China: Mexico

1
China Mexicos mirror

• May 2004
• P U B L I C S T R A T E G I E S DE MÉXICO

2

• Mexicos economy at a crossroads

The road chosen will determine the future of the
country
3
New business environment

• US market for Mexican goods will not grow at the
  same rate it did during the second half of the
  90s.

• Decreasing returns to penetration
• Set of economic conditions in the US
• Excess installed capacity
• Excessive consumer and company debt
• Government deficits
• Large current account deficit
• Beginning of the demographic burden

4
New business environment

• 2. Macroeconomic stability
• Low inflation
• Lower interest rates
• Higher real wages
• The competitive effect is uneven

• No longer feasible to hide behind
• Financial instability
• High inflation
• Financial speculation
• Devaluations

5
New business environment

• 3. Free trade is here to stay
• 2003 total free trade under NAFTA
• Openess with most Latin American countries
• Opening to the EU is well under way

• Smuggling of goods in sectors with remaining
  restrictions

6
New business environment

• 3. Free trade is here to stay
• Convergence with United States and Canada
• Variety of products
• Quality
• Services
• Stores
• Prices
• in trade and investment,
  total convergence

7
New business environment

• 4. Competition with Asia is inevitable
• The domestic market is not enough for development
• We compete in three markets
• Domestic
• Investment
• International

8
Competition from China Bilateral trade (millions
of US dollars)
Source Secretaría de Economía
9
Competition from ChinaForeign direct investment
inflows (2003)
(billions of US dollars)
Source UNCTAD
10
Competition from China

• Chinas production worldwide
• 50 of photographic cameras
• 30 of television sets
• 30 of air-conditioners
• 25 of dish-washers
• 20 of refrigerators
• 70 of lighters
• Yearly growth rate of prices of TV sets in the
  US -9

11
Competition from ChinaShare of total US imports
(percentage)
Source USDOC
12
Competition from China
Share of US imports Textile and
apparel (percentage)
15
13
11
9
7
5
3
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
China
México
Source OTEXA
13
Competition from China
Share of US imports Agriculture and
food (percentage)
China
Mexico
Source USDOC
14
Competition from China
Share of US imports Autos and autoparts (percentag
e)
China
Mexico
Source USDOC
15
Most important change in China Country has
shown that it will follow the road of economic
reforms and will make the decisions needed to
grow
Before MtM
Today, MtCh
16
New business environment

• 5. New economy
• Lean manufacturing in the 80s
• Lean retailing in the 90s
• Variety of products hundreds of shirt models by
  size, colors, collar and sleeves, etc.

17
New business environment

• 5. New economy
• Translates into
• Consumers in charge of assembly lines
• Minimal or no inventories
• Distribution logistics
• Transfer and management of risk

18
Whats to be done?...
Competitiveness
ATTRACTIVENESS

• Improve the combination of risk and return
  combination
• Return sales costs

19
Whats to be done?...the government
Reduce risks, and implement a permanent program
to reduce costs

• New industrial policy
• Competition for investment is dynamic need to
  improve the combination of risk-return constantly
• Rationale for structural reform enhance
  certainty and make the country less expensive
• Modernization of the fiscal system and lowering
  of tax burden, income tax 20
• Opening of energy sector

20
Whats to be done?...the government

• Mexico country of logistics

21
Whats to be done?...the government
Educational revolution
22
Whats to be done?...the government

• Play on comparative advantages
• Proximity to the US
• Youth of Mexican workers
• Better integrate regionally
• Cumulation under CAFTA

23
Whats to be done?...private sector

• Sales market growth
• Domestic
• United States
• Others, European Union
• Specialize in areas of expertise
• Identify areas with a greater value added
• Discover value in isolation

24
Creating value
Whats to be done?...private sector

• Treasurer
• Designer, engineer, logistics person,
• salesman

25
Whats to be done?...private sector

• Role of board of directors
• Inventory management
• Acquisition of and research in technologies
• Investment in human capital
• Acquisition of machinery and equipment
• Continuous improvement of quality

• Investment outside Mexico, mainly in the US

26
Whats to be done?...private sector

• Agressive program to reduce costs and increase
  productivity, eliminate redundancies
• Reduce investment and lending risk
• Improve corporate governance
• Transparency and accountability
• Protection of minority shareholders rights

27
Whats to be done?...private sector
Key to value creation consumer Only
companies close to consumers will be successful!
28
Whats to be done?...private sector
Textiles and apparel Nafta Cafta

• China is a threat to the survival of the regional
  textile and apparel industry
• It will only survive with enhanced
  competitiveness in an expanded regional market,
  by offering

• Full package design, fiber, fabric, apparel
  and distribution
• Scale sufficient to equal Asias
• More added value per unit produced
• More quality of the products
• Variety vs. volume
• Becoming global suppliers

29
China invincible? Unbeatable?

• Forecasting the future is hazardous
• Few months ago
• China presents a defaltionary risk
• Now,
• China presents an inflationary risk
• China is overheating
• China will soon run trade deficits

30
China invincible? Unbeatable?

• Japan, the tigers, and the US were deemed
  invincible
• 2. Portafolio diversification limits investment
  in China
• 3. Unfettered growth will catch up with China

31

• a. The one-child policy is unsustainable for
  families and public finances
• b. Subsidies across sectors, regions and
  governments have costs
• International trade disciplines will force the
  reckoning of hidden costs
• Many investments in infrastructure will prove
  unprofitable and will have to be paid

more expensive

• Opportunity growing market with enlarging middle
  class

32
New business environment

• 6. Demographic change

Children per woman
Source Consejo Nacional de Población
33
New business environment
6. Demographic change
34
P U B L I C S T R A T E G I E S D E M ÉXICO

• ldelacalle_at_pstrategies.com
• www.pstrategies.com