Mexico: The Business Opportunity Is Now

by Manatt, Phelps & Phillips, LLP

[authors: James R. Jones and Susan M. Schmidt]

On December 1, Enrique Peña Nieto will be inaugurated as Mexico's next President, reflecting the third orderly transition of power. Gone are the days when the end of a presidential sexenio signaled financial market disruption, dramatic policy shifts, and almost complete bureaucratic turnover. But more than political stability, Mexico's focus on creating an environment that attracts and supports international business and on growing its middle class, and on domestic and international conditions that present some potentially unique sector opportunities raise the question: if your business is not in Mexico, why not?

The statistics are well-known. U.S.-Mexico cross-border trade is about $1.3 billion a day. While Chinese or European imports are produced almost entirely with inputs from non-North American sources, imports from Mexico are 40% U.S.-made.[1] The U.S. is the largest foreign investor in Mexico. Mexico has the largest network of meaningful, comprehensive and effective trade agreements in the hemisphere - 12 comprehensive agreements with 44 countries, including NAFTA (U.S. and Canada), the EU, EFTA, Japan, Israel and most countries in the Western Hemisphere (Chile, Colombia, Costa Rica, Nicaragua, Peru, Guatemala, El Salvador, Honduras) – is negotiating with Singapore and potentially China, and has a myriad of less comprehensive trade protocols.

After nearly twenty years of reforms that began with NAFTA, Mexico understands international business and what it takes to attract and retain it. For U.S. and Canadian companies, NAFTA in 1994 established the groundwork for a more attractive business opportunity. Mexico now has joined the Trans-Pacific Partnership (TPP) negotiations, which will span markets from North America to South American to Asia. But more than trade agreements, Mexico has created an environment that welcomes international business. It has established agencies, such as ProMexico, that can be engaged as part of a solution for market entry and can address problems if they arise. In November 2012, it significantly modernized its labor law. Other Latin American countries, of course, trade internationally, but may be smaller markets, have less open regimes, be less globally integrated, or be more protective of domestic industries.

Evolving economic and social demographics foreshadow growing business opportunities. Up to half of Mexico's population is considered middle-class, a pro-U.S. market of more than 50 million that continues to grow, translating into increasing middle class aspirations and disposable incomes. More people have credit cards. Social and demographic changes, such as urbanization, both spouses working, and an aging population, have implications for businesses, from prepared baby food, to convenience foods, to services, to retirement homes for parents who once were cared for by their children. Middle-class lifestyles also reflect consequences of wealth, such as growing obesity and other noncommunicable diseases, and new healthcare needs.

The priorities of Mexico's new Administration present sector prospects, among them opening up energy (oil, gas, electricity), expanding legalized gaming, and other sectors today characterized by duopolies. PEMEX, the Mexican state oil company, will not be privatized or partially privatized à la Brazil's Petrobras. More likely is spinning out various noncore functions or activities that promise new opportunities for all companies, but perhaps mostly for mid-market energy product suppliers. Reinvigorating efforts to legislate and control gaming provides a potential new government revenue stream as well as business opportunity. Competitiveness will continue to be a buzzword for job creation and economic growth; however, Mexico's duopolies, which range from television and electricity, to beer, bread and milk, are seen as barriers to achieving those goals. The President-elect promises early reforms to tame such non-competitive forces.

Mexico is not without its business challenges. The institutionalization of democracy at all levels of government means that companies must assess the potential relevance of each level of government to its business. The Legislature is becoming more coequal with the Executive. State and local governments no longer depend on the federal government for direction. State Governors wield increasing power, today often demanding responsiveness from the federal government. Mexico's bureaucracies can be complex and vary in quality. Rule of law is always an issue. Cultural and practical factors define consumer needs and markets. And no one should ignore security issues. However, many companies are doing quite well in Mexico despite what the press reports. Security is a factor to assess, cost, and manage. Smart, strategic market entry or expansion can manage and minimize risks and open business opportunities.

ManattJones is a strategic international consultancy that supports its clients with services ranging from basic market assessment to doing business issues on an ongoing basis. We help companies enter foreign markets, set up distribution, solve government and policy-related issues, and establish public affairs and good corporate citizen programs. In addition to its office in Mexico, MJGS's U.S. offices complement in-country efforts through relationships with policymakers and influencers in the region and embassies in Washington.

[1] "Working Together: Economic Ties Between the United States and Mexico," Wilson Center, p. 37 (2012).

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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