Challenges for Establishing Businesses South of the Border

by Parker Poe Adams & Bernstein LLP
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Mexico is already a large player in the world economy, and it’s economic might is growing. Many manufacturers in Europe and the U.S. already have or are considering operations there, especially original equipment manufacturers (OEMs) and others in the automotive industry. But what do companies need to know to create a successful subsidiary south of the U.S. border?

There are a variety of challenges that manufacturers and other businesses face when they are starting operations in Mexico, Central America, and South America. I recently detailed some of those challenges at Clemson University during the 2017 International Forum for German and Spanish in the Professions. I shared some insights I’ve learned over the years while working on international business transactions and economic development. Below are some highlights.

Language

When we say things get lost in translation, they really do! I was born and raised in Mexico City, but I went to a German school in Mexico from kindergarten onward. I did not have German-speaking parents or anyone to practice with after school. Learning the intricacies of physics, math, and biology in German was a unique – OK, traumatizing – experience.

Learning multiple languages in Mexico was unusual when I grew up, and it still is today. A tiny percentage of the population speaks English. (The Mexican government recently announced ambitious plans to change that, but it will take decades.) The reality is that to do business in Mexico, you need a team with Spanish language skills. You also need to keep in mind how challenging it may be to find Mexican employees who speak English or any other language. Sometimes businesses have to train employees themselves or find other ways to get qualified local language resources.

Culture

Learning the language is an important first step, but it takes more than that to truly understand a country’s culture. This is critical for businesses because cultures make a difference in how things get done.

Parker Poe does a lot of work in Mexico, Central America, and South America, and I spend a great deal of time on “cultural translation” – making sure that our clients receive the same service level from local service providers no matter where they operate. We have a great network of attorney and local professionals that we’ve worked with in Mexico, Argentina, Chile, Perú, Venezuela, and other Spanish-speaking countries.  Having these relationships reduces the need for “cultural translation” to meet foreign business expectations. It is essential for businesses to translate not just the language but also the expectations, taking into account any related cultural aspects. By doing that, people operating around the world can check their assumptions and get on the same page.

Trade

Mexico is a party to 11 different free trade agreements with a total of 46 countries. It is currently negotiating reviews to some of those agreements, with NAFTA being the most high-profile example.

The third round of negotiations for NAFTA took place in Ottawa, Canada at the end of last month. The areas in the agenda for that meeting included small businesses, transparency, and food safety, among others. However, there are still elephants in the room. Among the most important are the rules of origin, which specify the percentage of components in a product that must be from the three NAFTA nations for it to qualify as duty free.  If that changes, there will be significant repercussions for trade. Businesses operating in Mexico, the U.S., and Canada should all be following the NAFTA negotiations closely, especially automotive manufacturers.

Site Selection

Many of the site selection factors we utilize in the U.S. can be used south of our border.  However, I want to highlight three items when conducting the site selection process in Latin America. First is the property. We know of companies that have found an industrial park they liked, negotiated the price, and often signed a letter of intent – only to realize the true owner of the property is a third party or that there is an ownership dispute. This shouldn’t happen with a good legal team that understands the local laws and conducts thorough due diligence.

When large amounts of water are required for an operation, water can be a big factor. For example, it can be tough to find in Mexico, particularly in the northern parts of the country. Most of it comes from wells, and concessions are controlled by the federal government. Businesses should analyze the specific water rights any industrial park has and what would happen as demand increases. In some cases, companies have had to purchase their own well concession separate from an industrial park, which can add substantial time and costs.

Power is the last factor I’ll discuss for site selection. Mexico has only one federal power company – Comisión Federal de Electricidad – so anything power related goes through it. It takes time and in certain areas its infrastructure is dated. Companies have had trouble when they needed a new substation operational quickly, needed to run a high-tension power line to their site, or needed redundant power. Sometimes, it may take several months to accomplish any of those tasks.

The point I would like to make here is this: surround yourself with a knowledgeable team, understand the local culture, laws, and regulations, and be thorough in due diligence.

Additional Factors

There are a variety of other challenges facing businesses establishing operations south of the U.S. border, including navigating different legal systems, geo-political considerations, logistics, foreign exchange risks, and labor considerations – among many more. I would like to encourage business leaders that have questions or need additional guidance on this topic to consult with legal counsel and qualified professionals.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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