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Myths and Realities of Doing Business in Mexico. Jerry Pacheco Executive Director – International Business Accelerator . 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

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 corruption, land of mañananarco-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

10 minute economic history of mexico

10-Minute corruption, land of mañanaEconomic History of Mexico

Pre columbian era to the revolution
Pre-Columbian Era to the Revolution corruption, land of mañana

  • 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’ corruption, land of mañana

  • 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’ corruption, land of mañana

  • 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 corruption, land of mañana

  • 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? corruption, land of mañana

  • 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 corruption, land of mañana

  • 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: corruption, land of mañanaLimits 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 corruption, land of mañana

  • 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 corruption, land of mañana

  • 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 corruption, land of mañanaMexicos: 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 corruption, land of mañanaMexicos: 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 corruption, land of mañanaMexicos: 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?

Economic sectors

Economic Sectors corruption, land of mañana

Manufacturing corruption, land of mañana

  • 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 corruption, land of mañana

  • ~$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- corruption, land of mañanaMaquila 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 corruption, land of mañana

  • 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 corruption, land of mañana

  • 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 ‘ corruption, land of mañanaGrupos’

  • 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 corruption, land of mañana

  • 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 corruption, land of mañana

  • 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