10 June 2016

Where the "Sweet Spots" Are in Mexico, Part 3

This is the third article in a three-part series on business and trade opportunities for Canadian companies in Mexico.

In Part 1, we explored the overall state of trade between Canada and Mexico today, some 20 years after the passing of the North American Free Trade Agreement (NAFTA).

In Part 2, we looked at how Canadian companies can evaluate their chances for success in specific industry segments in Mexico, and what it will take to prosper there in the future. Here, in Part 3, we dive deeply into some of the industry segments that have proven to be "sweet spots" over the past 20 years and look at some emerging ones as well.

Canadian companies that succeeded in Mexico in the two decades since NAFTA did so even during periods when there was a less-than-optimal, and sometimes less-than-cordial, relationship between the two nations.

As explained in part 1 of this series, today's Canada-Mexico trade environment may not be perfect, but it appears to be much better than it has been for some time. Plus, reforms implemented by Mexican President Enrique Peña-Nieto have opened the country to greater competition and foreign participation.

The keys to success for Canadian companies, as pointed out in part 2 of this series, are to develop a Global Competitive Advantage (GCA) and operate in the industry segments where Canadian companies have few barriers and demonstrated expertise.

To understand which parts of Mexico's economy will be open to Canadian trade and investment in the near- to long-term future, it may prove helpful to look deeply at some specific examples. Let's consider two industries where Canadian companies have already made inroads and two more where the barriers are just starting to fall.

Motor vehicle parts manufacturing

Few Canadian industries have seen as much upheaval in recent years as the automotive sector. The United States has always dominated vehicle production on the continent, with Canada reliably in second place. Canada also developed a booming business exporting auto parts to U.S. manufacturers.

But last year, Canada's share of the vehicle manufacturing market in North America fell to 14 percent --its lowest level since 1987 --while Mexico's share jumped to 19 percent, driven by massive investments in Mexico-based manufacturing by auto giants such as BMW, Audi, Volkswagen, and others1. Manufacturers have been drawn by Mexico's beneficial international trade environment for cars. Mexican-made vehicles can be exported duty-free across Latin America, the United States, Europe, and Japan.

Even though NAFTA and subsequent trade deals weakened the competitive position of Canadian car manufacturing, the arrival of foreign automakers in Mexico, combined with generous incentives and expedited approval processes, created a "sweet spot" for Canadian auto parts makers, according to The Conference Board of Canada2.

Canadian companies that had served domestic auto plants and/or exported to U.S. auto manufacturers have found considerable success supplying European automakers' plants in Mexico. In fact, the spot has proven so sweet that Canadian parts maker Magna International is now the fourth-largest private-sector employer in Mexico3 just 15 years after opening its first facility in the country.

The future of the auto sector in Mexico is far from certain, however. The key will be to watch how things shake out in the ongoing negotiations regarding the Trans-Pacific Partnership, where auto manufacturing has generated controversy. (See "Where the Sweet Spots Are in Mexico, Part 1")

Food exporters

Mexico's middle class has grown considerably in the years since NAFTA went into effect, and incomes and opportunities rose as a result. Those newly minted middle-class families have developed a taste for brand-name packaged food products that had previously been too expensive for them.

Although transporting, marketing, and selling Canadian food brands in Mexico proved an expensive and difficult task, this trend has been good for Canadian commodity exporters serving Mexico's food processing industry. Soaring demand for processed foods in Mexico pushed demand higher for the agricultural inputs that dominate the industry, particularly oilseeds. Canadian growers responded.

Rapeseeds, which are used to produce canola oil, became Canada's largest commodity export4 to Mexico, and now account for 14 percent (or CAD723 million) of the Mexican market or nearly 91 percent of canola imports5.

Even today, Mexican domestic production of oilseeds accounts for only 7 percent6 of the nation's needs. Mexico's government has responded with a support program called Pro-Oilseeds to offer incentives to domestic growers, but a projected 10 percent increase from that program is nowhere near enough to meet demand, ensuring Canada's strong export market.

Wheat has been a core ingredient in many of these products, too. This has been a boon to Canada, the world's third-largest exporter of wheat after the United States and France. In the years since NAFTA, Canadian wheat exports to Mexico have climbed. Those exports now represent a 6 percent market share, amounting to more than CAD306 million a year.

Regardless of the political or economic climate on either side, Canadian exporters will likely to continue to do well in the manufacturing and agricultural sectors where they have already put down deep roots. However, new sweet spots are emerging in additional areas. (See "Where the Sweet Spots Are in Mexico, Part 2" for the full list published by the Conference Board of Canada.)

Financial Services

In January 2014, Mexico enacted a series of financial-services reforms aimed at lowering the cost of borrowing for Mexico's small- and medium-size enterprises (SMEs).

The reforms recognized the power of increased competition to drive down costs, and that the fastest way to increase competition was to increase foreign direct investment (FDI) in the industry. The tactic seems to be working.

Financial services now accounts for 17.1 percent of FDI in Mexico, trailing only manufacturing among the industries the Conference Board of Canada examined. In fact, that 17.1 percent greatly exceeds the financial services industry's percentage of economic output in Mexico, something the study calls "punching above its weight" and a strong indicator of market openness to investment.

The reforms, which include provisions to reduce risks for foreign providers, should allow Canadian firms to increase their commercial lending in Mexico, according to a report from the Canadian Council of CEOs called Canada's Trade with Mexico: Where we've been, where we're going and why it matters released in February 20147.

Electricity Generation

Anyone who has ever opened a business in Mexico knows there are challenges involved, including the infamous difficulty in getting the lights to work. On the World Bank's Ease of Doing Business Index, Mexico performs rather well, 39th of 189 nations surveyed, but the country is singled out for two problem areas: "registering property" and "securing electricity."8

But that is about to change dramatically. President Peña-Nieto has championed legislative changes9 to allow greater private and foreign investment in Mexico's oil, gas, and electricity sectors. Canadian companies can find opportunities in selling equipment and/or expertise as the expected boom in power-related construction begins.

Is it time for your company to be making a move into Mexico? Consult with your legal team and your industry's trade association, and call your Relationship Manager at HSBC Bank Canada.

Where the "Sweet Spots" Are in Mexico, Part 1 – click here to read more

Where the "Sweet Spots" Are in Mexico, Part 2 – click here to read more

 

The keys to success for Canadian companies, as pointed out in part 2 of this series, are to develop a Global Competitive Advantage (GCA) and operate in the industry segments where Canadian companies have few barriers and demonstrated expertise.

Source:

  1. http://www.freep.com/story/money/cars/2015/06/13/auto-investment-plants-jobs-us-canada-mexico-nafta/27551801/ (Accessed on Aug 24, 2015)
  2. "Sweet Spots" for Canadian Businesses in Mexico, The Conference Board of Canada, October 14, 2014
    http://www.conferenceboard.ca/e-library/abstract.aspx?did=6433 (Accessed on Aug 24, 2015)
  3. Made In Mexico: An emerging auto giant powers past Canada
    http://www.theglobeandmail.com/report-on-business/international-business/latin-american-business/mexico-feature/article22987307/ (Accessed on Aug 24, 2015)
  4. http://www.bcstats.gov.bc.ca/statisticsbysubject/ExportsImports/Data/CountryTradeProfiles/TradeProfileMexico.aspx (Accessed on Aug 24, 2015)
  5. http://www.agr.gc.ca/eng/industry-markets-and-trade/statistics-and-market-information/import-and-export-data/countries-at-a-glance/mexico/?id=1410072148246 (Accessed on Aug 24, 2015)
  6. Mexico
    Oilseeds and Products Annual
    2014 Oilseeds and Products Annual http://gain.fas.usda.gov/Recent%20GAIN%20Publications/Oilseeds%20and%20Products%20Annual_Mexico%20City_Mexico_3-31-2014.pdf (Accessed on Aug 24, 2015)
  7. http://www.ceocouncil.ca/wp-content/uploads/2014/02/Canadas-trade-with-Mexico-Laura-Dawson-February-2014.pdf (Accessed on Aug 24, 2015)
  8. http://www.doingbusiness.org/data/exploreeconomies/mexico/ (Accessed on Aug 24, 2015)
  9. http://breakingenergy.com/2014/01/08/mexicos-energy-reforms-can-mexico-emerge-as-a-prime-global-oil-gas-industry-expansion-prospect/ (Accessed on Aug 24, 2015)

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