Could Mexico, on the verge of becoming the 10th biggest economy in the world, be a good investment bet for UK businesses right now? Strategies for growth editor, Dan Matthews, caught a plane to North America to find out

I arrived in Mexico City at 9pm on a warm evening in April. Despite the time and the fact that the sun had set two hours earlier, the temperature was locked at 25 degrees. I approached a taxi kiosk and paid 350 pesos for the ride downtown to my hotel.

The most frequently used symbol for the peso is the same as the dollar sign. At 25 pesos to the pound, this can be a frightening and confusing start to a business trip. My fare was £14, not the US dollar equivalent of £240, thank goodness.

The journey was slow going. Traffic in one of the world’s biggest cities is heavy and the road system does not cope well with the huge number of vehicles. It’s noisy and cars jostle for position; visitors considering renting a car be warned.

Visible security

One thing that hits you as a first-time traveller to Mexico is the large police presence. During the hour-long journey from the airport we drove past about 20 squad cars: some parked and some moving, but all with their lights flashing.

They are there day and night, acting partly as a deterrent to criminals and as a presence to reassure tourists. But such activity can also give the appearance, on first impressions, of a city with a major crime problem.

Nevertheless, the streets are full of life with groups of locals going about their business: buying, selling, talking and relaxing in the muggy night air. When I reach the hotel I get a warm welcome. The tourism industry, particularly in the capital, is one of Mexico’s hot sectors and visitors are generally well received.

RodrigoCeballos_SFG_fountain

English is relatively widely spoken, thanks partly to its neighbour to the north, but don’t expect everyone – street vendors or police, for example – to be fluent in anything other than Spanish.

Sprawling city

I’m in Mexico for three days and have a schedule of meetings lined up: first to introduce myself to Strategies for growth’s local photographer, Rodrigo, and plan my stay, then in the following days to interview some of the city’s business people from Grant Thornton, Schroders and The Anglo-Mexican Foundation. I travel to the interviews in Rodrigo’s car with his assistant, Lucas, giving ourselves more than an hour to drive across the city in the congested morning traffic.

The city is sprawlingly diffuse, and has multiple business clusters, as it does points of interest, slums and affluent neighbourhoods.

Getting from meeting to meeting is tricky, because there is no single undisputed business district equivalent to, say, the City of London.

The areas I visit have a concentration of tall buildings, but not many. Town planners have the luxury of lateral space and many of the buildings are wider than they are tall. There is also a surprising amount of greenery and purple jacaranda blossom.

Calm pace

Culturally, business is conducted at a more sedate pace than it is in the UK or the US. Spring is the hottest time of the year and there is a sense that people are conserving energy. The stereotype of the afternoon siesta is rare among working people, but lunch is an extended ritual compared to the flying fuel stops in London.

It is the most important meal of the day and Mexicans take their time, almost always leaving the office for a proper break from the working routine. The British 20-minute desk-bound sandwich and coffee is not something they’re keen to adopt.

This approach is symptomatic of the way Mexicans do business. Brits might go through a few niceties or a five-minute chinwag about football before opening a meeting, but for Mexicans an extended informal chitchat is enshrined in the day’s order of business.

‘The city is sprawlingly diffuse, and has multiple business clusters, as it does points of interest, slums and affluent neighbourhoods.’

Even the way business people greet each other is warm and informal. A handshake is fine, but increasingly for the younger generation of business leaders a hug is even better, especially at the end of a meeting if it has been productive.

But this warmth is at odds with the obvious security around commercial property. Giant remote-controlled gates and identification checks are normal. It’s hard to reconcile the friendly nature of the people I meet with the generally high threat level, which can be attributed to crime syndicates and drug cartels.

The city itself feels safe, but all buildings are guarded and armed police are everywhere. The people I meet are not coy about the crime problem; they believe it is the biggest barrier to Mexico becoming a world centre of business.

RodrigoCeballos_SFG_military

The Mexican opportunity

Predicting which countries will become the superpowers of tomorrow is far from straightforward. Even the BRICs, for so long hailed as the giants of tomorrow, are faltering. In 2016 Brazil has been beset by political strife and plummeting commodities prices; Russia has been pole-axed by Western sanctions; China’s stock market has been in turmoil; and while India’s economy remains strong, its impressive growth has slowed significantly over the past five years.

Mexico is part of the MINT group of countries (along with Indonesia, Nigeria and Turkey) more recently cited as the ones to watch. Experts say it is on the verge of becoming the 10th-biggest economy in the world and is well placed to move even higher.

It has a large population (120 million people), a currency favourable to foreign investment, a wealth of open trade deals with dozens of countries and is conveniently located next to the biggest economy of them all, the US.

Yet Mexico has its own unique set of problems – namely corruption and drug cartels – to which it must find solutions before it can challenge for the global top spots. It’s a source of great frustration for the country’s business people, who see its potential but are hamstrung by factors out of their control.

Grant Thornton launched in Mexico 36 years ago with four partners and five support staff. Today it employs 800 people, including 50 partners in 10 locations across the country. Together with the organisation’s expanding client base, it’s proof of Mexico’s ability to nurture ambitious businesses.

Three-man-montage

Leading Latin America

“I am very proud about the performance of our country,” says Mauricio Brizuela (above left), CEO of Grant Thornton in Mexico. “It is one of the top economies across Latin America, growing 2.5% in 2015, which is quite good given the global situation.

“Unemployment is low, while inflation is stable at about 3%. Our exports in the region totalled $383 billion in the last year, a little more than Argentina, Brazil, Chile, Colombia and Peru combined. The government is also making some good decisions – slowing the depreciation of the peso against the dollar, for example.”

Between 1929 and 2000, a single political party dominated Mexican politics, but a programme of electoral reform beginning in the late 1980s eventually established genuine democratic institutions and independence in electoral processes.

The judicial system has also been strengthened which, together with political reform, has accelerated the process of opening up the economy. Cronyism remains a barrier to growth, but changes in key industry sectors, most notably energy, are starting to take shape.

The country is in transit between the old system and the new, and many foreign organisations remain cautious about investing before the changes bed in. However, there is a general feeling that the next decade represents an enormous opportunity for Mexico.

“We have to be honest about the rate and impact of these reforms,” adds Brizuela. “We were operating one way for more than 70 years and change will take time. The really positive thing is that foreign investors are taking note of what’s happening.

“They know it won’t happen overnight; it will take more than a couple of years for these reforms to have a real impact across the country, but there is obvious excitement about where we are headed.”

Under a more open system, the country’s emerging industries will be allowed to flourish. From oil exploration in the Gulf of Mexico to car manufacturing, aerospace, electronics, tourism and education, there’s a host of opportunities for companies that are able and willing to invest.

And with the peso depreciating against the dollar, Mexico is now said to be a cheaper place to get things made than China – the so-called ‘factory of the world’.

Sector with potential

Another sector with potential is financial services. Alberto Deleze (above centre), who heads up Schroders in Mexico, says the savings and investment culture is embryonic, but will grow as money spreads more evenly throughout the country.

“The asset management business is probably still behind some others,” he explains. “But four years ago investment in the energy sector was slow, then a new president took office and opened up the sector. We are well positioned to grow when the same thing happens to us.

‘In the UK the baby boomers are doing well; in Mexico they’ve had a rough ride.’

“Savings are low and there is a job to do to encourage investors – institutions and individuals – to put money aside for returns in the future. Pensions contributions must go up and regulators need to allow new asset classes but I still think we are in a good place.

“In the UK the baby boomers are doing well; in Mexico they’ve had a rough ride. For 30 years, every time we changed president there was a huge impact on the exchange rate and disposable incomes would go down. The current generation is more aware of the problem and the shift will help appetites for investing and risk-taking.”

Tackling corruption

Mexico is an economy on the move. Although getting in now represents a risk, the rewards could be that much greater as a result. It is yet to create a widespread culture of entrepreneurship and many among its current crop of self-made men are linked to the old regime.

RodrigoCeballos_SFG_man

But as global companies begin to entwine their future with that of Mexico, pressure is building to create fertile conditions for new businesses to grow. Foreign investment, with its international codes of practice, is a potent weapon in the fight against cronyism.

Steve Smith moved to Mexico from the UK in 1982 and has witnessed the changes as an outsider. He has seen the old corrupt systems first hand and says they are being rolled back by progress.

“It used to be said that Mexico was run by 300 families,” says Smith, former head of the British Chambers of Commerce in Mexico and now Managing Director of The Anglo Mexican Foundation. “It was an enclosed, protected economy with a single presidency going back 70 years. The government was big and bureaucratic and vested interests were at work all over the place. It was corrupt and you were always being told to pay someone off.

“I saw it happen 100 times. I never went there and it cost me dearly several times. That was then. Corruption still exists but it is patchy and I believe that the federal government is largely free of it, local government perhaps less so.” Smith is bullish about Mexico’s potential, so much so that he wants to delay retirement to see the fruits of the ongoing reforms. He describes it as a “key opportunity”; one that has convinced many British businesses that it is a very exciting place to be.

“It’s a challenge, but it’s a very worthwhile one. That was the perception I developed during my presidency of the Chamber. More people are coming, keen to do business, keen to invest and prepared to learn more about the local market.”

Era of prosperity

Modernising an entire country is a job that takes decades to complete. Mexico’s journey began more than 25 years ago and is still only halfway there. It still needs to defeat the drug cartels, remove corrupt politicians, roll back red tape, encourage enterprise and improve the environment for outsiders looking in.

But there is a real sense that a tipping point is on the horizon; an uncorking event that will usher in a new era of prosperity. With economic growth still relatively modest it hasn’t happened yet, but with every new step forward comes new reasons to do business in Mexico.

“Over the past 10 years, growth has not been as spectacular as you would have hoped for but I think it is only a matter of time before Mexico can really move forward,” says Deleze. “There are many challenges but if we can tackle these then Mexico is definitely a place you want to be.”

Case study: Phase Eight

The UK fashion brand opened its first concession in Mexico in November 2014. It now has 12 across the country, delivering strong sales and profits.

RodrigoCeballos_SFG_phase8

Fashion brand Phase Eight was founded in London in 1979 to target women between the ages of 30 and 55. Its focus is fashion-conscious – though not fashion-obsessed – women who like quality but don’t want to pay over the odds.

The formula has proved popular and after expanding in the UK it branched out overseas, establishing a large global footprint.

Having opened its first non-UK presence in Switzerland as recently as 2012, it has grown rapidly and now has around 200 stores and concessions in Europe, the Middle East, the US, South East Asia and Australia.

Trade mission

Following a trade mission to Mexico and an introduction to the country’s leading chain of department stores, El Palacio de Hierro, the business started opening concessions in November 2014 and now has 12 across the country.

Rosie Stringer, Head of International Development at Phase Eight, says the brand was a good fit with Mexico’s growing middle class: “Mexico wasn’t top of our list of places to go but an opening came up to go on a trade mission. When we arrived we realised there was an opportunity. Mexico has some of the most beautiful department stores I have ever seen.

“There are consumers with spending power who fit our target demographic. There is wealth inequality in Mexico, but the population is large enough that even the top 10% represents a big market.”

Growth strategy

Phase Eight’s growth strategy is to test new markets by taking a small concession, adding more if the formula works and then launching its own stores if there is enough demand. The model is working in Mexico and the business is weighing up plans for further launches.

Sales and profits are strong in the new concessions, which, says Stringer, more than makes up for the difficulties associated with doing business in Mexico. “We built a strong relationship with El Palacio de Hierro but Mexico is definitely the trickiest business environment we have come across so far – although that’s largely because we have been dealing with mature markets,” she says.

“There are the usual tax, legal and reporting requirements, but they are particularly onerous. It made life quite difficult but we managed and the daily sales and profit reports show we were right to stick with it.”

RodrigoCeballos_SFG_mall

Local hurdles

To operate the concessions Phase Eight had to set up a local company and a local bank account. All the forms had to be translated from Spanish, although she adds that the local legal team was “very good”.

Yet there remain some ongoing issues: “Importing is tricky because we regularly get held up. We have to go through brokers, which means it takes up to a month to get clothes into the stores, compared with just a couple of days in parts of Europe,” Stringer says. There are also strict labelling requirements for every garment.

Despite all this, would she recommend Mexico?

“I would definitely recommend Mexico; you just need to be aware of all the challenges and you need strong legal, logistics and operations teams to make it work,” she says. “We have local sales managers and someone from head office visits every six months. We also have phone and email communication daily.”

Read more

You can get more advice about doing business in Mexico in our article on doing business in the North American country.

Read more Dynamic Markets profiles.

Images: Rodrigo Ceballos