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SpirE-Journal 2011 Q1

Mexico: Giving China and India a run for their money?

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Mexico: Giving China and India a run for their money?

Mexico, viewed in the 1980s as an economic failure, is now emerging as a global economic power. Among global emerging markets, Mexico has been one of the largest FDI recipients, while its exports are increasingly high-tech. It may soon have the potential to challenge the Asian powerhouses, China and India. How did Mexico achieve this and what does the future hold in store for the Tequila Tiger?

Mexico, viewed in the 1980s as an economic failure, is now emerging as a global economic power. Among global emerging markets, Mexico has been one of the largest FDI recipients, while its exports are increasingly high-tech. It may soon have the potential to challenge the Asian powerhouses, China and India. How did Mexico achieve this and what does the future hold in store for the Tequila Tiger? Mexico, one of the most popular vacation destinations in the world, is popularly known for its tequila and beaches. In fact, tourism is one of Mexico’s key economic pillars, making up nearly 13.2% of her GDP. The country is well known for stunning beaches like Acapulco, Cancun, Cabo San Lucas and Tulum. 

However, these old associations serve only to detract from Mexico’s rise as a global economic power. The country has a free-market, trillion dollar economy, which is the second largest in Latin America behind Brazil. Mexico is also an important player in many international forums including the G20. Though the country’s GDP contracted by 6.1% in 2009 due to the global financial crisis, it recovered with a growth of 5.5% in 2010. With high levels of investment in public infrastructure over the past few years, Mexico has a strong growth outlook over the medium term. China’s investment-led growth, on the other hand, seems to be moderating. Furthermore, the country is confronting an aging population due to its ‘one child’ policy, not to mention environmental and political issues. The rising wages of Chinese workers are also forcing companies to consider alternative investment sites, including Vietnam and even Mexico. For example, Meco Corporation, a U.S. maker of folding chairs and barbecue grills, recently shifted its production from China to Mexico, as Chinese wages have almost doubled since 2007. 

Mexico has the potential to leapfrog India in the outsourcing domain as well. The country has the advantage of proximity to the U.S. and a well educated workforce. In addition, Mexico has greater cultural and language compatibility with the U.S and its government has been supporting the BPO industry’s growth. 

A comparison of key economic statistics shows that Mexico is ranked much more favorably against Asian BRIIC countries than might be widely thought, especially when it comes to national wealth per person. In fact, Mexico’s GDP per capita is higher than that of Malaysia. 

Emerging from the crisis

It has not always been smooth sailing for Mexico. Having gained independence from Spain in the 19th century, Mexico lost a series of wars against the United States that led to massive loss of territory in what are now the US states of Texas and California. Mexico’s economy benefitted from US demand for commodities during the Second World War, and infrastructure investment fuelled brisk (if episodic) economic growth after the War, some of it funded by generous Western loans. 

However crunch-time came in 1982 when Mexico nearly defaulted on its international loans, owing to its flawed fiscal policies, high interest rates and an over-valued peso. An oil price drop in 1986 worsened the situation. The resulting economic crisis led to large scale unemployment and migration of people to urban areas and to the U.S. 

This trauma seems to have created momentum for economic and political reform. In 1994, a North American Free Trade Agreement (NAFTA) was signed among the US, Canada and Mexico. This led to an increase in foreign investment in the country and more exports to the US. In the election of 1997, 68 years of uninterrupted electoral dominance by one party (the PRI) came to an end, signaling the electorate’s desire for change. 

Although the outlook for the Mexican economy appeared positive in the late 1990s, structural imbalances persisted, resulting in the Peso Crisis of 1994-95. The crisis was worsened by a high fiscal deficit, inflation and interest rates. To expedite economic recovery, Mexico borrowed US$50 billion from the U.S., Canada, the International Monetary Fund (IMF), and Latin American countries. 

In the post-peso crisis era, Mexico has taken huge strides towards macroeconomic stability. Structural reforms have been progressively introduced to open the economy to trade and services. FDI and exports continue their onward march, while offshore oil production in the Gulf of Mexico is increasingly benefitting government coffers and the broader economy. In the 2000-2010 period, Mexico began exporting increasingly high value-added goods such as automotives and aviation parts, partly as a function of competitive pressures from China at the lower end of the export market. 

On only one big front has Mexico’s situation worsened – in the war against narcotics, as organized criminals moved production and distribution of US-bound drugs from Colombia and Bolivia to Mexico.

Meco Corporation recently shifted production from China to Mexico, as Chinese wages have almost doubled since 2007.
Location: Mexico’s Silver Spoon

Mexico is strategically located between the Atlantic and Pacific Oceans and forms a link between North and South America. This creates the potential for Mexico to be an important hub for global production and trade. 

The northern states of Mexico are more developed than the southern states. Monterrey, the capital city of the north-eastern Mexican state of Nuevo Leon, is the country’s 3rd largest city and a key commercial and industrial centre for the north. Mexico’s steel industry is concentrated in Monterrey which has been dubbed “the Pittsburgh of Mexico.” 

Central Mexico is inhabited by almost half the country’s total population. Mexico City and Guadalajara are the two biggest cities in this region. Mexico City, the national capital, is the country’s main economic hub and accounts for nearly one-fourth of Mexico’s GDP. Its income is driven by the services sector which makes up almost three-fourth of GDP. The informal sector of the economy, covering people whose income is generally not reported to taxation authorities (like shoeshine boys, mobile candy-and-gum sellers, garbage scavengers, day laborers and street performers) is prevalent in the region. 

Guadalajara, the capital city of the state of Jalisco, acts as a commercial centre for the surrounding agricultural region. The city has acquired the nickname of “Silicon Valley of Mexico” due to its well developed electronics and IT sectors. In fact, telecom and computer equipment from Guadajalara make up almost one-fourth of Mexico’s aggregate electronics exports. The city is also home to the University of Guadajalara, one of the largest institutions of higher education in the country. Trade liberalization 

Trade liberalization has proved beneficial for Mexico’s industry. Its manufacturing-for-export sector is dominated by high technology industrial production in automotives, metal mechanics and aerospace. The manufacturing of aerospace components has expanded with the rise of helicopters and jet aircrafts. Some domestic companies are also designing and manufacturing light propeller aircraft and Unmanned Aerial Vehicles (UAV) in Mexico. 

Automotives 

The automotive industry is among the most important contributors to Mexico’s output. Auto manufacturers in Mexico include the US “Big Three” – General Motors (GM), Ford and Chrysler; leading German car maker Volkswagen; and major Japanese firms such as Nissan, Honda and Toyota. All of these firms operate assembly plants in Mexico and together produce 40 car models in the country. 

Mexico holds a competitive advantage in vehicle and engine manufacturing due to its low labor costs and the considerable track record it has built up in production-related innovation. Furthermore, multinational automotive companies benefit from tax incentives and exemptions. Perhaps most importantly of all, Mexico’s geographic proximity to the US, by far the world’s biggest car market in revenue terms, is a magnet to auto manufacturers. 

Consumer Electronics 

In the last decade, Mexico has seen tremendous growth in the electronics industry. In 2008, it left China, South Korea and Taiwan behind to become the world’s largest manufacturer of smart phones. The sale of digital cameras, TV sets and mobile phones declined in 2009 due to the global financial crisis. But in 2010, the consumer electronics grew by 21.3% due to a bump in consumer spending during the FIFA World Cup. 

Many consumer electronics companies (e.g. Mabe) have been operating in Mexico since the 1950s and have expanded their operations in Asia, Europe and U.S. markets with Mexico as the base. Meebox Inc, a Guadalajara based company, recently introduced a new tablet – the ‘Meebox Slate’ – at the Las Vegas Consumer Electronics Show 2011, competing against Apple’s iPad. 

Aerospace 

The aerospace industry has contributed more than any other towards burnishing Mexico’s credentials as a global high-tech hub. This is on account of the demanding product quality and Intellectual Property protection standards needed for a country to develop a viable, export-oriented aerospace industry. 

Over three billion dollars have been invested in this sector in the last three years. An additional 800 million investment dollars are expected in 2011. Low production costs in Mexico, versus other aerospace hubs like France and Brazil, are one of the drivers of this success. 

Luis Olive, the head of Promexico (the Promotion, Investment and International Business Unit of Mexico’s Business Promotion Agency), declared that the aerospace parts industry will create 35,000 jobs over the next five years. 

Food 

Mexican food has long been titilating taste buds around the world. The country’s cuisine has evolved over time to incorporate a blend of different influences especially Spanish, French, Mayan and Caribbean. In 2010, Mexican cuisine was added to the world’s “intangible cultural heritage” by UNESCO. 

An affluent population, 55% of which is under 24 years old, is expected to drive the growth of the domestic food sector. Many of the country’s leading food producers are in the process of expanding and consolidating their operations through acquisition. One example is the bakery group Bimbo, which has recently acquired Sara Lee’s North American Fresh Bakery division in order to expand beyond Mexico. 

Large FDI Inflows 

Among emerging markets, Mexico has been one of the largest FDI recipients. Its government encourages foreign investment in most of its economic sectors. Promexico is the federal government agency responsible for promoting Mexican exports globally and for attracting FDI into the country. Promexico is currently focusing on those sectors where Mexico holds a competitive advantage. Energy, automotive and auto parts as well as tourism infrastructure and mining are the priority sectors. 

An indicator of its success is that the agency approved 24 strategic investment projects worth US$5,341 billion in 2010. A major portion of inward investments are coming from Brazil, Germany, the USA, Spain and Korea. The projects are further expected to generate around 10,800 direct jobs during the implementation period.

In the 2000-2010 period, Mexico began exporting increasingly high value-added goods such as automotives and aviation parts.
The Rise of World-class Mexican Companies

The number of world-class multinational companies with their roots in Mexico is notable. Business groups such as Cemex and Coca Cola FEMSA expanded their reach in the overseas market during the early 1990s. Using their healthy domestic market as a springboard, these Mexican firms are increasingly competing with their Chinese and Indian counterparts in global markets. 

CEMEX, a Mexico-based global cement and building materials manufacturer, is one of the top three cement manufacturers in the world. The company leverages efficiencies across a wide range of building materials products to reduce costs while being able to tailor its product mix to suit market needs in different countries. 

PEMEX or Petroleos Mexicanos, is the largest oil company in Mexico and the Latin American region. PEMEX is among the few large companies in the world that are fully integrated. It produces products at all stages of the value chain – upstream, downstream and end-products. 

Another good example of a Mexican multinational is Cerveceria Modelo (Grupo Modelo), which is the manufacturer of the Corona brand of beer, one of the best selling brands worldwide. The major area where Grupo Modelo differs from competitors is that it produces many of its own inputs, including raw materials, cans, packaging and machinery. It is, therefore, able to differentiate itself from its counterparts. This helps the company guarantee the quality of materials and timely delivery of finished products.

One of Mexico’s advantages is a better track record on Intellectual Property protection compared to China and India.
The Road Ahead

Mexico has taken big strides in recent years. With financial and institutional reform, it has shed its image as an economic basket-case. With a large domestic market, a young population, proximity to the US and a rising per-capita income that is almost double that of China, Mexico is on its wa

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