MEXICO THE LATIN ECONOMIC LOCOMOTIVE GATEWAY TO THE AMERICAN DREAM. Business Sweden

Transcription

1 MEXICO THE LATIN ECONOMIC LOCOMOTIVE GATEWAY TO THE AMERICAN DREAM Business Sweden

2 MEXICO THE LATIN ECONOMIC LOCOMOTIVE GATEWAY TO THE AMERICAN DREAM By Business Sweden Graphic design: Business Sweden Communications Photos: Olof Holdar (page 4 5), istock by Getty

3 FOREWORDS... 4 EDITORIAL LEADER... 6 INTRODUCTION...8 BECOMING THE REGION'S DRIVING FORCE...10 TRAITS OF THE MEXICAN ECONOMY POLITICS AND ECONOMICS AN OVERVIEW...16 MACROECONOMIC OUTLOOK...20 HOW TO SUCCEED INDUSTRY ANALYSES Automotive Sector Mining Sector ICT Sector Energy Sector Retail Sector The Health & Life Sciences Sector CONCLUSION...50 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 3

4 FOREWORDS Despite the uncertainty created by President Trump around NAFTA and future U.S. Mexican trade relations, Business Sweden asserts that Swedish companies interest in investing in Mexico will not diminish. On the contra ry, this report serves as a platform for examining new business opportunities amidst the changing political landscape, as well as capitalizing on existing ones created during the current reform-minded government in Mexico. Swedish companies present in Mexico are optimistic when looking to the future. This is shown in the most recent Mexico Business Climate Study, a report produced annually by Team Sweden. The study concludes that many Swedish companies expect continued increase in sales and recruitment in 2017 as well as in the years to come. Many Swedish companies have strong market positions, with a 29 % market share on average in their segments. To add further optimism, Ericsson recently announced a plan to recruit several hundred engineers to its Global Service Center in Mexico, and H&M expects to double the number of stores in the country annually over the coming years. In addition, newer companies like Spotify and izettle are expanding rapidly on the Mexican market. Although several Swedish companies are already doing well in Mexico, there are still lots of opportunities just waiting for Swedish innovative companies. There is a demand for solutions in areas where Swedish companies are in the forefront, such as; sustainable energy and transport, road safety, ICT (incl. IoT), waste management, sustainable forestry and mining, as well as for a variety of smart city solutions including air and water quality services for the country s many and large cities undergoing rapid modernization. During recent years, Business Sweden has been one of the fastest growing foreign trade representations present in Mexico. We can offer our clients robust and top qualilty support in their quest to grow their international revenue. My hope is that you will find this study as inspiring as I do. I know we can do even more together in Mexico. YLVA BERG President & CEO Business Sweden Yours sincerely, Ylva Berg President & CEO Business Sweden 4 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

5 Business Sweden s purpose is to help Swedish companies to grow their international revenues and international companies to invest and expand in Sweden. We see great potential to generate and strengthen prosperous business relationships between Sweden and Mexico, contributing to sustainable development and economic growth in both countries. The recent years have had a great impact on foreign investment in Mexico. In , the government carried out important structural reforms, which have opened up historically closed markets. Both the energy and telecom markets are now open for external competition. This has created new possibilities for foreign direct investments as well as increased competition on the markets, bringing better services and lower consumer costs. After the implementation of these reforms, foreign investment increased. Especially successful markets so far have been automotive, aircrafts, energy, food, tourism, bank and finance. This has had a positive effect on Swedish exports to Mexico, in 2016 Swedish exports to Mexico were SEK 6 billion, an increase with 32 % since I am happy to hear Swedish companies present in Mexico confirm this positive development; they now see new business opportunities and a need to recruit new talents. At Business Sweden, we are determined to contribute to strengthening the commercial ties with Mexico even further. Swedish companies have a lot to offer the growing Mexican market, not least in terms of innovative and sustainable solutions. I am confident that even though Swedish investments in Mexico already are substantial, there are still vast opportunities to increase our commercial exchange and continue to improve quality of life with smart solutions and new ideas in important sectors. TOMAS NORLING Vice President Head of Region Americas Yours sincerely, Tomas Norling Vice President, Head of Region Americas BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 5

6 EDITORIAL LEADER How ironic is it not, that merely 20 years ago, as some of us began setting up our first account, China was still, officially, a communist state ideologically averse to international trade when, in 2017, Party Chairman Xi Jin- Ping is not only the first head of the Chinese People s Republic to attend the neo-liberal economic elite s tea party at Davos International Economic Forum. Not only a defiance to the fundamental Marxist principles that Mao instilled in his vast population of 20th century comrades, the most powerful post-mao leader of China goes beyond historic irony to become the key-note speaker defending globalized trade in the fear of a US and UK-lead new paradigm of protectionism and introverted populism. How does this become an imperative variable in the short and medium term economic development of Mexico? There is arguably no other economy of the size of that of Mexico that has had such an interlinked dependence and positively (mutual) economic boost as that between Mexico and the US. Even if only a fraction of President Trump s threats of economic disengagement and divestment are materialized, a vacuum of profitable capital investment opportunities will be freed up not obliterated, as is easy to assume and the most obvious powerful contender to fill this gap and expand it s global financial hegemony is undoubtedly China. Business Sweden therefore highlights the opportunities USD per hour for Swedish companies with strong economic ties to or prospects in large Asian economies to consider carefully the opportunities that will open up through transforming Asian Mexican export-import and value chain relationships. Expect shifts of assembly and manual-labor processes from China toward Mexico, already incentivized by Mexican labor costs dropping below China s in recent years, as evidenced below. Conversely, Mexico will now not only be an opportunistic market for a cost-efficient base for sales toward the rest of the Americas, but also a strategic location for trade with China and other quickly developing Asian economies. MEXICO HAS OVERTURNED CHINA'S HOURLY WAGES % Source: BofA Merril Lynch Global Research, Banxico, INEGI, International Labor Organization, China NBS -19.6% Mexico China 6 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

7 Driving a campaign based on isolationistic rhetoric with the promise to bring back manufacturing jobs to the United States, President Trump has delivered many threatening messages to several of the country s most important trading partners. As the target of much of this harsh discourse from the 45th president of the United States, Mexico could be facing threats of sharply increased trade barriers with its main trading partner. While the two economies are greatly intertwined, with a constant heavy flow of goods across the second longest border in the world, the prospect of reducing this flow could be particularly damaging not only for Mexico but could also severely damage the Southern States in the US who are very dependent on their export to Mexico, as well as many other areas of the economy, including staple food. Being greatly dependent on its massive neighbor, Mexico is seeking to reduce this dependency with more trade with other countries, looking towards Asia, Europe and other parts of Latin America. The European Union and Mexico have accelerated ongoing trade negotiations aimed at improving the mutual free trade agreement. Cecilia Malmström, the Swede who currently serves as the European Commissioner for Trade, has and will continue to meet with Mexico s Minister of Economy, Ildefonso Guajardo, repeatedly in The Swedish Minister of Trade, Ann Linde, has also undertaken a bilateral delegation to Mexico in the autumn of this year further positioning and promoting Sweden as an advantageous trade partner for the region. Nonetheless, after more than half a year of Mr. Trump s presidency at the time of publishing, the US president has not managed to implement virtually any of his controversial campaign-vows. There are several underlying reasons for this: despite Republican majority in both houses of congress, the party remains greatly divided and seemingly yet in majority opposed to many of Trump s populist promises; Mexico has stood surprisingly strong in negotiations and made the new administration aware of the cross-border security implications of a hostile policy stance toward Mexico and Central America; the American private sector has voiced their concern about proposed protectionist trade measures and xenophobic labor force regulations; and, finally, Trump has been faced with the reality of his own limited experience in managing the US federal system and exerting global political influence. At the time of publishing, Republicans themselves have rather decidedly excluded the building of a Mexican border wall from budget proposals, Trump himself has announced that he will not break up the NAFTA free-trade agreement and so far the deportation of immigrants or de-facto assault on Mexican residents has been limited and rather secretive. The Mexican Peso has already recovered to pre- US-election currency exchange rates vs the US dollar (and other currencies) and continues to stabilize around an expectedly medium-term rate of approximately 18 MXN/USD. One thing has been proven beyond doubt; political uncertainty destabilizes investor confidence and the effects have been rattling for Mexico. The roller-coaster s loops are over but the question now is how many twists and turns remain; either way, the Mexican wheelof-fortune keeps spinning with successful players taking home sweet rewards. Happy reading! Mårten Wilkens Project Manager, Mexico City BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 7

8 INTRODUCTION Mexico is an underutilized market for Swedish companies, providing many opportunities over a large spectrum of industries. One of the major benefits of operating in the country is the low manufacturing costs, where the country is one of the most cost-competitive countries to produce in, if not the cheapest. Already the country has a large established automotive industry that is growing as more and more producers identify the benefits of placing production in the country. Mexico also hosts one of the largest mining industries in the world, leading the world s production in silver. The country has ambitious investment plans, where for example the energy sector is undergoing a transition from carbon based fuel to renewable energy. As an upper middle income economy with a young population, the prospects for continuous growth loom bright. Increased consumer spending is expected to play a major role in this growth when the country makes its climb upwards the list of the largest economies in the world. The time to do business in the country has seldom been better than it is now, with a growing consumer market and deregulation and de-monopolization taking place in several sectors, providing plentiful of opportunities for Swedish companies. In this report we will take a closer look at these opportunities and present our insights on how to succeed on the Mexican market. 8 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

9 BUSINESS IN MEXICO EASIER AND CHEAPER MEXICO IS A LARGE, HIGHLY DEVELOPED ECONOMY TRADE AGEEMENTS Mexico has more free trade agreements than any other country in the world. LARGE POPULATION With 127 million people, Mexico has a large pool of potential customers. GROWING ECONOMY Estimates show that by 2050 Mexico will be the world's fifth largest economy. LOW COSTS Mexico has among the lowest production costs in the world. BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 9

10 BACKGROUND BECOMING THE REGION S DRIVING FORCE Mexico is the second largest economy in the group of countries that make up Latin America, as well as one of the most competitive and developed country in the region (alongside Chile). Being the world s largest Spanish speaking country, Mexico is probably the most influential country in a region that is home to over 400 million Spanish speakers, with strong ties to the rest of the region through a series of free-trade agreements and historic cooperation. Several Latin American economies are currently suffering mightily during the distress of low global demand of natural resources, often exacerbated by corruption and political turmoil, most prominently in Brazil and Venezuela. What is receiving less attention known is that most Latin American economies are experiencing periods of moderate to strong growth, where several countries such as the Central American countries of Nicaragua, Panama and Guatemala are growing rapidly. As the most diversified economy in the region, Mexico is undergoing a period of expansion, albeit a modest one. With a slow-down facing Brazil, the other major power in Latin America, Mexico is presenting itself as the present and future leader among this group of nations, where Mexico is expected to be the world s 5th largest economy by the year Swedish companies with presence in Mexico are mostly very successful: in combination, 50 of these companies employ over 60,000 people making up almost 4 % of their total global workforce. For most Swedish companies in the country the market share has been increasing significantly over the last couple of years. Further, almost all of them have expansion plans in the country in the medium-term and 70 % plan to increase the number of employees. 10 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

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12 TRAITS OF THE MEXICAN ECONOMY ONE OF THE MOST COST COMPETITIVE NATIONS IN THE WORLD FOR MANUFACTURING Swedish companies active in Mexico are rapidly seizing market shares. In interviews with country managers and regional managers at Swedish companies active in Mexico, half of the responding companies had at least a 10 % growth of their market share during Some had seen their market share double or more. According to the same study, investing and producing in the country is considered to be much more profitable than investing in other parts of Latin America and slightly more profitable than South- and East Asia. The manufacturing cost structure of Mexico was in fact one of the best in the world already in 2014 and this competitive advantage has been strengthened in last years as the Mexican Peso has plunged against the US Dollar. In a large study comparing the business location costs in over 100 cities in Asia, Europe and the Americas, Mexico City and Monterrey came out on top with the most competitive costs. The low production costs can be explained by the low wages and the long hours that Mexicans work. In fact, Mexicans work more than any other country in the OECD, even ahead of the South Koreans. This translates into around 600 hours more per year than the average Swede. However, productivity per worked hour is quite low, partly due to the low level of education. THE WORLD S MOST OPEN ECONOMY Mexico is the country in the world with most free-trade agreements with other countries. The country has free-trade agreements with a total of 45 countries, including the members of the European Union, Japan, United States and several countries in Latin America. Mexico s openness against the outside world is a greatly appreciated element among Swedish companies conducting business in the country, and in combination with the location of the country this serves as a substantial benefit for those who want to tap into the Latin American markets or those of the US and Canada. Another sign of the open and business-oriented approach of the country is the steady improvement in the World Bank s Ease of Doing Business report. For 2017 the country is situated at number 47, placing it first in Latin America and ahead of for example Italy. The various states of Mexico are also competing internally as they are measured individually by the World Bank. Therefore, it is easy to compare the results between the various 12 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

13 MAIN INDUSTRIAL HUBS IN MEXICO TIJUANA Manufacturing, tourism, health toursim, biggest medical device centre in North America. CIUDAD JUAREZ Manufacturing. MONTERREY Manufacturing, automotive, food & beverages. GUADALAJARA ICT, Creative industries, forestry, textiles. LEON / BAJIO Automotive, chemicals, leather, agriculture/food. MEXICO CITY Political centre, home to most corporate headquarters, well developed service sector, large consumer market, adademic and innovative hub. PUEBLA Automotive, education, metals, electrical products, chemicals, textiles. Central and northern Mexico are the main industrial hubs in the country. BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 13

14 states, something that provide an incentive for the states to compete between them of whom provide the best regulatory environment for business. Thus, the ease of doing business is likely to improve further. The greatest risks that remain in terms of economic expansion depend on the uncertainty of Donald Trump s policy-mix outcome as pertains to potential new import tariffs. Finally, the future of the country and its economic development is of course also heavily dependent on ongoing gubernatorial elections and the upcoming federal poll both of which have significant impact on the incidence of corruption and foreign trade relations. THE TALE OF TWO COUNTRIES Mexico is a widespread country with a large population that is home to several distinct cultures in various regions. The development of these regions differs heavily where the lion s share of economic activity is confined to states bordering the US and states in the central of the country. These parts of the country are home to several large and developed industrial centers such as Mexico City, Monterrey and Guadalajara. Wealth and consumption is concentrated to these larger cities that hold the prerequisites for continued growth of their economy and population as they can attract skilled labor from other parts of the country, as well as increase the productivity. This division of the country between the richer and the poorer regions is further strengthened by educational inequalities where the completion of higher education is much more common in the more developed regions and cities. The large differences that exist in the country through the gaps in productivity, wealth and economic opportunities between various cities and regions justify the need for a deeper understanding of the market situation in order to make informed assessments of business opportunities in the country. THE ELEPHANT IN THE ROOM CORRUPTION AND INSECURITY Being a nation where the division between those who have and those who do not is abysmal, acts of violence are common. This situation is made worse by the war on drugs that has severely affected parts of the country. In the capital and the large cities the situation is far better as they are largely spared from the violent clashes between the armed forces and the drug traffickers that have done a lot to taint the image of the country. Despite the calmer situation in the large cities an understanding of what areas are safe and what areas to avoid is needed. Even though Mexico is the easiest country in Latin America to do business in according to the World Bank, where corruption is a component of the index, corruption and bureaucracy are widespread phenomena where Mexico ranks 95th out of 167 countries in Transparency International s Corruption Perceptions index for 2015, a position slightly behind China. Mexico is aiming to improve on their bad reputation where they now are participating in international programs to fight corruption. Corruption is particularly severe in infrastructure development or in other public tender processes. Police interaction is another area that is greatly associated with corruption, where the officials seek to increase their income through bribes. Swedish companies in Mexico express that the corruption in the country is a serious problem. The companies experience problems in application processes of operational licenses or when attempting to fulfill other requirements stipulated by law. Corruption is also common in health and environmental inspections. 14 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

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16 POLITICS AND ECONOMICS AN OVERVIEW Politics and trade in Mexico some tribulations, not so many trials but always open for business REFORMING INSTITUTIONS PERHAPS, BUT NOT PARTY The current federal government in Mexico is led by Enrique Peña Nieto, from the Institutional Revolutionary Party (PRI). Peña Nieto won the presidential election in 2012, the term is six years. During 2013 and 2014, the president suggested and carried out important structural reforms to open up the historically closed energy and telecom markets for external competition. This has created new possibilities for foreign direct investments as well as increased competition on the markets, bringing better services and lower consumer costs. The reforms where supported by the opposition in the congress, which gives them a broad political support and makes it difficult for a coming new president to change. After opening up the markets foreign investment is increasing, according to the Swedish embassy in Mexico. Especially successful markets in 2015 when investments increased by 11 %, were the automotive, the aircraft industry, energy, food, tourism and finance sectors. The positive trends can be seen in Swedish export to Mexico, which increased by 28 %, or SEK 5.8 billion, between 2014 and 2015, thus turning around a two-year negative trend. Swedish companies present in Mexico say they see a positive development, both new business opportunities and a need for recruiting new talents. The next presidential election in Mexico is getting closer. With less than one year left, Peña Nieto is increasingly seen as a lame duck, especially since Mexican presidents cannot be re-elected. People are now wondering who will take over the responsibility in 2018, and what it will mean for the future. From 1929 to 2000, PRI reigned Mexico. This party has changed their political views from left to right during the years, and is now best described as a mix of both. The first non- PRI president was Vicente Fox, elected in 2000 he represented the conservative centerright party National Action Party (PAN). His victory marked the beginning of a process of greater pluralism of political parties in Mexico. Since then, Mexico s political system has 16 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

17 experienced a shift from single-party dominance to a system of multi-party politics. Today there are eight parties represented in the Congress, the three biggest being PRI, PAN and the center-left Party of the Democratic Revolution (PRD). When the PRI returned to power in 2012, they showed a more liberal side than its ideological predecessors. Enrique Peña Nieto started out popular in the public opinion. In his first years he made progress in opening both the oil sector and telecommunications to private investors. This led to better terms for foreign investors as well as for Mexican consumers. Unfortunately, Mexico has been and still is suffering from low oil revenues, weak economic prospects and declining oil production. As a result, some of the government s plans have been put on hold, for example construction of new railways. The NAICM project though, which is the new international airport, is still ongoing with full speed. One can assume this will be part of Peña Nieto s legacy as president, and therefore it is prioritized. Partly due to events mentioned above, the president is now struggling with low approval rates. He is seen by many as weak in relation to USA, as well as not doing enough to end corruption and drug violence. With Trump winning the elections in the US, the Mexican president s approval rate dropped to his lowest measures ever, 25 %. THE PRI LOSES ITS GRIP OF LOCAL STATE GOVERNMENTS Even with the low approval rates, PRI has a chance to stay in power after Not mainly due to own achievements, rather because both PAN and PRD are facing internal disagreements which weaken them. However, PRI risks winning without getting the strong mandate needed to implement the reforms required to reduce violence and corruption. Some argue it is time for completely new politics, and say recent admission of independent candidates in the presidential race might mean unexpected news, by some this is also seen as a step in the right direction against corruption. Although most of Latin America is turning to the right, Mexico could go the other way in There are signs showing a growing support for populist, anti-system candidate and two-time presidential competitor Andrés Manuel López Obrador (2006 and 2012). This former mayor of Mexico City began his career as a PRI politician. In the 2006 election, his loss was declared by less than one percentage. He claimed fraud and organized protests, and kept the country in suspense for more than a year. Lopez Obrador is now a member of the left party National Regeneration Movement, better known as Morena. Some of the other potential candidates in the race for the presidential post are: the current Head of Government of Mexico City, Miguel Ángel Mancera for the PRD, likely to run together with the PAN in a most unusual left-right coalition for government. The PAN might push forward the former first lady and wife of Felipe Calderón, Margarita Zavala. The ever dominant PRI party may put their weight behind Jose Antonio Meade (or as independent) the current Secretary of Finance, or perhaps the Secretary of Internal Affairs, Miguel Ángel Osorio Chong, among other possible candidates. Regardless of who becomes president in 2018, the political direction within some areas are expected to remain. One of those areas is trade: Mexico s economy is quite exportdependent and cordial relations with other countries are therefore politically prioritized. Hence the over 40 Free Trade Agreements (FTAs) that Mexico has with other countries. China is seen as the greatest competition, not least regarding exports to USA. As regards trade with the U.S, they remain Mexico's most important trade partner with 80 % of exports going to the neighbor in the north. However, with Donald Trump as the new president in the U.S terms might change, especially if the new president in Mexico 2018 turns out to be one with nationalist tendencies. Other BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 17

18 factors might also have effect, such as experts and politicians claiming that Mexico s economy is too dependent on the U.S economy, and that it would benefit from diversifying its export markets. One can sense the direction changing a bit, the recent events regarding the Trans-Pacific Partnership agreement (TPP) is one example. When Donald Trump said USA will not continue negotiate the TPP, Mexican Finance Minister stated that they will continue the process with or without the U.S. Parallel to this the EU and Mexico will discuss modernizations of the already existing FTA between the two parties. This will hopefully open more doors and increase trade, says the Swedish embassy to Mexico. EXTERNAL INFLUENCES Even though many Mexican industries are blooming, it does not include all. The steel industry has been suffering from Chinese competition for many years; their steel is highly subsidized and therefore cheaper. This has made it hard for Mexican steel producers to stay profitable. As a response to this, the Mexican government introduced a 15 % protective tariff on all steel coming from countries without an FTA with Mexico, aimed to reduce the Chinese steel import. This has led to a decrease of imported Chinese steel by 77 %, but at the same time it has made the import process more time consuming for all steel exporters. Companies from countries with FTAs say they are also affected by this in a negative way, according to the Swedish embassy to Mexico. Returning to the political debate in Mexico, it is very much affected by the coming election in The big issues during the elections are predicted to be corruption and drug violence and harsher punishments for the above as well as healthcare reforms. These issues already are high on the agenda and problems with corruption, by example, are real and widespread in the country. As a result, foreign companies are discriminated in public procurement processes, mainly at state- or municipal levels, which make up around 70 % of all procurements in Mexico. The existing FTA between Mexico and the EU requires transparency and that all information regarding procurement is made public, but this only covers procurements on a federal level. Swedish companies though, have not pointed out any specific obstacles to trade. The re- negotiations of the FTA between Mexico and the EU might mean that the demand for transparency becomes an elevated issue. However, these negotiations are estimated to finish late 2017, and so far nothing is set in stone. There is a growing consensus that Mexico is in need of comprehensive reforms to abolish or diminish corruption, accomplished by the rule of law. This would require a leader with a strong mandate, preferably without too much baggage and loyalties. In 2018 we will know for sure what direction the country will take for the coming 6 years. 18 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

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20 MACROECONOMIC OUTLOOK THE THREAT OF TRUMP As previously stated the election of Donald Trump as president of the United States is potentially very damaging to the Mexican economy. His presidential campaign was packed with rhetoric of seclusion and disgust towards the trade deals with other nations, much of which directed towards the Southern neighbor and the NAFTA treaty. Trump has called this treaty the worst trade deal in history however despite the harsh rhetoric it is unclear whether he could endanger the immense bilateral trade between the two nations. As the value of the trade is close to 600 Billion US dollars each year, the damaging effect of hindering this trade could be immense. Mexico would be the main loser if tariffs where to be imposed, where 80 % of the country s exports are going to the other side of the Northern border, but the damages to America is also likely to be immense, in particular to the Southern states. It is not likely that Trump will be able to raise tariffs as he has proposed, this as he certainly will face stark political opposition, not least from members of his own party. WEAK CURRENCY The threat of dismantling NAFTA, has put a downward pressure on the value of the Mexican Peso, a currency that already had depreciated heavily against the US dollar as export income has fallen due to the low oil prices during the last few years. For companies that mainly serve the Mexican market with their cost base in Mexico this is not a major issue, as their lower revenues can be compensated by their lower cost. The country was even before this depreciation one of the cheapest countries in the world to be producing goods in, and the advantage for those producing goods in the country and exporting them has been further augmented by this value reduction. Consequently imported products competing against locally made products will see their margins erode. Some industries might be able to maintain their margins but rather their volumes are likely to suffer as fewer buyers can afford their products. The largest customer in the country, the Mexican government, has been forced to put some of their very ambitious investment plans on hold due to a budget deficit, although most of them remain as scheduled as these are deemed urgent and necessary for the continuing growth of the country. A prolonged budget 20 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

21 deficit may however affect fiscal spending more negatively in the future, something that will have repercussions in the overall economy. The Mexican economy is still expected to grow at a steady pace in the coming years, driven by increased consumption and growing export of non-petroleum products and, as discussed, the Mexican Peso is already on a stable path toward foreign-exchange rate recovery. Ease of doing business MEXICO HAS THE REGION S HIGHEST INVESTMENT POTENTIAL COLOMBIA PERU MEXICO CHILE ARGENTINA BRAZIL Competiveness BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 21

22 HOW TO SUCCEED UNDERSTAND THE CHALLENGES Mexico is potentially a very profitable market in several sectors, as presented in this report. However, despite being the country in Latin America that is the easiest to do business in (according to the World Bank), being mindful of the challenges that are associated with the market is essential in order to succeed. Mexico is still a society where contacts have major impacts. Being a collectivistic country, loyalties often lie within the member group, where loyalty is often the overriding principle to other regulations and rules. Therefore, contacts are an ever greater asset in Mexico than most places elsewhere, and could be an absolute necessity in order to open the right doors, even more so considering that face-to-face contact often can be necessary before doing business in the country. Thus, making use of local expertise is often the simplest and most effective way get a fast start in Mexico. In order to effectively deal with the problems of corruption in the country Swedish companies that already are established in Mexico agree that it is beneficial to be clear with their values towards other stakeholders already from day one has made it easier for them to reach their goals accordingly. However, they are aware that they have to work hard to exercise their values in the country, where risks assessments, strict rules and internal and external audits are key to maintain their business ethics. In order to reduce the risk of corruption Swedish companies should aim to start discussions with governmental representatives at the top, instead of starting in the lower or middle hierarchy where corruption is more widespread. Nevertheless, the generally reliable federal administration often lack adequate influence and control over State and Municipal authorities. Therefore, if foreign companies operations depend on the lower echelons of government, they should be careful in their dealings with public officials and attempt to have a record and/or relevant witnesses to any negotiations and financial transactions to minimize the risk of corruption. DEFINE MARKET ENTRY STRATEGY ESTABLISH PRESENCE Mexico is a huge country, with distinct conditions and prerequisites for various states and cities. The best strategy to enter this kind of market is often to have a geographical focus, where one or a couple of sites are targeted, whilst minding the long-term expansion from the start, something that enables companies to scale up over time. This means targeting a location that of course serves a good starting point in terms of demand but also makes sense from an expansion perspective. The capital, a market that alone is one of the largest city economies in the world and a larger economy than most European countries, 22 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

23 is often a great entry point for the export of consumer products and services. The Mexican economy is also heavily clustered around several major metropolises and dependent what industry or branch one is working in or serving, identifying the right cluster for entry is essential in order to as efficiently as possible cater to your target groups. The border between Mexico and the US is the busiest border in the world, both for people and trade. Establishing business in Mexican cities located close to the border can serve as a stepping stone into the US market. However, as emphasized in this study, US trade policies might hamper trade between the two countries but cross border trade is likely to remain very dynamic, nevertheless. BOOSTING PERFORMANCE OF SALES PARTNERS For companies that rely on sales partners for all or most of their sales in a country, the performance of the latter is going to be directly related to the sales and the profits of the company. Therefore, it is very important to understand if one's partner on the market is performing adequately. Utilizing one single partner in the country could seriously stifle the profit-potential. Mexico is a vast country with several different and distinct regions, and partners who have an adequate presence in all can be scarce. Even if they do have presence in several regions their performance may not be optimal in each region. Finding partners that allow companies to achieve a good market presence in the most important regions is essential, where relationships that once worked may have to be revised in order to achieve growth and to make profits. Deteriorating partnership performance can at times also be remedied by making a greater commitment to the partnership, where activities such as marketing support, trainings, better utilization of the strategic competencies of the company for the distributors as well as greater follow up on KPIs. However, sometimes weak performance is best resolved by terminating the relationship with sub-par partners, and searching for new ones where the prospect of success is far greater than in previous constellations. BE PATIENT A market entry in Mexico requires a long-term plan. Doing business in Mexico is often slower than it is in Europe, and the need to establish relationships is greater. Some emerging companies have experienced immediate success, such as izettle, that started up in Mexico about three years ago and has grown to a team of more than 35 since. Then again, many Swedish companies have a long trackrecord in the market, with certain companies boasting a presence for more than a century, experiencing truly impressive growth once well established in the country. That is and has been a positive foundation for prospective Swedish companies with innovative complementing technologies that are able to enter the market as a supplier to the well-established players, commanding trustworthy presence through a historically solid Swedish Mexican trade relationship. What is important to note is that personal connections carry heavy weight in industrial success, born of a culture where trust is to be earned as an alternative guarantee for commercial transactions. On the one hand, personal interaction is therefore stressed as immensely valuable, but Business Sweden has therefore also specialized in developing the capacity to represent client companies as a trusted proxy. Furthermore, as previously stressed selecting the right partners and distributors is essential for success. Thus, companies should take their time in identifying and selecting the best fitting partners and distributors. Also have local lawyers run through distribution contracts and ensure to include clear termination clauses, timeframes and the expected results. Several Swedish companies in Mexico agree that being open, concerned and proactive about social rights, observing Mexican BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 23

24 WORLD BANK EASE OF DOING BUSINESS / THE ECONOMIST 2016 MEXICO LATIN AMERICA & CARIBBEAN GNI PER CAPITA (USS) Ease of doing business rank (1 90) 47 Overall distance to frontier (DTF) score (1 90) POPULATION Starting a business (rank) 93 Getting credit (rank) 5 Trading across borders (rank) 61 DTF score for starting a business (0 100) DTF score for getting a credit (0 100) DTF score for trading across borders (0 100) Procedures (number) 7.8 Strength of legal rights index (0 12) 10 Time to export Time (days) 8.4 Depth of credit information index (0 8) 8 Documentary compliance (hours) 8 Cost (% of income per capita) 17.8 Credit bureau coverage (% of adults) Border compliance (hours) 20.4 Minimum capital (% of income per capita) 0.0 Credit registry coverage (% of adults) 0.0 Cost to export Documentary compliance (US$) 60 Dealing with construction permits (rank) 83 Protecting minority investors (rank) 53 Border compliance (US$) 400 DTF score for dealing with construction permits (0 100) DTF score for pretecting minority investors (0 100) Time to import Documentary compliance (hours) 17.6 Procedures (number) 13 Extent of disclosure index (0 10) 8 Border compliancy (hours) 44.2 Time (days) 86.4 Extent of director liability index (0 10) 5 Cost to import Cost (% of warehouse value) 9.8 Ease of shareholder suits index (0 10) 5 Documentary compliance (US$) 100 Building quality control index (0 15) 11.7 Extent of shareholder rights index (0 10) 8 Border compliance (US$) 450 Extent of ownershiop and control index (0 10) 6 Getting electricity (rank) 98 Extent of corporate transparency indeex (0 10) 4 Resolving insolvency (rank) 30 DTF score for getting elctricity (0 100) DTF score for enforcing contracts (0 100) Procedures (number) 6.8 Paying taxes (rank) 114 Time (days) Time (days) DTF score for paying taxes (0 100) Cost (% of claim) 33.0 Cost (% of income per capita) Payments (number per year) 6 Quality of judicial processes index (0 18) 10.1 Reliability of supply and transparency Time (hours per year) 286 of tariffs index (0 8) 6.2 Total tax rate (% of profit) 52.0 Resolving insolvency (rank) 30 Postfiling index (0 100) DTF score for resolving insolvency (0 100) Registering property (rank) 101 Time (years) 1.8 DTF score getting registering Cost (% of estate) 18.0 property (0 100) Recovery rate (cents on the dollar) 69.1 Procedures (number) 7.7 Strenght of insolvency Time (days) 42.1 framework index (0 16) 11.5 Cost (% of property value) 5.2 Quality of land administration index (0 30) 16.3 Note: Most indicator sets refer to a case scenario in the largest business city of an economy, though for 11 economis the data are a population-weighted average for the two largest business cities. For some indicators a result of no practice may be recorded for an economy; see the data notes for more details. In starting a business, procedures (number), time (days), and cost (% of income per capita) are calculated as the average of both men and women. For the postfiling index, a result of not applicable may be recorded for an economy. laws, having a high degree of diversity and equality in their workforce and having good practices from Sweden adapted to the Mexican culture creates a high competitive advantage for Swedish companies in Mexico. It could take some time to find the right setup, but when the companies get it right they often find themselves to be very competitive in the Mexican market. As a final introductory (and recurring) theme, Mexico is and should be proud of its steady rise on the global economic stage in one way made explicit by its path toward one of the world s most open economies and positioning itself as an ever more smooth market to enter as a foreign or local entrepreneur. 24 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

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28 INDUSTRY ANALYSES In this report Business Sweden will highlight the outlook for industries with large potential in Mexico, where a description of the current situation is followed by an outlook for the future and our recommendations. 1. Automotive Sector Full speed ahead on the Mexican circuit CURRENT SITUATION The world's assembly-center During recent years Mexico has become a key destination for investment, especially for automakers and their suppliers. The automotive industry in Mexico represented 47.7 % of the country s manufacturing activity in 2014, and exports are continuously increasing. As many as 33 international OEM s are present in the Mexican automotive sector, as well as over 800 autopart suppliers. Among the most dominating companies you find Nissan, Ford, General Motors, Volkswagen and Honda 40 (, all situated in the well-developed clusters in the centre and north of Mexico (see maps below for exact localization of production of light vehicles, heavy vehicles and R&D centres). Sweden is represented by a number of Swedish companies, with two well known OEM's being Volvo Buses and Scania. On the supplier side you find Swedish companies such as SKF, Autoliv, KB Components, AQ Wirirng Systems, IMS Nonwovens and Trelleborg. And just recently, Suzuki Garphyttan opened a plant in Guanajato. The Mexican automotive industry is mainly focused on the production of light vehicles. However, the heavy vehicles segment has undergone a rapid expansion during the last years. Manufacturers are engaged in the assembly, stamping and production of bodywork for a wide range of models to meet domestic and export demand. Ten heavy vehicle producers and two manufacturers of engines for these types of vehicles currently have production facilities in eight Mexican states BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

29 From 2012 through the full year 2015 alone, engine production increased from 2.8M to 3.7M units. This production is projected to grow to 4.2M units by This rapid growth is the result of the expanded vehicle assembly presence in the area. A large number of automakers and suppliers produce engines and transmissions in Mexico, and some companies are currently investing to expand their operations 11. In addition to traditional manufacturing operations, automakers are choosing Mexico as a place to locate Research and Development (R&D) centres (CAR, The Growing Role of Mexico in the North American Automotive Industry, July 2016). In 2014 there were as many as 360 facilities for R&D for the automotive industry in Mexico, divided into 106 design centers, 247 laboratories and 7 vehicle test centers 14. According to the ProMéxico report The Mexican automotive industry: current situation, challenges and opportunities, the industry hit record levels for both units produced and units exported in WHAT DOES THE FUTURE HOLD? The impact of US protectionism Mexico is now the world s fourth largest automobile exporter, when taking into account the export of both heavy and light vehicles, and foreign investment in Mexico's tradeable sector is likewise substantial. The country s liberal trade regime and growing incomes mean that the Mexican market will increase and continue to be attractive to exporters and investors. If it had not been for the present political debate around the future of NAFTA, the 1994 North American Free Trade Agreement, and the somewhat declining demand for light vehicles in the US, the expectation for export growth would still be very optimistic. These two factors cannot be overlooked while attempting to predict the future of the automotive industry in Mexico. In light of Ford Motor s cancellation of its investment plans in Mexico, BMI Research is revising the forecasts for the production of passenger vehicles in Mexico to an increase of 6 % by 2020, down from 10 % 17. Key indicators for Mexico th producer of vehicles globally, and the leading producer in Latin America: 3.6 million units. 5 th producer of heavy vehicles globally: 191,000 units. 7 th producer of light vehicles globally: 3.4 million units. 4 th exporter of heavy vehicles: 156,900 units. 7 th exporter of light vehicles globally: 2.8 million units. 21 of the major vehicle manufacturers in the world have presence in 14 Mexican states More than 300 Tier 1 suppliers to the terminal industry The terminal industry is responsible for 81,927 jobs Automotive and auto parts industries participation National GDP: 3 % Manufacturing GDP: 18 % Foreign Direct Investment (FDI): 20 % Total exports: 27 % BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 29

30 LOCALIZATION OF FACTORIES PRODUCING LIGHT VEHICLES 41 Tijuana Hermosillo Chihuahua Saltillo Saltillo Derramadero Ramos Arizpe Ramos Arizpe BAJA CALIFORNIA NORTE Aguascalientes X 2 SONORA CHIHUAHUA SLP COAHUIEA BAJA CALIFORNIA SUR DURANGO El Salto Puebla Sialo SINALOA NAYARIT NUEVO LEON ZACATECAS TAMPS. AGS. S.L.P. JALISCO COLIMA GTO. ORO. GUERRERO HIDALGO MICHOACAN MEX. TLAX. MOR. PUEBLA VERACRUZ TABASCO CAMPECHE YUCATAN QUINTANA ROO Puebla OAXACA CHIAPAS Salamanca Celaya Sialo Cuautitlàn Toluca Toluca Civac Automakers have announced 24.2 billion USD worth of investment in Mexico since 2010, nearly a third of all new spending on North American factories according to nonprofit organisation Center for Automotive research (CAR). Ford, Honda, Mazda, Nissan, and Ram all have opened new assembly plants during this period. Another five plants are planned before 2020, one example is Volkswagen Group who will open an Audi plant in the coming years, BMW has announced its will start operating its own assembly plant in 2019 and the Daimler and Renault Nissan joint venture is constructing a plant that soon will start production 11. Despite that Ford has changed the expansion plans in the country, other manufacturers continue with theirs. In total, it is expected that the new OEM s investments will generate huge business opportunities for Tier 1, Tier 2 and Tier 3 suppliers in the coming three years, where the most conservative estimates indicate a the value of these business opportunities at 10 BUSD, whereas the most positive appraisals value the opportunities to a staggering 38 BUSD. The National Industry of Auto-parts is working to develop local providers and reduce the imports of components and raw material. To add further boost to the development the Ministry of Economy has launched a program 30 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

31 LOCALIZATION OF THE PRODUCTION OF HEAVY VEHICLES 41 Mexicali Silao Querètaro Querètaro BAJA CALIFORNIA NORTE BAJA CALIFORNIA SUR SONORA CHIHUAHUA DURANGO SINALOA NAYARIT JALISCO COLIMA COAHUIEA ZACATECAS AGS. S.L.P. NUEVO LEON GTO. ORO. GUERRERO TAMPS. HIDALGO MICHOACAN MEX. TLAX. MOR. PUEBLA VERACRUZ OAXACA Saltillo Escobedo, Nvo. Leòn Garzia, Nvo. Leòn SLP CAMPECHE TABASCO YUCATAN QUINTANA ROO There are clusters for production of light and heavy vehicles, as well as for R&D. Identifying the right location is very important before making investment decisions Mexico, as resources differ greatly in various regions. It is also a good idea to compare costs and amount of administration required in different states and cities while this can vary a lot. In the World Bank s latest Doing Business en México you can find detailed information on this topic. Cuautitlàn Izcalli, Edo Santiago Tianguistengo, Edo Tultitlàn, Edo. Mexico Cd, Sahagùn Cd. Sahagùn, Hidalgo to strengthen the chain of provision for companies established in Mexico 14. Despite the apparent attractiveness of the large business opportunities, there are of course challenges associated with investing in Mexico. Apart from the high level of corruption and crime that Mexico suffers from, there are other issues to consider. The country s main trading partner is USA, to where around two thirds of Mexican goods and services in the sector are exported 14. A challenge for the country is to diversify its export markets, a conversation that has existed long before the current debate surrounding NAFTA. BMI Research states one should not take for granted that NAFTA will remain in its actual form, but that it is unlikely that trade between the three involved countries would be severely hindered. This is due to the fact that the supply chains in the automotive sector between USA, Canada and Mexico are deeply integrated, where USA and Canada-based factories shipped nearly $29 billion worth of parts to Mexico in 2015, according to INA, the Mexican autoparts industry s national association. Mexican plants in turn sent more than $78 billion worth of cars and auto parts to the US alone 15, accounting for much of the trade surplus Mexico has with the US 16. BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 31

32 PRODUCTION OF HEAVY AND LIGHT VEHICLES, K UNITS * 2018* 2020* Light vehicles Heavy vehicles Mexico specializes in light vehicles (95 %) but the heavy vehicle segment is growing faster Therefore, the economic repercussions of a trade war would be considerably detrimental for the US, and its government might also find itself facing lawsuits from US manufacturers if they finally do decide to abandon NAFTA 17. BUSINESS SWEDEN SYNTHESIS Lack of local providers OEM s, Tier 1 and Tier 2 suppliers are interested in developing local providers in order to save costs and improve supply chain performance. Mexican companies mainly focus on manufacturing small components to the spare parts market. They do not have the financial resources or the support to access cutting edge technology. As a result they lack in production capabilities demanded by the OEMs. This opens a window of opportunities for Swedish companies, especially for suppliers producing transmissions, steering and suspension systems, plastic parts, seats and brakes, as these products mainly are imported today 14. An ideal OEM-Supplier relation is typically characterized in the form of a pyramid in Mexico it has the shape of a rhombus, illustrating the lack of local suppliers, especially in Tiers 2 and 3. Considering the rapid expansion of the Mexican automotive industry, the market offers opportunities for many Swedish companies in the sector. A tough stance by US President Trump cannot be ruled out and the introduction of higher tariffs is still distinctly possible for politically sensitive sectors of the economy. In the shorter term it is nonetheless important to monitor the status of the NAFTA deal or any new replacement agreement, taking potential consequences into consideration when assessing the market opportunity. OEM (Ideal) Tier 1 Tier 2 Tier 3 OEM (Mexico) Tier 1 Tier 2 Tier 3 32 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

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34 2. Mining Sector Plenty more to dig for, just more consciously CURRENT SITUATION Metals galore For more than five centuries, Mexico has been one of the leading producers and exporters of minerals worldwide. It is one of the most important industrial sectors in the country, where it represents 5.5 % of the country s GDP. The country is the leading producer of silver in the world, and holds second place in bismuth, sixth in zinc, seventh in salt and the eight in gold. The mining clusters are located mainly in the north and western states Sonora, which holds 31.6 % of the production and Chihuahua with 11.3 %, as well as in Zacatecas with 27.6 %, which is located in the centre of Mexico 19. Each year, Business Sweden Mexico organizes trade delegations that visit the two main mining clusters in Sonora and Zacatecas as well as other working visits to mines around the country and region. During the delegations Business Sweden carry out technical workshops in which Swedish companies can present solutions to actual challenges in the mining industry, as well as organize visits to mines owned by Mexican companies. Between 2014 and 2015 the value of mining-metallurgical production increased 6.5 %, driven mainly by a 16.8 % value growth in precious minerals production. This development is due to higher production volumes, which offset the negative price trend. Investments have been growing where the investments for 2015 of almost 1.5 billion dollars in new projects represent an increase of 10 % compared with In addition, eight mining products obtained record productions: gold, silver, lead, copper, zinc, wollastonite, magnesium sulphate and sodium sulphate. In 2015 gold contributed 34.1 % of the total value of domestic production, followed by copper with 19.7 % and silver with 18.5 %. Mexico is a large recipient of foreign direct investment in the mining sector. The mineral advisory firm Behre Dolbear 18 ranks Mexico as the 5th most attractive destination for mining investments. According to the Mining Chamber of Mexico (Camimex), investments in the sector reached 5.2 billion dollars in This represents a 5.1 % increase over Canada is the main foreign investor in the Mexican mining industry with 65 %, followed by USA with 17 %. In total there are 267 identified companies financed by foreign capital operating in the Mexican mining industry, that manage a portfolio of over 900 projects. More than one third of these projects are in the exploration stage 11. Swedish companies are well represented as suppliers to the mines. Companies such as Atlas Copco, Sandvik, Volvo Trucks (MACK), Volvo Construction & Equipment, SKF, SSAB, Xylem and Stafsjö are all active in the mining industry in Mexico. WHAT THE FUTURE HOLDS Digging into deep pockets According to BMI Research studies Mexico s mining industry value will see a solid growth, supported by low operating costs and a strong project pipeline over the next few years. The country s sector value is forecasted to increase from USD15.7bn in 2016 to USD17.8bn by 2020, averaging 3.3 % annual growth. The country will remain the leading global silver producer, averaging 4.5 % annual growth 34 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

35 driven by increased silver consumption in Asia. The BMI Research study also states that Mexico s copper sector will continue to increase output due to competitive operating costs as well as a significant project pipeline over the coming years 17. The strong forecasts has spurred interest in new mining production sites, exemplified by the 515 MUSD investment made in the San Julian site in Chihuahua that will focus on the production of silver and gold. The federal government is committed to supporting the mining industry s consolidation and growth, creating better conditions for investment in each stage of the mining process. It has made progress in strengthening Mexico s competitiveness through reforms, responsible macroeconomic policy and an industrial policy focused on developing expertise in geology. These initiatives contribute to promote sustainable development of the mining sector 11. In December of 2015 there was a total of 25,531 mining concession titles in force in the country, which cover an area of million hectares, equivalent to 11.8 % of the national territory. This area is expected to grow since the Federal Government has granted mining concessions for a total surface of 347,967 square km, almost 18 % of the national territory. Although the future looks bright for the Mexican mining industry it is important to follow closely the development of prices of metals. The World Bank estimates that the downward trend in prices will continue and although some degree of recovery is forecasted to begin in 2017, however in the medium term prices are not expected to reach the levels they recorded in 2010 and Further, assessments of the risk of cartel/gang violence must be made. This problem is particularly widespread in the northern part of the country, where most mining developments are found. Trumps s threat to tear up NAFTA has caused uncertainty in Mexico. However, the threat against the mining industry is smaller than that of for example the Mexican automotive industry, where sales are highly dependent on the US market, as metals are globally traded commodities. BUSINESS SWEDEN SYNTHESIS The silver streak There are plenty of business opportunities in the Mexican mining industry, given MEXICO WILL CONTINUE TO BE THE WORLD S LEADING PRODUCER IN SILVER Mexico Silver Mine Production (LHS, moz) & Share Of Global Total (RHS, %) e 2016f 2017f 2018f 2019f 2020f Production % of global 19 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 35

36 the huge market size as well as the variety of mineral wealth. Domestic production includes 32 different minerals where Mexico is among the top ten producers in the world for half of them. The broad range of metals produced creates a market with many niches and companies are likely to find segments that are underserved. One of the competitive disadvantages for the Mexican mines is the high cost of energy. Therefore, solutions that can reduce the use of energy are in high demand for the mines. Other products related to the sustainability of mining are also drawing increasing interest, not least as the population is becoming increasingly aware of the negative environmental side-effects associated with current mining activity in the country. BMI Research states that Mexico s mining sector will gain increasing interest from international firms, due to the country s low operating costs and vast mineral reserves. Grupo México will remain the dominant copper producer in the country, while other sectors will see new junior and mid-tier entrants. Given Mexico s size and the well dispersed mining clusters, distribution is problematic (see map further down). Normally the best way to serve the market is to start identifying distributors and then develop an approach that combines direct sales as well as distributors. All business in Mexico is made mine by mine and personal meetings are highly prioritized. To succeed in the market one has to have their feet on the ground. 3. ICT Sector Reforms to get everyone talking, surfing and thinking CURRENT SITUATION Extensive Constitutional and Market-based ICT Reforms Mexico has introduced an ambitious mediumterm strategy for Internet and Communications Technologies under President Peña Nieto s administration. The telecommunications reform rests on four fundamental pillars 33 : 1. Broadband internet access as a constitutional right. 2. Improved and updated legal framework through the establishment of an independent regulatory body, the Federal Institute of Telecommunications (IFT), and Specialized Courts. 3. Promoting market competition and eliminating barriers to entry to the industry through anti-monopoly regulation and 100 % access for foreign capital. 4. Designated, nationwide megaprojects: a new shared mobile broadband network, base grid improvement and expansion, digital terrestrial television, and a so-called Mexico Connected program. Since the decree of these reforms in 2012/13 the government has made tangible progress with substantially positive results be it from headwinds of civil and academic movements or public administrative efficiency. Either way, it is a fact that progress has been made and impact of above reforms showing results. Between Q3 36 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

37 2014 and Q the telecommunications sector grew at a rate of 10.6 % in comparison to the national GDP growth 33 of 2.6 % (in itself healthy on a concurrent global comparison). In the three years from 2012 to 2015, mobile broadband subscriptions nearly doubled, and internet penetration increased by more than 10 % 33. Furthermore, the market dynamism created by administration policies of opening up the market and creating opportunities for public-private partnerships has seen foreign direct investments (FDI) double over the last two years, making up 12 % of national FDI The government has commissioned a few prioritized mega-infrastructure projects to achieve the desired social impact of these reforms, of which two are of notable interest and provide opportunities for the Swedish ICT industry: la Red Compartida the Shared Network and México Conectado Connected Mexico. WHAT THE FUTURE HOLDS Connecting Mexico The Mexico Connected project sets out to establish public internet access points across the country with the aim of eventually reaching the entire population. The official objectives include closing the digital gap or ensuring access to internet for a larger part of the population and improving the reach and quality of public services. Achieving the 2015 aim, over a 100,000 such internet spots have been set up in schools, hospitals 33, libraries and open public areas including city parks. This project also provides significant opportunities for Swedish companies in terms of infrastructure development and innovative solutions for public IT-application such as e-health services, public information access, identity verification for tax/financial services, etc. Business Sweden has been collaborating with Swedish companies from the large, with Ericsson already employing some 6,000 people in Mexico and well established since 1902, to the newer with a multitude of SMEs from Spotify to rural entrepreneurs bringing something innovative to the table. All have one thing in common: they have opened their eyes to the massive potential in the Mexican market of 125 million inhabitants and local entrepreneurial willingness to collaborate in order to create mutual benefit, sustained by the good reputation Swedish quality and business values continues to command. Red Compartida By the end of 2015, Mexico became the first country in Latin America to finish the migration from the former analog tv bandwidth to a digital terrestrial network, freeing up the 700 MHz spectrum for mobile broadband use 32. This was designated to a state-planned Shared Network that would be leased out for a full private concession with the premise that any winner would have to increase the measly 79 % national mobile phone coverage statistic to at least 85 % to enter the bid. This project is budgeted at around 7.5 billion USD, with a winning consortium constituted as Grupo Altán under Spanish Mexican leadership awarded the tender in November This undoubtedly provides unlimited business opportunities, and Business Sweden has been working to improve visibility of Swedish companies and will continue to do so in order to promote access to the great potential this project offers for suppliers of ICT solutions. In the past year Business Sweden has been instrumental in supporting Ericsson to engage in different ICT opportunities, from smart cities, transportation, financial inclusion to a carriers carrier project (Red Compartida). We expect the Mexican ICT market to expand as more infrastructure is deployed and digital transformation enables industries to be more efficient, innovate and improve experience to consumers (João Yazlle, Managing Director Ericsson Mexico). BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 37

38 BUSINESS SWEDEN SYNTHESIS Time to Plug & Play Advancements have been made to achieve the Mexico Conectado vision in terms of the regional internet centers and general public connectivity, but there is yet much to be done and the current presidency is eager to take credit for a substantial rollout. Slow but purposeful progress is also being made in terms of the transparency of the government department s public tender process, such as featuring a live webcast of tender deliberations and participant s bid presentations (despite subsequent, but as of yet unsubstantiated, allegations of bias against the final opposing consortium bid). As for the government and private sector s enabling of an improved basis for the digital ecosystem, the rate of internet penetration has doubled during the current administration s mandate, but that rise from 44 to 57 % is still a poor global (and regional) average 33. Despite being home to Latin America s largest telecom operator, Carlos Slim s America Móvil, this reality has persisted due to financial incentives and economic hegemony, but the Red Compartida project is designed to level social benefits through increased coverage to regions that are in the radio shadows (and excluding oligopolistic spectrum ownership from this bandwidth). The current, regionally poorest, national mobile phone coverage of around 79 % of the population was to be lifted above 85 % to enter the bidding process, and the winning consortium has delivered a promise of at least 92.2 % coverage by These factors provide wide-ranging opportunities for Swedish ICT companies with innovative solutions, many of whom are already present with a proven track record in one part or another of current value chains but further opportunities will abound as projects such as the above mentioned are deployed, general proliferation of the internet continues, and a massive customer base for new and existing digital services develops. 4. Energy Sector The power to change? CURRENT SITUATION Widespread reforms driving energy sector modernization In 2013, Mexico implemented the Energy Reform and by this accomplished the country s most important economic change in 50 years. The reform opened up the Mexican Energy sector for the first time. The objective is to attract new investors and increase the economic growth in total by boosting the energy sector. This seems to work well, investors and private companies are lining up to take part in the developments on the now open market. The implementation of the Energy Reform involves several actions already taken by the Mexican government to achieve the vision that 35 % of the country s electricity will be generated from renewable sources by 2024, thus also aiming to incorporate new innovative technologies in the sector 29. The modernization of the sector dissolves the monopoly of the two principal actors within the Mexican energy sector, the Federal Electricity Commission (CFE) and Petróleos Mexicanos (PEMEX). Now, private companies are authorized to participate 38 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

39 in all areas of the productive chain, with the exception of the electricity distribution network which will remain in the hands of CFE. The reform also seeks to take advantage of the nation s oil reserves. Mexico holds the third largest oil reserve in Latin America, after Venezuela and Brazil, with 9.8bn barrels (bbl) as of year-end , but has not been able to fully gain from it due to the economic and technological slowdown which has impacted PEMEX in the last decade. But now, with the current reform, the Mexican government expects to attract domestic and foreign investments of nearly $50.50 BUSD 30 between 2015 and The Energy Reform consists of several important measures. One is the creation of the Wholesale Electricity Market. This will allow new companies to participate as electricity suppliers, providing electricity at competitive rates which benefit Mexican businesses, industries and households. Another significant part of the reform is the introduction of Clean Energy Certificate, which has established that by 2018 a minimum of 5 percent 31 of the electricity consumption from large users must be generated from environmentally friendly energy sources. By 2019 this share should rise to 5.8 percent 31, demonstrating a continuing initiative for the promotion of clean energy generated from renewable sources like wind, water or solar energy. The aim is to fulfill Mexico s global commitments in environmental matters and combating climate change. WHAT DOES THE FUTURE HOLD? Recent renewable tenders will boost the cleantech sector From 2014 to 2015, the installed capacity for clean energy generation grew 7.0 %; Mexico today has enough capacity to generate 28 % of its energy needs from clean sources and is on its way to reaching its goal to raise it to 35 % by 2024, with intermediate goals of 25 % in 2018 and 30 % in The Mexican government estimates that Mexico will require investments in electricity infrastructure of $131 BUSD between now and 2030 including $15 BUSD in transmission lines, which for the first time will be open for private investment 16. As result of the First Renewable Energy Auction, 11 companies will install 18 new wind and photovoltaic projects to produce 1,720 megawatts of power with an estimated investment of $2.1 BUSD by In the Second Renewable Energy Auction companies won contracts to build about 5,000 megawatts of new clean energy-generating ROUND 1 Tender 1. Shared Production Contracts for exploration and extraction in shallow waters. Tender 2. Shared Production Contracts for the extraction of hydrocarbons in shallow waters. Tender 3. License Agreements for the extraction of hydrocarbons in terrestrial areas. Tender 4. License Agreements for the exploration and extraction of hydrocarbons in deep waters. ROUND 2 Tender 1. Shared production contracts for exploration and extraction in shallow waters. Tender 2. License agreements for exploration and extraction in terrestrial areas. Tender 3. License agreements for the exploration and extraction in terrestrial areas. BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 39

40 capacity with an investment of around $6.6 BUSD. In the electrical transmission sector, CFE recently published the pre-conditions necessary for participation in the tender of the first public-private partnership (PPP) of the new energy scheme. It consists of the construction and 25 years of operation of the first direct current transmission line (HVDC). It will carry 600 kilometers of wind energy produced in the state of Oaxaca to the center of the country, with an investment of up to $1,700 MUSD 38. Bidding for a more productive future of the Mexican oil and gas sector The official end to the 76-year monopoly of state-owned oil company Pemex manifests a new era of productive potential. In several tenders contemplated since the Energy Reform, the Oil & Gas sector has been completely opened for private investors. Although lower oil prices have discouraged global producers from increasing investment in frontier and higher risk upstream land, it is expected that Mexico will be an outperformer among hydrocarbon producing countries. This due to its historic and robust sector reforms coupled with a vast underground potential. The first round of tenders (Round 1) requires an estimated investment of $8,500 MUSD annually until the end of As part of this, 156 blocks were offered of which 96 corresponded to exploration and 60 to extraction projects 30. Whilst the strengthening of crude oil benchmark prices over the year helped stabilize Pemex losses, the price of Mexican crude oil remains at historic lows, deeming the majority of its upstream operations unprofitable. Therefore, it is expected that Pemex will remain under significant financial and operational strain over the remainder of the shorter term. BUSINESS SWEDEN SYNTHESIS Seeking innovations for clean-energy production & consumption Mexico has enormous potential in practically all renewable resources and is on its way to position itself as one of the countries that invests most in renewable energies in the world. At the same time, thanks to recent reforms in the energy sector, barriers which prevent the development of new generators, technologies, markets and consumers are being eliminated. The reform is driving the modernization of the Mexican energy sector, turning state-controlled enterprises to private investments and promoting the use of renewable energies. This opens up for international companies, not least Swedish, to seize the promising new business opportunities. The Swedish industry has been involved in several seminars as well as workshops with the main key actors in the Mexican energy sector, which means Sweden is an important partner for Mexico in its strive to reach the objective of significantly raising the usage of renewable energies in the country, while simultaneously providing the necessity for Swedish innovative solutions and potential for investors that may reap the benefits available in this renewed market. 40 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

41 Museo Soumaya, Mexico City Drill on the sea near Cozumel, Mexico BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 41

42 5. Retail Sector From the textile-boom to modern high-end assembly processes, the Mexican maquilas keep churning out as ever CURRENT SITUATION Shop-for-what-you-got, on the spot! A consumer spending boom is currently sweeping across Mexico and it looks like it is here to stay. The Mexican retail sector has been growing steadily ever since the global recession in 2009 and it has kept pace despite government spending cuts, faltering consumer confidence and recent tax reforms generating tightened fiscal conditions. The spending binge is most likely the result of several factors but three of these are considered main. Firstly, Mexico has had a historically low inflation rate and it reached a record-low 2.1 % in December Secondly, information from the International Monetary Fund (IMF) shows a boost in private credit and since January overall nominal private credit has grown by a remarkable 19.5 % on average. Thirdly, there has been an upsurge in remittances due to depreciation of the Mexican peso. Between January and June the remittances in peso terms were up by an astonishing 30 %, in comparison to an increase of 8.9 % in remittances in US-dollar terms for the same period 20. Mexico is a hybrid consumer market where world renowned companies like Walmart share the streets with pop-up stores. Even though the presence of traditional village shops is significant, the retail sector is mainly dominated by a number of major players like OXXO (convenience stores) and Liverpool (department stores). According to information from a Mexican retail association, retail sales grew by a nominal 10.6 % during the January July period of 2016 and the retail sector is set to keep growing due to several factors. Mexico is a big country with a massive population forecasted to increase to 127 million by the end of The middleclass is growing steadily and the country has a young population that drives the consumption. The number of young childless couples, also known as DINKS (Dual Income and No Kids), with high disposable income has nearly doubled since 2005 and for them exclusivity and the way of life that the brands project is primarily, while price is not of great concern. Positive for the retail sector is also that more women are going into employment meaning more potential customers for retail companies. As a result of the positive outlook Mexico s retail sales are projected to reach billion US dollars in 2017 a rise of 17.8 % since WHAT THE FUTURE HOLDS Smitten by brand consumerism Ever since Donald Trump came out on top in the US elections in the beginning of November 2016 year there has been wide spread uncertainty about how Mexico will do under the reigns of the Donald. The concern is understandable and warranted given Mexico s close commercial ties with its neighbour in the north. As a result of the outcome of the elections the Mexican Peso has jittered at around 20 to the USD, and the depreciation could have a negative impact on the Mexican s willingness to consume, but there is positive news as well. Some experts mean that Mexico has pressed the accelerator on domestic consumer demand. People in the northern 42 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

43 states of the country are no longer crossing the border for shopping and in December 2016 this resulted in year on year growth of up to 100 % for some consumer goods segments in Mexico 22. Given recent events, could it well be that we will see a reverse shopping tourism where Americans go to Mexico? Even though the Mexican retail sector is booming it faces the same challenges as retail industry sectors in most countries. Over the course of the last few years the big retail chains with physical stores have lost significant ground to the growth of Internet sales. A contributing factor to this is the entry of Amazon. The American giant started its Mexican operations in 2015 selling e-books and e-reader devices but soon expanded to offer a full-scale range of products The number of Internet users in Mexico is growing rapidly and for Swedish retail companies it is key to use this tool in order to succeed in the Mexican market over the long haul. A good example of embracing the world of internet retailing is the company Cornershop, founded in 2015 and owned by the Swede Oskar Hjertonsson. With said company customers can do their grocery shopping online through their Internet browser or the smartphone app and choose between products from a variety of supermarkets and specialized stores. After placing the order, the products are delivered to your home or office in maximum 90 minutes and to a cost of around 3 USD. The fashion industry is known to be very changeable, but Mexico has with its fast and flexible production schemes been able to guarantee on-time delivery and quality which together with great creativity has helped the country to meet the needs of the industry to a very large extent. The Mexican retail apparel industry has experienced significant growth during recent years and by the end of 2016 it was estimated that the industry had reached a total value of MUSD, which is 15.6 % more than in The positive development is largely the product of lowered import taxes stemming from Mexico s impressive numbers of free trade agreements. The aforementioned has allowed foreign companies to enter the Mexican market with a good sustainable growth creating a high level of competition. The tough market climate has forced the players to run intensive marketing campaigns and to create strong brand consciousness in order to keep their market share. In addition to what has been said, for a fashion company to be successful in Mexico it is critical to offer credit facilities to low income consumers and to secure desirable real estate 21. Despite the strong market presence of department WHAT ARE MEXICANS SPENDING THEIR MONEY ON? 69.7 Food and grocery 9.8 Home and garden 8.5 Apparel and accessories 6.6 Electrical and electronics 2.5 Furniture and floor coverings 1.2 Books and stationary 1.2 Sports and leisure equip. 0.5 Music, video, enternainment Source: Retail Sector: Global and Mexican highlights of the supermarket & hypermarket industry, PwC, 2015 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 43

44 stores such as Sears, Liverpool and El Palacio de Hierro and competition from brands like Zara, H&M has achieved great success in the Mexican market. During its 5 years in the country, the Swedish company has opened 24 stores nationwide and according to Bea de la Borbolla, PR and Communication Manager, Mexico is a very strong market for H&M. The results that we have had these years have been impressive. Customers have received the brand in a very positive way 21. Even if H&M as a brand with more economic products has done exceedingly well on the Mexican market, there is a big potential for premium brands as Mexicans through fashion want to signal social success and the fact that Mexico City has more (USD) millionaires than Sao Paulo, Shanghai or Moscow 26. For those companies who do not see a potential in the Mexican market, the country can be interesting for another reason. Since 1965 it is possible for certain factories ( maquilas or maquiladoras ) to import material and equipment without paying duties and tariffs for assembly, processing, or manufacturing and then export the final product, sometimes back to the country of origin 27. This is interesting especially given Mexico s extremely low labor costs and that several reports describe Mexico as the most cost competitive nation in the world for production, eclipsing that of China and other Asian manufacturing hubs 10. BUSINESS SWEDEN SYNTHESIS Tacos down, bottoms up! As illustrated in the chart above, the food and grocery industry is by far Mexico s biggest retail group accounting for 69.7 % of the country s total retail sales and 8.4 % of the Americas retail food industry value. The industry experienced a dip in 2009/2010 but bounced back to life shortly thereafter and has kept growing ever since. By the end of 2018, the Mexican food and grocery industry is forecasted to reach a total value of 180 BUSD, a CAGR of 5 % since The industry is expected to deliver steady growth in the near future thanks to a growing population which is one of the world s youngest 55 % is 24 years old or younger. Supermarkets (300 2,500 square meters) and hypermarkets (2,500 square meters and above) are controlling an important part of the Mexican grocery industry with big players such as Walmart, Chedraui and Superama dominating the market. The aforesaid channels nearly always have more than 40,000 SKUs (stock-keeping units) which calls for fierce competition when battling for the customer s attention. In-store visibility is the key factor when it comes to being chosen by the shopper. Obesity is a huge problem in the Mexican society and in 2014 Mexico was the most obese nation in the world according to the UN, surpassing the US with 32.8 % of the adult population being overweighed. Contributing factors are great consumption of sugary drinks and unhealthy fast food. The situation has made the government to promote healthier eating and lifestyle through different programs. The efforts are slowly showing results and Mexicans are now starting to opt for healthier food and beverages. The market for organic products is currently on an upswing, especially in the bigger cities like Mexico City, Monterrey and Guadalajara 21. It is anticipated that the organic food sales market will have an average annual growth of 15.4 % per year until 2017, which is 10 percentage points higher than in the US and makes Mexico one of the most interesting and promising markets in the America s region. Organic food production has been regulated by the Mexican government since 2006 but it was not until 2013 that an official logo was issued for labelling and commercialization certified organic products, and this can be interpreted as that the segment is expected to continue to develop and grow. Some processed organic products that have been successful on the Mexican market are beverages, oils, cereals, sauces, dairy products and sweet products, and they are often sold to premium mass retail outlets, gourmet 44 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

45 stores and high-end restaurants 28. Even if these cost a bit more than conventional products, the middle and upper class are willing to pay more for healthier food options and products originating from European countries are often associated with high quality. Fortified and diet foods and beverages is another type of health products that are taking market shares from conventional processed food. These products offer value added ingredients like protein, calcium, vitamins, minerals and more sophisticated functional formulas such as probiotics, folic acid and omega 3 at the same time as they often are reduced in sugars and calories. To sum up, there are significant sales opportunities for Swedish companies within the market for health products, perhaps especially for beverages given the fact that Mexico is the number one consumer in the world of bottled soft drinks 28. Mexico s low labor costs together with its extensive network of Free trade agreements make the country a highly suitable location for manufacturing of all kinds of products, both for the massive domestic market and for the rest of the Americas. Companies opting for a softer landing in the Mexican market should consider teaming up with a local distributor that can provide valuable insights about the specific market and share customer networks. Worth mentioning and something to bear in mind is that the distribution fee can vary quite a lot and consulting Business Sweden can therefore be a good idea when entering into a partnership. 6. The Health & Life Sciences Sector CURRENT SITUATION Mexico s health care sector is growing and facing complex and challenging health care needs The Mexican healthcare market was valued at 79 BUSD in and offers a wide range of opportunities for Swedish companies. It is driven by an ageing population, economic growth and improved access to healthcare. Parallel to this, chronic diseases and other health issues are increasing care volume. The government is introducing policies and programs that promote innovative research, where the objective is to support the development of new medicines that combat chronic diseases 35. The epidemiological focus has gone from transmittable diseases to chronic degenerative diseases, which forces the nation s health care model to change from react and response to act and prevent. Mexico is a sizeable market for all types of medical devices. Imports of equipment, instruments, disposable and dental products reached 4 BUSD in The US Department of Commerce estimates that imports account for 80 % of the local demand for medical equipment and instruments and about 40 % of demand for medical disposables. Baja California is the location for Mexico s main medical devices cluster, where this region accounts for around 33 % of the country s total exports in the sector and where over 80 companies that export medical devices are active 37. Foreign Direct Investment (FDI) between the years exceeded 3 BUSD, with mainly BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 45

46 LANDSCAPE OF THE MEXICAN HEALTH SYSTEM PWC, BUSINESS SWEDEN ANALYSIS Business and citizens Patients SERVICES Premiums Healthcare private insurance (4%) Employers & employees contributions Social Security: IMSS; ISSSTE; Seguro Popular (26%) Public services for non-insured population (34%) Public services for insured population (66%) Public healthcare services Federal government Healthcare and public services social protection (22%) Public institutions IMSS Opportunities IMSS (81%) ISSSTE (18%) PEMEX, ISSFAM (1%) State government Individual contributions 718 hospitals outpatient units Drugs public spending 26.8% hospitals 70% units with less than 10 beds 6% units with more than 25 beds 48% out-of-pocket expenses 464 hospitals outpatient units Drugs public spending (IMSS 75%, ISSSTE 18%, PEMEX 7%) FUNDS RESOURCES As a consequence of the widespread use of private healthcare providers out-of-pocket spending account for close to half of health expenditures. European and US investors 37. Further, Mexico is the world s second largest market for medical tourism, only behind Thailand, with a market valued at 3 BUSD per year, where Mexican agencies reckon that this number could triple or quadruple within the next 7 8 years 35, rife with opportunities for foreign investment. Although the population is relatively young, with approximately nine people of working age to every adult over 65, the country faces complex and challenging needs ahead according to OECD s review of the Mexican healthcare system. Whilst life expectancy over the globe increased by three years on average, rising from 77.1 to 80.4 years between 2000 and 2013, it only increased by 1.3 years in Mexico, from 73.3 to 74.6 years. This means a widening of the gap in longevity between Mexico and other countries from around four to six years. This development has made the Mexican government strive to provide better care for the elderly 36, and Swedish companies offer a wide range of elderly care products and best practices that can be applied to Mexican health institutions. Obesity has become a serious problem for the Mexican population, with a significant impact on overall health standards. Over the past 30 years, Mexico has become one of the countries in the world most heavily affected by the global epidemic of obesity. The country is now second only to the United States in overall obesity, its prevalence increasing from 69.5 % to 71.3 % of the adult population in the short period between 2006 and 2012 (OECD 2016) 36. At this rate, this nation is now one of the countries with the highest child obesity prevalence in the world with one in three children being overweight or obese. As a result, diabetes, the chronic disease most directly linked with obesity, is spreading rapidly in Mexico, affecting 16 % of the adult population (OECD 2016) BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

47 HEALTH ISSUES PREVALENCE ON THE MEXICAN POPULATION Deseases of circulatory system Diaetes mellitus Malignant neoplasms Deseases of digestive system Deseases of respiratory system Certain infectious and parasitic diseases Congenital malformations, deformations and chromosomal abnormalities HIV Mental and behavioural disorders Tuberculosis per 100,000 population Eurostat/OECD/WHO/national statistics A SNAPSHOT OF THE HEALTH SYSTEM IN MEXICO Dependent on your occupation and if you are part of to the formal or informal labor market there are different systems that provide healthcare services. Salaried or formal-sector workers are usually either covered by the Mexican Social Security Institute (IMSS, with approx. 60 million insured) or Institute of Social Services and Security for Civil Servants (ISSTE, with approx. 12 million insured). Although citizens that participate in the formal economy are covered through IMSS and similar systems, they often seek treatment from private healthcare providers, where the service is perceived as better. Non-formal sector workers are covered by Seguro Popular that, unlike the other systems, does not cover treatment of chronic diseases and therefore people who have low incomes often have to pay for these services themselves. This is particularly problematic with the harsh impact of diabetes among the population. The cues for receiving treatment at publicly administered hospitals often are so long that it forces dialysis patients that need regular treatments to seek more efficient options, mostly through private healthcare providers. As a consequence, out-of-pocket spending accounts for close to half of overall health expenditures. In general, there is a high demand for better provisioning of health-related services, creating a necessary growth of the health care sector as whole that is under development. As mentioned, this is a significant figure in Mexico: in 2014 total health expenditure equalled 6.8 % of national GDP. This fact, along with strong market growth in recent and coming years, makes the market more attractive to potential new Swedish entrants. As a proportion of total spending, 52 % of Mexico s expenditure comes from public institutions, while countries such as Chile (46 %) BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE 47

48 and the United States (48 %) show lower public expenditure. Out-of-pocket spending accounts for 48 % of this spend, with countries such as Chile (54 %) and South Korea (43 %), having a similar rate to Mexico. The fact that 52 % of out-of-pocket spending is concentrated in the three highest income deciles suggests that much of this spending may be more related to choice than to access, benefiting the private sector (OECD 2016) 36. WHAT DOES THE FUTURE HOLD? Exceptional market growth potential and openings for innovative solutions within chronical disease care. Expenditures on health within the Mexican market are indeed significant and the expected yearly growth rate in the healthcare market is about 5 % for the coming years. The estimates from the Mexican government are even higher, forecasting more than 6 % annual growth, and the figure to reach US$101 billion in The Mexican market for medical devices ranks as the 11th fastest growing market in the world, and it is mainly supplied by foreign manufacturers 8. Meanwhile, Mexico is the ninth largest exporter of medical devices worldwide and holds the number one position in Latin America 37. As a result of the increasing obesity in the country, diabetes, which is the chronic disease most directly linked with obesity, is spreading rapidly in Mexico and is now affecting 16 % of the adult population 36. In addition, even more people suffer from diseases connected to the circulatory system, which can also be linked to obesity. This has caused the government to work towards creating national programs promoting physical activity as well as legislations to address the national obesity problem. Taxes on food and non-alcoholic beverages are being introduced to improve public health and to lower the rate of obesity and reduce the prevalence of diabetes in the country. Although public healthcare has become increasingly accessible for almost the entire population many problems persist where ser vices cannot be provided by the public healthcare systems. Therefore, the Mexican government has reinforced its commitment to unify existing public health care sub-systems into a universal social service in the coming years. This should improve the efficiency and provide better protection for the most vulnerable. BUSINESS SWEDEN SYNTHESIS Opportunities in private healthcare system and elderly care. Given the nature of the healthcare system in Mexico, Swedish companies could enter and grow their market by initially addressing the private healthcare system. It offers greater resources and reduced timeframes for product registration and policy creation. This would allow companies to create revenue while reaching for opportunities in the public sector, where the largest healthcare provider in Latin America IMSS is particularly important. Companies should consider a mid- to long-term perspective when conducting sales towards these public institutions given the time needed for national and institutional sanitary registration. As the Mexican government has increased the focus on elderly care there will be plentiful of opportunities in this sector, for both products as well as best practices that can be utilized by the Mexican health institutions. The same is true for products or services that can help remedy the national epidemic that is obesity and the diseases that come with it, both in terms of prevention and treatment. As for market entry, Swedish medical devices and equipment can be imported duty free with a certificate of origin. Imports are subject to a 16 % VAT. All medical and health care products that touch or affect the human body must be registered prior to sale or use in Mexico. Obtaining sanitary registrations and market approval of medical devices is often technical and time consuming in Mexico, but products that have been previously approved in USA and Japan can apply for a fast submittal process in Mexico BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE

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50 CONCLUSION In the World Bank s Doing Business report from 2017, Mexico was ranked as the easiest country to do business within Latin America. Typically somewhat in the shadow of the gargantuan Brazilian market, Mexico has in recent years managed to gain recognition for how strong, open and diversified its economy is. As pointed out by The Economist, a country once heavily dependent on oil now has Latin America s largest and most sophisticated industrial base, with the automotive sector at its core. Mexico is surpassed in exports of vehicles only by Germany, Japan and South Korea. Its increased competitiveness as a manufacturing center is creating a trend for manufacturing companies to move from Asia to Mexico to serve the American markets, and further Asian investments are expected to fill the potential gap that a US protectionist policy shift might inflict. Its macroeconomic stability and the reforms in education, ICT and energy sectors are starting to have a positive impact on individual citizens and the labor market as a whole, improving weak productivity and ultimately strengthening overall economic performance. In terms of investment in the manufacture and retail markets, Mexico is establishing itself as the most attractive destination in the entire Americas. At Business Sweden we are glad to see that the Swedish company base in Mexico is continuously increasing. The larger Swedish companies have been here for decades, for example Ericsson that celebrated 112 years in Mexico in 2016, but we also see strong growth for smaller companies such as izettle that entered Mexico only 4 years ago and now has over 35 employees. We invite more Swedish companies to take part in the business opportunities in Mexico and expand their operations in Latin America. At Business Sweden we are committed to support companies growing their international revenues by finding new revenue streams, shortening time to market and lowering the risks. Olof Hällerman Trade Commissioner to Mexico 50 BUSINESS SWEDEN MEXICO THE LATIN ECONOMIC LOCOMOTIVE