A Survey of the Mexican Business Environment

1
A Survey of the Mexican Business Environment

• Dante Di Gregorio
• Anderson School of Management UNM
• January 2009

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

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 12,177 (or 7,830 GNI Atlas method,
  2005)
• Comparable with Russia, Chile Malaysia
• Double the GNI/capita of Brazil, Thailand or
  Serbia
• US GDP/GNI per capita - 43,968 / 44,710
• China GDP/GNI per capita - 4,644 / 2,000
• 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
• Inflation

5
Myth Mexican industry is technologically
backward and dominated by US-led maquilas

• Reality
• Technologically-advanced engineering production
  capabilities
• Approximately 100 Mexican companies with greater
  than US1B/year revenue
• An emerging entrepreneurial culture
• Dominant role of maquiladoras limited to border

6
Myth Mexican culture is not conducive to
businesscorruption, 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
10-Minute Economic History of Mexico
8
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)

9
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

10
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

11
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)

12
The Mexican Business Environment in the new
Millennium
13
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
• Increasing importance of states municipios

14
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 2.8
• 2006 4.8
• 2007 3.3

15
Lingering PessimismLimits to Development

• Economic, Political Social Issues
• So far from God, so close to the US
• Dependence on oil, maquiladoras, exports
• Inequal living standards poverty stagnant real
  wages
• Drugs
• Immigration the loss of human capital
• The Natural Environment Water
• Indigenous issues Chiapas
• Legal, tax, labor reforms
• Deregulation (telecommunications, electricity)

16
Demographics Regional Issues
17
Demographics

• 2008 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 12,177/7,830

18
Regional EconomiesDistrito Federal (Mexico City)

• The Capital 25M inhabitants
• Largest city in the world (along with others)
• Seat of power for government, financial,
  corporate (domestic MNCs) sectors
• No manufacturing
• Los chilangos
• Fast-paced, chaotic lifestyle
• Cosmopolitan, status-conscious culture

19
Regional EconomiesMonterrey

• 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
Regional EconomiesGuadalajara, 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
Regional EconomiesThe Border

• 2,000 miles and 10-25 of Mexicos 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 Mexicos 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 Mexicos job loss
• Sectors autos, electronics, apparel
• Locations Cd. Juarez, Tijuana, border, Yuc.

25
Non-Maquila Manufacturing

• Theres 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 average136)
• 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 NM?

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

• Theres 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.

30
New Mexico and Old Mexico

• Where does NM stand in terms of trade and
  investment ties with Mexico?
• NM exports just about 375M/year to Mexico (of
  2.5B/year to all countries)
• Mexico is 1 market for NM in (excluding
  semiconductors) and in of products.
• 35th state in exports to Mexico 44th in exports
  to world
• BUT, we must account for the nature of NMs
  economy.
• 43rd state in terms of exports as of GSP
• 20th state in terms of exports to Mexico as of
  GSP