IE Insights - (IE) Singapore

INTERNATIONAL ENTERPRISE SINGAPORE

IE Insights Vol. 16_Sep 2014

Mexico: The Aztec Tiger Mexico continues to draw attention as an important investment destination in Latin America despite the lower than expected Gross Domestic Product (GDP) growth. In 2013, the country attracted a record US$35.2 billion (S$44.5 billion) in foreign direct investment, an increase of 178% from 2012. The strong agenda of structural reforms led by President Enrique Peña Nieto’s administration looks set to improve the country’s already competitive business environment, by putting an end to traditional monopolies in the telecommunications and energy sectors, diversifying government revenue resources and improving the quality of education. These initiatives have enhanced business and investment opportunities for Singapore companies, particularly in the oil & gas, infrastructure and manufacturing sectors.

By Francisco RIOS, Carmen HUANG, Sarah LER, Natalie CHOO Americas Group [email protected]

Contents

03

16

Summary

Singapore-Mexico Bilateral Ties • Singaporean companies in Mexico

04 Mexico’s Reforms Positioning for Growth • A bold reform agenda to improve Mexico’s attractiveness to the global business community • An upward economic growth trend in the medium term

18

09

24

Economic Strengths That Drive Business Opportunities • An open economy that continues to diversify and forge new partnerships • Manufacturing supply chain deeply integrated within North America • Aerospace • Automotive • Global player in energy production with growing emphasis on investment and technology adoption • Comprehensive plans for infrastructure development to support the country’s economic growth

Doing Business in Mexico • Choosing a Location • Setting up in Mexico • Finding a good local partner • Risks and Challenges • Understanding the Business Culture

Conclusion

25 Annex

Disclaimer While every effort is made to ensure that the information in this document is accurate, the information is provided by IE Singapore to you without any representation or warranty. Any reliance on the information in this document is at your own risk. IE Singapore does not accept any liability for any errors, omissions or misleading information. IE Singapore and its employees shall not be held responsible for any consequence arising from your reliance on any information provided by us. You are advised to consult your own professional advisors.

2

Summary // After decades of being perceived as the United States’ poor neighbour and North America’s backyard for cheap manufacturing, Mexico has emerged as one of the most promising economies in Latin America, and perhaps even the world. // In the first year of President Enrique Peña Nieto’s new administration, 12 reform bills were pushed through Congress, with five requiring constitutional amendments. President Peña Nieto’s success in pushing through these reforms earned him the accolade of having “accomplished more in his first year in office than his three most recent predecessors combined”1. // These reforms have increased Mexico’s attractiveness to foreign investors and appear to have a positive impact on the business environment in Mexico. The labour, fiscal and energy reforms have had the most immediate impact on opportunities for Singaporean companies. // Mexico’s current economic strengths include: • An open economy that continues to welcome new partners in search of diversification. While fully integrated with the North American market through the North American Free Trade Agreement (NAFTA), Mexico is also a founding member of the Pacific Alliance and an increasingly key player in the Trans-Pacific Partnership (TPP) negotiations; • Its supply chain integration with North America, which has been a key driver in the development of its qualified and capable labour force, particularly in the manufacturing space; • Its role as a global player in energy production. Currently the 8th largest oil producer globally, Mexico is increasing its emphasis on investment and technology adoption. PEMEX2 plans to increase production to 3 million barrels per day by 2018 and 3.5 million barrels per day by 2025. The reform will allow foreign companies to explore and produce, which should increase Mexico’s oil production in the coming decade; and • A robust private sector comprising home-grown companies, a growing number of which now contend as global players and leaders in their respective industries. // IE Singapore sees significant opportunities in Mexico for Singaporean companies, particularly in the sectors of energy, manufacturing and infrastructure.

1 “Mexico’s Reforms: The Devil In The Details”, 15 January 2014 http://www.forbes.com/sites/riskmap/2014/01/15/mexicos-reforms-the-devil-in-the-details/ 2 PEMEX - Petróleos Mexicanos, Mexico’s national oil company

3

Mexico’s Reforms Positioning for Growth After decades of being perceived as the United States’ poor neighbour and North America’s backyard for cheap manufacturing, Mexico has emerged as one of the most promising economies in Latin America, perhaps even the world. In the words of President Enrique Peña Nieto, 2013 was the year where “Mexico decided to take flight”. It was, however, also a year of contradictions. Foreign direct investment (FDI) hit a record high of US$35.2 billion (S$44.5 billion) in 2013, a 178% increase from 2012, but GDP growth was a disappointing 1.3%, dampened by delays in government spending due to a focus on reforms and natural catastrophes. Mexico today is in a unique position, revitalised by a year of reforms and deeply integrated with North America and increasingly, South America. With a capable but low cost workforce to tap on, Mexico is now set to capitalise on this momentum. Growth is expected to pick up in 2014 and 2015, with Mexico’s central bank estimating GDP growth of 2.3% to 3.3% for 2014, and 3.2% to 4.2% in 20153.

3 “Mexico Central Bank Cuts GDP Forecast on Weak U.S. Expansion”, Bloomberg, 22 May 2014

4

Mexico’s Reforms Positioning for Growth

A bold reform agenda to improve Mexico’s attractiveness to the global business community President Peña Nieto (from PRI, or the Institutional Revolutionary Party), was sworn in on 1 December 2012. He represented the return to power of the PRI, a party that had led Mexico for 71 years before the PAN (National Action Party) took over for two consecutive terms, having had power for the last 12 years. President Peña Nieto took office with a reform agenda that will drive Mexico’s economic and social policies during his six-year term. On his second day in office, President Peña Nieto announced an ambitious agreement, the “Pact for Mexico”, a document signed by the four most influential parties in the country: the PRI, the PAN, the PRD4 (Party of the Democratic Revolution) and the PVE (Ecological Green Party). The primary purpose of the pact was to create a consensus that transcends political differences, enabling Congress to pass necessary reforms to promote democracy and economic growth, as well as to reduce poverty and social inequality in Mexico. This pact provided the basis for several key accords of the other reforms that followed. The initial success of the pact is evident from the multiple reforms that have been conceptualised and approved (listed in chronological order): // Labour reform – aimed at increasing market flexibility and reducing hiring costs for employers, this pro-business labour reform is expected to boost investment and help spur economic growth; // Telecommunications reform – aimed at opening the media and telecommunications market to international competition so as to increase supply of services, lower costs and end the monopolies held by Carlos Slim’s5 telephone company America Movil and Emilio Azcarraga’s television powerhouse Grupo Televisa; // Fiscal reform – aimed at lowering the state’s dependency on oil taxes, which currently accounts for a third of government revenue. The fiscal reform will raise tax revenues by closing loopholes through an electronic tax system, raising taxes for the upper income bracket, introducing a tax on junk food and sugary drinks, and unifying the value-added tax (VAT) throughout the country, greatly changing the state’s revenue matrix; // Educational reform – aimed at tackling serious inefficiencies in the education system, improving teaching standards and the quality of teachers. The educational reform will introduce teacher evaluations and create an autonomous regulator;

4 The PRD has since November 2013 departed from the Pact, and as a result allowed the PRI and PAN to speed up the proposals for the energy reform, pushing for greater autonomy to be given to the national oil company, PEMEX. 5 Carlos Slim Helú is a Mexican business magnate, investor, and philanthropist. From 2010 to 2013, Slim was ranked the richest person in the world. His extensive holdings in a considerable number of Mexican companies through his conglomerate, Grupo Carso, SA de CV, include interests in the fields of communications, technology, retailing, and finance. Presently, Slim is the Chairman and CEO of telecommunications companies Telmex and América Móvil.

5


// Energy reform – aimed at ending state monopolies in the oil & gas (PEMEX) and electricity generation (Comision Federal de Electricidad - CFE6) sectors, as well as encouraging private investment in the energy sector. The reform will allow for more foreign participation in exploration, production and transportation activities. Hailed by the press as the “mother of all Mexican reforms”, the government hopes that this reform will increase the efficiency and quantity of oil production; // Banking/ Financial reform – aimed at increasing bank penetration, improving the ability of commercial banks to enforce contractual obligations, and enhancing financing channels for SMEs by reducing loan guarantee requirements. President Peña Nieto successfully pushed a dozen reform bills through Congress, five of which required amendments and bylaws to the constitution. The list of reforms and their respective statuses (as of 30 June 2014) can be found in the Annex. Figure 6 reflects the status of the 12 reforms passed. To date, no other modern Mexican president can claim to have had such a deep impact in his first year of administration, with Forbes lauding President Peña Nieto for having “accomplished more in his first year in office than his three most recent predecessors combined7”. Despite President Peña Nieto’s success, the negotiations have put some strain on the relationships between the various political parties, posing a challenge as President Peña Nieto pushes for the passing of the reformist amendments to the constitution into law. However, it appears that these challenges are not insurmountable – the landmark energy reform has been successfully signed and passed into law as of 11 August 2014, officially marking the end of the decades-long state monopolies in the oil & gas and electricity generation sectors. President Peña Nieto has also successfully garnered support for his bold moves against powerful union leaders. // In February 2013, the day after passing the education reform, Ms Elba Esther Gordillo, the highly influential leader of Mexico’s 1.5 million member-strong teachers’ union, was arrested on suspicion of embezzling US$159 million (S$201.2 million) in union funds. Ms Gordillo’s arrest is a clear exercise of his presidential authority and a demonstration of his commitment to fight corruption. // By passing the energy reform and the removing all five representatives of the PEMEX workers’ union from the company’s board, the Government has diminished the influence of the PEMEX union in the procurement process of capital-intensive deals. This has, in practical terms, streamlined the decision-making process as it isolates any political agenda from the technical and commercial decision makers.

6 CFE - Comisión Federal de Electricidad, Mexico’s national electricity provider 7 “Mexico’s Reforms: The Devil In The Details”, Forbes, 15 January 2014

6


The only obvious shortcoming of this administration so far has been its relative silence on public security issues. Unlike the previous president, Felipe Calderon, who launched his military-led crackdown on drug cartels shortly after taking office at the end of 2006, President Peña Nieto has spent his first year shifting the focus from the drug war to economic reform. Although concerns regarding security are legitimate, these occurrences are typically localised and restricted to a few notorious states such as Michoacán, Tamaulipas and some states bordering the US. The new administration has been focusing on tackling structural issues before battling organised crime, to provide viable alternatives to people who had “no choice” but to engage in illicit activity. However, the recent violence this year in Michoacán and Tamaulipas and the rise in the number of kidnappings have forced President Peña Nieto to concede that his administration needs to do more to tackle security problems.

An upward economic growth trend in the medium term Delays in government spending due to the emphasis on crucial policy reforms, lower than expected oil production, along with natural catastrophes, led to substantially reduced GDP growth of 1.3% compared to the 3.9% forecast at the beginning of 2013.

Figure 1: Key Economic Indicators for Mexico, (all 2013 estimates unless otherwise indicated)

Source: “Mexico”, CIA – The World Factbook. Last accessed 4 March 2014

Area

1.96 million sq km

Population

118.81 million (July 2013 estimates)

GDP (Purchasing Power Parity)

US$1.85 trillion (S$2.3 trillion)

Real GDP Growth Rate

1.3%

GDP Per Capita (PPP)

US$15,600 (S$19,738.7)

Inflation (consumer prices)

4.0%

Total Exports (fob)

US$370.9 billion (S$372.2 billion)

Total Imports (fob)

US$370.7 billion (S$469 billion)

Current Account Balance

- US$14.18 billion (-S$17.94 billion)

Total External Debt


Exchange Rate (average)

12.76 Mexican pesos (MXN) per US$

Stock of direct foreign investment


7


However, general sentiment remains positive. FDI has increased dramatically, reaching a record US$35.2 billion (S$44.5 billion) in 2013, a 178% increase from 2012. 2014 also started strongly, with Mexico receiving US$5.8 billion (S$7.3 billion) in FDI in the first quarter, the best first quarter8 performance since 2007. In the first seven months of 2014, large companies like PepsiCo, Nestle, Cisco and Daimler announced a total of US$10 billion (S$12.7 billion) worth of planned investments into Mexico over the next 5 years. BMW is the newest entrant in the automotive sector, announcing in July 2014 a US$1 billion (S$1.3 billion) investment to build a new plant in San Luis Potosi, a state some 400km north of the capital Mexico City, while UTC Aerospace Systems and Dishon have announced a total of US$400 million (S$506.1 million) in investments in their operations to service the aerospace industry in the states of Baja California and Querétaro respectively. Domestic investment is also expected to increase, with President Peña Nieto raising his goal for public and private investment in infrastructure to 7.7 trillion pesos (US$590 billion/ S$746.5 billion) over the next five years in an effort to improve the country’s growth prospects9. Mexico’s central bank estimates growth rates between 2.3% and 3.3% for 2014 and between 3.2% and 4.2% for 2015, fuelled by the recovery of the US economy, which is the destination of almost 80% of Mexico’s production. Ranked as the 4th easiest place to do business10 in Latin America and the Caribbean by the World Bank and the 55th most competitive economy11 globally (out of 148 countries) by the World Economic Forum, Mexico is a market with significant growth potential. Ranked 12th globally in terms of GDP, Goldman Sachs estimates that Mexico will become the 5th largest economy by 205012, with Accenture even more optimistic, placing Mexico in the top 6 by 2025. The general consensus remains that the Mexican economy will grow substantially in the coming years, potentially surpassing even some developed economies. Reflecting this consensus, Moody’s has upgraded Mexico’s sovereign debt rating from Baa1 to A3, making Mexico the second of three countries in Latin America – Chile being the first and Peru the third – to earn a coveted “A” grade sovereign rating.

8 The first-quarter figures, which are preliminary and subject to revision, are based on filings by foreign investors with the Economy Secretariat’s National Foreign Investment Registry 9 “Mexican Government Boosts Infrastructure Investment Plan”, The Wall Street Journal, 28 April 2014 10 Economy Rankings, The World Bank Group, June 2013 11 The Global Competitiveness Report 2013–2014 12 PWC and HSBC rank Mexico 7th and 8th largest economy by 2050 respectively

8

Economic Strengths That Drive Business Opportunities Mexico is an open economy with potential to serve as a regional platform. Deeply integrated with North America’s manufacturing supply chain and an increasingly important energy hub, domestic private companies can serve as local partners for foreign investment. An open economy that continues to diversify and forge new partnerships Mexico is a free market economy with key sectors being services (47.1%), manufacturing (18%), trade (16.3%), mining (8.4%) and construction (6.7%). The openness of the Mexican economy is reflected in the network of 12 FTAs that Mexico has signed, granting Mexican products preferential access to 45 countries. Beyond bilateral agreements, Mexico’s active participation in other international agreements and blocs further demonstrate Mexico’s seriousness in trade liberalisation. // North American Free Trade Agreement (NAFTA) Firmly established for the last two decades, the NAFTA region, comprising Canada, the US and Mexico, represents a market of 474 million people and a GDP of US$19.2 trillion (S$24.3 trillion). The success of the NAFTA is evident from the extensive trade between the three countries; in 2013, 78.8% of Mexico’s exports went to the US while 2.1% went to Canada. // Pacific Alliance (PA) Mexico is also one of the four founding members of the PA, an economic trade bloc that seeks to remove trade barriers between member states, with a clear orientation towards enhancing trade with Asia. Together with Chile, Colombia, and Peru, the PA is a market of about 216 million people with combined GDP US$3.1 trillion (S$3.9 trillion), representing 35% of Latin America’s total GDP. The goals of the PA include free trade and economic integration among the member states, free flow of human capital, a joint stock exchange (MILA) and leveraging each other for common diplomatic representation and joint investment promotion. Singapore is the first Southeast Asian Observer country of the PA. This sends a strong message to the countries of the PA that Singapore is interested in Latin America, and that Singapore can be used as Latin America’s entry point to Southeast Asia.

9

Economic Strengths That Drive Business Opportunities

// Trans-Pacific Partnership (TPP) The TPP is an ongoing free trade agreement negotiated by Australia, Brunei, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the US and Vietnam. The TPP aims to enhance trade and investment among TPP partner countries, promote innovation, economic growth and development, as well as support the creation and retention of jobs. The TPP plays a crucial role in promoting and complementing Mexico’s new orientation towards Asia. Singapore companies can take advantage of the regional integration, low import and export tariffs to use Mexico as a platform to do business with North America and increasingly, with Spanish-speaking South America (in particular Chile, Colombia and Peru through the Pacific Alliance).

Manufacturing supply chain deeply integrated within North America Since the NAFTA came into effect on 1 January 1994, Mexico’s privileged access to the US and Canadian markets have driven the integration of its manufacturing supply chain with those of its NAFTA counterparts, and catalysed its progression up the value chain. By 2008, Mexico was ranked among the top 20 countries by the Economic Complexity Index13, which measures the productive structures that a country possesses to manufacture and export a large number of sophisticated goods, an unsurprising top performer among the Latin American countries. Mexico is also considered the third most ‘sophisticated’ economy in the world, where 19.3% of its GDP comes from medium and high-tech exports, behind only Germany (28.2% of GDP) and South Korea (27.2% of GDP)14. In a manufacturing outsourcing cost index by Alix Partners15, Mexico is ranked the most competitive manufacturing destination globally. This can be attributed to its young, productive and affordable labour force, coupled with competitive energy costs arising from the US shale revolution. These factors have contributed to the success of Mexico’s manufacturing sector, with high-tech manufacturing clusters developing across the country, as illustrated in Figure 2. Although pronounced, the investment and development has traditionally been conducted by OEMs and Tier 1 companies. However, due to increasing labour costs in China in the last couple of years, an increasing number of Tier 2 and Tier 3 suppliers are entering the market.

13 The ECI is a joint project by the Center for International Development at Harvard University, the Harvard John F Kennedy School of Government and MIT 14 IHS Data – Global Insight; ProMéxico’s Analysis. Data in USD Real terms, 2005, considering G20 countries- 2011 GDP - Medium Technology (MT): Specialty Chemicals, Machinery, Equipment, Appliance, Electrical Industrial Machinery, Motor Vehicles & Parts Total, Motorcycles & Transport. Equipment, Railroads & Equipment - High Technology (HT): Aircraft & Spacecraft, Advanced materials, Computers & Office Machinery, Communication Equipment, Medical, Precision & Optical 15 Manufacturing Outsourcing Cost Index 2010, Alix Partners

10


Figure 2: Map of Mexico with strong focus on advanced manufacturing Tijuana Tecate Mexicali Nogales

Ciudad Juárez

Hermosillo Chihuahua Monclova Torreon Saltillo Los Mochis Rames Culiacán Arizpe

Nuevo Laredo Monterrey Matamoros Tampico

Zacatecas Aguascalietes Guadalajara Automotive Autoparts Aerospace

San Luis Potosí Querétaro Ciudad Silao Sahagun Estado Tlaxcala Mexico Puebla Morelos

León

Electric-Electronics Source: “Mexico”, ProMexico 2014

Moreover, a growing list of US companies are scaling back their China operations and heading to Mexico to manufacture an array of products, like headsets (Plantronics); hula hoops (Hoopnotica); toilet brushes (Casabella); grills and outdoor furniture (Meco Corporation); medical supplies (DJO Global); and industrial cabinets (Viasystems Group), a phenomenon known as “nearshoring” – the returning of operations to nearby or neighbouring countries. These US companies have recognised that offshore manufacturing in China is no longer as attractive due to the appreciation of the Chinese yuan, increased competition among Chinese factories that has resulted in labour shortages, longer lead times, and rising wages in China. They have instead moved their operations south of the US to Mexico. While opportunities are plenty, the window of opportunity is narrow as the landscape is expected to become increasingly competitive, and in some areas saturated within the next decade.

11


Aerospace Mexican aerospace exports grew from US$1.7 billion (S$2.2 billion) in 2005 to US$5.5 billion (S$7.0 billion) in 2013, with the number of aerospace manufacturers tripling from 100 to almost 300. Major OEMs such as Airbus, Bombardier, Cessna, Honeywell and Safran have established manufacturing facilities in Mexico. Bombardier, for example, produces and assembles 90% of its global cable harnesses in its Querétaro facility. At the Farnborough International Airshow on 17 July 2014, UTC Aerospace Systems announced that it will invest US$300 million (S$379.6 million) in Mexicali, Baja California on a plant that will manufacture acoustic systems. Likewise, Dishon announced a US$100 million (S$126.5 million) investment on the expansion of their CNC machining, assemblies and kitting plant in Querétaro. However, despite growth of the aerospace sector in Mexico, the lack of a strong domestic supporting industry means that there are opportunities particularly in complex machining and surface treatment.

Figure 3: Number of Aerospace companies in Mexico*

*includes research and development centres

109 Source: “The Aerospace Industry in Mexico”, ProMexico 2014

2006

150

160

2007

2008

194

2009

241

249

270

2010

2011

2012

Automotive Mexico produced 3 million vehicles in 2013, ranking 8th globally as a vehicle manufacturer. Mexico is the 4th largest exporter of light (passenger) vehicles worldwide, and in 2013 overtook Japan as the main light vehicle exporter to the US. A testament to the quality of the automotive manufacturing industry is evident in the growth of automotive FDI from US$8 billion (S$10.1 billion) in 2004 to US$43 billion (S$54.4 billion) in 2013. Mexico continues to attract OEMs such as General Motors, BMW, Daimler, Renault, Mazda, Nissan, Toyota and Volkswagen to establish their manufacturing facilities in Mexico.

12


In the first half of 2014, Mexico’s car production hit 1.6 million, overtaking Brazil narrowly with an output of 1.57 million, to become the region’s largest car producer. To adhere to NAFTA regulations, Tier 1 automotive suppliers are expected to fulfil 55% local content requirement, resulting in many preferring to source for components from Tier 2 suppliers with a Mexican presence. This is an area of opportunity that Singapore companies, particularly Tier 2 suppliers with plastic injection moulding, integrated electronics, tooling and machining capabilities – a gap in the Mexican automotive industry – can explore. Singapore companies can leverage Mexico’s low cost yet capable workforce, vibrant and international manufacturing environment, vast array of industrial parks and well-developed logistics infrastructure to service the North American industry of Tier 1 and Tier 2 companies in the automotive, aerospace and electronics sectors.

Global player in energy production with growing emphasis on investment and technology adoption Mexico is the 8th largest oil producer globally, with crude oil production in 2013 averaging 2.5 million barrels per day (bpd). However, for a country where oil and gas revenues account for a third of government revenue, declining production levels since its peak of 3.4 million bpd in 2004 is a worrying trend. Continued high oil prices will drive the demand for more exploitation of oil reserves in Latin America. PEMEX, the 8th largest oil & gas company in the world, has overtaken Saudi Arabia as a key energy provider to the US, second only to Canada. Despite the US shale revolution, the supply of Mexican heavy crude oil will remain an important pillar of the US energy landscape as many US refineries are configured to process heavy crude from Mexico, rather than the light crude produced domestically from shale.

Figure 4: Mexico oil production (million barrels per day) Million barrels per day 3,500 3,000 3,012

3,127

3,177

3,371 3,383 3,333

3,256 3,076 2,792

1026

1082

1113

1136

1385 1163

1417

1036

1464

1012

1520

946

1766

2039

2244

2387

2458

2425

2174

925

Source: Pemex Business Plan 2014-2018

2,548

946

Total

2,601 2,577 2,553

1003

1,000

Ligeros

1130

Pesado

1238

1,500

1774

2,000

1997

2,500

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

500 0 2000

2001

13


However, as illustrated in Figure 4, PEMEX’s oil production has fallen by 25% from a high of 3.3 million bpd in 2004, due to the natural decline of the Cantarell field and lack of investments in new exploration sites. PEMEX estimates that 55% of prospective resources are in deep water in the Gulf of Mexico, while 33% of prospective resources are in Southeast Mexico, which currently has the most developed exploration and production (E&P) infrastructure. With more than 16,000 wells to be drilled before 2021, E&P capital expenditure for 2007 – 2021 is projected to cost US$15.5 billion (S$19.6 billion) annually. JPMorgan Chase & Co16 estimates that the recently approved Congress bill will generate as much as US$15 billion (S$19.0 billion) in additional foreign investment annually, and the easing of restrictions that had previously barred large international oil explorers from drilling in Mexico will help PEMEX revive output and crack vast shale formations. Lauded as the nation’s most significant economic reform since joining the NAFTA, the energy reform will increase PEMEX’s flexibility in operations. The removal of union members from the company’s board will benefit the private sector, including Singapore companies, especially those exploring projects with a high technological component. The reform will also: // Allow private firms to obtain production-sharing contracts or licences and to book oil reserves for financial reporting. Reserves are often used to value E&P companies and make predictions for their revenue and earnings; reflecting this in their balance sheets increases their appeal when raising capital and seeking financing loans; // End the 75-year monopolies of PEMEX and the Federal Electricity Commission, which must now compete against private power-generators; and // Create a sovereign wealth fund to invest oil revenues for the long term. The energy reform has been successfully passed into law as of 11 August 2014. The Mexican energy ministry has also announced that an area worth around 20.6 billion barrels of oil equivalent (boe) will remain under PEMEX. The remainder will be open to private exploration, with companies such as Shell, ExxonMobil, BP and Lukoil said to be among those lining up for the auctions to begin17. The Round One tender, set for 2015, will offer foreign and private oil companies the rights to 109 fields covering 14.61 billion boe in prospective resources18. These changes, together with the shale developments in the US and recent discussions among the NAFTA countries to integrate their energy sectors, will give Mexico increasing access to cheap energy, through piped shale gas from the US, further enhancing its low cost differential.

16 “Mexico Passes Oil Bill Seen Luring $20 Billion a Year “, Bloomberg, 14 December 2013 17 “Mexico energy reform divides opinion”, BBC News, 14 August 2014 18 “Mexico’s Round Zero and Round One oil projects”, Reuters, 14 August 2014

14


IE Singapore enjoys a long standing and positive relationship with PEMEX, and is well positioned to facilitate business in the energy sector. As PEMEX and international oil companies look to take advantage of the liberalisation of the energy sector, Singapore upstream E&P equipment companies can benefit by supplying rigs, vessels and equipment, as well as sophisticated technology and engineering solutions. PEMEX alone invested US$26 billion (S$32.9 billion) in 2013, and expects its investments to increase to US$27.7 billion (S$35.0 billion) in 2014, and US$31.3 billion (S$39.6 billion) by 201819.

Comprehensive plans for infrastructure development to support the country’s economic growth The Mexican government’s 2014-2018 National Infrastructure Plan will see public and private investments in infrastructure reach 7.7 trillion pesos (US$590 billion/ S$746.5 billion) over the next five years, a 73% increase from the US$340 billion (S$430.2 billion) outlined in 2013, adding between 1.8 and 2 percentage points to Mexico’s growth rates by 2018. These projects, spanning the energy, communications, transport, housing, urban development, health and tourism sectors, are part of the government’s plan to improve Mexico’s lagging infrastructure development - Mexico is ranked 66th out of 148 countries in terms of overall infrastructure quality20. The government expects that 60% of the overall investment will come from federal and state budgets, with the rest coming from the private sector. While the energy sector is expected to account for 50% of the overall investment, investments in communications and transport, including highways, railways, ports, and broadband networks, are still expected to exceed US$100 billion (S$126.5 billion). IE Singapore sees important opportunities in leveraging Singapore’s expertise and positive track record in industrialisation to tackle projects with the federal and the different state governments in the areas of masterplanning, township development, ports, airports, water and waste management.

19 “Pemex to invest $28bn in 2014”, The Financial Times, 3 March 2014 20 The Global Competitiveness Report 2013–2014

15

Singapore-Mexico Bilateral Ties Ties between Mexico and Singapore remain strong, with 2015 marking the 40th year of bilateral relations between both countries. In 2013, Mexico was Singapore’s 4th largest trading partner in Latin America after Panama, Venezuela and Brazil, with bilateral trade amounting to S$4.2 billion, an 18.1% increase from S$3.6 billion in 2012. Singapore’s total stock of FDI into Mexico amounted to US$980 million (S$1240 million) at the end of 2012, placing Singapore as Mexico’s 3rd largest investor from Asia Pacific and its 19th largest foreign investor21.

Figure 5: Trade Figures (Yearly) S$million 6,000

5364.6

5,000

4241.9

4,000 3023.8 3,000 2172.2 Imports

2370.1

2428.4

2394.6

2005

2006

2007

3279.5 2871.8

3585.8

2,000

Exports Total Source: Singapore Department of Statistics 2014

1,000 0 2004

2008

2009

2010

2011

2012

2013

Singaporean companies in Mexico Singapore’s investments in Mexico encompasses a variety of sectors, with more than 40 companies established in the country and many others doing business with Mexican companies. These include contract manufacturers for automotive and electronics (Sunningdale and Fagerdala), logistics (APL), tourism (Banyan Tree), agribusiness (Olam), furniture (Koda), textiles (Grupo Kaybee), and oil & gas (Keppel, Sembcorp, Swiber), among others.

21 “Mexico”, Coordinated Direct Investment Survey, IMF, last accessed 27 March 2014, 2012

16

Singapore-Mexico Bilateral Ties

Sunningdale Tech is a vertically integrated plastics solutions company that invested in Mexico in 2003. It is an example of a Singapore company that is reaping benefits from its last decade of investment in Mexico. Today, Sunningdale has doubled its manufacturing capacity in Mexico, servicing the automotive and consumer IT industry, and is starting to supply to the medical and healthcare industry. Using Mexico as a base, Sunningdale is able to access the potential of a 600 million strong Latin American population and drive its expansion into the region. Fagerdala is another company which has benefitted from their presence in the Mexican market. Fagerdala opened its first fully integrated facility with polyethylene extrusion capabilities and scrap recovery in Ciudad Juarez, Chihuahua. It also recently invested in a new wooden pallet facility, bringing its 30 years of experience in extrusion, fabrication processes, packaging design, speciality polymers and leadership in cushion packaging technology and total packaging solutions to Mexico. In the next few years, Fagerdala has plans to expand into three new regions further south of Mexico. Since 2012, Swiber has established its footprints in the Latin America market, clinching contracts with an aggregate value of approximately US$440 million (S$556.7 million). Swiber secured its first Engineering, Procurement, Construction and Installation (EPCI) contract in Mexico in partnership with a Spanish company for an offshore project to build a 77km submarine pipeline in the shallow waters of the state of Campeche in the Gulf of Mexico. Since then, Swiber has built a strong presence in Mexico, winning contracts with a key client. Swiber has established offices in Mexico City and in Ciudad del Carmen and is expanding its services to include the provision of marine services to different clients. Other sales by Singapore companies in the Oil & Gas industry include Sembcorp Marine and Keppel Offshore & Marine’s installation of jack-up rig projects, and Asetanian Marine’s chartering of vessels to Mexican players. Keppel Offshore & Marine has signed an MOU with PEMEX to develop a shipyard in the port of Altamira, state of Tamaulipas – a state to the north east of Mexico, bordering Texas. The first phase of the contract is under discussion and includes the construction of six jack-up rigs. The total yard development cost is approximately US$400 million (S$506.1 million), with the first phase estimated to be about US$150 million (S$189.8 million). Singapore companies are also extending their distribution network to tap on the 120 million strong consumer market. XMI distributes its X-mini capsule speakers, while Haw Par distributes healthcare products. Furniture companies such as Koda and Star Furniture have also made sales into the Mexican market through partnerships with leading departmental chains in Mexico. Banyan Tree has also made important investments in Mexico with two properties, both ranking among the top 10 best resorts in the country. Their property in the famous beach of Acapulco was considered the number one luxury resort in Mexico in 2013.

17

Doing Business in Mexico While opportunities abound, market entry into Mexico can be challenging, just as in any other emerging economy. There are business risks and conditions that Singapore companies need to be aware of and be prepared to tackle effectively in order to succeed in Mexico. Here, more than in other places, companies need to localise not only their products but more importantly employ locally, whether through a joint-venture with an established local company, an acquisition, or simply by hiring local talent. Choosing a Location Mexico City may be the seat of government and the de facto business capital, but regionalism is crucial in understanding Mexico’s business culture. 63% of the top 100 businesses have their corporate headquarters in Mexico City and the State of Mexico neighbouring the City, but 23 companies based in the state of Nuevo Leon (where Monterrey is the main city) contribute about 21% of the top 100 companies’ total net sales. While Greater Mexico City and Monterrey are the two large industrial headquarters, Singapore companies should consider other states that have their own niches. // Campeche, Veracruz and Tabasco are states along the Gulf rich in oil & gas deposits // Baja California, Sonora, Querétaro, Chihuahua and Nuevo León have extensive aerospace manufacturing clusters // Guanajuato, Aguascalientes, Baja California, Nuevo León and Puebla have advanced manufacturing capabilities and increasing activities in the automotive industry // Baja California, Sonora, Chihuahua, Tamaulipas and Jalisco actively serve the electronics sector // Baja California, Sonora, Sinaloa, Yucatan, Chiapas are rich in natural resources for mining and agricultural activities

18

Doing Business in Mexico

Besides the availability of talent in the local industry, companies should also take into consideration the ease of accessibility to major ports and airports, as well as the overall connectivity of the state within Mexico or to the United States. In addition, each state in Mexico has a state-owned investment attraction agency which prioritises particular sectors for the state. These investment attraction agencies are able to provide in-market facilitation through their vast networks and may have customised tools such as priority land allocation and tax breaks for foreign investors.

Setting up in Mexico Generally, Mexico is very open to foreign investment and companies, and has in place a well-developed, structured system for investors wishing to set up operations. Local content requirements, which differ from industry to industry, tend to be relatively low. The Mexican legal system offers a number of vehicles through which companies can establish themselves, the most common of which are: // Joint Venture After signing the agreement specifying the respective rights and responsibilities of the foreign company and the Mexican partner with respect to their joint venture (JV), the JV would either have to be registered as a traditional company or have its operations carried out by the Mexican partner. // Public Limited Company or Limited Liability Company This structure is normally used when a legal entity is required and can take two main forms- SA de CV (Sociedad Anonima de Capital Variable), similar to a public limited company and S de RL (Sociedad de Responsabilidad Limitada), similar to a limited liability company. The setup process is straightforward and relatively fast, but requires a Mexican legal representative to be responsible for tax and to respond to local authorities if needed. // Maquiladora (or Maquila) This structure is specific to companies with factories or assembly plant operations, for which the Mexican government allows a preferential tax regime. Companies under this setup are allowed to import raw materials duty-free as long as production is geared towards export. This regime has worked relatively well for the states along the US border, where leveraging on the NAFTA has resulted in a substantial expansion of the labour market in Mexico in the last 20 years.

19


// Shelter Operations This is a variation of the Maquiladora where labour-intensive companies can outsource their non-core activities (including legal, accounting and human resources) to a shelter operator who retains the legal exposure. This is particularly interesting for smaller companies or companies in their first years of operations as a tool to mitigate risk. This sampling of Mexican entities and structures allow for flexibility to determine political and economic rights among the shareholders or partners. IE Singapore can recommend consultants or legal advisors to ensure the choice of the correct entity to set up in the market, given the particularities of each project or investment.

Finding a good local partner Mexico’s private sector is well established both locally and internationally, but is also highly saturated. Two state companies, along with 14 conglomerates, control 75% of the top 100 companies’ net sales. With a net worth of US$73 billion (S$92.4 billion) as of March 2013, Mexico’s Carlos Slim is at the apex of Forbes’ World’s Billionaires list. There are 12 other Mexican billionaires in the top 1000 list, compared with 33 from Brazil. Considering that Brazil’s economy is almost 35% larger than Mexico’s, it is striking that the total net worth of the 13 Mexican billionaires (US$145.8 billion/ S$184.5 billion) is comparable to that of the 33 Brazilians (US$172.25 billion/ S$217.9 billion). This suggests that Mexico’s economic wealth is concentrated among a small but very powerful group of businessmen. Mexico has a robust private sector of home-grown companies that are increasingly international which could be potential partners for Singapore companies looking to enter Mexico and the region. In order to operate and compete successfully in such a consolidated and established environment, Singaporean companies keen to enter the market should focus on integrating local knowledge into their operations, be it through a JV, an acquisition of established companies, or by hiring experienced local talent.

20

Risks and Challenges // Lack of Transparency In 2013, Mexico was ranked 106 out of 177 economies in the Transparency International Corruption Perceptions Index. However, corruption appears to have passed from an endemic problem prevalent across sectors, activities and even on the streets to an issue present only in particular sectors and within the government. While there has been some progress under the new administration and important policies are in the process of being implemented (including the anti-corruption and transparency reforms), the ranking reflects the realities and complexities of doing business in Mexico. // Bureaucracy The Mexico of the ‘80s and ‘90s was known (particularly in the USA) for painful bureaucracy, long lines and embedded inefficiency in procedures as simple as paying for electricity or phone bills, and unsurprisingly, in all government-related documentation processes. The past three administrations have however placed a lot of emphasis on improving processes and cutting red tape, resulting in the significant improvements that we see today. Today, one is able to make online payments for most services (electricity, phone, water and even tax), and the service centres of local governments have improved greatly. While there are still areas for improvement, the Mexican government is taking steps in the right direction. In the meantime, a little patience and persistence go a long way.

21


// Lack of Security Security – or the lack thereof – is a critical concern among Singapore companies when considering and assessing Mexico. Drug trafficking, prevalent within Latin America and the US, is typically linked to corruption, as well as violent and organised crime. This is a pressing issue which the Mexican government has to focus on at the federal, state and municipal levels, as Mexico strives to position itself as an attractive location for foreign business. The security issue, however, as shown by the large amount of FDI received by Mexico most recently, is not an insurmountable barrier to doing business. While Mexico is not as safe as Singapore, violence is typically localised and targeted. The states north of Mexico are generally more complex while states in the surrounding areas of Mexico City have successfully lowered crime rates and ensured a safer business environment. Two states in particular, Michoacan and Tamaulipas, are currently suffering an increased wave of violence, with the federal government acting to contain the situation. On a more positive note, Mexico City has, for example, one of the highest police officer to resident ratios in the world, with one uniformed police officer per 100 citizens. Security in the city has worsened slightly recently, and the local government is stepping up its vigilance. Ultimately, as in every big city, it is important to know the places to avoid. // Lack of public information on companies Unlike Singapore, there is no centralised system in Mexico through which one can access information on companies’ financial, legal or credit performance. Hence, when choosing a partner, a client background check is of paramount importance, and this can only be done successfully through personal referrals, seeking the opinions of trusted partners or through the engagement of professional services to conduct the necessary due diligence.

22


Understanding the Business Culture // Speaking the language Having studied or worked abroad (mostly in the US), a large number of senior Mexican businessmen have good English proficiency. Initial engagements and project negotiations can often be done without language being a barrier. However, the ability to communicate in Spanish is essential as the project advances into the implementation phase. Having a bilingual team is useful in these circumstances. // Understanding the business culture Mexicans tend to behave in a hierarchical and formal way, particularly when securing meetings with senior representatives in both the public and private sectors. A formal letter requesting a meeting is a good way to start but more importantly, it has to be directed to the correct person within the organisation. Persistently following up on your request with a phone call to the personal assistant will increase the chances of the meeting being confirmed. In addition, you should be prepared for last minute confirmations and changes, and be flexible in adapting your schedule. This flexibility is sometimes difficult for Singapore companies as they tend to be accustomed to a culture of longer term planning and certainty. // Cultivating good personal relationships Mexicans are known to close important business deals with either friends or family, hence cultivating personal relations is critical to a company’s success in Mexico. Having a partner or an employee who has built up these personal connections works well too.

23

Conclusion Our outlook for Mexico is positive in the immediate, medium and longer term, as the vast array of structural reforms put in place by President Peña Nieto are steps in the right direction, which once implemented, should drive economic growth to higher levels. Growth forecast by the end of Pena Nieto’s term in 2018 is that of 4-5% annual growth. With an energetic start to the presidential term in December 2012 and strong emphasis on reforms, President Peña Nieto’s administration inadvertently created the expectation among Mexicans that these reforms would have immediate positive impact on macroeconomic growth. As a result, when growth in 2013 was reported at an underwhelming 1.3%, there was much unhappiness and dissent. Going forward, the administration faces the challenge of managing Mexicans’ expectations for growth, as they adjust to the new economic environment and realities. Today, Mexico counts as a highly industrialised economy and is, without a doubt, one of the most competitive and highly capable manufacturing centres of the world. FDI continues to pour in and Mexico will increasingly benefit from the nearshoring trend observed in the North American automotive, aerospace, and electronics industries due to lower energy (mainly electricity) prices. The energy reform, once implemented, will likely propel the sector as the most important engine of growth in the country and a key driver of prosperity. The expected growth in the manufacturing and energy related activities will be sustained by a new wave of infrastructure developments that the government has already begun to shape. We believe that Singapore companies possess the relevant capabilities to address opportunities arising in the energy, manufacturing and infrastructure industries throughout Mexico. Understanding the landscape, challenges and particularities of Mexico is fundamental to successfully navigating the market. Singapore companies that have ventured into Mexico have generally been successful, and the increased interest and investment by Singapore players will increase the comfort level for new entrants.

24

Annex Figure 6: Mexico’s 12 main reforms in 2013 and their respective statuses as at 30 June 2014

Reform Bill

Constitutional amendment needed?

Senate

House of Representatives

State Assemblies

Enacted

Labour

Yes

Passed

Passed

Passed

Yes

Telecoms

Yes

Passed

Passed

Passed

Yes

Fiscal

No

Passed

Passed

-

Yes

Education

Yes

Passed

Passed

Passed

Yes

Energy

Yes

Passed

Passed

Passed

Yes

Financial Services

No

Passed

Passed

-

Yes

Transparency

Yes

Passed

Passed

Passed

Yes

Political/ Elections

Yes

Passed

Passed

Passed

Yes

Anti-corruption

No

Passed

Passed

-

Yes

Federal District Political Reform

No

Passed

Pending

-

No

National Criminal Procedure Code

No

Passed

Pending

-

No

Right to Respond

No

Pending

Passed

-

No

25

International Enterprise Singapore International Enterprise (IE) Singapore is the government agency driving Singapore’s external economy. We spearhead the overseas growth of Singapore-based companies and promote international trade. Our vision is a thriving business hub in Singapore with Globally Competitive Companies (GCCs) and leading international traders. Trade has always been the backbone of Singapore’s economy. In addition to promoting export of goods and services, IE Singapore also attracts global commodities traders to establish their global or Asian home base in Singapore. Today, Singapore is a thriving trading hub with a complete ecosystem for the energy, agri-commodities and metals & minerals trading clusters. GCCs are a critical growth engine for the next phase of Singapore’s development. GCCs compete on the global stage against the very best in their industries. They contribute to Singapore’s economic resilience, develop Singaporeans into global business leaders and strengthen the Singapore brand. Through our Global Company Partnership, we work with Singapore-based companies in their various stages of growth towards being globally competitive. We customise total solutions in capability building, market access and financing for these companies as they internationalise. Our global network of overseas centres in over 35 locations provides the necessary connections in many developed and emerging markets. In Americas, we are present in four locations namely São Paulo, Los Angeles, Mexico City and New York. Visit www.iesingapore.com for more information.

26

Our Offices in Americas Los Angeles, United States of America International Enterprise Singapore 6300 Wilshire Boulevard, Suite 814 Los Angeles, CA 90048 United States of America T +1 323 936 5561 [email protected] Mexico City, Mexico International Enterprise Singapore Av. Paseo de las Palmas 405, Office 1002 Col. Lomas de Chapultepec Del. Miguel Hidalgo Mexico, D.F. C.P. 11000 T +52 55 9150 2560 [email protected] New York, United States of America International Enterprise Singapore 55 East 59th Street Suite 21A New York, NY 10022 United States of America T +1 212 421 2207 [email protected] São Paulo, Brazil International Enterprise Singapore Alameda Santos, 700, cj.91 01418-002, Cerqueira Cesar São Paulo – SP Brazil T +55 11 3050 2121 [email protected]

Our Past Issues // Vol.1_Jul 2012 // Vol.2_Jul 2012 // Vol.3_Sep 2012 // Vol.4_Oct 2012 // Vol.5_Nov 2012 // Vol.6_Jan 2013 // Vol.7_Mar 2013 // Vol.8_Apr 2013 // Vol.9_Jun 2013 // Vol.10_Sep 2013 // Vol.11_Sep 2013 // Vol.12_Oct 2013 // Vol.13_Nov 2013 // Vol.14_Jan 2014 // Vol.15_Feb 2014

China’s Twin Paradigm Shifts - Beacons in a Sea of Change Myanmar: Opportunities in Asia’s Last Frontier Economy Thailand: Resilience and Economic Revival A Win-Wind Situation: Opportunities in the European Offshore Wind Industry Indonesia: Partnering the Private Sector for Growth Malaysia: State of Transformation Forging Ahead in China: A Survey of Singapore Companies Japan: Opportunities Amid Change and Recovery Central China: A Growth Story Driving Singapore’s External Economy Beyond 30 Years Vietnam: Prospects Amidst Challenges Brazil: Beyond the World Cup and Olympics Indonesia’s Consumer Sector: Tapping the Consumer Dollar in Food and Retail Navigating the Risks and Opportunities China’s Third Plenum: Decisive Shifts towards a Market-Oriented Economy and People-Centric Urbanisation

27

International Enterprise Singapore 230 Victoria Street #10-00 Bugis Junction Office Tower Singapore 188024 1800-IESPORE (1800-4377673) local toll-free T +65 6337 6628 F +65 6337 6898 www.iesingapore.com

V1/Sep 2014

Our Global Network Abu Dhabi Accra Bangkok Beijing Chengdu Chennai Chongqing Dalian Doha Dubai Frankfurt Guangzhou Hanoi Ho Chi Minh City Istanbul Jakarta Jeddah Johannesburg Kuala Lumpur London Los Angeles Manila Mexico City Moscow Mumbai New Delhi New York Qingdao Riyadh São Paulo Seoul Shanghai Surabaya Sydney Taipei Tokyo Wuhan Xi’an Yangon

This brochure is printed using soy ink on recycled paper.