Mario Hernández
Leading Partner of the IMMEX Segment
KPMG México
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View from the Top

Diversification on Right Path but Quicker Pace Needed

Fri, 09/01/2017 - 09:54

Q: How will Mexico’s economy face the protectionist rhetoric presented by other international markets?

A: Mexico evolved in a globalized environment that fostered international trade through fiscal incentives. The big leap for the country was NAFTA in the early 1990s, followed by trade agreements with Europe and other countries in Latin America. The TPP was set to consolidate this idea of an open economy, decreasing Mexico’s dependence on the US dollar and the North American market. The country still has a strong economic link with the US in terms of oil and manufacturing, and with Canada in the mining sector. Several governments have tried to diversify our commercial relationships and even though there have been success stories, Mexico is far from the position it should have.

The recent changes in the global economic landscape, will mean that Mexico along with other Latin American economies will feel an impact on their development strategies. There is uncertainty as to what will happen in the years to come and right now the only thing the world has is campaign promises. Mexico’s strategy to diversify is on the right path but our efforts have to be faster, boosting strategies like the Energy Reform. We have natural resources, tourism, a strong manufacturing base and an excellent location between North and Central America to expand our international presence.

Q: What is your view of the US President’s attacks on NAFTA and the prospects for a renegotiated treaty?

A: There were worries in the US regarding employment generation, independent of whoever was elected president for 2017. The country has a considerable commercial deficit and debt and as in many other markets, companies had to move abroad to remain competitive against China, Korea and Japan. But it would be unrealistic to talk about a fully protectionist idea wherein all manufacturing activities were carried out in the US. Production and living costs make this economically inviable.

Unfortunately, many blame NAFTA for the sense of unrest. But the reality is that with or without this agreement, companies needed a way to be efficient. The trade and customs barriers that were implemented in prior years to protect the US market and manufacturers were insufficient. The decision to become an open economy is still valid.

Nonetheless, NAFTA’s main bases remain strong. Countries can regulate the economy but companies set the rules. It is not a political but an economic decision and as long as this remains the same, there should not be no major effects.

Q: How will Mexico’s commercial position evolve as an exporting country?

A: As globalization impacted more and more countries, companies started to invest in markets without considering all influential factors. Manufacturing savings did not counter the logistic costs that corporations needed to make, leading to the creation of regional economic blocks. Mexico and Central America became the manufacturing hub for North America, Eastern Europe became the main production destination for Europe, while China, Korea, Singapore, India and Vietnam targeted the Asian markets.

When European and Asian companies started to invest in Mexico, they did so with the intention of targeting the North American market and not their home regions. Investment will be directed at the US and South American markets. Companies will not move their production facilities to the Americas to target the Asian or the European markets. On that same note, investors will not move their manufacturing sites out of Mexico unless it is economically beneficial.

If the US wants to solve its employment issues, it needs to find a way to improve its competitiveness. Many US states have offered incentives to companies looking for a new production site. China went through the same process once manufacturing activities began migrating to Vietnam and Singapore. The reason is completely economic-oriented.

Q: Which countries might find the greatest advantage in investing in Mexico?

A: Mexico remains as one of the most attractive manufacturing destinations thanks to its costs and economic and political stability. Our demographic distribution is perfectly centered and the domestic market is equally strong. The country offers a great opportunity to target North America and it has now become the main entry to the Latin American market. Brazil is currently undergoing political, economic and social problems, making Mexico a sound alternative for investors as our fiscal environment is far simpler. Europe, China, Japan and Korea will be important players in attracting foreign investment to Mexico in the future.

Q: How can Mexico move past incentives and into an added value for companies looking to invest?

A: We consider that Mexico could be losing competitiveness against other countries with similar business models related to manufacturing operations and currently many companies already located in Mexico are wondering if Mexico has the necessary infrastructure to support its projected growth. We also hit a fiscal bump two years ago, which needs to be resolved in the coming years. The country continues to operate under the same manufacturing scheme it created almost 50 years ago. Mexico has not incorporated the local supply chain into the process and still needs to make the leap toward higher added-value activities.

Even though we produce engineers, we do not target areas that could boost the industry. We focus on industries that already exist without creating any new products. The relationship between the automotive and aerospace industries is a clear example. It took decades for the automotive sector to develop adequate human talent and to establish a few research and engineering centers in the country. Now that the aerospace industry is growing, companies are looking to the automotive sector for engineers but they still need training.