Mexico s Strengths. Table 1. Comparison of manufacturing labor costs

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1 Mexico s Strengths Mexico s Some 25 years ago, Mexico set out to achieve a greater economic openness focused on freeing international trade and attracting investment flows. This policy is supported by an aggressive agenda to privatize government companies. During this period, Mexico made many changes to its Foreign Investment Law and executed free trade agreements with the world s leading economies. The country also reached a consistent, solid and stable macroeconomic framework that has brought certainty to investment decisions that companies have to make. Today, Mexico offers an attractive business environment, legal certainty, one of the world s largest free trade agreement networks, economic sectors that are highly developed and that offer very competitive costs. Furthermore, the country is developing its infrastructure to turn it into a worldclass logistics platform and it is working on deregulation to simplify even more business operation. This document outlines Mexico s strengths and competitive advantages that make it an excellent choice for businesses to establish their operations. Competitive Labor Costs Mexico offers significant savings on labor costs when compared to other investment options in the Americas, Europe and Asia. For example, transferring operations to Mexico can lead to savings of close to 90% in labor costs. Table 1 compares labor costs in various countries. Table 1. Comparison of manufacturing labor costs Source: United States Department of Labor (International Labor Comparisons, 2007) and International Labour Organization (salary history in dollars). Note: Estimates for labor costs per hour for 2008 use 2008 growth rate for labor unit cost (source Global Insight) and the exchange rate at year end. As Table 1 shows, labor costs in Mexico are significantly lower than in Brazil, Poland, Argentina and Taiwan, to name a few. Also, since 2008 Mexico and China have comparable labor costs.

2 Several consulting companies, such as Boston Consulting Group, AT Kearney and Alix Partners (which measure competitiveness of the manufacturing sector in developing economies), acknowledge the advantages that Mexico offers for production investment. Namely, Alix Partners ranks Mexico as the best destination for manufacturing investment, better than China, India and Brazil. Simplicity of Operation The amount of time and procedures required to open and close a business, as well as the procedures and time needed to obtain construction permits, are crucial to the success of international business. In Mexico, investors only need 13 days and 8 procedures to open a business, and 138 days and 12 procedures to obtain a construction permit. This is significantly lower than what is required in India, China or Brazil. Table 2 compares the number of procedures required to open a business in different countries. Table 2. Comparison of days and procedures required to open a business Source: World Bank, Doing Business,

3 Furthermore, a business in Mexico can be closed in just two days, and the recovery rate is 64% 1. This is significantly lower than countries such as India, Brazil, Chile and Russia (Table 3). Table 3. Comparison of procedures to close businesses Source: World Bank, Doing Business, Accessibility to Large Markets Internal Market and NAFTA Region Mexico has a population over 100 million inhabitants, where 45.7 million are in productive age. That is why Mexico s internal market is attractive for businesses that establish in the country (1.08 billion dollar GDP in 2009). In 2008, Goldman Sachs ranked Mexico as the thirteenth largest economy, and they estimate that by 2040 it will be one of the world s largest economies. On the other hand, the country s geographical location and NAFTA constitute a great platform to sell from Mexico to the world s largest market (regional GDP of billion dollars, as shown in Table 4). It is estimated that by 2014, the region s market will reach billion dollars, that is, 25.6 of the world s GDP. Table 4. Market size in the NAFTA region in 2009 (Billions of dollars) Country/Region Gross Domestic Product Private Consumption United States Canada Mexico NAFTA Region Source: Global Insight estimates - December Recovery rate refers to the percentage of payment to creditors and shareholders that is available after closing. The higher the rate, the stronger the economic sector, since there are more resources available for new business.

4 Free Trade Agreement and Trade Agreement Network Mexico s Mexico has signed 12 free trade agreements with 44 countries, which make it one of the most open countries to international trade and provide access to more than one billion potential consumers (with income representing 60% of the world s GDP). Table 5 shows how Mexico has more free trade agreements than China, the US, India and Korea, among other countries. Table 5. Number of countries with which free trade conditions are established and maintained Source: World Trade Law. Also, Mexico has reduced its tariffs from 13% to 8% on average, and they are expected to reach 4% by This will increase profitability for businesses that are established in Mexico, because they will have access to foreign input and final products at competitive prices. On the other hand, Mexico requires very few procedures for importing and exporting goods; only 5 documents are required to complete exporting or importing procedures. Table 6 compares foreign trade procedures in different countries. Mexico is ranked higher than countries such as Brazil, Russia and India.

5 Table 6. Comparison of procedures required to complete foreign trade operations Mexico s Source: World Bank, Doing Business Legal Certainty for Foreign Investment Signing Agreements on Reciprocal Promotion and Protection of Investments (RIPPA) is part of a strategy established by the Mexican government to provide national and foreign investors a legal framework that offers stronger protection for foreign investment in Mexico and Mexican investment abroad. In general, RIPPAs cover the following disciplines: investment definition, scope of application, promotion and admission, investment treatment, expropriation, transfers and resolution of Investor-State and State-State controversies. Table 7 shows how Mexico has signed 27 of these agreements. Table 7. RIPPAs signed by Mexico Source: Ministry of Economy. Furthermore, some of the Free Trade Agreements that Mexico has signed include a chapter on investment that is similar to an RIPPAs, for example, the agreements signed with the US, Canada, Chile, Colombia and Japan.

6 The institutional framework that relates to trade agreements regarding investment (through RIPPAs) brings legal certainty to businesses that decide to establish operations in Mexico. Low Transportation Costs Mexico offers yet another advantage: its proximity to the world s leading consumption centers. This allows businesses to increase their response times to demand changes while it helps to decrease inventory costs. Table 8 shows the number of days required to transport by sea a container from competing countries and Mexico (columns), to important distribution and consumption centers (rows). Table 8. Comparison of sea distance days to the main consumption centers Source: Boston Consulting Group. Operation Costs There are many elements that affect operation costs and, therefore, business profitability. Some of these elements are tax rates, the number of tax payments (which affect administrative costs) and the cost of employee termination. Table 9 shows Mexico s advantages in these areas compared to other countries. Table 9. Comparison of operation costs *Business tax rates in Mexico follows the most recent Federation Income Law, which was approved in November 2009 by the Congress of the Union. Source: World Bank, Doing Business

7 Operating in Mexico can lead to significant tax savings compared to Brazil, India and the US. A highlevel analysis shows that businesses that have production activities in the American market could benefit from a reduction of up to 11.5 percentage points in their tax rates simply by transferring their operations to Mexico. With respect to the number of tax payments, Mexico requires only 6 payments per year, which is better than countries such as Brazil, Germany, Poland and India. Even though it seems that Mexico is at a disadvantage when compared to countries such as Canada and Poland in the area of employee termination costs, it is important to note that salaries in Mexico are 54% lower than Polish and 88% lower than Canadian salaries. Therefore, employee termination costs in Mexico are lower than in most of the countries included in the comparison. Population and Human Capital Demographic Window Mexico has 107 million inhabitants. The country s economically active population (EAP) was 45.7 million for Q2 2009, which is one million higher than Q Table 10 shows the evolution of the country s population structure. Table 10. Population structure in Mexico, Q Source: National Population Council. Table 10 shows that by 2030 Mexico will have the lowest economic dependency rate for children and seniors. This will create important business opportunities due to the size of its domestic market (which is the result of a large number of economically active individuals) and the number of skilled human resources available.

8 In the following decades, working age population will reach 88 million. Table 11 shows how the economic dependency index will behave towards Table 11. Mexico s demographic window Source: INEGI estimates. Trained Staff Every year in Mexico, close to 90,000 students graduate from engineering and technology programs. This means that Mexico is a source of talent that is very attractive for businesses in various sectors. The higher-education system in Mexico includes 2,539 institutions that offer education services and international exchange opportunities. Also, Mexican universities combined offer more than 900 graduate programs in the areas of engineering and technology. With the purpose of maintaining the development of our human capital within the context of economic recession (which we are already overcoming), the federal government designed an Employment Preservation Program which avoided losing half a million job sources in the country s exporting sector. Infrastructure and Access to the United States Mexico is well communicated thanks, in part, to 27,000km of railroads that go north to the US, south to Guatemala, west to the Pacific Ocean and east to the Gulf of Mexico (and the Atlantic Ocean).

9 Mexico has several internal distribution terminals which communicate with the main sea ports. This allows reducing costs and expediting the arrival and departure of goods. In summary, Mexico has 85 airports (26 domestic and 59 international airports) 16 international sea ports 27,000 kilometers of railroads 123,000 kilometers of main highways In addition, Mexico has a 3,000km border with the US, which allows for low transportation costs to that market. There are 52 access points between the US and Mexico that record traffic of 4.5 million load vehicles and more than 70 million automobiles every year. Appendix 1 includes graphs to illustrate Mexico s logistics platform. With the purpose of helping increase Mexico s competitiveness, the federal government increased investment in infrastructure from 3% of the GDP to 5% in the last three years, through the most important infrastructure program that the country has had in decades. Also, the government continues working to create the best conditions that will allow the private sector to participate in the program s projects and other projects that are interesting for businesses. Natural Resources Mexico s wide variety of natural resources favors the development of a large number of productive activities, including those related to biotechnology and generation of renewable energy. The following are just a few of Mexico s strengths: Ranked the world s fourth country in terms of biodiversity. The world s second largest silver producer. One of the leading copper producers in the world. Potential wind energy generation estimated at 40,000 Megawatts. Potential hydroelectric energy generation estimated at 53,000 Megawatts. Mexico also has natural beauties that make it an attractive destination for new tourist projects. Macroeconomic Stability The World Economic Forum s (WEF) latest report on global competitiveness revealed that, in terms of macroeconomic stability (which in turn measures five variables: public finances, national savings rate, inflation, interest rate differential and public debt), Mexico improved its ranking by 20 spots between 2008 and 2009, going from the 48 th position (out of 133 countries) to the 28 th. Table 12 shows Mexico s strength in important macroeconomic variables compared to other economies. In terms of public debt, Mexico does not show solvency issues. The level of its public debt as a percentage of its GDP is below 25%, much lower than countries such as Brazil, Argentina and India. Moreover, recently adopted tax measures reinforce the medium-term sustainability of public finances and the ability of the government to continue supporting improvements to the country s infrastructure.

10 Table 12. Comparison of selected macroeconomic stability indicators Source: World Economic Forum (WEF), The Global Competitiveness Report and Aswhat Damodaran, Stern Business School, NYU, Country Risk Premium. On the other hand, the monetary policy has allowed Mexico to reach inflation levels close to our leading trade partners. In 2009, Mexico recorded its lowest inflation rate since % according to the Bank of Mexico. Also, our country risk level, which is at a 3% rate, is more competitive than that of Colombia, Brazil, India and Turkey, that is, 3.9%, 4.5%, 6% and 7.9% respectively. Favorable Exchange Performance In the following years, Mexico will experience a better actual exchange performance than many of the countries it competes with in international markets. For example, Table 13 shows the expected behavior that actual exchange rates in many countries will have before the dollar o the euro.

11 Table 13. Expected behavior of actual exchange rates in selected countries, before the dollar and the euro ( , average yearly variation). Source: ProMexico estimates based on Global Insight forecasts. As the table shows, Mexico s actual exchange rate will remain virtually balanced before the US and German markets (as an example of the euro) between 2008 and In contrast, Asian countries such as China, South Korea, India, Japan (as well as South Africa) will experience strong actual exchange appreciations. This will lead to a relative decrease in the prices of goods exported from Mexico to North American and European markets, compared to its Asian competitors 2. This means new business opportunities in the short and medium terms for businesses that want to increase their profitability or better position their products in international markets. Mexico is a great choice as an operation and exporting base. Safety and Institutional Strength Mexico is becoming stronger because its institutions are being reinforced and the rule of law is being consolidated. The government is committed to fighting organized crime. Investors and citizens can be sure that, regardless of the images that are being broadcast, Mexico s streets are safe and it is possible to make business as in any other part of the world. In fact, some studies clearly reveal the differences between how society perceives safety in Mexico and the numbers that are associated to crime rates. A clear example is how the media have recently compared Mexico to Colombia in terms of safety. 2 Mexico will also have advantages in the Japanese market. In this case, the peso s yearly actual average depreciation will reach 10% (from 2008 to 2012), while China and South Korea will depreciate close to 5% during the same period.

12 Cultural Power Mexico s Mexico is one of the world s cultural powers. Its cultural offer enriches the business experience for foreign companies, in a human and professional sense. Mexico is considered an international player in terms of culture because Mexico is the Latin American country with the largest number of sites that have been declared World Heritage by UNESCO. It has the world s second largest International Book Fair on a global scale (the FIL in Guadalajara, Mexico). The Festival Cervantino in Guanajuato, Mexico (which focuses on theater, dance and music) is among the world s top five arts festivals. The Guadalajara and Morelia film festivals are among the 10 best international film festivals. Thus, businesses in Mexico not only lead to high profitability, but they are carried out in an environment that is culturally rich. This has a positive effect on the human development of those who decide to make business with Mexicans. Final Considerations It is clear that Mexico is one of the best operation location alternatives because of many reasons. In the following years, the country will continue progressing in many levels, such as infrastructure, legal certainty, deregulation and safety, among many others, with the goal of further improving its business environment. The road traveled and the goals set by the Mexican government and society will turn Mexico into an economic power by the year Businesses that choose Mexico as their center of operations will undoubtedly achieve their medium- and long-term goals.

13 APPENDIX 1. MEXICO S LOGISTICS PLATFORM Mexico has 85 airports (26 domestic and 59 international airports) 16 international sea ports

14 2,000 kilometers of railroads 123,000 kilometers of main highways (see maps)

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