Considerations for Doing Business in Mexico
Overview
The Mexican economy is the 11th largest in the world, valued at $2.4 trillion. Since joining the North American Trade Agreement (NAFTA), now the US Mexico Canada Agreement (USMCA), Mexico has become the US’ second largest export destination. Mexico currently has 46 free trade agreements and has a strong energy and manufacturing industries.
Businesses operating in Mexico are evaluating their domestic strategies given the poorest performing economy since the 2008 financial crisis and incredible political uncertainty. Prior to the COVID pandemic, private companies were already actively monitoring underlying uncertainty related to Mexican President Andres Manuel Lopez Obrador’s (AMLO) administration. For manufacturers, this meant potentially reassessing their supply chains and their go-to-market strategy. Today, manufacturing companies for instance are reevaluating their distribution strategy, especially as the Mexican government looks to break certain supply chains for public purchases.
Ultimately, organizations must conduct extensive market analysis to evaluate their supplier network as well as its sales strategy. This is especially relevant since external political and economic pressure can impact a company’s market approach. Consider the pending 2020 U.S election results. While a scenario where U.S. Democratic nominee Joe Biden becomes President of the United States may most closely resemble a return to former U.S. President’s Obama years, it is clear that the progressive movement in the U.S. echoes the same protectionist sentiments as those currently in the White House under President Donald Trump.
AMLO’s Economic Priorities
Prior to the COVID pandemic response, the economic initiatives the AMLO administration pursued clearly reflected the “pink tide,” the wave of left leaning and populist governments that dominated Latin America in the post-2000’s. The current government’s commitment to social programs (i.e. combatting poverty) were at the top of the agenda for resource planning and economic policy. Key infrastructure development is also a priority for AMLO, who this year moved forward on the Mexico’s Tehuantepec isthmus rail, a massive project to develop Mexico’s southeast and compete with the Panama’s monopoly on Atlantic to Pacific shipping.
In practice, the Mexican government’s focus on rolling back liberalization of key national industries like oil creates concern for long-term infrastructure investment in Mexico. The Mexican government’s budget priorities have not reflected AMLO’s electoral promises. Headlines of government austerity in 2019 have extended into this year while the government’s investment outlook prioritizes key projects like the Maya Train, the isthmus rail mentioned above, and a reinvigoration of PEMEX, the state owned oil producer.
U.S. Election Impacts
Recent U.S. policy under the Trump administration increases uncertainty for doing business in Mexico. The COVID pandemic & protectionist policies contributed to a large depreciation of the Mexican Peso. Further, it is likely that in reelection, the administration would continue to favor protectionist policies to prioritize U.S. businesses. The Trump administration will likely continue to advance its combative posture towards the Chinese market which could refocus supply chains in North America as companies evaluate their supply chain risk.
If elected, a Biden led administration would likely see a pivot to further engagement with Latin America. However, it is unlikely that there would be a political imperative to further open trade. In fact, a Biden administration’s economic recovery plan includes incentives to domestic manufacturing, which may cause a restructuring of supply chains depending on the industry. This is partly due to the protectionist influence within the Democratic party. This may cause further trade stress with Mexico, which has just gone through the USMCA renegotiations.
Takeaways for International Businesses
Foreign companies in Mexico should pay special attention to their go to market and distribution strategy. Manufacturing companies, especially those who have extensive supply chains in the United States, should evaluate their distributor relationships in order to utilize what market opportunities exist both in public and private industries. This is critical since Mexican purchasing power has decreased significantly and price differentiation is increasingly important. This means prioritizing markets that are accessible directly by importers and creating new relationships held independently of their current distributor networks.
It also begs the question as to whether companies should actively look to expand their productive capability in-country by taking advantage of accessible capital and global trends to move supply chains away from China. Businesses should also monitor the Mexican government’s commitment to infrastructure projects. Updates should actively be monitored given the government’s priority to centralize contract bidding.
Have Questions?
Miguel & FAO Global’s team of executive consultants will help you craft detailed strategy and navigate complex geopolitical & overseas market issues. FAO Global incorporates more than a decade of preparing organizations for international ventures in the public, private, and non-profit sectors.
Author BIO
Miguel Tavera is an international consultant with experience living in over five countries and speaks three languages. He has worked with a number of industries including technology, cybersecurity, healthcare, and banking.
Miguel’s expertise is in global strategy as well as macroeconomic and political risk analysis. He is currently pursuing his MBA and LLM in International Business Law at IE Business School in Madrid, Spain.
