1 MEXICO CSCMP Perspectives CONNECT. COLLABORATE. CSCMP.
2 MEXICO written by: Octavio Alberto Carranza Torres, Universidad Panamericana, Mexico Table of Contents Executive Summary...5 Section I. Mexico: Background and Country Characteristics...6 A. Introduction to the Country...6 B. Economic and Political Perspectives Bribery Educated workforce Corporate taxation GDP...8 C. Mexico s Culture...8 D. Summary of Mexico s Economic and Business Development Challenges Theft Managers perspectives...10 E. Mexico s Relationship with the US...12 Section II. Mexico in the Global Commercial Arena...13 A. Introduction...13 B. Mexico s Exports and Manufacturing...14 C. International Trade Agreements...15 Editor: Jessica D Amico Direct Line: (630) CSCMP Global Perspectives is published by the: Council of Supply Chain Management Professionals 333 East Butterfield Road, Suite 140 Lombard, Illinois USA Phone: (630) Fax: (630) Web Site: cscmp.org 2007 Council of Supply Chain Management Professionals Section III. Logistics Infrastructure and Potential Development...16 A. Logistics Infrastructure...16 B. Mexico s Infrastructure Challenges Customs delays FAST Pedimentos...19 C. Mexico s Ports Future development and supply chain management opportunities Technical characteristics of ports The strategic Pacific-Atlantic axis...22 D. Roads and Highways...23 E. Railway System...24 F. Airports...26 G. Industrial Parks and Warehousing...26 H. Outsourcing Services Providers...27 Section IV. Managerial Capabilities and Opportunities...28 A. Success Case Studies Wal-Mart Cemex Bimbo Femsa...29 Section V. Legal, Political, and Regulatory Factors...30 A. Labor Regulations...30 B. Termination of the Labor Relationship...32 Section VI. Conclusion...32 Section VII. Source Materials...33
3 Endnotes...34 List of Figures Figure 1.1: Major Mexican Imports and Exports During Figure 1.2: GDP per Person for Figure 1.3: Mexico s Area of Opportunity Across the US Border...12 Figure 2.1: Locations of Maquilas and Automotive Manufacturers...14 Figure 3.1: Main Customs Sites...18 Figure 3.2: Operations in Mexican Ports...22 Figure 3.3: Main Roadway Corridors...23 Figure 3.4: Mexico s Polygon of Logistics Decisions...23 Figure 3.5: Number of Four-lane Highways and km of Coverage...24 Figure 3.6: The Mexican Railway System (Secretaria Comunicaciones y Transporte, SCT)...25 Figure 3.7: Rail Transport...25 Figure 3.8: Air Transport Tonnage Figure 4.1: Bimbo and Femsa s Logistics Network...30 List of Tables Table 1.1: Government-Induced Obstacles Perceived by Companies...10 Table 1.2: Market Obstacles Perceived by Companies...11 Table 1.3: Southeastern States GDP vs. California State GDP...13 Table 2.1: Major Mexican Exports in 2002 (other than petroleum)...14 Table 2.2: Commercial Free Trade Agreements...15 Table 2.3: Mexican Exports to Its Top Four Importers...15 Table 3.1: Delay Times for Loads Clearing at Customs...17 Table 3.2: Distance to Selected Points from Manzanillo...18 Table 3.3: Total Requests (Pedimentos) Between March 2004-February Table 3.4: Distance to Strategic Locations in the World in Nautical Miles...20 Table 3.5: Characteristics of Major Mexican Ports...21 Table 3.6: Industrial Parks in Mexico by State...26 Table 3.7: Approximate Warehousing Space in Selected Cities...27 Table 4.1: Major Labor Regulations...30
4 Area: 1,964,375 square kilometers Seashore: 11,122 kilometers Climate: varies greatly, from an arid north to a tropical south featuring rain forests; Mexico s capital experiences median temperatures of 14.4 degrees Celsius. Terrain: mostly rugged and mountainous; some plains and coastal lowlands Natural Resources: natural gas and crude oil reserves, coal, silver, gold, mercury, zinc, barite, asbestos, pumice, fluorspar, feldspar, pyrite (sulfur), fish, arable land Population: 106, (July 2005 estimate) Population Growth Rate: 1.39% (2005 estimate) Languages: Spanish (official) Government Type: Republic Capital: Mexico DF (Distrito Federal or Federal District) GDP: $694 billion (2004 estimate) GDP Real Growth Rate: 4.4% (2004 estimate) Labor Force: million (2004 estimate) Unemployment Rate: 3.8% (2004 estimate) Industries: tourism, machinery, iron and steel, automotive parts, chemicals, food processing, textiles, motor vehicles, clothing, footwear, ceramics Imports: $196 billion f.o.b. (2004 estimate) Exports: $188 billion f.o.b. (2004 estimate) Currency: Mexican peso Railways: 26,000 kilometers Highways: 110,000 kilometers Airports with paved runways: 62
5 Executive Summary Mexico offers a wealth of supply chain management opportunities. With mostly sound economic policies in place consistently for the past ten years, Mexico may very well be on its way to transforming itself into a developed economy in the next decade or two. Of course, this will largely depend on the strength of its people and government agencies. The road will not be an easy one, and this Global Perspectives will reveal some of the challenges that Mexico must overcome in order to achieve its goal of economic development. Cultural differences can be a problem. This publication will show how Mexico differs from other western countries, and even from some of its South American neighbors (Argentina, Brazil, and Chile). Culture makes a difference in how logistics activities are conducted because it sets operative standards, and, even though some Mexican companies have achieved world-class standards, this tends to be an exception to the rule within this country. The United States has exerted an important influence on Mexico as historical, political, economic, and even sociological causes have intertwined both countries. In this issue of Global Perspectives, we will contend that Mexico, due to its proximity to the US, has many opportunities when conducting business with its northern neighbor, but at the same time, it has many challenges that need to be resolved. Most issues revolve around the need to develop a more entrepreneurial and professional attitude towards work as well as a worldclass logistics infrastructure, which would result in a much-needed boost to the country s economy. Currently, Mexico does not count on a world-class logistics infrastructure as many managers contend but it has reasonable logistics capabilities, and an enviable geographical location. It is not a developed country, but it has nurtured a wealth of relations with world superpowers not to mention that it is one of the seven largest exporters in the world all facts that bring promise and prospects for future generations. There are numerous examples of Mexican companies that have developed world-class managerial capabilities, such as Cemex and Bimbo. The fact that Mexico is a border neighbor with the US has brought many opportunities to talented young practitioners, and this exchange has led to the development of a new perspective on management within the country. However, for many foreigners doing business in Mexico, the change in the attitude towards work is a slow one. Mexico is one of the best-positioned countries in the world in regards to the implementation of foreign commercial agreements. Almost 90% of its exports go to the US, which seems reasonable since the US is not only a neighbor, but the largest economy in the world. Trade agreements also exist with Europe, South America (currently with Chile and shortly with Mercosur), Japan, and several other countries. Mexico s geographical location makes it an ideal global platform for many companies (such as Volkswagen s plant in the state of Puebla). Some important factors influencing Mexico s economic potential become more evident while reviewing a map of the Americas, including the US. For example, the southern state of Chiapas one of the poorest regions in Mexico could easily be connected with New York and several other major points in the US in two or three days, if only paved highways or a ferry existed to link this state with the port of Progreso and the eastern US. Should the inclusion of US customs processes within Mexican airports be accepted and agreed upon by all major political parties, Cancun could be transformed into a Latin American hub the way Miami is. This would generate innumerable economic development opportunities for all of Mexico s southern states. Other factors influencing Mexico s logistics systems stem from the country s intertwined history, culture, and traditions. Studying Mexican history may be challenging, but it could provide some important answers to today s logistics questions. Octavio Paz, one of Mexico s best-known writers, offers some of these answers in his work, El Laberinto de la Soledad, which is a well-known and critically-acclaimed sociological essay about Mexico, its history, and its people. A good example of Mexico s political disputes and a revealing look into its sometimes-outdated vision of what it takes to compete in today s global economy lies in its troubled infrastructure to and from some of its Southern American neighbors. For example, goods moved from Chiapas to San Jose de Costa Rica can expect to travel 1,000 kilometers by road, go through five different customs checks, and transfer to different trailers due to local regulations. The authorities within these five countries are well aware that developing alternatives to a very congested Panama Canal could provide them with innumerable logistics and financial opportunities, and although there is fierce competition for a slice of the pie (www.transportesxxi.com/index. php September 19, 2005), this is still far from being resolved. 5
6 Section I. Mexico: Background and Country Characteristics A. Introduction to the Country Mexico underwent an important political change in 2000 when a president came into power from a different party than the PRI (Partido Revolucionario Institucional or the Institutional Revolutionary Party), which had been the leading political party for the past 70 years. Among some of the highlights of the PRI s rule, which will be mentioned later, are the economic reforms that began in the 1980s and resulted in the country s strong business relationships throughout the world. Culture is a critical issue when analyzing operations in Mexico. It is important to understand how culture works in Mexico because this is probably one of the most complex and rich cultural environments in the world with its own set of particulars. For example, an understanding of these cultural differences is critical when interpreting communications, such as when determining the true meaning of yes when it is meant as a polite no. There are at least three major geographical areas for potential development opportunities. Even though the northern states have been the traditional places to look for opportunities, southeastern Mexico has become an important player, and the growing population density around Mexico s Distrito Federal (Federal District or DF) make it an interesting location for manufacturing and logistics companies. The US is a big player in Mexico and its influence cannot be ignored. With one of the longest borders in the world, the US has exerted strong influence and provided many growth opportunities for companies located in Mexico. B. Economic and Political Perspectives i Mexico s government features a presidency and three governing bodies, in similar fashion to the American system: the legislative branch, judicial branch, and executive branch (presidency). Mexico was governed by the Partido Revolucionario Institucional (PRI) between 1929 and Once strongly nationalist and interventionist, the leaders of the PRI government of the 1990s embraced free-market policies and economic liberalization. Vicente Fox Quesada s victory in July of 2000 as the presidential candidate of the center-right PAN (Partido Acción Nacional or National Action Party) was a milestone in the country s transition to democratic pluralism. However, under the Fox administration, political effectiveness was hindered by a divided legislature and slow-moving political reforms. The country has three main political parties, which include the above-mentioned PRI and PAN, as well as the PRD (Partido de la Revolución Democrática or Democratic Revolutionary Party). PAN did not have a majority in the parliament and many political experts, including those from the Reforma (a major newspaper at agree that not having a majority position and lacking important political capabilities has prevented the PAN government from generating consensus and successfully implementing the urgently-needed reforms that would propel Mexico s gross domestic product (GDP) to developed-country status. The two main reforms that many experts, journalists, and economists (and probably the two right-leaning parties, PRI and PAN) are asking for are opening the petroleum industry and energy sectors to foreign investment and government deregulation. In 2005, leftist party presidential candidate Andrés Manuel López Obrador led the polls, but any forecasts about the final outcome of the presidential ballot seemed risky. Finally, in 2006, Felipe Calderón was inaugurated as Mexico s new president after winning by a very narrow margin. Some turmoil has arisen around the narrow margin, and even now, it cannot be said for sure that a clear political leader exists in Mexico. There is a strong feeling that the newly-elected president, Calderón, must still earn political legitimacy within his country.
7 The regime change set the stage for a practical revolution within many of Mexico s government agencies. A Transparency Law has begun to be enforced (www.diputados.gob.mx/leyesbiblio/pdf/244.pdf), and allows citizens the access to any kind of information generated by the government. The need for this law may be best understood from a cultural backlash to decades of PRI rule and probably centuries of Spanish and Aztec Indian traditions which have cemented a managerial style based on secrecy. 1. Bribery Mordidas, or bribes, are a sort of endemic disease within the Mexican business community. Even though democracy is bringing to light and eliminating many of these practices, they still remain a problem for day-to-day Mexican business transactions. Police officers, in many cases, see them as a normal practice, but eventually dominoing into a set of unique challenges for road transportation transactions. But it should be said that a growing acknowledgement of the issue exists, and an effort is being made through public campaigns (e.g., advertising and calls for research) developed to combat corruption. 2. Educated workforce Mexico s universities are well-respected within Latin America. The Universidad Nacional Autónoma de Mexico (UNAM at is the biggest university in Latin America. The Instituto Tecnológico de Estudios Superiores de Monterrey (Tec at the Instituto Tecnológico Autónomo de Mexico (ITAM at and the Universidad Panamericana (UP at are the main private universities. Mexican students studying engineering and business administration follow comprehensive curriculums that allow them to perform competitively in any part of the world. Mexico has high literacy rates at 90% in , according to Unicef. Middle managers and blue-collar workers can obtain additional training at institutes like the Instituto de Capacitaciòn de Mandos Intermedios (ICAMI at 3. Corporate taxation The corporate Major tax 2004 rate was Expor reduced ts from 33% to 30% in 2005, and is set to fall to 28% in The top personal income tax rate will also fall to 28% in Tax on royalties is between 15% and 34%. Depreciation allowances range from 5% to 25%, but can be up to 50% on pollution-control equipment. Tax on assets is 1.8% and is deductible from income tax. 3% The value-added tax (VAT) Manufacturers rate is 15%, but food products and medicines are exempt from VAT. 13% Import duties range from zero to 35%, with the trade-weighted average tariff at around 2.9%. VAT is levied at 15% Oil on all imports except those in the border region, where a 10% rate applies. In 2004, exports totaled $188 billion US and imports $197 billion US, producing a trade deficit of $8.8 billion US. The current-account deficit was $7.4 billion US, around 1.1% of GDP. Most of Mexico s exports are manufacturing (84%) and most imports are intermediate Agricultural goods (75.9%). Figure 84% Products 1.1 considers imports and exports for Figure 1.1: Major Mexican Imports and Exports During 2004 Major 2004 Impor ts Major 2004 Expor ts 11% 13% Intermediate Goods Capital Goods 13% 3% Manufacturers Oil 76% Consumer Goods 84% Agricultural Products
8 4. GDP Figure 1.2 shows Mexico s relative economic situation. The GDP pattern follows a well-known geo-economic division within Mexico: the industrious and rich north, the political center (Mexico City), and the poor south. In addition, wealth is concentrated in three main geographic locations: the US border, Mexico City, and the tourist Mayan triangle (of Yucatán, Quintana Roo, and Campeche). These three areas emphasize the three main dynamic sources of income within Mexico: US cross-border trade, the economic centralization of the old Aztec empire (Mexico City), and tourism (one of the most important industries in Mexico). Figure 1.2: GDP per Person for 2004 (www.inegi.org.mx) GDP per inhabitant (thousand pesos or hundred dollars) BAJA CALIFORNIA SONORA CHIHUAHUA BAJA CALIFORNIA SUR COAHUILA SINALOA DURANGO NUEVO LEON TAMAULIPAS SAN LUIS POTOSI Legend MEXICO by P_H 88 to 166 (7) 62 to 88 (6) 47 to 62 (6) 36 to 47 (5) 0 to 36 (9) AGUASCALIENTES JALISCO GUANAJUATO COLIMA EDO DE MEXICO DISTRITO FEDERAL GUERRERO TLAXCALA OAXACA YUCATAN CAMPECHE TABASCO CHIAPAS C. Mexico s Culture Many foreigners, such as multinational managers, find it very difficult to work ii with native Mexicans due to the cultural differences. Mexico s culture is quite unique and deserves a good deal of attention to understand its roots. The blend of Aztec Indian culture and Spanish colonization has left an indelible mark on their descendants attitudes and value system. Mexico s cultural idiosyncrasies, some of which are discussed below, must be grasped by managers if they are to succeed in doing business in Mexico. Mexico s culture can be viewed as a problem or as an opportunity. The complex web of attitudes and relationships generated by a melting pot of Spanish traditions and preexisting Aztec culture creates a puzzle, particularly when it comes to how authority figures are viewed. On one hand, there is a sort of absolute submission towards any form of authority and the power it represents. On the other, it is difficult for a foreigner to determine when someone says yes to be polite, but really expects it to be understood as no it could even seem as if the word no has been banned from some Mexicans vocabulary. Punctuality is also an issue, and dealing with Mexicans sensitivity and an unwillingness to show direct disagreement, confrontation, or anger are some of the more serious problems. iii Mexico s cultural focus on work and productivity are important topics since they depart from traditional western standards, or even from other Latin American standards. There seems to be a geographical pattern to some of these attitudes towards work, which fits into the three major areas of the country: the North, Center, and South.
9 Even with these issues, it is important to point out that some of the most important multinational companies in the world are based in the country, and have managed to be competitive and successful in their fields. Some of these companies are Ford in the state of Hermosillo, Solectron in the state of Guadalajara, General Motors (GM) in the state of Toluca, or, Nissan in Aguascalientes, as well as Volkswagen in Puebla. Well-known authors have provided different explanations for the localization of Mexican attitudes. Mexican writer and Nobel Prize Winner, Octavio Paz, gives a somewhat pessimistic vision of Mexican people, explaining that they have a tendency to guard their feelings because of pride or because of a fear of appearing inferior. On the other hand, journalist Andres Oppenheimer, in Bordering on Chaos, provides a more recent perspective of some of Mexico s political and sociological problems using a wealth of examples derived from the PRI s 70-year rule. Some of these explanations could very well be termed as surrealistic there is, for example, a detailed description of a dinner hosted by President Salinas de Gortari for the wealthiest Mexican businessmen. The dinner was organized in order to request the businessmens financial support for PRI s candidate. Another example is how one of the main TV networks prepared its news programs in such a way as to place the PRI s candidate in a more positive light. Oppenheimer stresses the fact that transition to a modern democracy after 70 years of practical dictatorship iv is not a simple task, revealing atypical behaviors in some major financial and political actors in the process v such as corruption, inappropriate use of power, unclear administrative procedures, and misuse of the law and judicial system. Resentment or oversensitivity is another problem. People tend to get hurt by attitudes that are otherwise common in the Western Hemisphere. The problem is that they won t show this sensitivity outwardly, and instead, seem to be very happy. Anecdotal evidence abounds: the German manager that could not give orders to his employees in his usual German manner (using a slightly higher tone than what is usual), or the Japanese company that had to hire local consultants because female employees would not bear the way they were being treated. Mexico is a complex country in the way that people view one another. Corruption has been a way of life for many public servants such as for the police, but with due exceptions. Essentially, foreigners can find the Mexican attitude toward work at least puzzling, that is, until they acknowledge the cultural elements that affect it. Timeliness, or punctuality, is not an asset, and this can be a problem for any business operation. As mentioned earlier, this is one of those problems that may vary regionally: the north is heavily influenced by American culture, the center and south have different attitudes. Jose Luis Guerrero, in El nacimiento de Mexico: entre cantos y danzas, (Mexico s Birth: Between Songs and Dances at gives the broader, more historic perspective among the three authors. In his opinion, the Mexican way of doing things has been molded by the two major civilizations (European and Indian) that managed to coexist in the country. Baroque, for example, which is a Spanish artistic style (but also, an attitude towards life) has given a very gentle tone to their relations with one another. But at the same time, it can imply that there are no straight answers at all, and some foreigners who have learned this the hard way have a saying: you will never get a no from a Mexican, instead you ll have to deduce whether it is a yes or a no. There is also another set of characteristics that may have an effect on business operations, but that influence may very well change from one state to the other. This set of characteristics involves reluctance in accepting compromises and being punctual. In Mexico City, people use punctuality as an excuse because of the terrible traffic congestion. But, in general, it is really difficult to set professional standards based on Western standards in Mexico, when punctuality is not always viewed as an asset.
10 D. Summary of Mexico s Economic and Business Development Challenges From 1994 to 1995, Mexico experienced an economic crisis that resulted in a dramatic reduction of domestic consumption and investment. vi As a result of a weak exchange rate and privileged market access in the US and Canada (both of which were growing strongly), exports became the sole engine of growth. Until the second quarter in 2001, the growth in external trade was important, and largely attributable to the dynamism of the northern industries (mostly maquiladora). Combined exports and imports soared, from $117 billion US in 1993 to $341 billion US in From April 2001 to June 2002, however, a sharp US economic slowdown reversed the trend. Exports began to recover in July 2002, but strong competition in the US market from other countries (such as China) and weak productivity growth in Mexico were partly to blame for the uneven recovery. Estimates from the Instituto Nacional de Estadística, Geografía, e Informática (INEGI or National Institute of Statistics, Geography, and Computer Science at gob.mx/inegi/default.aspx) indicate that non-oil exports increased by a meager 0.4% in 2002 and only 0.3% in 2003, with figures for manufacturing at 0.5% and 0.4% respectively. 1. Theft Even though theft and property loss have decreased 71% in the last four years, they still persist, particularly in Mexico City and its immediate surroundings (Reforma March 28, 2005). In 2000, there were 950 reported incidents versus 265 in 2004 according to public officials. But according to Bimbo s Transportation Director, the company experiences eight partial or total thefts a day. On one particular occasion, the company experienced the theft of four trailers, and were only able to recover three. This problem is felt the strongest in Mexico City, where detailed theft and loss statistics (www.transportesxxi.com/index.php) indicate that the city experiences 46% of all thefts reported in the country. It is important to bear in mind that official statistics are not always accurate because they are based on insurance policy claims, and there is a difference between the number of insurance policies and the total number of transportation vehicles (e.g., 18,000 versus 470,000 in 2003). But even with this margin of error, these statistics still clearly reflect a problem. 2. Managers perspectives The Centro de Estudios Económicos del Sector Privado (CEESP or Center for Private Sector Economic Studies at holds an annual survey on perceived obstacles for business development. The 2005 survey was given to 2,600 executives who were asked to grade on a 1-7 scale (where 1 was not important and 7 was very important) the impact of different problems on business development. The following table shows some of the main issues Mexican executives perceive as roadblocks..table 1.1: Government-Induced Obstacles Perceived by Companies Average Respondent Issue Rating Percentage Safety (robbery, crimes, % (kidnappings) Plagiarism % Informal economy % Trade unions % Fiscal policies % Lack of transparency in law % design, policies, and regulations Law enforcement % Legal system performance % Licenses and permits acquirement % Legal procedures to launch a % company Inadequacy of laws, policies, and % regulations to companies necessities Foreign commerce operation % requirements Service management government % performance Mexico s public infrastructure % 10
11 First, bribery is a national problem that has a sociological explanation. As a society, Mexico has accepted bribery as a necessary evil. This can be corroborated at many levels: policemen, purchasing managers, government officials, etc. Bribery is like an expected salary for many. In a similar way, the role of state and trade unions is viewed as a problem. vii Secondly, there is an artistic attitude viii towards work another necessary evil for many Mexicans and, with the exception of the north (as mentioned earlier), discipline is not the norm. Table 1.1 shows executives perspectives about different issues, with the average response on any given issue shown in the second column, and the percentage of respondents who addressed the specific issue shown in the third column. Table 1.2 corroborates some of the comments that were made in the prior section as they relate to Mexican attitudes about work: supplier reliability, labor rotation, resources (skilled labor and raw material), and equipment and parts availability. Many have a common cultural root in a particular attitude towards professionalism and entrepreneurship. ix Inherited cultural traits have certainly not facilitated entrepreneurship, instead driving many of the problems. Table 1.2 also gives an overview of some common Latin American problems (e.g., government monopolies, limited loan access, private company monopolies, and technical development) and some problems related to the local culture. The entrepreneurial ability, contrasting with Mexico s northern neighbors, x comes about through a combination of two factors: culture and law (societal respect to laws). Table 1.2: Market Obstacles Perceived by Companies Average Respondent Issue Rating Percentage Government monopolies % Private companies monopolies % Loans access % Illegal transactions between companies 4 79% Corruption is a particularly interesting part of this survey, xi as Mexico ranks 64th among 145 countries. The most corrupt country is Haiti, which has an index of 1.5, while Mexico s index is 3.5 (on a scale of 1 to 10, with 10 being the least corrupt and 1 being the most corrupt country). One of the most remarkable findings of this survey is that Mexico s index has decreased slightly since 1995 when it was 3.2, with its highest peak (remember, the higher the better) in 2001, at nearly 4. The study directly relates corruption with a lack of governance, essentially pointing to a bad government as the alleged cause of corruption. The study quotes that companies have to spend 6% of their annual income on unofficial or unrecorded payments (in other words, bribery), which of course, could otherwise be invested in technology or other growth drivers. For system-dynamics practitioners, this would be considered a typical systemic problem (John Sterman from MIT has mentioned this) because one could say that Mexican businessmen are otherwise quite professional and service-oriented (the study above supports this assertion). This means structure conditions human behavior, and without denying a correlation between ethics and freedom of choice, businessmen cannot always find an alternative to induced corruption. Skilled labor availability % Technology development % Labor rotation % Labor cost % Raw material, spares, and equipment % availability Supplier reliability % 11
12 E. Mexico s Relationship with the US Although there are countries other than the United States that border Mexico, and many others with which it has commercial relations, there is no relationship more important to Mexico than the one it has with the US. Mexico could easily play a more prominent role in the global supply chain marketplace by better leveraging its strategic location. The US/Mexico border is one of the longest borders in the world (3,152 kilometers), and not surprisingly, 87% of Mexico s exports go to the US. Ten million first-generation Mexicans (www.conapo.org.mx) are estimated to be living in the US as of 2003, generating strong cultural, economic, and familial bonds. One of the two main Mexican sources of external income is moneys sent from Mexicans living in the US to relatives still living in Mexico. Although the other main source of income is petroleum, business opportunities in manufacturing, processing, and logistics services are very important to the country. With ports on both the Pacific and Atlantic coasts and a welldeveloped highway and railroad infrastructure, there are virtually limitless opportunities for added value in different production and distribution processes. Mexico s exports industry services a range of locations, from mature markets and stable demand patterns to industries with variable demand (such as the fashion industry). xii Demographics play an important role in Mexico s relations with the US. The recent demographic boom in Mexico gave it its most important growth opportunity to date. It is expected that, in the next 25 years, Mexico will have more people of working age than at any other time. It is then reasonable to think that this could translate into the US sourcing some of its workforce needs to Mexico to fill in gaps created by the US aging workforce (when baby boomers approach the end of their productivity curve). US companies will have to decide if they want Mexican workers in the US or in Mexico, but whatever their decision, it is very likely that most of the workers creating products and services for the US will come from Mexico. Some financial experts argue xiii that with adequate sanitary measures in place, Mexico could source all of the US chicken supply, possibly generating hundreds of thousands of new jobs for workers within Mexico. According to the president of the Asociación Nacional de Transporte Privado (ANTP or National Association of Private Transportation at transportation costs are 20% higher than the $6 billion US spent in the US annually. This represents 15% of companies revenues, and is much higher than other developed countries where it is usually 11%. The ANTP represents major Mexican companies such as Bimbo, Femsa, Pepsi, and Wal-Mart. Figure 1.3 shows Mexico s geographic and logistics location in relation to the US. Of particular interest are the logistics corridors beginning on the Pacific coast and ending in the interior of the continental US ocean transportation flow between Asia and the US West coast is one of the highest in the world (www.ci-online.com). Figure 1.3: Mexico s Area of Opportunity Across the US Border Nebraska The area with the biggest logistics opportunities Kansas from Mexico s side Long Beach ENSENADA Arizona New Mexico Oklahoma Texas Kansas Missouri Arkansas Louisiana Illinois Pennsylvania Ohio Indiana West Virginia Virginia Kentucky Tennessee Mississippi Alabama North Carolina South Carolina Georgia Laredo 1600 Florida GUAYMAS MAZATLAN ALTAMIRA TAMPICO TUXPAN VERACRUZ DOS BOCAS PROGRESO Manzanillo LAZARO CARDENAS COATZACOALCOS 12 SALINA CRUZ
13 Manzanillo is the port with the highest annual container volume xiv in Mexico, and is only 1,600 kilometers from Laredo, Texas (a major Latin-American continental crossing point). Comparing this proximity to Long Beach (or the nearby port of Los Angeles), one can attain a better idea of what areas are influential and can create an economic impact. The distance from Manzanillo to Laredo is approximately the same as the distance from Long Beach to the Texan border. Assuming that there could be a value-added process implemented when moving product to the US, xv the Manzanillo-Laredo intermodal corridor can be very attractive for logistics infrastructure and manufacturing/distribution investors. As Figure 1.3 shows from a logistics point of view (and assuming any barriers to free cross-border trade are eliminated), locations within the Manzanillo-Laredo corridor can compete with many locations in the United States. This competitiveness could be further enhanced if Mexican ports in the Gulf coast were considered as alternative or complementary locations. The area where no other Pacific port can compete with Manzanillo, when it comes to distance, is formed by the southern states of Texas, Louisiana, Mississippi, Alabama, Georgia, Florida, and South Carolina. These states are of particular interest because their combined GDP has grown to a value higher than that of California (see Table 1.3). Table 1.3: Southeastern States GDP versus California State GDP (www.bea.gov/bea/regional/gsp/) Value N/A Source: Bureau of Economic Analysis, U.S. Department of Commerce. Note: This table shows Southeastern states GDP/California GDP Section II. Mexico in the Global Commercial Arena A. Introduction During Mexico s last three presidential terms, there was political continuity and coherence when it came to international trade. Even though the financial crisis was a serious drawback for the country, there was still continuity of economic policies. This different position in regards to import and export opportunities can be attributed to a growing appreciation of the country s beneficial geographical attributes. Mexican exports clearly focus on the US (the 87% mentioned earlier) and combined with Canada, Germany, and Spain build up to 91% of total exports. Industrial exports mostly concentrate on electronics, yet there are a number of other potential markets and products that have been lucrative for companies operating in Mexico and serving customers in Asia, Europe, or even South America. In the last 18 years, the Mexican government has worked with this strategy in mind. However, future sales projections should not be limited to the US and Canada. Many multinational companies based in Mexico are already using the country as their launching pad for global business. A good example of this is VW s Puebla plant, which produces automobiles to fulfill the company s global demand for products. The well-developed industrial base of maquilas may help growth and development in other industrial sectors. As mentioned earlier, one of Mexico s main manufacturing exports is electronics, and since this is a sophisticated industry, it can help boost other industries through the lessons learned using skilled labor. There is no particular region in Mexico that can better suit the establishment of a particular type of company there are business opportunities in all the Mexican states. There are, of course, restrictions to the establishment of some particular industries in some places, and a company trying to establish its presence within Mexico should first carefully explore and balance all the pros and cons for its particular case. Mexico is a global player by its mere geographical position, and this is exemplified by the fact that world-class automotive factories are located in different parts of the country. Exporting from these different locations shows that Mexico s logistics capabilities are well-suited to developing in many parts of the country. 13
14 B. Mexico s Exports and Manufacturing Table 2.1 shows Mexico s main sources of income (not including petroleum and external remittances). Other sources (www.inegi.org.mx) show how the maquila industry has boosted exports. NAFTA has been justified by many economists by the fact that maquila exports have grown steadily since the agreement s implementation in The city of Guadalajara in the state of Jalisco, one of the more important northern states, exemplifies how an industrial environment develops in Mexico. xvi Companies like HP, Solectron, Kodak, and many other well-known global manufacturers have created what Jalisco locals call the Mexican Silicon Valley. The heart of all these companies export strategies is electronics, and Guadalajara shows how maquilas can be developed south of the border. Mexico has created its most sophisticated industrial base through these companies. The northern states, and Jalisco especially, are vivid examples and provide important lessons to companies operating in other industrial sectors. Table 2.1: Major Mexican Exports in 2002 (other than petroleum) Car Manufacturer Automotive Supplies Computer and Electronic Product Manufacturing Appliance Manufacturing Note: Mexico s top 100 exporters in billions of dollars (From Customs, Mexico s top 100 exporters and importers, 2003). Total Figure 2.1 shows the location of some of the primary manufacturing sites in Mexico. What seems to be clear from this map is that companies are not following a circular pattern emerging from the capital (essentially going against Mexican historical development patterns based on Mexico City as the main population center). As mentioned earlier, the Aztec empire and the Spanish colonization have concentrated economic and political decisions in the country s capital. Communications Equipment Manufacturing 23,539 25,228 7,068 7,294 3,063 7,871 2,717 76,780 Maquilas Value Added (Millions of dollars) and main automotive export plants localization EMS xvii An important aspect that should be emphasized regarding Mexico and what sets it apart from other Latin American countries (such as Chile or Argentina) is that it offers companies opportunities in many more cities than just the capital (in this case the capital is really centrally located at only 400 kilometers away from its geographical center). Figure 2.1: Locations of Maquilas and Automotive Manufacturers (www.inegi.org.mx) and Customs Machinery Manufacturing Total 1,132 Mexicali References Ramos Arizpe 2,425 Tijuana Automotive export plant location Mexicali Mauila location 3,525 Ciudad Juarez 871 Chihuahua 338 Torreon 338 Ciudad Acuna 136 Ramos Arizpe Piedras Negras GM to Japan Canada and Central America Daimler Chrysler Veracruz Automotive Export Port Location Silao GM Toluca Daimler Chrysler GM Puebla 287 Mexico Veracruz Volkswagen 14
15 The second conclusion that can be drawn from this figure is that there are particular patterns for each of the sites shown in this map, each location with its own particular draws: Tijuana maquilas have different market and distribution strategies than in Ciudad Juarez the former probably serve California with a higher percentage of exports, and the latter partially serve California, central, and eastern US. Similarly, automotive companies that export to different markets overseas (such as GM in Ramos Arispe exporting to Japan, Canada, and Central America) have very different location and distribution strategies than, say Volkswagen. C. International Trade Agreements Mexico is one of the countries with the highest number of international trade agreements in the world, with agreements with the US, European Union, and Japan. Table 2.2 gives an overview of all the commercial treaties held by Mexico. Table 2.3 shows Mexico s total exports to its top four importers of goods (the US, Canada, Germany, and Spain) versus only goods exported to the US. The high concentration of exports within two treaties, NAFTA and the EU, leaves some excellent opportunities for the other treaties where commerce can be leveraged. As highlighted under this issue s Ports section, Mexico can be seen as global hub where some markets generate production-scale economies for different products. Table 2.2: Commercial Free Trade Agreement Country Initiated on NAFTA-US, Canada, and Mexico January 1, 1994 Costa Rica January 1, 1995 Colombia, Vene-zuela, and Mexico January 1, 1995 Bolivia January 1, 1995 Nicaragua January 1, 1995 Chile August 1, 1999 Uruguay July 15, 2004 El Salvador, Guatemala, and March 15, 2001 Honduras European Union (EU) July 1, 2000 (goods) March 1, 2001 (services and investment) Free Trade European Association July 1, 2001 Japan April 1, 2005 Table 2.3: Mexican Exports to its Top Four Importers Countries: US, Canada, Germany, and Spain US foreign commerce Year Amount Percentage Amount participation 2004 $172, % $165,111 87% 2003 $156, % $146,803 89% 2002 $151, % $143,048 89% Table 2.3 clearly shows the opportunity for diversification of Mexican exports to different markets. Even though the US is a huge natural market for Mexican exports, the diversification to other countries could bring great opportunities for companies located in the country. 15
16 Section III. Logistics Infrastructure and Potential Developments A. Logistics Infrastructure The communications and transportation infrastructures are very important assets to Mexico. With more than 10,000 kilometers of four-lane highways, 100,000 kilometers of two-lane roads, 4 intermodal corridors, 26,000 kilometers of railroad tracks, 62 airports (47 of them international), and a wealth xviii of maritime ports on the Pacific and Atlantic coasts, Mexico could justify the term algorithmic nightmare when it comes to all possible combinations of intermodal transportation for imports and exports. This may not be very different from the US or other developed countries, but it is unusual for a developing country to have so many logistics options. Companies operating within Mexico enjoy a number of varied logistics combinations. One example is Lazaro Cardenas, a port in the state of Michoacan. The Port is 800 kilometers closer to Houston than the port of Long Beach is. There are many other logistics equations to be considered, but this example gives an idea of the potential logistics opportunities that the country can offer. There are also innumerable opportunities for infrastructure and operational investment on behalf of logistics companies. There are many potential combinations of different transportation modes that can be used to a company s advantage. Some examples include the port of Ensenada, which increased its container movement threefold during September 2005 due to an agreement with a local company. The port of Progreso could also serve the eastern US very well for goods coming from southern Mexico. Mexico has a well-developed base of outsourcing providers, in some cases, with world-class capabilities. Industrial parks have received attention from state government and some have been quite successful. An example is Queretaro at just 200 kilometers from Mexico City, which has become an important industrial anchor. Mexico has some very dynamic areas relative to other locations in Latin America that developed world-class capabilities in just a few years. Examples include San Luis Potosí, Toluca, Tijuana, and Mexicali. B. Mexico s Infrastructure Challenges A report from the Instituto Mexicano de Competitividad (or Mexican Institute for Competitiveness at is one of Mexico s major think tanks where several well-known and prestigious institutions participate. The Instituto s work highlights three main problems in Mexican logistics infrastructure:....trucks versus rail. This is a combination of infrastructure and management decision-making problems that may be causing about $30 billion US in extra expenditures. It is simply a matter of using the resources that are at hand..customs delays. Especially in ports, delays are twice that of international standards (ten days versus five days). A study by Carranza and Villegas xii finds that financial costs caused by these delays total approximately $5 billion US per year. In a global economy where time is a very valuable asset, these delays clearly hinder Mexico s competitiveness. Truck ownership. The transportation structure is based on a very high percentage of single-owned trucks, making trucking companies not as efficient as they could be. Since one of the main economic assets the country has is its strategic logistics position, developing a reliable base of trucking companies is a strategic objective for the country s logistics and competitive success. 16
17 1. Customs delays Reducing customs delays is a strategic part of the logistics process of any company working in Mexico. Delays arise from the culture (as mentioned earlier), and current government authorities have been working to solve many of the bureaucratic problems that arise from this sensitive issue. Assuming that the whole Mexican territory can be crossed by train or by truck in five days (see Table 3.2), a delay of an extra day due to customs may put the best logistics strategies at risk. It may be important to note that, from the Mexican customs perspective, there are two types of imports. The first is internal transit imports that will be accepted within Mexican territory at another customs location (such as Queretaro, a well-known dry port near Mexico City). A transit import may also come through a port (e.g., Manzanillo) and go through Mexican territory to get into the US. Then there is a definitive import, which is accepted in the port and is liberated, or cleared there, for sale or to be introduced to another process without further inspections. Table 3.1 shows the different delays that may arise within customs. The participation or lack of seasoned logistics operators makes a difference in the way a problem is dealt with, which could mean as much as 100% or more time added to the process. The second column in Table 3.1 shows the time required to introduce a product, which will officially be imported at another location within Mexico (internal transit, which will go through customs at another location in the interior of Mexico). The third column shows the base time that is necessary for a final import. The fourth column shows the additional time that may be required in some cases (for example, when a customs agent makes what is called previous recognition, or when there may be some specific procedures related to a product review that take time). Table 3.1: Delay Times for Loads Clearing at Customs (source: personal interviews with customs agents) Internal Transit Final Import (Days) Base Time (Days) Additional Time (Days) Having seasoned logistics experts Previous in the operations Recognition Without seasoned logistics experts (without in the operations discrepancies) 120 to 150 (with discrepancies) Red Light Some conclusions can be drawn based on this table: The minimal delay time at customs is one to two days, which is extended one more day if the products are in internal transit. In a worst-case scenario which is quite infrequent goods can be delayed as much as five months. Assuming you are making a final import at a customs facility, the minimum delay time will be three days, and in the worst reasonable case, it could be 13 days (where a final import is without seasoned logistics experts and with red lights), and the next reasonable case is four days. 17
18 Table 3.2 shows distances from Manzanillo to different points at the US border. Integrating the perspectives from both tables (tables 3.1 and 3.2), the reader can grasp how important it is to interact with customs: all of Mexico s geographical advantages can be lost in customs delays. Table 3.2: Distance to Selected Points from Manzanillo (www.ferromex.com.mx) Location Distance Time required to reach Minimal time to (kilometers) the border (hours) cross the border Nuevo Laredo (through Monterrey 2, days, 5 hours by Ferromex) by TFM (Celaya Monterrey) 1, days Mexicali 2, days, 12 hours Nogales 2, days, 10 hours Piedras Negras 2, days, 5 hours Ojinaga 2, days, 6 hours Ciudad Juarez 2, days, 8 hours Note: This timetable was made for rail travel times and there may be important differences with truck times. Figure 3.1: Main Customs Sites Some of the main Custom s sites (Import-Export Requests) Mexicali Ciudad Juarez Ciudad Acuna Tijuana Nogales Agua Prieta Columbia Nuevo Laredo Piedras Negras Reynosa Matamoros Guaymas La Paz Monterrey Altamira Guadalajara Puebla Mexico Toluca 2. FAST The Free and Secure Trade project (FAST at is a cross-border project to help speed up the customs clearance process. It is being implemented by both Mexican and US governmental authorities in order to eliminate most of the delays at cross-border customs. The project will allow companies to use RFID scanning methods, among other technologies, to speed up all their customs clearance processes. 18
19 3. Pedimentos Table 3.3 should be reviewed alongside Figure 3.1. Pedimentos, or requests, (the first step when undertaking some type of import or export), have to be made through a customs agent. The numbers shown by the Servicio de Administración Tributaria (or SAT at which is the federal taxes agency that also covers customs, gives an approximate idea of export and import volumes. Table 3.3: Total Requests (Pedimentos) Between March 2004 and February 2005 Customs Imports Customs Exports Nuevo Laredo 1,267,042 Nuevo Laredo 441,564 Mexico City Airport 669,640 Mexico City Airport 210,207 Tijuana 452,833 Tijuana 148,808 Colombia 315,144 Colombia 110,082 Ciudad Juarez 313,560 Ciudad Juarez 104,182 Reynosa 245,653 Guadalajara 103,022 Matamoros 245,380 Nogales 86,468 Mexicali 238,774 Reynosa 85,267 Guadalajara 230,533 Monterrey 79,605 Veracruz 182,031 Toluca 70,329 Nogales 171,535 Ciudad Hidalgo 61,985 Mexico 161,797 Matamoros 50,953 Manzanillo 152,549 Veracruz 47,150 Monterrey 146,727 Manzanillo 42,288 Piedras Negras 104,278 Mexicali 41,397 Toluca 96,967 Altamira 38,733 From these figures, it is clear that Nuevo Laredo is the most important cross-border point. It is also apparent that there is a general tendency to have many more pedimentos imports than pedimento exports. This may reflect a financial tendency (exports are made in much bigger shipments) or a dispersion of imports. There are several conclusions for this table and these figures: 1) Import pediments represent three times the export pediments. 2) Import and export pediments in border cities, such as Laredo, Ciudad Juárez, and Tijuana represent 68% and 63% of totals. 3) Mexico City s Airport alone represents 13% and 12% of imports and exports. 4) Internal customs at Guadalajara, Monterrey, Mexico, and Toluca represent 10% and 16% of imports and exports. 5) The fourth group is ports (Manzanillo and Veracruz), which represent 8% and 6% of pediments. 19
20 C. Mexico s Ports Mexico enjoys a particularly competitive geographical and economic position in the world, comparable to the US, Europe, Asia, South America, and Central America. From a logistics point of view, Mexico is one of the great world hubs. It could be called the most important one, given the status of the US as an economic world power, and taking into account its relative distance to the main economic centers of the world. Table 4.4 shows general distances between selected locations all over the world (Rotterdam in Europe, Hong Kong in Asia, and some South American ports). This table gives an idea of how Mexico could act as an international hub. Mexican ports on the Atlantic and Pacific Oceans are actually separated by relatively short distances. For example, Figure 1.3 shows that Salina Cruz and Coatzacoalcos are separated by only 300 kilometers, slotting these ports competitively with the Panama Canal under most circumstances. In Table 3.4, ports on both Mexican coastlines have been considered in comparison to important transportation locations in the world. Since the distance from Mazatlán to Veracruz is 1,715 kilometers, and the distance from Veracruz to Manzanillo is 1,460 kilometers, the relative differences in distances between Mexican ports and other world locations can be weighed. Table 3.4: Distance to Strategic Locations in the World in Nautical Miles (www.maritimechain.com) Rotterdam Buenos Aires Santos Valparaiso Hong Kong Veracruz, Manzanillo or Mazatlan Rotterdam Buenos Aires Santos Valparaiso Hong Kong 5, d 23 hs 6, d 4 hs 5,450 18d 23 hs 3,929 13d 4 hs 7, d 22 hs 6, d 5 hs 5,439 18d 22 hs 7,449 25d 21 hs 9, d 24 hs 6, d 5 hs 2,800 9 d 18 hs 10, d 19 hs 5, d 22 hs 3, d 3 hs 10, d 20 hs 7, d 21 hs 2,800 9 d 18 hs 3,489 12d 3hs 10, d 12 hs 9, d 24 hs 10, d 19 hs 10,320 35d 20 hs 10, d 12 hs Assuming vessel speeds of 12 knots, Mexico is relatively competitive in transit time with ports all over the world (shortest distances are shown in bold font, while italics show the second-best distances. Underlined figures show the third-best distances). Even compared with ports in the same regions (Santos, Buenos Aires, and Valparaiso), Mexican ports remain competitive in distance and transit times. There has been a sound economic policy from the government in regards to ports, privatizing them and allowing them to become increasingly competitive. Important investments are being made to enhance this competitiveness for the next ten to 20 years. Port authorities, logistics operators, and companies operating in them are aware of this relevance. xxi 20