than China, Central 
America or even Southern Mexican states.  Nuevo Leon officials 
realize that they face tough international competition in the 
manufacturing sector from both Asia, particularly China, and the 
Central American countries now armed with CAFTA benefits.  For 
example, in the textile and apparel industry, Nuevo Leon's 
manufacturing employment steeply declined from 10,237 in 1995 to 
5,524 in 2006.  Nuevo Leon has focused on existing industries 
such as automotive and household appliances, plans to develop an 
aerospace industry, and has promoted knowledge based industries 
such as information and communication technologies, health, 
biotechnology, and nanotechnology.  Nuevo Leon has used a new 
law providing incentives to investors in strategic industries. 
In addition, Nuevo Leon touts its City of Knowledge research 
park in its promotion brochures to lure FDI.  Nuevo Leon has had 
some successes, attracting computer manufacturer Lenovo and 
information technology services firms like India's Infosys. 
Indeed, according to state figures, although only 2% of the FDI 
from October 2006 to September 2007 was invested in the software 
sector, these investments created 16% of the new jobs.  See 
reftels A (investment law), B (City of Knowledge), and C 
(medical tourism). 
 
Politics Dominated by the PAN and Conservative Wing of the PRI 
 
¶12.  (U)  The PAN and PRI parties dominate Nuevo Leon politics, 
and the leftist PRD is only a minor player.  The PAN and PRI are 
both competitive in national and local races, as a PRI Governor 
replaced a PAN Governor in 2003.  However, the PRI's fortunes 
reversed in the 2006 mid-term elections, where four of PRI 
Governor Jose Natividad Gonzalez Paras' handpicked candidates 
for mayor lost to PAN candidates in the Monterrey metropolitan 
area, and PAN also won a slim majority in the local unicameral 
legislature.  The local PAN and PRI candidates are similar 
ideologically.  For example, PRI Governor Gonzalez loves to 
discuss how Nuevo Leon will conquer the challenges of 
globalization and even local unions emphasize education and how 
they can compete globally.  In contrast, the local PRD presence 
is negligible.  The PRD polled approximately 2% in the 1994, 
1997, and 2003 elections for federal deputies, although they 
achieved 7% in alliance with the PT (Workers Party).  The PT is 
actually stronger locally, receiving 5% of the vote in the 1997 
and 2003 elections for federal deputies.  Similarly, the PRD/PT 
alliance received only 9% of the vote in the 2000 Presidential 
election.  However, buoyed by the popularity of PRD Presidential 
candidate Andres Manuel Lopez Obrador (AMLO), the leftist 
alliance collected 16% of the vote in 2006, but AMLO's coattails 
did not extend to local candidates, where the PRD/PT alliance 
fell to 9% for federal deputies and 8% for federal senators in 
the 2006 election.  The PRD is also very weak in local 
elections, only gaining 1% in the 2003 Governor's race, and 
currently has only 1 local deputy (elected on a proportional 
 
MONTERREY 00000010  004.2 OF 004 
 
 
vote) in the local legislature.  During the massive 2006 
election protests in Mexico City, the local PRD mounted only 
token protests which were roundly ignored by the general 
populace. 
 
Nuevo Leon to the Rest of Mexico: Catch Up 
 
¶13.  (SBU)  Nuevo Leon generally prefers to look North to the 
United States rather than South to Mexico City.  Nuevo Leon 
leaders often emphasize their ties to the United States rather 
than Mexico.  For example, several leaders claim that in terms 
of GDP, Nuevo Leon is closer to Mississippi and Louisiana than 
Southern Mexico, and contacts often note the regional economic 
integration between Northern Mexico and Texas.  Econoff has 
spoken to a variety of political and business contacts about the 
gap between Nuevo Leon and the rest of Mexico.  Their uniform 
prescription is to criticize Southern Mexico as backward, and 
recommend that Southern and Central Mexico adopt (in their view) 
Nuevo Leon's superior work ethic and business climate.  For 
example, business leaders often hold up the example of Oaxaca, 
where political turmoil and demonstrations damaged tourism, 
their only viable industry.   Several contacts also complained 
that the federal government takes far more in taxes from Nuevo 
Leon than it returns, and they see the money as often wasted by 
the federal government.  None of our contacts support additional 
taxes to provide more resources for Southern Mexico, although 
several wistfully hope for a U.S. Marshall Plan for Mexico. 
Indeed, several contacts believe that it will be many years 
before the South can catch up to Northern Mexico, and they seem 
far more interested in advancing Nuevo Leon's economic 
integration with Texas than sacrificing to modernize Southern 
Mexico. 
 
¶14.  (SBU)  Comment.  Nuevo Leon has been a NAFTA success story, 
but it is not necessarily a template for reform.  Nuevo Leon 
achieved its successes through manufacturing but has not engaged 
in the fundamental reforms needed to transform Mexico (see 
reftels D and E). It still suffers from the same constraints as 
the rest of Mexico, including high energy prices, antiquated 
labor laws, the predominance of public and private monopolies in 
many sectors of the economy, poor public education and graft. 
Many business visitors are initially dazzled by the 
infrastructure and Monterrey's material success, but as they 
look deeper they begin to see corruption, security problems and 
lack of opportunities for poor Mexicans that lie beneath the 
flashy facade.  Monterrey has certainly been successful by 
Mexican standards, but fundamental changes are still needed to 
reach their goal of becoming a true first world city. 
 
¶15.  (SBU)  Comment continued.  In terms of politics, the PAN 
and Northern PRI have similar economic beliefs, as both profess 
a commitment to provide more and better jobs through increased 
international competitiveness.  Nuevo Leon does not have a 
viable leftist party, and the local political actors rarely ask 
how to broaden economic opportunities to the poor or grapple 
with the problems of poverty, although 27% of the population is 
below the poverty level.  The similarity between the parties 
provides for a stable business climate, but is not conducive to 
addressing fundamental inequities in the system.  End Comment. 
WILLIAMSON