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Myths and Reality of Doing Business in Mexico

Myths and Reality of Doing Business in Mexico. Dante Di Gregorio, Associate Professor January 2010 digregorio@mgt.unm.edu. Mexico Myths. ‘Not a significant market, other than basic goods’ ‘Continuous economic crises – no stability’ ‘The peso is worthless, inflation is rampant’

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Myths and Reality of Doing Business in Mexico

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  1. Myths and Reality of Doing Business in Mexico Dante Di Gregorio, Associate Professor January 2010 digregorio@mgt.unm.edu

  2. 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’

  3. Myth: Mexico is too poor to be a significant market for anything but basic goods • Reality: • Mexico is a middle-income country • GDP/capita: $14,270 (or $9,980 GNI Atlas method) • Comparable with Russia, Chile, Turkey, Poland & Malaysia • Double the GNI/capita of Serbia, South Africa, Colombia • Triple the GNI/capita of China and 10X that of India • US GDP/GNI per capita - $47,580 / $46,970 • China GDP/GNI per capita - $2,940 / $6,020 • 2nd most important metropolitan market for high-end luxury goods in the Americas – Mexico City • 2nd largest market for US exports (Mex > China + Japan)

  4. Myth: Mexico has constant economic crises, the peso is worthless, & inflation is high • Reality: • Cycle of econ. crises (1976, 1982, 1986-87, 1994) broken in 2000 and 2006 • Avoided contagion from emerging market crises (e.g., Southeast Asia, Argentina) • Peso – stronger & more stable than US$ for most of the last decade (until recently) • Inflation < 5%; investment grade status

  5. Myth: Mexican industry is technologically backward and dominated by US-led maquilas • Reality: • Technologically-advanced engineering & production capabilities • Approximately 50 Mexican companies with revenues greater than US$1billion/year • An emerging entrepreneurial culture • Dominant role of maquiladoras limited to border

  6. 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

  7. Myth: Mexico is now a failed narco-state • Reality: • Violence and insecurity in isolated areas of Mexico are not new • Violence and insecurity are more isolated than is depicted: • Murder rate of US citizens (50/year) is equivalent to 1/3 of Albuquerque’s or 1/5 of Houston’s • Violence concentrated along border and among those involved in drug trade, security, media • Risk is no higher/lower than US, just different

  8. 10-Minute Economic History of Mexico

  9. 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)

  10. The Revolution and the ‘Institutionalized Revolution’ • 1910-Diaz regime ousted • Zapata, Villa, Carranza, Obregon • 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

  11. The Technocrats and ‘The Crisis’ • Pattern of sexenio crises, 1976-1994 • ‘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

  12. 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 (most tariffs eliminated by 2003)

  13. The Mexican Business Environment in the new Millennium

  14. 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 • New Federalism in Estados Unidos Mexicanos • Increasing importance of states & municipios

  15. Recent Economic Performance: Reasons for Renewed Optimism • Consistent economic growth 1995-2000 • Change in GDP under Zedillo: • 1995: - 6.2% • 1996: +5.1% • 1997: +6.8% • 1998: +4.9% • 1999: +3.9% • 2000: +6.6% • Stagnation under PAN, 2000-2006 • Change in GDP under Fox/Calderon: • 2001: - 0.2% • 2002: +0.8% • 2003: +1.4% • 2004: +4.2% • 2005: +3.2% • 2006: +5.1% • 2007: +3.3% • 2008: +1.3% • 2009: - 7.2%

  16. 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)

  17. Demographics • 2010 Population: 110 Million (1950-25M) • 91% literacy • Education expenditures: 6% of GDP (US-5%) • Life expectancy: 76 years (US-77 years) • Urbanization: 75% (US-77%) • Access to potable water: 83% (Korea-83%) • Physicians/100,000 people: 120 (US-280) • GDP/GNI per capita = $9,980/$14,270

  18. 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

  19. 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

  20. The Many Mexicos: Guadalajara and Jalisco • 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

  21. 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?

  22. Economic Sectors

  23. 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

  24. Maquiladoras • ~$100B/year in exports (half of Mexico’s total) • But only ~1/4 is value added • Highly cyclical, vulnerable to global econ. • Approx. 300,000 jobs lost in last downturn • Represented ½ of Mexico’s job loss • Sectors: autos, electronics, apparel • Locations: Cd. Juarez, Tijuana, border, Yuc.

  25. Non-Maquila Manufacturing • There’s more to manufacturing in Mexico than the maquiladoras • PITEX: Preferential tariff treatment for temporary imports. • IMMEX: new umbrella for maquila, Pitex, 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.

  26. 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 30% (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

  27. 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 Hispanic-owned firms

  28. The ‘Grupos’ • Importance of the diversified conglomerate • Relation to other emerging markets • Grupo Monterrey • Alfa, Vitro, Femsa and many subsidiaries • Other important grupos: • Grupo Carso (America Movil, Telmex, Telcel, Prodigy, Sanborns, CompUSA, Xignux, banks) • Grupo Bimbo • Televisa

  29. 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

  30. New Mexico and Old Mexico • Where does NM stand in terms of trade and investment ties with Mexico? • NM exports just about $384M/year to Mexico (of $2.8B/year to all countries) • Mexico is #1 market for NM in dollar terms (excluding semiconductors) and in number of products. • 35th state in exports to Mexico; 44th 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

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