Because of its manufacturing strength, proximity to the U.S. and increasing acceptance of the distribution channel, Mexico has become an attractive market for distributors looking to expand internationally. Despite these compelling reasons, companies must be strategic when they head south of the border.
The Mexican border town of Tijuana can evoke images of seedy bars and sky-high crime, but in the late 1990s, the largest city in Baja California represented a timely business opportunity for industrial distributor Hisco.
After selling to customers in Mexico for many years, Houston, TX-based Hisco figured it could better meet their needs with an office there, so in 1998 the company launched its Mexico division, HiscoMex, to service the CRT television industry. President and CEO Bob Dill says Hisco, like many other U.S.-based distributors, was initially drawn to Mexico because of rapid manufacturing growth and easier movement of goods between the nations thanks to the North American Free Trade Agreement, enacted in 1994.
Within two years of opening its Tijuana branch, HiscoMex expanded to six locales, and today it has 11 locations across the country that serve a broad range of sectors. The decision to set up shop in Mexico proved to be a wise one, as the company has seen its fortunes there expand along with its footprint.
“We regularly generate a better growth rate in Mexico than we do in the U.S.,” Dill says. “We continue to expand our presence in Mexico and look for new areas to develop.”
Land of Opportunity
“Mexico is a wealthy country, although we in the U.S. don’t think of it that way,” says Barry Lawrence, director of the industrial distribution program at Texas A&M University. “That’s only going to continue to get better. Mexicans are very industrious, intelligence, creative, innovative. And they’re going to continue to compete well in the world. Their economy is positioned for good things.”
A few years ago, the Texas A&M program conducted the Texas-Mexico Trade Corridor Consortium with distributors to study opportunities in Mexico.
Lawrence points to Mexico’s population of 122.3 million and its GDP of $1.3 trillion – the 15th highest in the world – as well as its proximity to the U.S., steady economic trajectories and clear industry verticals as compelling reasons for expanding abroad.
Mexico has established itself as Latin America’s manufacturing leader and is in a “positive cycle,” according to the Manufacturers Alliance for Productivity and Innovation.
Automotive manufacturing is at the heart of this surge, according to Fernando Sedano, a MAPI Foundation economic consultant who covers economic development in Latin America. Sedano says U.S. demand has fueled production of cars and car parts in Mexico, benefiting suppliers across a myriad of sectors and regions.
“When you have strong growth in the automotive industry, then you’re going to see growth all over the place,” he says. “Most intermediate industries supply automotive – basic metals, rubber and plastic, machinery and equipment, electronics.”
Mexico’s manufacturing output increased 3.4 percent during the first three quarters of 2014, led by the automotive sector’s 11 percent growth in this period, according to MAPI. And the organization’s most recent economic forecast predicts 3.5 percent and 3.9 percent manufacturing output growth for Mexico in 2015 and 2016, respectively, in part because more companies are nearshoring their manufacturing operations to Mexico from China to take advantage of shortened supply chains and competitive labor costs.
“Many U.S. manufacturing companies realize that not everything can be made in China because of the supply chain,” Sedano says. “They have to find alternatives. There are not that many alternatives, and there is only one alternative where you have relatively attractive cost of production and relatively efficient supply chain – and that’s Mexico.”
Mexico’s manufacturing boom also means opportunity for distributors. Total demand in Mexico for industrial and construction products is estimated to be $90 billion or more, with three-quarters of that demand in manufacturing, according to MDM’s market intelligence division MDM Analytics. Mexico’s total estimated demand for MRO products is $58 billion.
Savvy distributors can tap into that market, says Lawrence, noting that Mexico “understands the value of distribution – if you’re in the right channels.” However, the country still suffers from what he called the “European disease,” in which manufacturers work directly with buyers because of short geographical distances and dense population, something that plagued Europe for a long time before distributors “started winning the value proposition,” Lawrence says.
“What we see when we look out across Mexico is still a general lack of distribution support,” he says. “… If you take out the U.S. and Canada, most of the world doesn’t view distribution as a value-add. It just hasn’t matured enough; the value proposition hasn’t developed enough.”
Mexico, however, is progressing, and the value proposition
for distributors there is improving, as evidenced by the nation’s maturing manufacturing landscape.
“The complexity of manufacturing that’s entering Mexico is at the highest level it’s ever been,” says HiscoMex Vice President William Bland. “They’re replacing low-end manufacturing like textile plants – a lot of them have moved offshore – with aerospace and automotive component facilities.”
Other companies are benefiting from that shift, as well. Houston, TX, distributor Victory Packaging – which, along with Hisco, was part of the Texas-Mexico Trade Corridor Consortium – entered Mexico in the early 2000s when Delphi Automotive asked Victory to open a branch near one of its car part plants.
“When we came here we had one customer, no suppliers and nobody really within the company with any experience in wholesale distribution or packaging,” says Mike Holzwarth, the company’s vice president of sales for Mexico. Holzwarth, who has worked many years in Mexico and the last 11 with Victory, says the distribution landscape has improved, and the company has grown to 16 locations.
“Little by little, the culture seems to be changing,” he says. “That means growth for our industry, but it also means a hell of a lot more competitors.”
Crossing the Border
The most important component of Mexico’s distribution market is its fragmentation, says Matt Petersen, director, retail and distribution, US Dynamics Industry, Microsoft, who notes that an independent electrical wholesale distribution branch in Mexico might be 3,000 square feet with a walk-up window and the footprint of an ice cream shop. In addition to being fragmented, the line between wholesale and retail isn’t as distinct as it is in the U.S. With these differences in mind, Petersen says it is crucial for any distributor with aspirations of expanding internationally to align itself with like-minded partners.
“I would look to partner with my customers who maybe are a step ahead of me – they just opened up their international branches and they’re realizing the challenges,” he says. “Like any business, if you’re guaranteed a customer or two, you take a lot of the risk off the table.”
Petersen says acquisition might be an effective method of entering Mexico because the fragmented market provides plenty of targets for purchase.
“By acquiring, you automatically get the employees, local knowledge, customer base and you get local language expertise,” Petersen says. “You reduce the risk of hiring the wrong people, which you might do if you opened up a branch from scratch. Partner locally, acquire, leverage local knowledge.”
Acquisition isn’t the only means of entry. Grainger, Chicago, IL, expanded to Mexico in 1996, and Fernando Lopez, its general manager for Mexico, said the past two decades have been a “success story for Grainger” thanks to the company’s commitment to investing in its “distribution network, inventory, new products, new sellers, new employees and new solutions.”
Lopez says Grainger covers 94 percent of Mexico with next-day delivery through its four distribution centers and 18 branches. While acknowledging the fragmented market, especially in MRO, he says that provides numerous opportunities for a company like Grainger.
“A lot of customers that we have are looking for a company like us, a company that has the infrastructure to provide service around the country, that can provide the solutions for savings that they’re looking for while managing the complexity of purchasing indirect material,” Lopez says. “And they’re also looking for partners that are financially solid and partners that understand multinational businesses that are in Mexico.”
Barriers to Success
Lawrence advises distributors contemplating a Mexico entrance to complete extensive due diligence on a number of issues, stressing the need for “Mexican professionals, Mexican workforce and an understanding of the Mexican business model.”
But while knowing Mexico’s labor laws, import-export procedures and tax policies are obvious for launching any international venture, Lawrence says the factor that “trumps everything else” is knowing
how businesses there conduct the sales cycle.
“If you’re going to be selling to local businesses, you may often find that you’re in a situation where you have to develop a trust element,” Lawrence says. “A local sales force will know that. And Americans often get highly frustrated with the local forces because they say, ‘It’s taking too long for you to close the sale.’ What the local sales force will know is that, yes, it takes two, three, four, five times as long to get anything moving, but once it gets moving it’s much easier to sustain and it can hit higher volume levels because trust is the all important factor in Mexico.”
Hisco Director of Marketing Andy Behr says that the company experiences an extended sales cycle with its Mexico business, but that is changing as the U.S. and other nations continue to wield influence over Mexican business practices.
“Often, design, specification and purchasing decisions are driven by the parent company or OEM in the U.S. or Japan and there can be a significant time lag before the changes are implemented in Mexico,” Behr says. “However, as engineering competencies improve at the manufacturing plants in Mexico, some decisions are being made at a local level and, as a result, we are seeing some improvement in cycle time.”
Not only will the sales cycle differ in Mexico, but many buyers are loyal to Mexican products, says Grainger’s Lopez, who points to a “strong preference in certain products and certain brands for the local ones. For a U.S. distributor, offering only brands from outside Mexico may be limiting.”
Another consideration is pricing. This can be a challenge in a country that hasn’t fully embraced the distribution model, and convincing customers to pay more for the value-add can be difficult, says Victory’s Holzwarth.
“There is a mentality in Mexico that is price-driven. That is, ‘How can I get the best price because that is the best deal?’” he says. “What happens is that’s not always the best deal, getting the best price. You can buy a truckload and it will sit there for a year. But that mentality has been changing over time. People are figuring out that it’s cheaper to buy with a little bit better service.”
‘Not for the Faint of Heart’
Invariably, any discussion of doing business south of the border involves security and safety concerns, according to the distributors that operate there and the consultants who advise them.
MAPI’s Sedano warns of political turmoil and criminal activity – and sometimes the combination of the two, as when the mayor of Iguala, Guerrero, in Southern Mexico masterminded the abduction of teaching students and handed them over to a crime syndicate. High-profile kidnappings, cartel wars and cargo thefts have given Mexico a reputation for nefarious activity, but crime rates vary throughout Mexico, with most people agreeing that the northern states near the U.S. border have the most problems.
Distributors must consider “first and foremost, the safety of your people,” Lawrence says. “You’re probably going to have local management, but it’s important to have American executives visit the operations, not just because they can gain intelligence that they can’t get working strictly through a management team, but also because it’s a statement. Top management needs to show up once in a while otherwise people feel like they’re neglected.”
Other challenges exist, lengthening the time needed to make a Mexico expansion work. While the companies that have made the necessary adjustments to operate successfully in Mexico present a blueprint of do’s and don’ts, merely following a checklist won’t be enough.
Hisco, for example, was able to flourish because of “long-term commitment and involvement, and deep understanding of how to conduct business in Mexico and across the border,” Behr says. “It takes a long time to develop that competence and expertise. It’s not for the faint of heart.”
Despite a host of concerns and considerations surrounding an expansion into Mexico, the opportunity for distributors to succeed is closer than they might think.
“Mexico is our neighbor, our business partner, our friend and our family,” Lawrence says. “We really believe in Mexico and I think distribution is going to find a good home there.”