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Myths and Realities of Doing Business in MexicoJerry PachecoExecutive Director International Business Acceleratorjerry@nmiba.com 1Mexico MythsNot a significant market, other than basic goodsContinuous economic crises no stabilityThe peso is worthless, inflation is rampantTechnological backwardnessIndustry is dominated by US-led maquiladorasMexican culture is not conducive to businessCorruptionLand of maanaMexico is a failed narco-stateMyth: Mexico is too poor to be a significant market for anything but basic goods Reality:Mexico is a middle-income countryGDP per capita (nominal / PPP): $8,143 / $14,335Comparable w/ Russia, Arg., Chile, Brazil, Turkey, Malaysia2.5X the GDP/capita of China and 6X that of IndiaUS GDP per capita - $45,989 / $ 45,989 China GDP per capita - $3,650 / $6,828India GDP per capita - $1,134 / $3,2702nd most important metropolitan market for high-end luxury goods in the Americas Mexico City2nd largest market for US exports (exports to Mex > exports to China + Japan)

Myth: Mexico has constant economic crises, the peso is worthless, & inflation is highReality:Cycle of econ. crises (1976, 1982, 1986-87, 1994) was broken in 2000 and 2006Avoided 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 maquilasReality:Technologically-advanced engineering & production capabilitiesApproximately 75 Mexican companies with revenues greater than US$1billion/yearAn emerging entrepreneurial cultureDominant role of maquiladoras is limited to border

Myth: Mexican culture is not conducive to business: corruption, land of maanaReality:Carlos Fuentes:The Mexican maana 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 governmentWorkforce is young and ambitious, with strong technical skills and work ethicImportant to recognize the distinction between social culture and business cultureMyth: Mexico is now a failed narco-stateReality:Violence & insecurity are a huge social problem, but the economic impact has been limited so farMurder rate of US citizens (50/year for 1.5-2 million people) = 1/2 of Albuquerques or 1/4 of Houstons. Violence is concentrated in key states and among those involved in drug trade, security, mediaJP Morgan Chase estimates economic cost at 1.0-1.5% of GDPRisk is no higher/lower than US in much of Mexico, just differentHuge challenge as violence spreads to unexpected areas (e.g., Monterrey) and in unpredictable patterns

10-Minute Economic History of Mexico

Pre-Columbian Era to the RevolutionMexico City focal point of civilization1500-100K inhabitants, 30M in MexicoArchitecture, irrigation, engineering, writingFeudal system: caciques and tribute1520-1810 Spanish imperialist economyEmergence of la raza1810-1910 Incomplete independenceSpanish control displaced, but feudal system remained (caudillos)

The Revolution and the Institutionalized Revolution1910-Daz regime oustedZapata, Villa, Carranza, ObregnThe revolution never ended, but was institutionalized (PRI)Economic system inspired by the revolution, but patterned after colonialismUnequal development; closed economyPoor separation of firm & state

The Technocrats and The CrisisPattern of sexenio crises, 1976-1994Curse of oil & administering the abundanceTechnocrat PresidentsDe 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, 1980-2000Monetary & Fiscal PolicyInflation reached 100+%, now under 5%Balanced budgetsDeregulation & PrivatizationPrivatization of banks, rail, telcom, industryFDI & franchise laws; increased transparencyTrade Liberalization Export OrientationGATT (max tariffs from 100% to 20%)NAFTA (nearly all tariffs eliminated by 2003)

The Mexican Business Environment in the new MillenniumNew Millenium: A New Mexico?Political change2000 elections: Vicente Fox (PAN)Political pluralism = Political GridlockPAN PresidencyPRI Senate and Chamber of DeputiesPRD Governorships, Mayor of Mexico City2006 elections: Felipe Calderon (PAN)AMLO (Andres Manuel Lopez Obrador) factorGridlock continues2012 elections: The Pena Nieto AdministrationNew Federalism in Estados Unidos MexicanosIncreasing importance of states & municipiosRecent Economic Performance: Reasons for Renewed OptimismConsistent economic growth 1995-2000Change 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, 2000-2010Change 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 DevelopmentEconomic, Political & Social Issues:So far from God, so close to the USDependence on oil, maquiladoras, exportsUnequal living standards/poverty/stagnant real wagesDrugs & drug-related violence, lawlessnessImmigration & the loss of human capitalThe natural environment & waterIndigenous issues & ChiapasLegal, tax, labor reformsDeregulation (telecommunications, electricity)Demographics2010 Population: 110 Million (1950-25M)93% literacyEducation 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 / $14,335The Many Mexicos: Mexico CityThe Capital: 25M inhabitantsLargest city in the world (along with others)Distrito Federal: Seat of power for government, financial, & corporate (domestic & MNCs) sectorsNo manufacturingLos chilangos:Fast-paced, chaotic lifestyleCosmopolitan, status-conscious cultureThe Many Mexicos: MonterreyThe Sultan of the NorthEconomic Sectors:Traditional strength in heavy industry (steel, autos, other manufacturing)Migrating to new economy & higher value-addedCemex, Alfa (Alpek, Nemak), Vitro, FemsaLos regiomontanos:The Texans of MexicoThe Many Mexicos: JaliscoGuadalajara: The Mexican CityEconomy 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 Border2,000 miles and 10%-25% of Mexicos pop.Historical importance is less than the rest of Mexico1940-1970: Border population grew 10 timesHigh interdependence with US economyFor better and for worseDoes NAFTA make the border more relevant, or less relevant?

Economic SectorsManufacturingTraditional strength: low-tech & heavy mfg.Steel, auto parts, products for domestic marketLow-end export items (golf club shafts)Transformation of Mexican manufacturing:Emphasis on ISO 9000Capital-intensive activitiesFrom wire harnesses to electronics systems

Maquiladoras~$120B/year in exports (half of Mexicos total)But only ~1/5 is value addedHighly cyclical, vulnerable to global econ.Sectors: autos, electronics, apparel Locations: Cd. Jurez, Tijuana, borderFirst-generation maquilas no longer competitive; upgrading is essentialNon-Maquila ManufacturingTheres more to manufacturing in Mexico than the maquiladoras; line is blurringIMMEX: new umbrella for maquila, Pitex (preferential tariff treatment for temporary imports), otherThe 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 SectorTumultuous history of banking sectorNationalized, then privatized, then bankrupt, then sold off to foreigners; now stableBank 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. ServicesInterest rates have declined, but credit is still scarce for the private sectorCredit available for consumption, not investments

Other SectorsEnergy: continued state dominancePemex (oil), CFE (electricity)TourismTraditional emphasis on state-led developmentsTransition to diffused & sustainable developmentProfessional servicesPotential competitive advantage for NM & Hispanic-owned firmsThe GruposImportance of the diversified conglomerateRelation to other emerging marketsSpin-offs of historic Grupo MonterreyAlfa, Vitro, Femsa and many subsidiariesOther important grupos:Grupo Carso (America Movil, Telmex, Telcel, Prodigy, Sanborns, CompUSA, Xignux, Frisco, banks)Grupo BimboTelevisaEntrepreneurship in MexicoTheres 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 entrepreneurshipNew Mexico and Old MexicoWhere 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 total35th state in exports to Mexico; 46th in exports to worldBUT, we must account for the nature of NMs economy.43rd state in terms of exports as % of GSP20th state in terms of exports to Mexico as % of GSP