safety and electronics may also come out of the contraction in a better position than many of the hardest hit areas.
Preparing for the future is difficult in the current climate. I don’t think anyone can see past three months with any accuracy,” Doherty says.
“Forecasts are all over the place right now, from rosy to dire,” Lawrence says. Estimating recovery times will vary between industries. “Safe” predictions have some industries beginning to recover by the end of 2009, while anything tied to real estate will continue to struggle through 2010, and possibly into 2011.
The Mexican economy will continue to be ruled by uncertainty for at least the next nine months, Martínez Lázaro says. “Fourth quarter declines were greater than expected, which leads us to believe that the situation will be very complicated this year.”
Mexico continues to hold opportunity for North American companies, according to Martínez Lázaro, despite some of the challenges it is currently facing. Not least of which is the recent and highly publicized violence surrounding the illegal drug trade there. Foreign investors will watch the Mexican government’s response closely.
But the fact that Mexico is not included in discussions about high-potential emerging markets that focuses on the BRIC nations – Brazil, Russia, India and China – is a mistake, says Martínez Lázaro. “Mexico will be called to play a key role in the coming years, as a natural gateway to North American markets.”This is part of an MDM series of articles looking at growth opportunities globally.
The remaining optimism at the beginning of the global financial and credit crisis very often came from emerging markets. Though those markets’ growth slowed, they still saw growth, contrary to the negative trends seen in the U.S. Growth forecasts for Brazil, for example, were revised downward, but remained positive, and India continued to see investment growth.
And another emerging market – Mexico – continued to steadily plod along even as its trading partners suffered from a barrage of bad news. The picture has since darkened for many of these countries.
Until a few months ago, it was believed that the emerging markets, and especially Latin America, would not be affected by the financial crisis that hit Western countries, says Juan Carlos Martínez Lázaro, a professor of economic environment at the Instituto de Empresa in Spain.
“But now, although the Mexican economy is in a better position than in the past, it is clearly impacted by its close relationship with the U.S.” Close to 80 percent of Mexico’s exports are bound for the U.S. Demand for those items has decreased significantly in the past few months.
“We’re seeing a virtual shutdown in some sectors,” says Dr. Barry Lawrence, director of the industrial distribution program at Texas A&M University. Automotive and discretionary items such as electronics and appliances are feeling the biggest pinch in Mexico. Even healthcare, a traditionally strong sector, is starting to slowdown, as elective or non-urgent care is set aside until better conditions.
Even with the negative outlook for manufacturing, some U.S. distributors appear to be weathering the storm by keeping the focus on stronger markets. Michael Smith, COO of OneSource Distributors, Oceanside, CA, says volumes in Mexican markets are steady even though he budgeted for a slight downturn this year. Year-to-date, revenues are ahead of that budget.
According to the Latin American Manufacturing Outlook: 2008-2009 from MAPI/Manufacturers Alliance, the Mexican economy contracted in September (the latest month for which data is available). Initial estimates were for a contraction of 1.3 percent, Lawrence says. “Now, we’re expecting it to be much worse than that.” Manufacturers in general should be prepared for a significant contraction.
Industrial activity in Mexico declined 11.9 percent in 2008, compared to 2007, according to figures provided by the National Institute of Statistics and Geography. Employment in manufacturing dropped 4.7 percent for the year.
“The manufacturers are experiencing the recession the most,” Martínez Lázaro says. But, compared with the manufacturing recession of 2000-2001, this economic turndown promises a more positive outlook for recovery in Mexico.
William Doherty, director of channel development in Latin America for Rockwell Automation, Milwaukee, WI, says Rockwell is posting some growth and still expects a strong first half in Mexico, although delayed and cancelled orders are starting to increase. “Things are getting a little more exciting in Mexico than we’d like them to be.”
Before the global financial crisis, Mexico was on the verge of an economic boom, Lawrence says. Now, that boom likely will be delayed and the extent of the growth will be limited.
China vs. Mexico
During the downturn of 2001-2002, many manufacturers began shifting operations to China to take advantage of the cheaper labor available.
“We’re not seeing this activity in this recession,” says William Bland, vice president of HiscoMex, the Mexican division of electronics and electrical distributor Hisco Inc. Instead, plants are implementing “maintenance shutdowns” and limiting operations to four to five days per week instead of seven.
Some manufacturers are also moving production back to North America, setting up shop in Mexico and other parts of Latin America.
Manufacturers from China and Korea looking to break into new markets have also announced plans to open plants in Mexico. Three Chinese automakers – Changan Auto, Geely Holding and FAW – recently announced plans to move into the country. The shift, in part, is due to the volatility of oil prices. For many manufacturers, the cost of shipping finished products overseas has more than offset the benefits received from lower labor expenses.
Labor costs also have begun to increase in China in recent years, narrowing the gap between it and Latin American countries, Martínez Lázaro says. But if the Mexican government wants to accelerate this trend, it has to improve its infrastructure.”
The general downturn has had a negative impact on most manufacturing sectors in Mexico, Lawrence says. Some, however, have been hit harder than others. “Anything that has to do with large discretionary spending – areas like automotive or appliances – are going to be hit the hardest and the longest,” he says.
In the short term, Martínez Lázaro suggests that it may be difficult to find any sector that will be profitable as the contraction already includes construction and mining, among others.
Because of its presence in the electronics and automotive industries, HiscoMex has had to adjust its operations depending on regional conditions. “In some markets we have right-sized our business units,” Bland says. “In other emerging territories we have added sales resources.”
In addition to the general recession, developing business opportunities is impacted by the underdeveloped infrastructure of the region. While roads and transportation lines have improved in recent years, there are still few carriers that support small carriers and parcel deliveries efficiently, Bland says.
Additional challenges arise from operating in another country, though Mexico has managed to establish a business climate that is very similar to that in the U.S., Lawrence says. Many managers speak fluent English, allowing for smoother communication between departments within the company, and Mexico has made great strides in implementing many of the same safety standards required north of the border.
One solution for overcoming the cultural challenges that remain is for manufacturers, such as Rockwell, to contract with local distributors who have knowledge about local tax and labor laws, Doherty says. Rockwell utilizes a limited distribution model in Mexico that is similar to the one in place in the U.S. And with the exception of locations along the border, the company favors local distributors.
The limited infrastructure of Mexico is not only a challenge; it also presents opportunity for manufacturers and distributors alike. On the Baja peninsula, expansion within the tourism industry has allowed for continued growth for OneSource, Smith says. “New buildings require new infrastructure.” At this point, commercial construction in tourism has not suffered the same downturn as seen in residential construction.
“We’re definitely watching infrastructure as an area of potential growth,” Lawrence says. “The problem is attracting investment right now.” Once financial markets stabilize and reopen, infrastructure development will open many opportunities to draw foreign investors back into Mexico, Martínez Lázaro says.
Beyond infrastructure, many believe that the oil and gas sector, particularly as it relates to exploration, will be fairly quick to recover from the contraction. “It’s critical for Mexico to get that sector turned around,” Doherty says.