Latam and Caribbean Expansion Opportunities for Mexican Companies

Over the past 30 years, traditional Mexican companies have strategically expanded across Latin America and the Caribbean in search of new opportunities for growth and geographic diversification. Many of these companies, spanning diverse sectors, have been successful in their Latin American expansion due to their level of international competitiveness, productivity, critical mass, access to capital and their creative innovation and research practices.

Even though the US is a natural market for Mexican companies, due to its geographical proximity, USCMA, market size and dollar-based revenue and profits, such expansion or dependence does not come without risks. The political environment and immigration policies in the US over the past few years have highlighted the type of volatility many Mexican investors hadn’t anticipated.

The current political situation and economic expectations in Mexico have reinforced the interest of companies and family groups to continue exploring other markets, including Europe and Asia. The strategic plan to diversify geographically continues to be a priority and is relevant to identify new sources of growth and preserve invested capital.
Taking into account the international geopolitical environment and the need for companies to diversify their suppliers due to the challenges faced by international logistic chains, particularly from China, North American firms are seeking suppliers in Latin America and the Caribbean to access nearshoring opportunities. In particular, US firms should be strengthening their trade links across South and Central America, and the Caribbean.

The US government should also seek to incentivize this process, not only to diversify its import dependence from Asia but also to counter China’s growing economic and political influence throughout Latin America. As it stands, this trend will likely be driven by the private sector as the current and past administrations have not focused on this. I would anticipate that this may change in the short to medium term.

Another driver for Mexican businesses to expand into other Latin American and Caribbean nations is the search for human talent. For example, there is strong demand for nearshoring call centers where the time zone and language skills favor Latin America; however, there is a limited pool of English speakers, which leads call center providers to have operations in multiple countries in the region.

According to a survey performed by Americas Market Intelligence, the greatest source of risk perceived by businesses across Latin America is government elections. Most of the recent elections in the region have been “change” elections, which create uncertainty and lead to slower economic growth as companies pare down their CAPEX budgets until there is clarity as to the actual policies implemented by new governments. Other perceived risks in the survey include currency devaluation, onerous business regulations and protectionism.

Although the political situation in several Latin American and Caribbean countries is undergoing a process of change and adjustment, the opportunity for Mexican companies to grow, integrate and complement their operations through acquisitions or strategic alliances continues.

Thanks to free trade agreements with the US and Europe and geographic positioning, several of the countries in the region can serve as a platform to complement and diversify exports to the US and other international markets. Many South American currencies are trading at historic lows, offering a very attractive entry point for Mexican investors (given the relative strength of the Mexican peso) with a medium and long-term horizon.

Midsized businesses and technology companies in the region understand the value and opportunity of regional expansion. Institutional investors prefer business plans that include regional expansion and geographic diversification for their proven value creation in the medium and long term as well as the attractiveness to strategic buyers as part of their divestment strategies.

As per an editorial in the latest edition of Americas Quarterly: “It may sound like hyperbole, but it’s true: Today offers the best chance in a generation for Latin American economies to change the way they interact with the world, and with each other. The lessons from the pandemic, the war in Ukraine, and a growing ideological alignment among governments in the Americas have all made ‘nearshoring’ and regional integration the buzzwords of the moment. The opportunity is clear. Only 15% of Latin America’s overall trade happens within the region, compared to 38% in North America and 55% in the European Union ... Any effort to integrate economies will help produce quality jobs, and generate growth, at a time when both are acutely needed in the wake of COVID-19.”

In my more than 30 years of experience in Latin America and the Caribbean, I could generalize that despite the economic and political fluctuations of these markets, most countries have had positive growth and significant improvements in their economic and social conditions. Mexican companies interested in international expansion should reassess the growth opportunity and opportunities offered by the region, especially through acquisitions in strategic markets.