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’• ‘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/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)

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

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

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 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

10-Minute Economic History of Mexico

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-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

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

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)

The Mexican Business Environment in the new

Millennium

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

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%

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)• 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

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: 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

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?

Economic Sectors

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

• ~$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.

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.

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

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

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

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 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