MEXICO: A WORK IN PROGRESS

Editor’s note: The very same day I arrived in the city of Monterrey the local news reported that police had found six severed heads in the trunk of a car parked at a gas station. I was in Monterrey to lead a seminar and workshop on Service Management to a local group of business men and women over the coming three days and this was hardly the welcoming I was expecting.

I have traveled widely throughout Mexico and the city of Monterrey in particular for more than twenty years on business and have followed the nation’s gradual descent into violence and death. The depredations of the drug cartels in recent years, however, bear witness to a country which despite its potential and promise is on the verge of perhaps never returning from its infernal evil.

In the last decade alone, nearly two hundred thousand people have lost their lives many of whose bodies have been found horribly dismembered strewn on streets or hanging from bridges. In addition, people numbering in the tens of thousands are now classified as desaparecidos or people who have mysteriously gone missing.

The usual rationalization one hears in Mexico – aside from pointing the finger at America’s insatiable appetite for opioids – is that the violence is self-contained as drug cartels struggle with each other for supremacy in a local area. This is a naïve if not a feeble attempt at putting a good face on a grievous problem. Yes, the bulk of the dead are members of one cartel or another but police officers and military personnel have also been killed in ambushes and skirmishes with the heavily armed cartels. In addition, many innocent civilians, including tourists and foreign workers, have either been caught in a cross fire or purposely targeted so as to intimidate the local citizenry.

The plague that is the Mexican drug war seems no longer confined to the handful of states that have historically been a hotbed of crime. More and more drug cartel violence has been in evidence in tourist areas such as Acapulco, Cancun, Los Cabos, and Playa del Carmen. This has to be of concern to government officials as tourism is one of the largest sources of foreign exchange for the country. Still, Mexico is the most frequent destination for Americans with over thirty-five million tourists visiting the country in 2016.

President Enrique Peña Nieto, of the historically corrupt Institutional Revolutionary Party (PRI), sought an accommodation with the drug cartels. His approach was to push the problem down to local law enforcement. In contrast, Nieto’s predecessor, President Felipe Calderon saw the problem as one infringing on national security and one that required a more kinetic approach in seeking out and eliminating the perpetrators.

Nieto’s approach speaks for itself, however, as bloodshed has spiked to record levels. Homicides are now averaging in excess of 2,000 per month and will likely exceed 30,000 in 2017. That works out to about 25 homicides per 100,000 population. The comparable figure in the United States is about 5 per 100,000. Americans traveling in Mexico are especially at risk as approximately 600 souls were killed in the period 2009 to 2016. This makes Mexico the number one killing field for Americans, by far, of any country in the world.

WHY DO BUSINESS IN MEXICO?

In the 1990’s, I employed approximately one hundred workers in a software development center in Monterrey. We chose Monterrey – the second largest metropolitan area in Mexico with over four million inhabitants and the highest per capita income in the nation – for our development center because the city is a financial, commercial, and industrial powerhouse. The city is cosmopolitan with important museums, and an abandon of chic hotels, malls, boutiques, and restaurants. The city’s infrastructure of roads and highways is above average albeit in much need of repair. Telecommunications is adequate but remains hamstrung by the presence of a nation-wide duopoly that chills foreign carriers from entering the market. It is comforting, but also rather unsettling to see the ubiquitous presence of armed military personnel patrolling the streets.

The city made logistical sense to our company because it was proximate to our hubs in the West and Midwest of the United States, and to markets in South America. Mexico City, a huge market in its own right, with over twenty million population and the nation’s financial, government, and administrative center, is an hour and a half by plane. The icing on the cake, however, was the fact that Monterrey is blessed with some of the finest institutions of higher learning anywhere.

The Monterrey Institute of Technology, known as el Tec, is a world class university known for its STEM – Science, Technology, Engineering, and Math – undergraduate and graduate programs as well as its programs in business and healthcare. Most of the graduating students are not just highly competent in their own disciplines but most have a working knowledge of English. Furthermore, the workforce embraced with enthusiasm our service mission which in a few words is encapsulated as “customers are first.” Without a doubt, the young men and women who worked for us were some of the best in our employ anywhere in the world.

The software development center proved to be a big success. President Ernesto Zedillo visited the site, gave a rousing speech of praise and spoke of the ushering of a new era in Mexico.

IT’S GOING TO TAKE MORE THAN MAQUILADORAS

Mexico’s GDP ranks 15th worldwide at $1.1 trillion and is within striking distance of countries such as Spain, Australia, and even Russia. Two thirds of the nation’s GDP is comprised of services such as banking and tourism. At a macro level, Mexico has the potential to vault higher in the GDP rankings. The country is blessed with ample natural resources, ports of entry in the Pacific and Atlantic Oceans, a young and industrious work force, an abundance of new graduate engineers, and close ties to the largest economy in the world. Mexico’s economy will have to grow, however, at a more aggressive clip than it has experienced over the recent past. The growth in GDP over the last ten years, for example, has been virtually nil.  By all accounts, a developing nation like Mexico should sport a very lofty growth rate. GDP on a per capita basis, too, is bleak: Mexico ranks 72th among all nations and is immediately behind Russia.  By comparison, Australia’s GDP per capita is nearly six times that of Mexico.

Mexico’s maquiladoras – export based and usually foreign-owned manufacturing companies – are booming due to the nation’s modest labor rates. In addition, The North American Free Trade Agreement (NAFTA) has given Mexico access to the huge United States market under very favorable trading terms. But further growth is going to depend on whether the United States has any appetite for continuing to endure an annual trade deficit of roughly $70 billion.

Entrepreneurial new job starts, especially in knowledge industries, must remain a top priority to smartly diversify and spur the economy. To that end, Mexico needs to develop its private equity and venture capital ecosystem which currently is paltry. More fund managers, more capital, and, in the end, more confidence needs to come into the system to give a shot in the arm to young and innovative new businesses and industries. Commercial credit both short and long term is prohibitively expensive and therefore not a viable alternative for most development stage companies.

My experience here is telling. I had a client with a terrific and viable business plan in the e-learning space. The business had a modest revenue stream and was led by a team of very competent and experienced managers. The startup was headed by a CEO with a doctorate in computer science. Potential investors in the U.S. were rightfully wary of investing in Mexico and risk losing the protections afforded minority investors in the United States. As an alternative, I approached the CEO to re-domicile the business in San Antonio but that proved to be a non-starter for a variety of personal reasons. In the end, we were unable to find investors in Mexico who would belly up to the risk-reward profile of a technology-based startup.

Other precautions must be heeded by the foreign investor seeking to do business in Mexico. An early bridge which must be crossed is how to denominate a contract. We always insist on dollar denominated deals given the Mexican peso’s historically erratic nature – the peso has declined 100% in the last ten years and is now at twenty pesos to the dollar – but successfully negotiating all of the relevant terms is not easy. Also, contract negotiations can prove to be arduous as business practices which might appear to be matter-of-fact to the local businessman seem opaque to us. In one instance, our Mexican partner’s organization was so labyrinthine that it was difficult for us to fix a point of liability in the event of a breach. Mexico is not a common law jurisdiction and therefore expert legal advice is mandatory in order to interpret laws enacted by the various legislative bodies. Finally, corporate financial statements in Mexico can diverge significantly from GAAP standards and will normally require financial and tax advice to harmonize. These and other institutional and cultural reforms are the order of the day if Mexico despite all of its promise and potential is to clamber out of its current economic malaise.

Management Advisor

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