Transcript Myths and Realities of Doing Business in Mexico

Jerry Pacheco
Executive Director – International Business
Accelerator
[email protected]
Mexico Myths
 ‘Not a significant market, other than basic goods’
 ‘Continuous economic crises – no stability’
 ‘The peso is worthless, inflation is rampant’
 ‘Technological backwardness’
 ‘Industry is dominated by US-led maquiladoras’
 ‘Mexican culture is not conducive to business’
 Corruption
 Land of mañana
 ‘Mexico is a failed narco-state’
Myth: Mexico is too poor to be a significant
market for anything but basic goods
 Reality:
 Mexico is a middle-income country
 GDP per capita (nominal / PPP): $8,143 / $14,335
 Comparable w/ Russia, Arg., Chile, Brazil, Turkey, Malaysia
 2.5X the GDP/capita of China and 6X that of India
 US GDP per capita - $45,989 / $ 45,989
 China GDP per capita - $3,650 / $6,828
 India GDP per capita - $1,134 / $3,270
 2nd most important metropolitan market for high-end luxury
goods in the Americas – Mexico City
 2nd largest market for US exports (exports to Mex > exports to
China + Japan)
Myth: Mexico has constant economic crises, the peso is
worthless, & inflation is high
 Reality:
 Cycle of econ. crises (1976, 1982, 1986-87, 1994) was
broken in 2000 and 2006
 Avoided contagion from emerging market crises (e.g.,
Southeast Asia, Argentina)
 Peso – stronger & more stable than US$ for much of the
last decade (until recently)
 Inflation < 5%; investment grade status
Myth: Mexican industry is technologically backward and
dominated by US-led maquilas
 Reality:
 Technologically-advanced engineering & production
capabilities
 Approximately 75 Mexican companies with revenues
greater than US$1billion/year
 An emerging entrepreneurial culture
 Dominant role of maquiladoras is limited to border
Myth: Mexican culture is not conducive to business:
corruption, land of mañana
 Reality:
 Carlos Fuentes:

“The Mexican mañana does not mean putting things off till
the morrow. It means not letting the future intrude on the
sacred completeness of today.”
 Comparatively moderate levels of corruption & largely
limited to government
 Workforce is young and ambitious, with strong
technical skills and work ethic
 Important to recognize the distinction between social
culture and business culture
Myth: Mexico is now a failed narco-state
 Reality:
 Violence & insecurity are a huge social problem, but the
economic impact has been limited so far
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Murder rate of US citizens (50/year for 1.5-2 million people) =
1/2 of Albuquerque’s or 1/4 of Houston’s.
Violence is concentrated in key states and among those involved
in drug trade, security, media
JP Morgan Chase estimates economic cost at 1.0-1.5% of GDP
 Risk is no higher/lower than US in much of Mexico, just
different
 Huge challenge as violence spreads to unexpected areas
(e.g., Monterrey) and in unpredictable patterns
Pre-Columbian Era to the Revolution
 Mexico City – focal point of civilization
 1500-100K inhabitants, 30M in Mexico
 Architecture, irrigation, engineering, writing
 Feudal system: caciques and tribute
 1520-1810 – Spanish imperialist economy
 Emergence of ‘la raza’
 1810-1910 – Incomplete independence
 Spanish control displaced, but feudal system remained
(caudillos)
The Revolution and the ‘Institutionalized
Revolution’
 1910-Díaz regime ousted
 Zapata, Villa, Carranza, Obregón
 The revolution never ended, but was ‘institutionalized’
(PRI)
 Economic system inspired by the revolution, but
patterned after colonialism
 Unequal development; closed economy
 Poor separation of firm & state
The Technocrats and ‘The Crisis’
 Pattern of sexenio crises, 1976-1994
 Curse of oil & ‘administering the abundance’
 Technocrat Presidents
 De la Madrid and the ‘lost decade’ (1980s)
 Salinas de Gortari – renewed hope, shattered dreams,
and the ‘errors of December’ (1994)
 Zedillo – weak but transformational sexenio
Economic Reforms, 1980-2000
 Monetary & Fiscal Policy
 Inflation reached 100+%, now under 5%
 Balanced budgets
 Deregulation & Privatization
 Privatization of banks, rail, telcom, industry
 FDI & franchise laws; increased transparency
 Trade Liberalization – Export Orientation
 GATT (max tariffs from 100% to 20%)
 NAFTA (nearly all tariffs eliminated by 2003)
New Millenium: A ‘New’ Mexico?
 Political change
 2000 elections: Vicente Fox (PAN)
 Political pluralism = Political Gridlock
 PAN – Presidency
 PRI – Senate and Chamber of Deputies
 PRD – Governorships, Mayor of Mexico City
 2006 elections: Felipe Calderon (PAN)
 AMLO (Andres Manuel Lopez Obrador) factor
 Gridlock continues
 2012 elections: The Pena Nieto Administration
 New Federalism in Estados Unidos Mexicanos
 Increasing importance of states & municipios
Recent Economic Performance: Reasons for
Renewed Optimism
 Consistent economic
growth 1995-2000
 Change in GDP under
Zedillo:
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1995: - 6.2%
1996: +5.1%
1997: +6.8%
1998: +4.9%
1999: +3.9%
2000: +6.6%
 Stagnation under PAN,
2000-2010
 Change in GDP under
Fox/Calderon:
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2001: - 0.2%
2002: +0.8%
2003: +1.4%
2004: +4.2%
2005: +3.2%
2006: +4.8%
2007: +3.2%
2008: +1.8%
2009: -6.5%
2010: +5.4%
2011: +5.0%
Lingering Pessimism:
Limits to Development
 Economic, Political & Social Issues:
 ‘So far from God, so close to the US…’
 Dependence on oil, maquiladoras, exports
 Unequal living standards/poverty/stagnant real wages
 Drugs & drug-related violence, lawlessness
 Immigration & the loss of human capital
 The natural environment & water
 Indigenous issues & Chiapas
 Legal, tax, labor reforms
 Deregulation (telecommunications, electricity)
Demographics
 2010 Population: 110 Million (1950-25M)
 93% literacy
 Education expenditures: 6% of GDP (US-5%)
 Life expectancy: 75 years (US-78 years)
 Urbanization: 77% (US-82%)
 Access to potable water: 83% (Korea-83%)
 Physicians/100,000 people: 120 (US-280)
 GDP/capita (nom/PPP) = $8,143 / $14,335
The Many Mexicos: Mexico City
 The Capital: 25M inhabitants
 Largest city in the world (along with others)
 Distrito Federal: Seat of power for government,
financial, & corporate (domestic & MNCs) sectors

No manufacturing
 Los chilangos:


Fast-paced, chaotic lifestyle
Cosmopolitan, status-conscious culture
The Many Mexicos: Monterrey
 The Sultan of the North
 Economic Sectors:
 Traditional strength in heavy industry (steel, autos,
other manufacturing)
 Migrating to new economy & higher value-added
 Cemex, Alfa (Alpek, Nemak), Vitro, Femsa
 Los regiomontanos:
 The Texans of Mexico
The Many Mexicos: Jalisco
 Guadalajara: The ‘Mexican’ City
 Economy oriented toward:
 Traditional sector (textiles, furniture, ceramics, tequila,
mariachis)
 High-Tech (IBM, Acer, other telcom/IT equip)
 Los tapatios:
 Unique mixture of traditional Mexico with global
orientation
The Many Mexicos: The Border
 2,000 miles and 10%-25% of Mexico’s pop.
 Historical importance is less than the rest of Mexico
 1940-1970: Border population grew 10 times
 High interdependence with US economy
 For better and for worse
 Does NAFTA make the border more relevant, or less
relevant?
Manufacturing
 Traditional strength: low-tech & heavy mfg.
 Steel, auto parts, products for domestic market
 Low-end export items (golf club shafts)
 Transformation of Mexican manufacturing:
 Emphasis on ISO 9000
 Capital-intensive activities
 From wire harnesses to electronics systems
Maquiladoras
 ~$120B/year in exports (half of Mexico’s total)
 But only ~1/5 is value added
 Highly cyclical, vulnerable to global econ.
 Sectors: autos, electronics, apparel
 Locations: Cd. Juárez, Tijuana, border
 First-generation maquilas no longer competitive;
upgrading is essential
Non-Maquila Manufacturing
 There’s more to manufacturing in Mexico than the
maquiladoras; line is blurring
 IMMEX: new umbrella for maquila, Pitex (preferential
tariff treatment for temporary imports), other
 The border v. the interior.
 Border plants tend to follow ‘twin-plant’ model.
 Plants in the interior are more likely to serve the
Mexican market.
Financial Sector
 Tumultuous history of banking sector
 Nationalized, then privatized, then bankrupt, then sold
off to foreigners; now stable
 Bank loans as % of GDP: 40% in 1994, then down to
10%, now 15% (global average=136%)
 Leading players are foreign: Citibank (Banamex), BBVA
(Bancomer), Santander (Serfin)
 (Re-)Emergence of middle class creating
opportunity for insurance/other fin. Services
 Interest rates have declined, but credit is still scarce for
the private sector
 Credit available for consumption, not investments
Other Sectors
 Energy: continued state dominance
 Pemex (oil), CFE (electricity)
 Tourism
 Traditional emphasis on state-led developments
 Transition to diffused & sustainable development
 Professional services
 Potential competitive advantage for NM & Hispanicowned firms
The ‘Grupos’
 Importance of the diversified conglomerate
 Relation to other emerging markets
 Spin-offs of historic Grupo Monterrey
 Alfa, Vitro, Femsa and many subsidiaries
 Other important grupos:
 Grupo Carso (America Movil, Telmex, Telcel, Prodigy,
Sanborns, CompUSA, Xignux, Frisco, banks)
 Grupo Bimbo
 Televisa
Entrepreneurship in Mexico
 There’s more to Mexico than maquilas, PEMEX, and
the grupos.
 Mexico has one of the highest rates of
entrepreneurship in the world.
 Entrepreneurial activity is driven both by necessity and
by opportunity.
 Economic activity in Mexico remains regionalized or
localized.
 Growth in microfinance & social entrepreneurship
New Mexico and Old Mexico
 Where does NM stand in terms of trade and
investment ties with Mexico?
 NM exports are climbing to $500/year to Mexico (of
$1.5B/year to all countries)

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Mexico is #1 market for NM in dollar terms and in number of
products.
NM imports about $652M/year from Mexico, of $2B total
 35th state in exports to Mexico; 46th in exports to world
 BUT, we must account for the nature of NM’s economy.
 43rd state in terms of exports as % of GSP
 20th state in terms of exports to Mexico as % of GSP