Myths and Reality of Doing Business in Mexico

1
Myths and Reality of Doing Business in Mexico

• Dante Di Gregorio
• April 2009
• AHCC International Trade Workshop

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 12,177 (or 7,830 GNI Atlas method)
• 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 gt 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 lt 5 investment grade status

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
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 Albuquerques or 1/5 of
  Houstons
• Violence concentrated along border and among
  those involved in drug trade, security, media
• Risk is no higher/lower than US, just different

8
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)

9
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

10
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)

11
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

12
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

13
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

14
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

15
The Many Mexicos The 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?