MEXICO CSCMP. Perspectives CONNECT. COLLABORATE. CSCMP.

MEXICO CSCMP Perspectives CONNECT. COLLABORATE. CSCMP.

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...6.. 1. Bribery...7.. 2. Educated workforce...7.. 3. Corporate taxation...7.. 4. GDP...8 C. Mexico s Culture...8 D. Summary of Mexico s Economic and Business Development Challenges...10.. 1. Theft...10.. 2. 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) 645-3460 E-Mail: jdamico@cscmp.org CSCMP Global Perspectives is published by the: Council of Supply Chain Management Professionals 333 East Butterfield Road, Suite 140 Lombard, Illinois 60148-5617 USA Phone: (630) 574-0985 Fax: (630) 574-0989 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...16.. 1. Customs delays...17.. 2. FAST...18.. 3. Pedimentos...19 C. Mexico s Ports...20.. 1. Future development and supply chain management opportunities...21.. 2. Technical characteristics of ports...21.. 3. 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...29.. 1. Wal-Mart...29.. 2. Cemex...29.. 3. Bimbo...29.. 4. 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

Endnotes...34 List of Figures Figure 1.1: Major Mexican Imports and Exports During 2004...7 Figure 1.2: GDP per Person for 2004...8 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 2004-2005...26 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 2005...19 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

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: 106,451.679 (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: 43.40 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

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

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 2000. 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 www.reforma.com.mx), 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.

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 www.unam.mx) is the biggest university in Latin America. The Instituto Tecnológico de Estudios Superiores de Monterrey (Tec at www.itesm.mx), the Instituto Tecnológico Autónomo de Mexico (ITAM at www.itam.mx), and the Universidad Panamericana (UP at www.up.mx) 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 2000-2004, 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 www.icami.com.mx). 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 2007. The top personal income tax rate will also fall to 28% in 2007. 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 2004. 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

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.

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 www.virgendeguadalupe.org.mx/bibliografia.htm), 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.

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 2000. 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 www.inegi. 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 www.cce.org.mx/ceesp) 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, 5.7 94% (kidnappings) Plagiarism 5.4 84% Informal economy 5.2 87% Trade unions 4.3 79% Fiscal policies 4.3 88% Lack of transparency in law 4.3 85% design, policies, and regulations Law enforcement 4.3 85% Legal system performance 4.2 81% Licenses and permits acquirement 4.1 84% Legal procedures to launch a 4.0 82% company Inadequacy of laws, policies, and 3.9 81% regulations to companies necessities Foreign commerce operation 3.6 68% requirements Service management government 3.5 79% performance Mexico s public infrastructure 3.4 81% 10

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 4.7 83% Private companies monopolies 4.3 84% Loans access 4.2 84% 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 3.9 83% Technology development 3.7 81% Labor rotation 3.6 83% Labor cost 3.5 82% Raw material, spares, and equipment 3.4 79% availability Supplier reliability 3.3 82% 11

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 www.antp.org.mx/), 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 1 6 0 0 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

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/) 1997 1998 1999 2000 2001 2002 2003 2004 2005 Value 0.98 1.04 1.11 1.12 1.21 1.25 1.32 1.41 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 1994-1995 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

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 1994. 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

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 $172,456.70 91% $165,111 87% 2003 $156,946.10 95% $146,803 89% 2002 $151,913.90 94% $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

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 www.imco.org.mx) 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

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 1-2 3-4 2 Previous in the operations Recognition Without seasoned logistics experts 3-7 4-10 3 (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

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 2,030 29 5 days, 5 hours by Ferromex) by TFM (Celaya Monterrey) 1,639 23 5 days Mexicali 2,506 36 5 days, 12 hours Nogales 2,117 30 5 days, 10 hours Piedras Negras 2,044 29 5 days, 5 hours Ojinaga 2,127 30 5 days, 6 hours Ciudad Juarez 2,222 32 5 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 www.cbp.gov) 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

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 www.sat.gob.mx), 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

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 5,169 17 d 23 hs 6,327 22 d 4 hs 5,450 18d 23 hs 3,929 13d 4 hs 7,464 25 d 22 hs 6,394 22 d 5 hs 5,439 18d 22 hs 7,449 25d 21 hs 9,784 33 d 24 hs 6,394 22 d 5 hs 2,800 9 d 18 hs 10,586 36 d 19 hs 5,439 18 d 22 hs 3,489 12 d 3 hs 10,320 35 d 20 hs 7,449 25 d 21 hs 2,800 9 d 18 hs 3,489 12d 3hs 10,217 35 d 12 hs 9,784 33 d 24 hs 10,586 36 d 19 hs 10,320 35d 20 hs 10,217 35 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

1. Future development and supply chain management opportunities Currently, there is a strategy of specialization of Mexican ports, some of them enjoying renewed investment for infrastructure. For example, Guaymas (Figure 1.3) is proclaimed as the Arizona port because of its shorter distance than Long Beach to the border (www. Transportesxxi.com.mx). Recent announcements state that a larger capacity warehousing area will be built within the port. Some of the planned investments for port development include: xxii Altamira: liquefied gas plant Lazaro Cardenas: specialized container terminal, liquefied gas plant Progreso: specialized container terminal Islas Coronado: specialized terminal for liquefied gas Topolobampo: liquefied gas terminal Vallarta: two additional docks for cruisers Puerto Chiapas: specialized terminal for cruisers Dos Bocas: terminal for multiple uses Topolobampo is receiving investment moneys for a gas plant, and Lazaro Cardenas will soon have a four-lane highway connecting it to the central highway system. The Port of Tuxpan (see Figure 1.3), which is the nearest port to Mexico City (and, therefore, to all of Central Mexico) may have a more prominent role in the near future due to this proximity. The construction of a four-lane highway to Mexico City may change many logistics equations. Other ports, such as Ensenada (see Figure 1.3) are looking at unusual volume surges, which some experts attribute to the reallocation based on port congestion at Long Beach and Los Angeles. According to some sources (www.transportesxxi.com), Ensenada experienced a threefold increase in containers by September 2006. Some automotive companies are analyzing the possibility of using the port of Progreso (Figures 1.3 and 3.2). 2. Technical characteristics of ports Table 3.5 shows some of the technical characteristics of Mexican ports. Intermodal operations are a key asset within this scheme. As recently as June of 2005, the government signed an agreement to implement intermodal corridors that link port to port within Mexico as well as ports to the US border. Some of the most recent locations where intermodal facilities have been built are Monterrey, Puebla, Salinas Victoria, and Torreon. Major Mexican ports also have these types of facilities (e.g., Manzanillo, Veracruz, Altamira, Lazaro Cardenas). The main point is that there are two important ports on each coast (Atlantic and Pacific) that can be used as logistics hubs, and there are many existing ports on each coast that can be configured as operational ports, without the need for a large investment. Table 3.5: Characteristics of Major Mexican Ports Commercial Developed Dock Shipping Warehousing Intermodal Coast Port Length (mt) Area (m2) Facilities Pacific Guaymas 1,669 116,693 Pacific Topolobampo 537 137,700 Pacific Mazatlan 1,257 84,897 Pacific Salina Cruz 1,201 97,161 Pacific San Blas (Nayarit) 26,250 Pacific Lazaro Cardenas 2,967 1,319,753 Yes Pacific Puerto Vallarta 10,538 Pacific Manzanillo 722 7,398 Yes Atlantic Dos Bocas 192,180 Atlantic Villahermosa 45 645 Atlantic Altamira 6,004 1,051,720 Yes Atlantic Tampico 3,473 245,736 Atlantic Veracruz 4,029 444,318 Yes Atlantic Tuxpan 1,245 354,042 Atlantic Coatzacoalcos 1,977 157,176 Atlantic Progreso 1,490 295,186 21

Mexico s ports may very well be termed the stars of the country s logistics infrastructure because of their natural locations. Mexican ports processed 2.1 million twenty-foot equivalent units (TEUs) in 2004 (2005 Annual Report-SCT). Combined with intermodal operations, they can generate a wealth of logistics and supply chain management opportunities. Figure 3.2 shows some of the main operation numbers, such as containers and vehicle imports and exports (www.sat.gob. mx). Manzanillo is clearly the port with the highest number of containers moved (one of the first in Latin America) with 830,000 TEUs, (www.ci-online.com). Veracruz and Altamira are the other big ports, with Veracruz being the biggest car importer and exporter with 27,400 vehicles imported and 208,000 vehicles exported. The route from Salina Cruz to Coatzacoalcos (Coatzacoalcos is the Mexican/Caribbean port nearest Salina Cruz) is the isthmus from the Pacific to the Atlantic Ocean in Mexico, and it is linked by road and rail in a 300 kilometer stretch. These geographical attributes make it a clear competitor to the Panama Canal, and have allowed the region to draw some important companies for the processing and finishing of raw materials. This is one of the typical logistics combinations that can be found in Mexican territory crossings from the Pacific to the Atlantic (such as Manzanillo-Laredo, Manzanillo- Veracruz, Manzanillo-Progreso, or Salina Cruz Progreso seen in Figure 3.2). Figure 3.2: Operations in Mexican Ports ENSENADA Main Operations in Mexican Ports 39,202 Legends Vehicle Imports Vehicle Exports Total Containers 43,378 21,472 15,954 46,159 829,603 9,192 3,032 MAZATLAN 43,445 MANZANILLO ALTAMIRA VERACRUZ LAZARO CARDENAS 82,693 2,193 18,440 297,017 SALINA CRUZ 591,736 274,586 208,677 68,082 PROGRESO 3. The strategic Pacific-Atlantic axis Companies and government officials alike have recognized the great opportunities Mexico has to offer if it only exploited its privileged ocean access, as seen in the following examples: xxiii....the Port of Lazaro Cardenas has a direct connection to Kansas City by railroad..the Port of Manzanillo signed cooperation agreements with the Port of Houston and the Port of Shanghai..Anecdotal evidence (obtained from a presidential advisor) shows that some multinational companies are taking advantage of this strategic axis: LG, the Korean company, is sending goods from Asia to. Europe through the ports of Manzanillo-Altamira (see Figure 1.3 and Table 3.5)..International transit that avoids customs has been authorized in the following corridors: Manzanillo-Nuevo Laredo Manzanillo-Ciudad Juárez Lázaro Cárdenas-Nuevo Laredo Ensenada-Tecate-Mexicali-Tijuana As can be seen, Mexico is reconfiguring itself as a main logistics corridor, creating the opportunity for companies to cross from the Pacific to the Atlantic Oceans in several ways. 22

D. Roads and Highways Highways can be divided into two categories: tollways, featuring 4,880 kilometers of four-lane highways and freeways featuring 42,000 kilometer highways. Figure 3.3 shows the main corridors that the government recognizes as invaluable. Figure 3.3: Main Roadway Corridors (Secretaria Comunicaciones y Transporte, SCT) TIJUANA MEXICALI SAN LUIS RIO COLORADO ENSENADA NOGALES CD. JUÁREZ 13 1 HERMOSILLO GUAYMAS CD. OBREGON LA PAZ FUNDICTION LOS MOCHIS SAN JOSE DEL CABO CABO SAN LUCAS CULIACÁN MAZATLÁN CHIHUAHUA DELICIAS GOMEZ PALACIO 6 DURANGO TORREON MONCLOVA SALTILLO ZACATECAS PIEDRAS NEGRAS SAN LUIS AGUASCALIENTES POTOSI CD. VALLES LAGOS DE MORENO 8 LEON GUANAJUATO GUADALAJARA QUERÉTARO IRAPUATO PACHUCA MANZANILLO 3 CD. GUZMAN COLIMA FRESNILLO L. CARDENAS ZIHUATANEJO 2 MORELIA URUPAN TOLUCA CUERNAVACA ACAPULCO NEUVO LAREDO MONTERREY LINARES D.F. REYNOSA MATAMOROS CD. VICTORIA 4 12 10 11 ALTAMIRA TAMPICO CHILPANCINGO TUXPAN POCA RICA JALAPA TEXACALA VERACRUZ ORIZABA TEHUACAN OAXACA 7 COATZACOALCOS 9 1. MÉXICO-NOGALES CON RAMALA TIJUANA 2. MÉXICO-NUEVO LAREDO CON RAMAL A PIEDRAS NEGRAS 3 QUERÉTARO-CD. JUÁREZ 4 VERACRUZ-MONTERREY CON RAMAL A MATAMOROS 5 PUEBLA-PROGRESO 6 MAZATLÁN-MATAMOROS 7 PUEBLA-OAXACA-CD. HIDALGO 8 MANZANILLO-TAMPICO CON RAMAL A L. CARDENAS Y ECUANDUREO 9 TRANSISTMICO 10. ACAPULCO-TUXPAN 11. ACAPULCO-VERACRUZ 12. ALTIPLANO 13. TRANSPENINSULAR DE BALA CALIFORNIA 14. PENINSULAR DE YUCATAN CD. DEL CARMEN VILLAHERMOSA TUXTLA GUTÉRREZ PROGRESO MÉRIDA CAMPECHE 5 14 VALLADOLID CHETUMAL CANCUN TAPACHULA MO. MADERO CD. HIDALGO Figure 3.4 shows a polygon, which should be carefully studied by potential logistics systems investors. Curious as it may seem, the distance in hours from some vertices is reduced by half for the same distance from other vertices. Road and rail networks have different configurations, so distance by railroad may be longer than the same distances measured on the road network. Figure 3.4: Mexico s Polygon of Logistics Decisions Tijuana Mexico s Polygon of Logistics Decisions 27.5 hs 32 hs Matamoros 25.5 hs Manzanillo 14.5 hs 21.5 hs 11.25 hs 21.5 hs 12.25 hs 9.25 hs Veracruz Progreso For example, the distance from Manzanillo to Matamoros is half that from Manzanillo to Tijuana, which creates interesting opportunities for companies exporting goods to the US and/or bringing raw material from the Pacific Ocean. In a similar way, the Port of Manzanillo appears to be a center (geometrically), with a circle radius of 2,000 kilometers reaching various points on the US border. 23

Figure 3.5: Number of Four-lane Highways and Kilometers of Coverage Proportion of Four Lane Highways kms Over Total and kms of Four Lane Highways 753 798 343 641 325 70 626 386 708 167 109 305 305 Legend MEXICO by Denscarr2 143 647 0.05 to 0.08 (9) 0.04 to 0.05 (2) 0.03 to 0.04 (5) 165 0.02 to 0.03 (6) 0 to 0.02 (11) 796 429 478 143 796 7 9 6 508 76 85 216 139 71 57 291 214 259 70 244 Figure 3.5 shows absolute kilometer values of four-lane highways by state. It is clear that the northern states, which are the largest in area, have the longest network of this type. This is not accidental, since the most profitable routes go through these states. This fact should be considered when analyzing how to link the center of the country with the poorer south. Even though it may not be in a company s interests to help these areas, it should be in the US s interest given that Mexico s southern border is the weakest point in the US s security border policy. For example, organized crime groups like the well-known central-american Maras come to Mexico with the goal of eventually crossing the US border. The economic development of this area should be a strategic priority for both Mexico and the US. E. Railway System Figure 3.7 shows the Mexican railway system. Railways are the last strategic asset that serves the logistics system. American rail companies BNSF and Union Pacific have interests in two Mexican rail companies, Ferromex and TFM. Talks are underway and projects are being implemented in order to link railway systems in the US and Mexico in a more efficient way. Even though Ferromex has by far the biggest share of the entire network, TFM has the most profitable tract the one that goes from Mexico City to Monterrey and reaches Nuevo Laredo (the most important cross-border point). The railway system is privatized, which obliges these companies to make investments in the network. But the sort of monopolistic nature of railroads limits the ways in which commerce can be done, and the lack of rail sidings in industrial parks limits the possibility of using rail on a bigger scale. A study conducted by the Instituto de Competitividad Mexicana (IMCO or Institute of Mexican Competitiveness at www.imco.org.mx), shows that goods valued at $30,000 million US could be transported by rail instead of truck. This could be a reality if only more facilities existed at industrial parks, and if it were easier to switch between rail companies (currently a cause for conflict). The Mexican railway system is becoming increasingly efficient, and opportunities will continue to arise for companies to operate with the US in a more efficient manner. All these are changes that will take place within the next few years at the most because of the number of projects already underway. 24

Figure 3.6: The Mexican Railway System (Secretaria Comunicaciones y Transporte, SCT) TIJUANA TECATE MEXICALI PUERTO PEÑASCO NOGALES CD. JUÁREZ FERROMEX NACOZARI B. HILL OJINAGA HERMOSILLO CHIHUAHUA LA JUNTA GUAYMAS ESCALON FRONTERA PAREDÓON SUFRAGIO R.ARZIDE TOPOLOBAMPO TORREÓN CULIACAN DURANGO SALTILLO PIEDRAS NEGRAS NUEVO LAREDO MONTERREY CD. VICTORIA MATAMOROS TFM FERROSUR COAHUILA-DURANGO CHIAPAS-MAYAB FERROCARRIL DEL ISTMO DE TEHHUANTEPEC TERMINAL DEL VALLE DE MEXICO LINEAS CORTAS MAZATLÁN FELIPE PESCADOR TAMPICO AGUASCALIENTES TEPIC GUADALAJARA MANZANILLO IRAPUATO LÁZARO CÁRDENAS SAN LUIS POTOSI QUERETARO PACHUCA JALAPA D.F. PUEBLA TEHUACAN CORDOBA TIERRA BLANCA VERACRUZ COATZACOALCOS MEDIAS AGUAS PROGRESO MÉRIDA TENOSIQUE CAMPECHE OAXACA IXTEPEC SALINA CRUZ CUIDAD HIDALGO In any case, railways have enjoyed steady growth (as Figure 3.7 shows) since the privatization of 2000. Ever since the transfer took place, there has been an increase in rail usage by world-class companies. One example is Nissan s facilities in Manzanillo that import cars from Asia and send them by rail to Guadalajara and Mexico City. Figure 3.7: Rail Transport 25

F. Airports 0 351 Mexico s proximity to the US has generated a wealth of airport resources all over the country. International flights are the norm, and airlines like Continental have regular flights to the relatively smaller cities within Mexico (such as the Houston-San Luis de Potosi route). The main load airport is that of Mexico City, followed by Toluca (where FedEx has its Mexican hub). It is clear from Figure 3.8 that international freight has experienced an important increase (a 70% increase from 2000 to 2005), reflecting its interdependency with the Mexican economy. The increasing volume of electronics exports is somehow tied to an increase of expedited parts imports, and totals may reflect this trend. 600 500 400 300 280 351 Air Freight 2004-2005 100 0 389 410 467 Air Freight 2004-2005 389 410 467 2000 2002 2004 492 99 88 89 89 108 107 492 9 88 89 89 108 107 Figure 3.8: Air Transport Tonnage 2004-2005 International National G. Industrial Parks and Warehousing 00 2002 There are 329 industrial parks with nine more located in ports. A detailed 2004 description of each of them can be found at Contacto Pyme (www.contactopyme.gob.mx/). Companies in Latin America prefer to work in industrial parks for security reasons, and because of the difficulty experienced supporting infrastructure and utilities (water, light, etc.) throughout the region. Table 3.6 could be matched with what is presented in Figure 1.3, providing perspective on geographical distribution and industrial infrastructure concentration within Mexico (around main geographical regions such as the northern border and the center of the country). Distribution centers have become the star of the real estate sector (Reforma newspaper and www.transportesxxi.com/ April 3, 2005) because this sector enjoys an annual growth of 20%. The group formed by AMB Property Corporation, GAcción, Grupo Meta, and Frisa introduced capital investments to give new life to distribution centers while increasing their demand, particularly in the northern part of Mexico City. The type of warehousing facilities these com- Table 3.6: Industrial Parks in Mexico by State State Industrial Parks Aguascalientes 2 Baja California 49 Baja California Sur 1 Campeche 5 Coahuila de Zaragoza 28 Colima 1 Chiapas 2 Chihuahua 25 Distrito Federal 2 Durango 3 Guanajuato 6 Guerrero 1 International Hidalgo 4 National Jalisco 20 Mexico 22 Michoacán de Ocampo 2 Morelos 3 Nayarit 1 Nuevo León 46 Oaxaca 3 Puebla 13 Querétaro Arteaga 11 Quintana Roo 3 San Luis Potosí 6 Sinaloa 6 Sonora 28 Tabasco 2 Tamaulipas 18 Tlaxcala 6 Veracruz de Ignacio de la Llave 4 Yucatán 4 Zacatecas 2 Total 329 26

panies are offering is more than ten meters high, feature several dock platforms, eight-ton resistant surfaces, and 15,000 square meters of floor space. GAcción (www.accion.com.mx/resufin.html) stated that it would invest $560 million US to develop logistics centers. Many of the old distribution centers are being dismantled and refurbished. Mexico needs to further develop its infrastructure in many areas, and industrial parks are a way to solve this problem. Companies are left to find ways of managing these deficiencies, and they usually do so by centralizing investment in one location. Table 3.7: Approximate Warehousing Space in Selected Cities City Warehousing Space (million square meters) Mexico 2.8 Monterrey 3.7 Toluca 1.5 Queretaro 1.4 Distribution centers are being built primarily by the pharmaceutical, chemical, publishing, automotive, food, and electronics industries. Companies such as DuPont, Soriana (retailing), Comercial Mexicana (retailing), Wal-Mart, Kraft (with a location featuring 40,000 square meters), and Procter & Gamble have recently opened distribution centers, at an average rental per-square-meter cost at between $450.00 US and $550.00 US. The state of Queretaro may soon be the strategic location for distribution centers. Queretaro has many features, making it a favorite: it is considered one of the cities that has the best standard of living in Mexico, is famous for its cleanliness, is relatively close to the main consumption center (Mexico City), and enjoys good road and rail connections (Tijuana, Ciudad Juarez, Nuevo Laredo, Altamira, Veracruz, Manzanillo, and Lázaro Cárdenas). Its interior multimodal port has a capacity to handle 7,500 TEUs, and features double-deck train service and customs warehouses of 8,000 square meters, as well as an international airport. Its external commerce is of more than $8 billion US annually. During 1999-2003, it received investments of $536 million US and enjoys Mexico s highest employment rate growth. H. Outsourcing Services Providers Mexico s geographic proximity with the US along with globalization has generated a complex and significant base of outsourcing providers. The top ten outsourcing logistics companies operating in the country (according to a 2004 issue of Transportation Topics) are: UPS, FedEx, Yellow Roadway, DHL, Ryder, CNF, Penske, Exel, Schneider, and Swift Corporation. The size of the logistics market was about $3 billion US in 2004 (www.transportesxxi.com/, June 9, 2004). There are some noticeable examples of logistics contracts in Mexico, such as Coca-Cola Mexico contracting Exel to serve its potential market of $1.6 billion US. Exel created a consortium with all its Mexican distributors (SalesKO), which will distribute 62,000 units a week. This new company would distribute noncarbonated beverages such as Nestea, Powerade, and Ciel Aquarius. Exel works with customers like Procter & Gamble, Unilever, Black & Decker, Gillette, Wella, Disney, Hershey s, Kellogg s, Roche, Merck, Bristol Myers Squibb, Tyco, Gerber, Volkswagen and PepsiCo, and has sales of $300 million US in Mexico. As an example of warehousing capacity, Exel Mexico dedicates 500,000 square meters for outsourcing services. Danone has launched a distribution center to serve its logistics needs (considered one of the most complex in the world) to handle 52% of its national volume of products. Geodis, an outsourcing company, manages Danone s distribution center using a warehouse of 4,500 square meters with 180 employees, through an annual contract of $1.6 million US (source www.transportesxxi.com/). 27

Section IV. Managerial Capabilities and Opportunities The spread of managerial best practices has exerted an important influence on Mexico s managerial capabilities. There are a number of best-in-class examples among Mexican companies, with some heavy players mentioned several times in the Harvard Business Review, such as Cemex, Vitro, Bimbo, and Telmex. Globalization has spread knowledge of logistics and supply chain management best practices, and yet, there are hindrances to the implementation of best practices, some of which are discussed below in relation to the automotive industry: xxiv.1...operators and automotive suppliers have, in many cases, poor logistics coordination. On one hand, there are cultural differences between supply chain managers on both sides of the border due to the completely different educational and business environments where Mexicans and Americans have been educated and currently work. In addition to this phenomenon, there is a relative deficit of logistics suppliers with sophisticated logistics abilities in Mexico. International logistics providers haven t always developed processes to work with local companies. OEM suppliers are forced to deal with an excessive number of logistics providers, usually imposed by the OEM (a common practice in the automotive industry). When an automotive supplier has many customers, the coordination of its different logistics providers (each with its own set of schedules and rules) poses a problem. Communication can also pose a problem when new behavior patterns and new standards are being implemented..2...the entrepreneurial base within the country is limited, and this affects supplier operations, as there are not enough local suppliers in many industrial sectors. For example, there is a lack of local screw providers in the automotive industry in Mexico, which forces companies to source those products from Europe or Asia..3...Suppliers have particularly inaccurate forecasting processes. This is due to a local inability to operate and maintain sophisticated forecast technologies and to manage the required timely flow of information. In this case, cultural restrictions reflect the way in which information is handled. It has been observed that multinational companies with divisions located in Mexico and other Latin American countries have higher forecast errors in their Mexico operations. As an incidental explanation of this problem, an international consultant who has worked in several international environments said that, In Mexico I always ask questions twice, referring to the fact that local cultural characteristics oftentimes generate ambiguous or uncertain responses for simple daily occurrences (e.g., in a hotel, when asking an employee, Where is the bar? )..4...There is a lack of standardization in planning methods and operational norms within the business environment. On the one hand, there is a sort of Babel Tower effect due to the overwhelming variety of methods that can hinder procedure homogenization among companies. Babel Tower means that multiple organizations and operators may be working with different methods and perspectives, lacking a common analytical framework. On the other hand, some companies have operational norms (e.g., packaging design, pallet size, stock unit) that have been enforced by headquarters (e.g., Europe, North America) that cannot be applied in different continents or countries..5...in general, suppliers have a more distorted and amplified demand signal than the original market demand. In essence, the bullwhip effect aggregates distortions of all echelons between the market and the suppliers. Therefore, intermediate components demand varies more than finished products demand. This phenomenon is of particular interest to Mexico and other Latin American countries, since they produce intermediate goods for primary trade that are typically located several echelons away from the finished goods market..6...communication and cultural problems may affect coordination between Mexican suppliers and their US counterparts. There are dramatic examples of wrong or completely inaccurate forecasts that are sent from the US to Mexico. The cultural factor entailing employees speaking a different language and having a preconceived idea about their relationship with their counterparts hinders communication between both sides of the border. 28

A. Success Case Studies While problems such as those mentioned above are real, many successful companies operate in Mexico and can provide useful examples for others. 1. Wal-Mart In 2003, Wal-Mart in Mexico (or Wal-Mex) served 200 million customers at its sale points. Sales were about $12 billion US with operation costs representing 14.6% of sales. Wal-Mex has become the most important company on the Mexican stock exchange. In February 2004, Wal-Mex had 140 warehouses, 53 Sams Clubs, 83 Supercenters, and 44 Superamas. There are 320 outlets that are auto-service oriented, 43 VIPS restaurants, two Portones restaurants, and two La Finca Restaurants. Wal-Mart measures its efficiency in days-supply of inventory. At the end of 2003, inventory was at 37 days. In one year, they reduced inventories by seven days for Supercenters, four days for Sams Clubs, one day for Superamas, and two days for VIPS outlets. One inventory day is worth $30 million US. In 2002, the company had a 21.2% return on investment. The Wal-Mart case is particularly interesting because of the transculturation process it introduced, and reveals important lessons for foreign investors. The main tactical achievement was to incorporate well-educated, local managers into the company s managerial structure. It absorbed Cifra, a local supermarket chain, and integrated systems, incorporating local knowledge of taxes into its information systems. The company has 95% of its suppliers with EDI. 2. Cemex Cemex had $5.6 billion US in sales for 2000, and was the third-largest cement producer of the world for that year. Cemex has emerged and become an integral part of Monterrey s industry, transforming itself into a cement multinational. Understanding Monterrey s mentality will help you understand Cemex. Grupos, which are intertwined or interrelated companies whose owners have a similar profile, are the governing aristocracy of regiomontanos (the Spanish adjective for people/companies belonging to Monterrey). Some of these grupos have a high profile, going so far as to recruit people at Stanford with technical expertise and know how. Cemex is one of these companies. Cemex has excelled at its logistics capabilities as it has introduced, among other things, the use of the global positioning system (GPS) for its concrete mixer trucks that circle Mexico City while waiting for a customer s order to come in. Since Mexico City is one of the most congested cities in the world, the Cemex distribution strategy was to have trucks moving around the city to minimize distances from point of origin to destination. As part of its innovation strategy and permanent investment in technology, Cemex entered into some venture capital investments developing CxNetworks, and partnering with Grupo Alfa Latinexus (one of the largest B2B portals in Latin America), and Construmix or Construplaza. All these high-tech companies have shown that Latin American companies can incorporate world-class knowledge and adapt it to the region. 3. Bimbo With net sales of 35,651 million pesos in Mexico during 2004, Bimbo is the thirdlargest baked products manufacturer in the world, based on revenue. Bimbo has a presence in all of the Americas with 100 brands and over 4,500 different manufactured products. It has one of the biggest distribution networks in the world with 30,000 routes and 29,000 vehicles serving more than 1,300,000 points of sale. Figure 4.1 shows Bimbo s logistics network in Mexico. 4. Femsa Grupo Industrial Femsa begun as a Coca Cola bottling reseller, and then entered into the beer business. Being one of the biggest Coke resellers in the world, it developed sophisticated logistics capabilities and its own logistics service company, Femsa Logistics, which owns several distribution-related companies like Oxxo. Figure 4.1 shows both Femsa Logistics and Bimbo s network. Note how from within a distance of 1,000 kilometers from Mexico DF (a straight line from Mexico DF to Merida), Femsa Logistics has seven operating bases (main logistics landmarks of this network) and only two in the rest of the country, while Bimbo has 12 sites and only four in the rest of the country. Even though there are many logistics factors that define a logistics network for a company, since Femsa Logistics is the main logistics provider and Bimbo is the biggest Mexican distributor, this network may give an idea of how concentrated the population in central Mexico is. 29

Figure 4.1: Bimbo and Femsa s Logistics Network (www.fl.com.mx) and Grupo Industrial Bimbo S.A. (1998 Harvard Business School Case) Tecate Femsa Logistica s and Bimbo s Network Mexicali Santa Ana Ciudad Juarez Chihuahua Navojda Torreon Monterrey La Paz References Cross Docking and changing ports (Femsa Log) Operative Bases (Femsa Log) Guadalajara Queretaro Toluca Mexico Poza Rica Orizaba Merida Villahermosa Bimbo Factory Tapanetepec Section V. Legal, Political, and Regulatory Factors A. Labor Regulations xxv Mexico s labor force is growing at an annual rate of 2.4%, but the agricultural sector has been shrinking as the urbanization process continues moving people to the major cities in search of manufacturing jobs. Semiskilled and skilled laborers make up approximately one-third of the labor market. The following table shows some of labor regulations. Table 4.1: Major Labor Regulations Labor law Issue Description.The Federal Labor Law regulates labor contracts, minimum wages, employee benefits, and union activity within Mexico. Work Relationships..If a work relationship is not specifically defined as temporary from the beginning, there are few circumstances under which you can legally dismiss an employee without incurring compensation responsibilities. There is no time limit on the length of the work relationship unless it is explicitly defined for a set time or for a specific job. Benefits Profit Sharing Federal law requires firms to participate in a profit sharing program in which employees receive 10% of that firm s annual profits. Executive officers and general managers often do not participate in this program. 30

Table 4.1: Major Labor Regulations, Continued Issue.Benefits, Cont.. Description.Christmas Bonus (Aguinaldo) Firms are also required to pay a year-end Christmas bonus, or aguinaldo, to all employees equivalent to at least two-weeks pay. Those who have worked less than one year receive a pro-rated bonus....legal Holidays Mexican Federal Labor Law establishes seven legal paid holidays per year. Besides these holidays, many businesses and labor contracts observe additional days for religious and national celebrations....vacation Vacation time is guaranteed and rewarded based on seniority. Six days of paid vacation must be offered after one year of service, plus two additional days each year for the next three years. By the fifth year of service, this adds up to two weeks of paid vacation. After five years of employment, two more days must be added for each five-year block of service....social Security All workers are automatically covered by the public healthcare system, the Mexican Institute of Social Security (Instituto Mexicano de Seguro Social or IMSS), whether registered or not. It is the responsibility of the employer to register employees, as well as contribute a minimum of 17.42% of each worker s salary, depending on the risk factor of the job, into the social security fund. Benefits include basic healthcare and medications, attention to occupational accidents, and care for illnesses....employee Housing Employers also are required to pay a 5% fixed payroll tax to finance the Institute for the National Fund for Employee Housing (Instituto Nacional del Fondo de la Vivienda para los Trabajadores or INFONAVIT). The goal of this federal program is to provide benefits allowing employees to more easily acquire a home....retirement Insurance Under the Retirement Savings System (Sistemas de Ahorro para el Retiro or SAR), employers must pay 2% of a worker s salary (up to 25 times the minimum wage) to a retirement fund in a bank account under the worker s name. Work...The blue-collar workforce is accustomed to a six-day, 48-hour work week, the maximum allowed by law. Schedules.The white-collar workforce usually works an average of 40 hours per week. Whitecollar workers usually have more flexible schedules and sometimes, work into the late evening. Salary...According to the Federal Labor Law, the daily minimum wage should represent a purchasing power for a basic standard of living and is set annually in accordance to geographic region. The National Minimum Wage Commission (Comisión Nacional de Salarios Mínimos) has the authority to modify the minimum wage as needed. The minimum wage in the Federal District (Distrito Federal or DF), which encompasses Mexico City, is considerably higher than in other parts of the country, and there are also higher minimum wages established for some industries. Salaries can be established according to unit of time or work, a lump sum, commission, or any other criteria to which the parties agree. 31

B. Termination of the Labor Relationship Terminating a work relationship can be an expensive process in Mexico. To dismiss a worker without just cause, the payment of three months salary, plus 20 days pay per year of service is required. Employees with 15 or more years of seniority who leave voluntarily are entitled to a minimum compensation of 12 days pay per year of service since May 1970 when this law went into effect. Under certain conditions, such as temporary disability or illness, employers may lay off workers without having to pay severance. Terminating employees without incurring related financial expenditures is possible only when an employee grossly violates the working relationship. Some examples include sabotage, flagrantly neglecting safety procedures, or working under the influence of controlled substances. Other reasons for which an employer can avoid severance pay include: less than one year of service completion of the labor contract..physical or mental disability that prevents a worker from fulfilling his or her duties Written notification within 30 days of the violation stating reasons and effective date of termination is needed to legally terminate an employee. Dismissed employees with two or more years of service have the right to sue for reinstatement. If the employee wins the suit, he or she will regain the job, receive full back pay, and may even receive punitive damages. VI. Conclusion Mexico can be both an enormous puzzle, as well as a huge business opportunity for many investors around the world. As one big-three automotive company s general country manager put it: We are very happy with Mexico, where we have the most productive plants in the world. Mexico s culture is a big issue. Understanding and handling Mexico s cultural idiosyncrasies is one of the main strategic problems foreign managers face. The fact that Mexico is a close neighbor of the US is clearly one of the biggest economic, political, and entrepreneurial assets the country has many people think it is one of the biggest problems, but this discussion itself could fill an entire other issue of Global Perspectives. Infrastructure is sufficiently supportive so as not to hinder this relative advantage. In many ways, Latin America has been on track with important economic reforms, which have boosted many of its member countries economies. But, at the same time, many economists would say that poverty is a problem that could hinder even the best-performing democracies. Free markets and democracy could create important opportunities in this country if only some of its tremendous inequalities were resolved, which is certainly part of another debate in the region. But in the meantime, the country has made some important progress with its integration into NAFTA and the development of its human resource base, as well as some sound economical policies that have made this one of the strongest economies in Latin America. The development of managerial capabilities could be termed among the best in the region, and there are also universities and institutes (e.g., IPADE or EGADE Business Schools compete in many world business rankings) that can compete with many of those located in more developed countries. Mexico can achieve developed status if some of the pending economical reforms are implemented, and at the same time, if a huge effort is made in educating an important part of its population (those that economists term as being below the poverty line). At the same time, Mexico is entering what economists term a demographic boom, that is, the percentage of people between 20 and 60 years-of-age is the highest it s been in history. In the next 30 years, Mexico will be put to its most important test: if it does not achieve developedcountry status during this time period, it probably will not have the opportunity to achieve this status again. 32

VII. Source Materials In English American Chamber Mexico, http://amcham.com.mx Port of Salina Cruz, www.apisal.com.mx/ Porf of Dos Bocas, www.apidosbocas.com/ Porf of Topolobampo, www.apitopo.com.mx/localizacion.htm Porf of Baja California, www.bajaport.com/ Porf of Lazaro Cardenas, www.puerto-lazarocardenas.com.mx/juridico/marco_nor.htm Porf of Puerto Ensenada, www.puertoensenada.com.mx/ubicaciondelpuerto.html Porf of Tampico, www.puertodetampico.com.mx/new_site/localizacion.html Porf of Altamira, www.puertoaltamira.com.mx/ Porf of Progreso, www.puerto-progreso.com.mx/mm/fotos/fotos.htm Porf of Veracruz, www.apiver.com/ TMM (shipping company), www.tmm.com.mx/esp/english/default.asp Cpships (shipping company), www.cpships.com.mx Naviera Armamex (shipping company), www.naviera-armamex.com.mx/ Cemex, www.cemex.com Exnetworks, www.exnetworks.com In Spanish Recurso Confiable (consulting company), www.recursoconfiable.com/ National Mexican roads, www.capufe.gob.mx/ Secretaría de Comunicaciones y Transporte, www.sct.gob.mx/ Ports dependency, Secretaría de Comunicaciones y Transporte, http://e-mar.sct.gob.mx/index.php?id=1015 Instituto Mexicano del Transporte, www.imt.mx http://anierm.org.mx/orbsite_xp/ http://icave.com.mx/ www.eclac.cl/publicaciones/mexico/ Instituto Mexicano de Competitividad, www.imco.org.mx Secretaría de Economía, www.economia.gob.mx/ http://econ.worldbank.org/external/ Cámara Nacional de Transporte de Cargas, canacar.com.mx http://www.alianza.com.mx/index/esp/ Sinergia Empresarial, www.sinergiaempresarial.com.mx/ www.tecnologiaempresarial.info/circuito2.asp?t=1&id_nota=10165&idc=1&ids=1 www.fl.com.mx/ www.solistica.com/ Expansion (magazine), www.expansion.com.mx/ Virgen de Guadalupe, www.virgendeguadalupe.org.mx/ Comisión Nacional de Población, www.conapo.gob.mx/ Books Richard H.K. Victor, Alexander Veystman, American Outsourcing, August 11 (2005), Harvard Business School 9-705-037 Cemex: Global Growth through superior information capabilities, Prof. Donald A. Marchand and Rebecca Chung, IMD, (2002). Grupo Industrial Bimbo S.A. (1998)-Harvard Business School case The US and Mexico: The Bear and the Porcupine by Jeffrey Davidow 33

Endnotes i This section has been partially adapted from The Economist (www.economist.com). ii.ṫhis author s assumption comes from having lived four years in the country. There are no statistics about this issue, but there is numerous anecdotal evidence, as well as using common sense. iii.ȧt www.virgendegualupe.org.mx, El nacimiento de Mexico Entre Cantos y Danzas, José Luis Guerrero, and El Laberinto de la Soledad, from Octavio Paz, the most well-known Mexican writer, explain historical and sociological reasons for this behavior. iv.. Vargas Llosa, the Peruvian Nobel Prize winner, would term the 70 years of PRI government as the perfect dictatorship. v.ȯppenheimer gives the most practical and vivid description the author has read of the problems that arise from dictatorships. Anecdotal evidence shows that a western businessman visiting Russia just after the Berlin Wall fell would have difficulty locating personnel for even minor office tasks, such as locating receptionists: Communism had sort of wiped away any sense of responsibility from many people (the State was in charge of everything). The author does not contend that Communism was exactly the same as the 70-year-long PRI dictatorship, but it had similar effects in some ways. In the author s opinion, the sense of freedom that was somehow inculcated by the Spanish colonization makes the Mexican case very different from the Russian case. vi.ṫhis paragraph was adapted from The Economist (www.economist.com). vii.it is fair to say that the last administration (Vicente Fox s PAN) has done an important job of eliminating sources of bribery in public administration, but the problem may remain an endemic issue in Mexico for many more years to come. viii.ȧztecs were great artists, as much as they were one of the main civilizations that inhabited Mexico (Mayans are among some of the others). xiv.ṫhere is a sharp contrast between the way Spanish and English colonialism: the English process was based on commercial companies and the Spanish colonization was made on a mandate of the king. This characteristic gives an idea of the attitudes and laws that followed the first colonizers. The author is not giving his subjective opinion, but knowing the differences between the way in which the US and Mexico were occupied provides a better perspective of their different attitudes towards work. x.it would be interesting to find out what US executives say about these same issues. xi.ṫhey quote Transparency International rankings. xii.ḟor more details, see Christopher M., Towill D., Developing market specific supply chain strategies International Journal of Physical Distribution & Logistics Management, Vol. 13 No 1 2002. xiii.ė.g., Luis de la Calle Madrazo at the inaugural conference at Expologistica Mexico, which is probably the professional event in the country. xiv.ṫhis can be looked at in Figure 4.2 of this publication. xv.ȧssuming that the US is the biggest potential market where Mexico can add value, Mexican operators have high expectations for the Manzanillo-Laredo-Kansas corridor. xvi.ėlectronics manufacturing supplier. 34

xvii.ȧ detailed analysis of existing infrastructure will be made. Manzanillo, Altamira, Veracruz, and Lázaro Càrdenas can be listed among the most important ones, but there are many other opportunities for logistics intermodal transportation. xviii.ṡee for example Operando Desde Mexico: Claves Para Hacer Negocios, Octavio Carranza, Ediciones Ruz on press. xix.ẇhen goods go through customs, they may experience either a green (go) or red (stop and examine) light (the prior with a higher probability). Red lights generate detailed examinations of goods by customs personnel. xx.ṫransportes Siglo XXI (www.tsxxi.com.mx), one of the most important practitioner-focused magazines, has held a forum where topics about ports international competitiveness were thoroughly discussed. xxi.ṫhis information has been obtained from an interview with a presidential advisor. When analyzing the economic and political situation (Section V.), the reader should consider that investment in liquefied gas plant is part of Mexico s surrealistic political behavior: it has one the biggest known gas reserves, but since some sort of necessary reforms are not enforced, it has to import gas from several global sources. xii.ṫhis, as well as the information that follows, have been obtained from a presidential advisor. This information can be requested at Oficina de la Presidencia para las Políticas Públicas. xxiii.ṫhis paragraph has been extracted from Carranza O. and Villegas F. Cross Border Logistics and Sourcing: A Methodology to Analyze Planning Policies Universidad Panamericana, (ECCEA Technical report #15) upcoming in Carranza O., Villegas F. eds. The Bullwhip Effect in Supply Chains: A State of the Art Review of Methods, Components and Practical Cases. xxiv.ṫhis section has been adapted from information available on www.amcham.com.mx which features an annual Survey of Salaries which analyzes the compensation paid to 98 key positions within companies and a benefits survey, which examines what benefit packages firms are offering their executives, salaried employees, and sales executives. This information can be obtained from this organization. 35

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