16 January 2017

Tap into Mexico’s robust growth

The burgeoning Mexican economy is expected to increase demand for Canadian industrial exports and consumer goods

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Mexico will be a growing source of business opportunities for Canada in the coming decade, according to a new report prepared by The Conference Board of Canada (CBoC) for HSBC Bank Canada.

But to succeed in the country, Canadian exporters need to build strong and lasting relationships with local partners, develop business intelligence networks, leverage government resources, and be committed for the long-term.

The report says Canada's nominal exports to Mexico are forecast to increase by nearly 30 per cent between 2015 and 2019, making it the top destination for Canadian exports in growth terms, a position it will share with China.

Key trends

CBoC's optimism about the Mexican economy is based on three key trends that will support economic growth over the next five years: favourable demographics, ongoing economic reforms, and a strengthening manufacturing sector.

The manufacturing sector in particular is well positioned to expand at a robust pace in coming years, says the report. Thanks to moderate wage growth, sustained productivity gains, and affordable energy costs, it is now cheaper for firms to manufacture goods in Mexico than in China.

Improvement in Mexico's competitiveness since the early 2000s is transforming the country into a major North American manufacturing hub. This could lead to increased demand for Canadian industrial goods including auto parts, machinery, plastics and rubber, as well as primary metals and fabricated metals. In turn, this will increase demand for Canadian commercial and transportation services.

Expanding middle class

Mexico's young population – the median age is 28, compared with 37 in China, and 42 in Canada – will help expand the country's middle class and increase the demand for Canadian consumer goods, particularly meat, pet food and cosmetics.

Mexico could benefit from a similar economic boom to that experienced by Canada and the U.S. in the 1970s, when the wave of baby boomers entered the workforce.

However, the report cautions Canadian exporters against believing that they can compete in the Mexican market on cost alone. Instead, they will need to focus on niche and differentiated products for which Mexican firms may not have the necessary expertise or resources. They will require a global competitive advantage and the ability to create more value for their potential customers than their competitors do.

In 2015, Canadian exports to Mexico reached $6.6-billion, an increase of 30 per cent over 2010. During this period, according to the CBoC report, only Canada's exports to India, China, and the U.S. posted stronger growth.

Demand for industrial goods

The report identifies 14 Canadian industries that are likely to benefit from new exporting opportunities in Mexico and groups them into three key areas: industrial goods, consumer products, and services.

Demand for Canadian industrial goods will be driven by Mexico's growing manufacturing hub. Several industries that are well positioned to meet the demand include motor vehicle parts manufacturing, primary metal manufacturing and aerospace product and parts manufacturing.

Demand for consumer products will be driven by Mexico's expanding middle class and will benefit Canadian food manufacturers and manufacturers of other chemical products such as soap, perfumes and cosmetics.

Service providers will benefit from increased merchandise trade across North America. Canadian companies best positioned to take advantage are those offering commercial services such as design, research and development, advertising, maintenance and repairs, and financial services, and transportation and logistics services, according to the report.

Canadian companies in Mexico

To gain a better understanding of what it takes to establish and grow a business in Mexico, CBoC analyzed the operations and strategies of three Canadian companies that have been successful in the country, La Petite Bretonne, Morai Logistics, and Energold Drilling

CBoC says two key tips for success in Mexico emerged from its conversations with representatives of the three companies: building trust; and being committed for the long term.

La Petite Bretonne sells its products across Canada, the U.S., Mexico, and the Caribbean. Its flaky Micro Croissants® and soft oatmeal cookies appeal to Mexican consumers' tastes and cannot easily be replicated by its competitors.

The company has two commercial agents based in Mexico who import the company's products, represent it at food shows, and deal with local customers.

Morai Logistics is a third-party logistics provider that does business throughout North America as an authorized agent of U.S.-based Mode Transportation. Morai specializes in the Mexican market and has a deep understanding of Mexico's transportation infrastructure.

Personal relationships are important in the Mexican culture. "Mexicans want to know about you and your family and tell you about their family," says Morai's CEO Kelli Saunders.

Contrary to the general view, Mr. Saunders says language is not a barrier. He points out that Mexican business people are generally well-educated and often speak several languages, including English.

Energold Drilling is a mineral and energy drilling contractor that is internationally recognized for its low-impact social and environmental drilling methods. Energold operates more than 230 rigs in 25 countries worldwide. The company also has a small manufacturing facility in Mexico, which has become a key supplier of parts for its global operations.

Energold's Director of Corporate Development and Investor Relations, Jerry Huang says it is essential to communicate the firm's long-term commitment in a foreign market to all of its stakeholders.

Mitigating risk

The report acknowledges that doing business in Mexico can be challenging, particularly in the areas of security, border clearance, and corruption. However, these challenges can overcome if Canadian firms are committed to the market for the long run.

"The reality is that you must be careful. It's not Montréal or Toronto," says Dominique Bohec, VP Sales and Marketing for La Petite Bretonne.

Mr. Huang says risks can be mitigated by having adequate local knowledge and ensuring that people are fully trained so that they can anticipate potential issues.

Mr. Bohec agrees and says moving goods across the Mexican border can be a challenge because the process is complex and regulations can change quickly. The tasks related to La Petite Bretonne's product shipments to Mexico are assigned to specific employees who can deal with any potential problems at the border as they arise.

Morai has recognized the threat posed by the potential theft of transportation equipment. To reduce this risk, it offers an intermodal product line to customers by leveraging Mexico's railway system.

Corruption, including requests for bribes, can be more of a problem outside of the large urban areas, but Mr. Huang warns Canadian businesses not become involved.

"It's a slippery slope and a short-sighted way of doing business, which is unacceptable for a public company," he says.

Tap into Mexico's opportunities

Linda Seymour, Executive Vice President and Head of Commercial Banking for HSBC Bank Canada, says the CBoC report is a useful guide for Canadian exporters looking to establish or expand their business in Mexico.

Ms. Seymour adds that Canadian exporters help the country regain lost ground in productivity, innovation, and competitiveness – all key indicators of a healthy, prosperous economy.

"The more Canadian firms tap into the world's opportunities – including those in Mexico – the greater the odds of ensuring our long-term economic health," she says.

To read the full report Reaching Out for Business Opportunities in Mexico, please click here.

Source: Conference Board of Canada Report: Reaching Out for Business Opportunities in Mexico, September 2016

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