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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’

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myths and realities of doing business in mexico

Myths and Realities of Doing Business in Mexico

Jerry Pacheco

Executive Director – International Business Accelerator

[email protected]

mexico myths
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
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 / $3,270
    • 2nd most important metropolitan market for high-end luxury goods in the Americas – Mexico City
    • 2nd largest market for US exports (exports to Mex > exports to China + Japan)
myth mexico has constant economic crises the peso is worthless inflation is high
Myth: Mexico has constant economic crises, the peso is worthless, & inflation is high
  • Reality:
    • Cycle of econ. crises (1976, 1982, 1986-87, 1994) was broken in 2000 and 2006
    • Avoided contagion from emerging market crises (e.g., Southeast Asia, Argentina)
    • Peso – stronger & more stable than US$ 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
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 ma ana
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
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
      • 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
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
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
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
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
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 EstadosUnidosMexicanos
    • Increasing importance of states & municipios
recent economic performance reasons for renewed optimism
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, 2000-2010
    • Change in GDP under Fox/Calderon:
      • 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
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
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 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 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
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
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
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
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
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
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
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 & Hispanic-owned firms
the grupos
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:
    • GrupoCarso (America Movil, Telmex, Telcel, Prodigy, Sanborns, CompUSA, Xignux, Frisco, banks)
    • Grupo Bimbo
    • Televisa
entrepreneurship in mexico
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
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)
      • 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
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