The potential for Canadian firms in Mexico – an interview with the CEO of GlobalBMT

Last month I visited Mexico City and had the opportunity to sit down with Gloria Garcia, CEO of Global BMT Consulting, to talk about the country’s economy and the prospects for Canadian exporters with our other NAFTA partner. 

Too often our focus on Mexico is clouded by issues of safety and security. However what I saw in and around Mexico City was a rapidly evolving economy, with significant inward investment in high-tech, advanced manufacturing and consumer goods. In each sector the focus is split between using Mexico as a base for production into the US and Latin America and, increasingly, tapping into an increasingly vibrant Mexican middle-class.

Canada’s trade relationship with Mexico is an important one.  Mexico is Canada’s third largest trade partner after the US and China, and accounts for over $32 billion in bilateral trade. Since 1994 and the completion of NAFTA, trade between the two countries has grown by an average of 11.5% per year.  That said, the bulk of this trade flows North. Canada records a significant trade deficit with Mexico, over $25 billion, and despite Mexico being  the 4th largest export market for Canadian products and services, this amounts to a rather tiny $5 billion in Canadian exports.

The following is an expanded version of my talk with Gloria Garcia about the potential that Mexico holds for Canadian firms, notably as it relates to growing Canadian exports to an increasingly middle-class consumer class.

Learn more about Gloria and GlobalBMT here.

How would describe the state of the Mexican economy and the key demographic and economic trends that underpin its performance?

GG: Mexico has transformed from a small economy to an open and more diverse one. In the last 20 years, the Mexican government has made improvements to its infrastructure and fostered competition in sectors such as transportation, energy and telecommunications. Today, Mexico is the 11^th most populated and the 14^th largest economy in the world. Mexico is the second largest economy in Latin America, only after Brazil, with a positive growth outlook.  According to the International Monetary Fund (IMF), Mexico’s economy is expected to grow 4.1% in 2014. Perhaps more important, Mexico’s per capita GDP is above US$10,000, higher than China (US$6,091), South Africa (US$7,790) and six times India’s (US$1,489).^[2]   There are several industries in particular which are showing more dynamism and significant improvements such as aerospace, automotive, and information technology and communications amongst others.

This performance and the establishment of strong macroeconomic fundamentals are the result of economic reforms launched since the eighties and nineties:

– Fiscal discipline. The government has maintained a responsible fiscal policy with an annual public deficit between 2000 and 2012 lower than 0.5% of GDP.^[3

– Inflation. Mexico has successfully controlled inflation rates. Between 2000 and 2010, inflation has averaged 5% annually.^[4]Inflation may increase as a result of higher international commodity and food prices. Last year (2013) the inflation rate averaged 4.23

– Interest rates. Interest rates for 28-day government bonds (CETES) for 2012 and 2013 are well below 5%, similar to those registered in the last 2 years. Mexico has issued 20 year bonds in Mexican pesos in the international financial markets.

– Foreign debt. Mexico’s current foreign debt amounts to 37.5% of GDP (this compares favorably to the 51% OECD average in 2010).

– International reserves. Mexico has accumulated foreign reserves higher than US $180 billion, Thus, Mexico has a net debt of 23% of GDP, which puts the country in an even better position compared to other developed and emerging economies.

– Exchange Rate. Mexico’s exchange rate is flexible and has fluctuated with the volatility of the world financial markets. For 2014 it is expected that it will remain in the 13 peso/dollar range.

– Independent Central Bank. Mexico’s Central Bank is autonomous and is responsible for handling Mexico’s monetary policy without political interventions. Thus, Mexico’s monetary policy is isolated from political cycles and responds to market forces.

These characteristics have provided Mexico with macroeconomic stability and clear rules for business, which makes the country an attractive and strong partner for business. According to the World Bank^[5], Mexico is better positioned than the BRICS (with the exception of South Africa) regarding the ease to doing business. In particular,  Mexico is the country where, on average, the least amount of time is required both to start-up a business and to carry out international trade operations (imports and exports alike).

But for Mexico to grow faster, it needs  key reforms related to energy, telecom, labor and financial policies, which have now been approved, to trigger bigger investments and boost Mexico’s productivity significantly. At this moment the private sector seems to be on hold waiting to see these changes take place to then move ahead. The new government that took charge on December 2012 has focused largely on domestic political and security issues, however more work will be necessary on both these and broader economic reforms to continue pushing the country forward.

How would you describe Mexico as a consumer market for foreign companies? How big is the Mexican middle class? What can Canadian exporters gain from doing business in Mexico?

GG: As described in a recent paper from Luis de la Calle, Mexico is a middle class country: poor no more, developed not yet^[6].

All together this is a market of more than 100 million people,  though consumer markets are strongly segmented into a majority low income, a growing middle class and a rather elite upper class. In general, Mexican households have experienced years of continuous growth in their purchasing power,  the result of the combined effects of continuous growth in annual disposable income, banking accessibility and more women entering the job market.

With more disposable income, Mexicans have increased their overall consumption of basic goods and items considered to be non-necessary such as clothing and footwear, household appliances and consumer electronics, catering services, holiday packages and other leisure and recreational goods and services. The recent global financial crisis had significant effects on this spending, however they were not dramatic and focused instead on expenditure and debt control. Now consumers will continue to spend carefully until the financial reforms expected soon trigger the growth that everyone is expecting.

That said, as personal expenditures increase and purchasing habits change and become more sophisticated, there are more opportunities for foreign products in this market. The average Mexican consumer is very open to new products and foreign brands. Canadian products in particular have been very welcome by both business and personal consumers owing to a recognition of quality, value and corporate responsibility.

What are the primary challenges for foreign companies doing business/investing in Mexico? How can these be overcome?

Doing business in Mexico is no mystery and is really no more difficult than entering any well-established market. That said, I’ll admit that there are some complexities owing to the business culture and what I’ll call the slow-motion barrier that may discourage some companies. SMEs in particular may require more help to navigate the Mexican business culture and to develop good market intelligence and recognize real opportunities. It’s important to have the right contacts here who can help open doors to those opportunities and to introduce to real decision makers. GlobalBMT is focused on facilitating those types of contacts and helping firms from Canada and elsewhere succeed in this market. And while there is no exact formula for success, the 3Ps will get you there: Patience, Perseverance and Presence. Personal contact and the development of a business relationship are as important as the quality of the product and the price.

How would you describe Mexico/Canada business relations?  How do Mexican businesses and investors perceive their Canadian counterparts?

So far the 20-year balance of NAFTA is positive for both sides. However, the potential for more business opportunities — especially for Canadian SMEs — is still untapped. It is urgent that more SMEs learn about opportunities for doing business in Mexico, which can be a very profitable and growing market. This is the right moment to start as it is a market that takes time to conquer, so the sooner the better, especially given SMEs from other countries are actively trying to build presence here.

I must mention that the Canadian Embassy as well as several provincial governments have, very useful and effective trade promotion programs to help in the adventure here. But this requires SMEs to be willing to adopt a certain level of risk in taking on a new approach that looks beyond the US to this growing market.

Historically there has always been a lot of affinity and friendliness between Mexican and Canadians, and in general business flows quite smoothly. Mexicans really appreciate the flexibility and reliability of Canadian businesses and my experience shows that Canadians appreciate the friendliness and personal touch offered by their Mexican counterparts. Nevertheless we must not overestimate these attributes and must be careful to properly understand the business environment here. For example, for Mexicans it is very difficult to say NO, and to be as responsive and diligent as expected by their Canadian clients. So a certain level of patience is necessary on one side and an evolving set of client service capacities on the other.

Where will Mexico be in 10 years? Is it a low-cost producer  that competes with China or an innovative economy that will compete with Canada and the US for higher-value work?

According to the World Bank and PWC, by 2050 Mexico’s GDP PPP will surpass US$6.5 trillion. With this size, the Mexican market will be the 7th in the world by purchasing power. This means that in the coming years, Mexico will have a larger purchasing power than Spain, Canada, Italy, France, UK and Germany. The potential here is immense.

That said, my personal view is that over the next ten years, Mexico will still be in the middle: not a low-cost producer but not yet on part with  with Canada and the US. While the Mexican government is encouraging innovation and education, we are still lagging behind and will need time, resources, political commitment and private sector devotion to significantly improve our higher-value work. Related to these needs, there are a lot of opportunities for stronger collaboration in entrepreneurship and to help domestic SMEs grow and to encourage higher value added performance.

As a result, in the immediate term, the smartest strategy for Mexico will be to develop strategic alliances with NAFTA companies and partners that strengthen the competencies of, for example, Canadian firms and exploit the advantages that a creative, high-quality and lower-cost Mexico labor force provides.

This is a significant opportunity to enhance the Canada-Mexico relationship and one I hope we will see flourish in the years to come.

 

Muchos gracias, Gloria! Esperamos ver el desarrollo de una sólida alianza entre nuestros dos países!

To learn more about GlobalBMT Consulting visit http://www.globalbmtconsulting.com