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By Andrés Hernández, Anselmo García, Leonard Mertens1
Within this framework, the response of the iron and steel enterprises has encompassed a variety of measures; profound changes in management and organization at the plant level, including staff adjustments, the modernization of equipment, the search for new products and processes, the substitution of imports and the initiation of exports, adjustments in labour relations and a re-examination of the role of human resource management in the search for greater productivity and competitiveness in the industry.
This case-study analyses the nature and scope of the transformation of the skill content of labour resulting from this process and its projection into the twenty-first century.
The research was carried out at an integrated iron and steel plant in Mexico which through the corporate structure to which it belongs controls the entire production process from the extraction of the raw material (iron ore) to the marketing of products.
The plant manufactures bars and wire rod. It is a large enterprise, employing more than 644 persons in 1996. The production processes include the processing of ore into sponge iron by direct reduction, a steel mill with electric furnaces, continuous casting, rolling and finishing.
The study was carried out in two stages. First, a questionnaire was sent out to the management2 and another to the trade union representatives in the plant to obtain an initial qualitative assessment of the changes under way in the plant and their impact on the workforce. This was followed by an on-the-spot inspection and a series of in-depth interviews with the managers responsible for labour relations and training, production and planning, as well as with trade unions officials. Special attention was given throughout to the transformation of the skills of the workforce directly engaged in production and the qualitative aspects of the questionnaires.
The study begins by placing the case in the context of changes in the branch, and subsequently examines such aspects as market strategy, productivity improvements, technological innovations, organization and management of human resources, and labour relations. At each stage an attempt is made to link the respective process of change with the skill content and training of labour, and establish a set of general and specific references which provide a perspective for the next century.
The opening up of the Mexican economy began with membership in GATT in the mid-1980s, with tariffs being reduced from around 35% to 10% by 1993. When NAFTA came into effect in 1994, provision was made for subsequent reductions of one percentage point each year up to the year 2004, when the percentage would be zero. In the same way, under NAFTA, Mexico gained free access to the markets of the United States and Canada, with clearer rules than in the past being established for the regulation of trade between these two countries. It is to be hoped that the disputes concerning dumping which have characterized international trade relations, especially with the United States, will now be minimized.
With the opening up of the economy, Mexican enterprises have greater and more fluid access to the large markets of the United States and Canada; it also means free participation by enterprises of these countries in the Mexican market. Iron and steel production in the United States and Canada is respectively 8_ times and twice as high as that of Mexico: thus when the NAFTA came into effect there was a marked asymmetry in the industry in which economies of scale are a major factor in production costs (Castro, 1993).
Bearing in mind that one of the mainstays of macroeconomic policy at the beginning of the 1990s was the reduction of inflation through the overvaluation of the national currency against the US dollar, the pressure of international competition on national producers was very great and even increased up to the devaluation at the end of 1994 and beginning of 1995. However, the devaluation also resulted in a crisis in the domestic market, reducing by 35% the apparent national consumption of steel, and placing enterprises which had taken out loans for investments in installation and equipment in a no-win situation.
Manufacturing suffered ups and downs during the first half of the 1990s, when productivity increased (by an annual average of 4-5%) but employment fell (an accumulated reduction of 15% in 1994 compared with 1990). These were the years in which industry in general stepped up its process of modernization and rationalized its workforce (Laos, 1996; Mertens, 1996). This process was spearheaded by large enterprises, whereas small and micro-enterprises fell behind, with many of them unable to survive in the new environment (Brown, 1994).
With the 1995 crisis, industrial production fell by 7%, recovering in the second half of 1996, basically as a result of exports and the substitution of imports, although the domestic market was still very contracted at the beginning of 1997.
Since the iron and steel industry is a basic industry closely related to the production of capital goods, one would expect its cyclical behaviour to reflect the ups and downs of the economy, as was the case with the metalworking industry in Mexico in the 1980s (Mertens, 1996). One would also expect that with the opening up of the economy, many national producers would be seriously handicapped by the technological and administrative lag from which they suffered at the beginning of the 1990s (Castro, 1993).
However, the Mexican iron and steel industry behaved very differently. Although no precise data are available, small and medium-sized enterprises seemed to have suffered a major setback with the rapid opening up of the sector, which led Mexican producers in 1993 to request from the authorities an appropriate and effective system of defence against unfair practices (ibid.).
Despite the rather unfavourable circumstances, large enterprises did manage to adapt to the new circumstances, and even improved their position on the market both at home and abroad. What was particularly surprising was the fact that in the worst year of the Mexican economy in its recent history (1995), the iron and steel industry achieved a record level of production. This was because devaluation had made its products more competitive in the internal and external markets, enabling it to recover the ground lost in the national market and develop exports which until then had been very limited.
This "unexpected behaviour should be understood within the framework of the evolution which has characterized the industry since the mid-1980s. Up until the 1990s, 52% of the industry was in state hands. When the industry was privatized in 1991, it passed to the hands of mostly national groups of investors who in one way or another were already active in the branch or very close to it. Since these industrial groups enjoyed a strong financial position and benefited from their expertise in the branch, they seized on the opportunity offered by the sale of state enterprises at low prices, promising to invest in them in the coming years (ibid.).
Through investments, which in 1996 totalled around $3,500 million (Canacero), and by making use of the technology and installed capacities of the former state enterprises, where the main innovation required involved administrative management and organization, they were able to confront the year of crisis from a position in which they had little to lose and everything to gain.
The reorganization of enterprises and the subsequent investments and innovations, as well as the application of the ISO-9000 quality guarantee systems achieved some impressive results, with a doubling of labour productivity in 1991-95. At the end of 1995 many of the plants of the seven corporations which account for 80% of steel production had installed this system and had even begun to document the ISO-14000 system (Siderúrgica, Latinoamericana, 1995).
This process involved a major reduction in the workforce, particularly during the early years of restructuring (1992-94), from around 48,000 persons in 1990 to 34,000 in 1996 (INEGI-STPS). The reduction affected both manual workers and employees, so that the overall balance between both groups (70% manual workers, 30% employees) did not significantly change during these years, despite the technical changes to the production process.
There was thus an implicit social cost in this adjustment and modernization process, also reflected in the real wages of workers, which on average lagged far behind the increase in productivity. Although the industry managed to recover economically, conditions of remuneration and employment at the branch level have not improved. With the 1995 crisis, the real remuneration of production workers fell by 20%, whereas that of administrative and management staff dropped on average by only 11%. In terms of labour costs, the different evolution of salaries and wages changed the relationship between total expenditure on salaries for employees and wages for workers. Whereas in 1990 the total amount of wages and salaries was very similar on average at the branch level, by 1996 salaries paid to employees now represented 55% of total labour costs (INEGI-STPS).
The outlook for the industry in the year 2000 is based on a very different situation from that of 1990. There is now the challenge of achieving a strong position on the international market and at the same time consolidating the import-substitution strategy adopted in recent years. To this end, provision has been made for a package of projects worth $3,500 million for the period 1997-2000 (Eggers, 1997).
Entrepreneurs still have interesting national markets to explore, including the automobile industry, which is growing in Mexico, with considerable purchasing potential due to its increasing integration into the international market, and through which iron and steel exports could be indirectly strengthened. The latter may become more attractive than direct exports, due to stagnation in the demand for steel in the industrialized countries (Cruz, 1996). This will require an enormous effort by the Mexican iron and steel industry to innovate in products and processes, and establish close links with producers, a subject which the Steel Chamber sees as of strategic importance in the coming years. The Chamber believes that Mexico should opt for specialization and greater quality in its products, a strategy which will require a high capacity for learning and innovation and which in turn involves the promotion and transformation of training and the management of human resources.
As regards the first aspect, in 1990 wire rod accounted for 27% of the plant's total production, with the rest being bars. In 1996, the ratio was almost inverted, with wire rod accounting for 53% of production. The plant's share of the national bar market fell from 18% in 1990 to 14% in 1996, while its share of the wire rod market rose from 19% to 26% in the same period.
In the view of the management, "bars can be manufactured by any plant and we do not have a competitive long-term advantage with this product in Mexico or in the international market; there is even less scope if account is taken of the production potential of this kind of product of lesser complexity being developed in countries like China, and which may well dominate the market rapidly at cost levels which we cannot achieve here, making rod a commodity product with very low profit margins.
On the other hand, the enterprise believes that the production of wire rod is its greatest competitive advantage, the result of its modernization programme (approximately $120 million in 1990-97) and its management learning skills enabling it to master efficiently increasingly complex processes.
With the investments already made and those scheduled for the coming years, the enterprise will acquire the capacity to move towards specialized, higher-priced products with more value added and greater profit margins, in market niches. A longer-term possibility will be the production of even more specialized products based, for example, on alloys.
Therefore the consolidation of products in the market-place is not very important in the sales strategy. What is important, however, is the manufacture of new products: first, for existing markets and, second, for new markets. In a context of mature products, the plant will try to innovate and specialize its production. Such an approach should theoretically offer good development prospects in an open and a globalized market, which is the case of steel.4
As regards the second component of the market strategy, namely low prices, in the period 1990-96 the sales price of its products in dollar terms fell by 15 per cent, thus reducing profit margins, a situation which had already arisen before the 1995 devaluation.
Following the "country cost rise during this period, due to the increasing overvaluing of the peso against the dollar, major efforts were made to reduce costs, which had a negative effect on business. This drop in profits also reflected the gradual reduction in the plant's competitive capacity which obliged management to move away from a strategy of innovation based on continuous improvements towards major re-engineering measures involving process and product technology, the contracting out of support and service areas, staff cuts and the reduction of the cost of collective contracts (labour cost of unionized workers). This last factor, coupled with devaluation, resulted in 1996 in an average unionized labour cost5 of approximately $4.4 an hour, compared to $7.2 in 1991 and $9.5 in 1994 (this cost includes the average base wage, benefits and legal obligations -- social security, housing, etc.).
Furthermore, the cost of direct labour (unionized and non-unionized production workers) fell from $31 per tonne in 1994 to $21 in 1995 and $18 in 1996. This suggests that the effect of the devaluation of December 1994 was greater than that of the internal plant restructuring on costs.
Although the combination of devaluation and restructuring resulted in a considerable improvement (a drop of 42%) in labour costs per tonne of production, this reduction accounted for only four percentage points in the overall drop in production costs, from 9% in 1994 to 5% in 1996. Thus although the improvement in the plant's competitive profile was due in part to the reduction in labour costs, most of the cost reduction seems to have come from improvements in efficiency and quality achieved in the use of imports and machinery.
As regards the third aspect in the context of the 1995 crisis in the Mexican economy and the resulting decline in the internal market, the plant began to export that year, when it sent 11% of its production to foreign markets, mainly in the United States. This, coupled with its capacity to substitute imports on the domestic market in 1995, meant that the total production volume as compared with 1995 fell by only 11%, while apparent consumption of iron and steel products in the national market fell that year by 35% (Canacero, 1996).
Following the devaluation, competition from imported products on the national market fell, whereas that of national producers increased, as did competition on the external market. Although prices on the international market are 10% lower than national prices, the plant intends to continue its export drive to diversify its markets and better prepare itself to deal with the structural instability of the national market. Thus in 1996 it set up a special management unit responsible for exports.
Since the profit margin is higher in the domestic market, the plant focused attention on this market in 1996, when it began to recover, and reduced exports by 60% as compared with 1995 (in 1996 exports accounted for only 3% of production).
The reduction of exports and the renewed emphasis on the domestic market following its recovery after a period of crisis has been the traditional paradox of the dynamics of the Mexican industry. For macroeconomic reasons the plant should continue to export more and more, whereas at the micro-economic level it is more advantageous for it to sell more on the domestic market, which in turn results in the medium term in the creation of further imbalances in its external relations. It would appear that as a result of this specialization option taken up by the plant, only exports will guarantee a sufficiently large market to absorb the minimum cost-effective scale of production.
The combination of these three components of the plant's strategy to enhance its competitiveness allowed it in 1996 to achieve a record level of production6 and recover a level of cost-effective performance, before financing costs, which in 1996 was once again similar to that of 1990, approximately 13% in real terms (profit on assets). Its goal is to reach an operational profitability of 20%.
From the workers' standpoint, the process of restoring profitability was accompanied by heavy social costs, with lower employment and lower real wages in 1996 as compared with 1990. The main concern of the trade union is when wage levels will also begin to recover.
The new system of training based on labour skills and functions will to a large extent determine the recuperation of wage levels. Furthermore, it will indirectly affect the wage index which will tend to move towards the top end of the regional labour market. To the extent that the production process will depend on an increasingly skilled workforce with, if possible, a certain level of specialization achieved at the workplace, an extra payment will have to be made over and above the average rate paid in the region and which will in fact be close to or greater than the rates paid in enterprises offering the highest wages. Improvements in remuneration are likely to depend on the level of education and training required in the production process. It will not only depend upon the skills of the workers but also, and perhaps to a greater extent, on the skill requirement dynamics of the organization itself. The more the enterprise is dependent on the skills of its staff, the more such skills will be related to remuneration.
1 We should like to thank the management and trade union of the plant for their enthusiastic collaboration, as well as Jaime Díaz, Mónica Baeza, Roberto López and Roberto Wilde for their comments and contributions. Translated from Spanish by Brian Mallett (ILO). 2 The questionnaires used were adapted from the research instruments of the ILO/CIDA (Canadian International Development Agency) regional project (Technological change and the labour market), Santiago de Chile.
3 All the data presented in the following paragraphs case have been taken directly from management and trade union sources in the plant.
4 In a study carried out within the framework of the ILO/CIDA project on technological change and the labour market in the context of the metal trades and the food industry, it was found that the combination of process and product innovation was one of the characteristics of the more dynamic establishments in improving their productivity (Mertens, 1996).
5 The calculation is based on total average cost/year of a unionized worker, with a total of 2,212 hours/year/person and with a working week of 48 hours.
6 The decline in production 1992-93 was due basically to the installation of the new rolling mill, which halted production of rolled steel and created a learning curve. Both elements led to the decline in production in these two years.
