Doing Business in Mexico: A Look at the Opportunities & Challenges

Mexico’s business opportunities rival those of any other emerging economy in the world. Despite a complicated history with violence and corruption, the country is starting to transform its negative reputation into new opportunities. New initiatives, especially to boost Mexican innovation, and an ever-expanding middle class with disposable income have given way to a new era of business opportunities for residents and foreigners alike.

To attract new investment, the Mexican government is making significant improvements to its infrastructure to compete globally in sectors like telecommunications and transportation. According to a recent PWC report , Mexico will become the 7th largest economy in the world by 2050.

But, to understand how Mexico will get there, it’s important to understand Mexico’s history and some factors that led it to become what it is today.

A Brief History

In the early 1930s, Mexico began its recovery from the Great Depression and its manufacturing sector started to accelerate. This upturn included the nationalization of the petroleum and railroad industries as well as land reforms into the late 1930s. This strategy helped the country sustain economic growth from the 1940s until the late 1960s. Government initiatives fostered the growth of the consumer goods industry, and many of Mexico’s major cities saw significant growth during this time.

Following WWII, the Mexican government progressively undervalued the peso to reduce costs of imported capital goods and further expand its productive capacity. Mexico’s economy remained strong into the 1960s, and by 1970, Mexico was largely self-sufficient in food crops and most consumer goods and was also a significant exporter of oil and petroleum.

Unfortunately, this growth was not sustainable, and the peso became increasingly overvalued, hurting non oil exports. In 1982, Mexico entered a strong recession, from which it recovered slowly.

Growth finally rebounded in the 1990s in conjunction with the ratification of the North American Free Trade Agreement (NAFTA). However, yet another peso collapse followed in 1994, creating another economic crisis.

At the turn of the century, and with China becoming a cost-competitive manufacturing alternative, Mexico turned its manufacturing industry toward more valuable products, such as automobiles and aircraft, to stay in the game. During the 2000s, with the help of NAFTA and its proximity to the U.S., electronic exports also increased by 73% and automotive exports increased by 152%.

Mexico Today

Many predict Mexican manufacturing sector’s strong performance will boost the economy for years to come, but the technology and innovation sector is on the rise too.

Half of Mexico’s population is under 20 years old and extremely tech-savvy. Universities are graduating top engineering talent at rates that rival other leading countries. In 2013, Mexico created the National Institute of Entrepreneurship (INADEM), which has been a critical component of developing Mexico’s thriving startup ecosystem.

In 2014, the organization distributed over $650M to 500,000+ entrepreneurs and small businesses, leading to 70,000+ new jobs. Today, INADEM supports 20+ seed funds and participates in another 8-10 funds as an investor. Business schools across the country are also promoting entrepreneurship and the next generation of business leaders to embrace the knowledge economy.

While there are still a number of challenges one must overcome to do business in Mexico, government initiatives like INADEM and the first big technology successes are opening the doors to exciting new opportunities for new products and companies “Hecho en Mexico.”

Here’s a deeper look at a few of the biggest opportunities and challenges of doing business in Mexico today.

The Opportunities

Thanks to the North American Free Trade Agreement (NAFTA), owning and operating a business in Mexico is relatively straightforward – though this may change with the recent results of the U.S. presidential election. You don’t need to be a Mexican resident nor travel to Mexico to open a business. A few industries, such as gas and oil, are highly restricted, but for the most part, registering a business is not all that difficult. According to The World Bank and International Finance Corporation (IFC), Mexico currently ranks 36th in the world for ease of starting a business

Even though you do not have to be a Mexican resident to start a business, you will need to obtain a visa if you’d like to work in the country. Depending on the type of visa you need, this process can take roughly one month and is more complicated than other Latin American countries like Chile or even Colombia.

The economic output of Mexico, as measured by Gross Domestic Product (GDP) was $2.2 trillion in 2015 – less than the United States ($17.9 million), but greater than other NAFTA partner, Canada ($1.6 trillion). Geographically, Mexico is roughly the same size as Saudi Arabia, but has five times as many people!

Mexico manufactures and exports the same quantity of goods as the rest of Latin America combined. Mexico has at least 44 free trade agreements; the largest of those trade partners being the United States, China, and Japan. This means that any company interested in manufacturing in Mexico has duty-free access to 60% of the world GDP.

Mexico’s number one export is manufactured products, but it also exports considerable amounts of fruits and vegetables, silver, coffee, and cotton. In recent years, Mexico has become a major hub for electronics manufacturing – producing most of the flat-screen TVs sold in the U.S. Mexico’s emphasis on trade has given Mexican companies a key competitive advantage. For example, Gruma is the world’s largest tortilla maker, and Bimbo (who acquired U.S.-based Sara Lee) is now the largest bread maker in the world.

Mexico’s financial sector is well developed. However, compared to more developed nations, it is still quite difficult to obtain credit. A number of fintech companies are now launching to serve the largely unbanked population in Mexico and the rest of Latin America. More than 40% of venture capital dollars went to fintech companies in 2016, up from 29% in 2015. In fact, leading online lending company, Kueski, recently closed the largest capital funding round ever for a fintech startup in Mexico.

The funding scene in Mexico is now one of the most mature in all of Latin America. The connection between Mexico and Silicon Valley started in 2012 when 500 Startups acquired Mexican.vc and it continues to solidify. Alta Ventures, Mountain Nazca, and Wayra are also investing heavily in Mexican startups. Programs like Hackers/Founders are helping Mexican entrepreneurs and startups like Clip, Konfío, Cornershop, and Gaia Design are making international headlines, raising over US$62M combined. My fund, Magma Partners, has invested in two companies with Mexican founders over the past two years and hope to invest in more over the next year.

Image Credit: http://www.elfinanciero.com.mx/empresas/las-startups-mas-exitosas-de-mexico.html

Lately, all eyes are on Guadalajara which is growing into one of the leading tech outsourcing, manufacturing, and service centers in the world. Due to its proximity to the U.S. (a 4-hour flight from San Francisco), a number of major U.S. tech companies have set up back offices in the city. Hewlett-Packard, General Electric, IBM, Intel, and Oracle all have offices in Guadalajara and are creating an influx of direct foreign investment.

But there are also U.S. startups, like Wizeline, setting up their back offices in Mexico to cut operation costs. Companies are able to operate in a similar time zone as the U.S., and Mexican developers are easily out-competing those in Eastern Europe and India.

This influx of investment is also helping the city build a reputation as the home of some of the best engineering talent in all of Latin America. As the city continues on its path to becoming an important tech hub, and the government continues investing in its infrastructure, there’s no doubt that Guadalajara will continue to boast exciting opportunities for those interested in technology and innovation in Mexico beyond its capital city.

The Challenges

Unfortunately, one of the biggest challenges facing Mexico continues to be violence related to organized crime and corruption both in the government and with local police. President Peña Nieto is focused on increasing security spending from 1.5% to 5% of GDP (the same level that worked for Colombia).

In recent years, however, the crackdown has only led to more distrust in the government and an increase in violence, leaving more than 200,000 dead since it started. While the violence is mostly isolated in specific parts of the country, it’s something to keep in mind for anyone interested in doing business in Mexico as it is a complex issue that will require many more years to resolve. Additionally, it’s led to political instability and uncertainty, especially around every national election.

Paying taxes in Mexico can be a laborious process as well. Corporate income tax currently hovers at 30% and takes ~155 hours to file. VAT and social security filings can also take a long time to process.

In general, Mexico’s business culture tends to be slow-moving. It’s common to discuss important issues at the end of meetings. There are also large gaps between executive-level employees and other workers.

Recent political events in the U.S. are also generating many uncertainties in Mexico’s business environment. Trump recently referred to NAFTA as one of the “worst trade deals in history” and threatened to terminate the agreement, sending shockwaves waves throughout industries in the U.S. and Mexico alike.

Renegotiation of NAFTA could have significant consequences for businesses on both sides of the border and is an issue to watch carefully. Talks of imposing a 35% tariff on Mexican imports as well as encouraging Mexico to end its maquiladora program are just a few of the issues Trump wants to bring to the negotiation table. If you compare Mexico and South Korea’s manufacturing sectors, which started around similar times, South Korea created value add processes, which led to home grown companies, whereas Mexico mostly did lower level assembly of other countries’ goods. You can read more about what might happen if Trump dumps NAFTA.

The lack of competition in Mexico is also a hamper to growth in some key sectors of the economy. For example, Carlos Slim, a Mexican telecom tycoon and the world’s richest man in 2007, owns three companies which control 70% of mobile phones, 80% of home phone lines, and 70% of broadband in Mexico. This makes it incredibly challenging for companies in these sectors to compete. A number of other near-monopolies also exist in industries such as television (dominated by Televisa).

Uncertainties after the recent U.S. presidential election continue to persist, causing some damage to both business and consumer confidence in Mexico. However, a number of governmental initiatives to put Mexico’s technology sector on the global map are generating an exciting new wave of opportunities and hope that Mexico can one day put its bad reputation behind and move forward as a global powerhouse. Tech companies are doing their part from Mexico City to Guadalajara and Monterrey. I’m excited to see how the Mexican tech industry grows over the next 10 years!

Photo by Jezael Melgoza