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Mexico: Beyond sun and shadows
Omegar Martinez on August 23, 2016
A woman looks out from
a window shattered by a gunshot in
Carrizalillo, near the Canadian Goldcorp
gold mine, in November 2015.
One thing is certain: Mexico isn’t subtle. Even from a plane, the urban sprawl of its capital, the just recently officially named Mexico City (before April 2016, its legal name was Federal District — Distrito Federal or D.F. in Spanish) and the largest urban mass in the continent, can be overwhelming. If you travel to one of the country’s famous beaches, the beauty, colors, and climate hit you on the face as soon as you arrive. There’s certainly no mistaking that you’re in Mexico, even if you visit the less populated and traveled places.
From a distance, it seems a land of contrasts. There’s the friendly and welcoming people, and there’s also the violence of the drug cartels; there’s the beauty of its natural scenery, and there’s the travel advisory recommending you avoid visiting certain areas; there’s the peacefulness of the small, charming towns: the “Pueblos Mágicos“ (“Magic Towns”), and there’s the perception of corruption and insecurity. Above all, there’s the glow of a stable emerging economic and social powerhouse, and there’s the veiled threat that it’ll all come crumbling down, as it has before—the sun and the shadows of a country that’s perpetually on the brink of greatness or, as Mexicans say, “ya merito”—“almost there”.
Mexico has had multiple phases of embracing foreign investors, and there have been periods of economic bonanza followed by crippling inflation and rejection of foreign influence. The ink was barely dry on the North American Free Trade Agreement when the peso went into crisis in late 1994. And back in 1982, banks were nationalized, only to experience a reversal a decade later. Even further back in 1938, there was nationalization for oil and gas, but in 2013 an “energy reform” was passed so that other
investors, both national and, eventually (2018), foreign, could extract, produce and sell oil and gas and their derivatives in Mexico. There are already a couple of independent gas station franchises different from the ubiquitous state-owned Pemex stations rising throughout the country.
About these reforms, the director of ProMéxico, the agency that promotes investment in the country, Francisco N. González DÃaz, has recently said that his organization is getting many inquiries from Canadians about investing—not only in the traditional enterprises, but in new ventures, such as medical equipment. “These reforms were put in place to provide a basic and comprehensive safety net for investors. Investing in Mexico is now, and will be for the foreseeable future, a safe bet.”
Canadian firms in the country have traditionally sunk their money into parts for vehicles, mainly for cars, trains, and planes. Bombardier has done business in Mexico since 1981. Magna International, the car chassis and body manufacturer, employs more than 24,000 people across the country, mainly acting as provider for the growing number of car assembly lines, from the first ones in the country, Nissan and VW, to GM and Ford, and all the way to the new Honda and Kia plants. These factories have made Mexico the third largest car manufacturer in the hemisphere, after the U.S. and Brazil.
Canadian enterprises in Mexico also have a big presence in other industries: in financial services, with Scotiabank as the seventh-largest bank in the country in 2015, and one of the first foreign banks to establish itself in Mexico after the signing of NAFTA; in pharmaceutical, with Apotex as one of the country’s largest manufacturers of generics; and also electronics and plastics manufacturing (Celestica and Omni). But the biggest Canadian enterprises, the ones that have experienced the most growth, are in mining and energy.
In April, TransCanada won the contract for the construction and maintenance of what will be one of the largest pipelines in Mexico; they had previously won several contracts from the federal government, and by 2018, they’ll be operating six major natural gas pipeline systems, representing an overall investment of approximately $3.6 billion U.S.
Nearly three quarters of all Mexican mining concessions are held by Canadian mining concerns, with Goldcorp, Agnico Eagle, New Gold, Yamana Gold, and Alamos Gold among the biggest. These companies have invested between $450 and $800 million U.S. per year in Mexico, and have experienced record gains and profits on their investments since 2012. But it hasn’t been easy. Among the many problems, the hardest to overcome have been the land grants, the corruption, and the violence generated by crime and drug cartels, according to Michael Harvey, Goldcorp’s Latin America regional director for corporate affairs and security.
“Canadian mining companies are attracted to Mexico’s geological potential, stable macroeconomic environment, and skilled mining workforce. This is a mining country, especially in traditional mining states such as Zacatecas, Sonora, Durango, and Chihuahua, but the legal certainty around land tenancy issues is the single largest legal and social risk factor for mining companies in Mexico.”
According to the Mexican Constitution, underground natural resources belong to the nation, but the surface rights can belong to anyone. In Mexico, the traditional communal land holdings called ejidos hold the surface rights to more than half the territory. In order to extract the riches of the terrain, the mining companies have to rent those surface rights as well as pay exploitation rights to the federal government throughout the life of mine. “The legal uncertainty for mining companies occurs when ejidos decide they want to renegotiate the agreements signed before the mine was built,” explains Harvey. “Mining companies are in a significantly weaker negotiating position after the initial investment has been made. To get their way, an ejido can sue in Agrarian Tribunals, or its members can simply block the road leading to a mine.”
These confrontations, added to corruption, political pressure, and the presence of drug cartels, can even lead to violence. “Politicians, lawyers/consultants, and other social actors often muddy the waters around these ejido problems to their own benefit.”
“The biggest risk for investors in Mexico is and always has been [the] corruption [of] everyday life,” says Darrel Shaw, a Scottish investment manager for int-advisor.com who has lived in Mexico for twelve years now. “Sometimes it is more about who you know and not what you know, really, and having good connections. Also you have to take bureaucracy into account: to get basic paperwork filed for something small can take hours to days and going back and forward between different government offices.”
Some say this corruption is what aided in the rise of the narcos, the violent drug cartels that began fighting each other and the Mexican military, and sparked a wave of violence in late 2006 that has yet to end, but is at least diminishing.
And yet Mexico is not the most violent country in the region— Honduras, Venezuela, El Salvador, Colombia, and Brazil all have higher per capita murder rates. Most of its cities, especially Mexico City with its 22 million inhabitants, are safer to walk in than a stroll through, say, Detroit or New Orleans. But it would certainly be useless to try to hide the violence that the drug cartels, the narcos, have brought to the country in recent years. “The drug cartels are certainly a problem,” says Shaw. “When I arrived in Mexico, the drug problem was just rising, and there wasn’t a large protection net for foreign investors. This was a big problem for many years—however this has changed over time, and is getting better.”
Nevertheless there’s ample opportunity for growth in Mexico for investors. Some of the largest and deposits of silver, gold, copper, zinc, and lithium lie waiting below many ejidos. The production of cars, clothes, and electronics has been rising steadily for more than a decade. And even among the rise of the electronics maquiladoras (factories near the American border), there’s room to grow both in the internal market and in exporting from Mexico—thanks in part to the low minimum wages in the country. “Mexico has many opportunities to grow quickly in the technology sector,” says Shaw, “and being such a niche market, it’s very attractive for investors who can both sell locally and export their merchandise with ease from here.”
Harvey says that to achieve success in Mexico, you have to engage the locals. “The most important element of risk management is the strength of your team. I would recommend a solid mix of Mexican and multinational perspectives, in order to ensure the proper blend of local knowledge, headquarters culture, and compliance management.”
“Making strong connections will always help,” says Shaw. “Having this head start of people in the correct place to guide you and give you advice from their own experiences is invaluable.”
About this scenario, César Bueno, CEO of the Mexican chapter of the Canadian Chamber of Commerce, says: “Mexico’s perspectives are great, the country is in a privileged position that will translate into one of the biggest growing economies in the world in the years to come.” The international ratings agencies agree: Mexico has steadily been earning better ratings than the other emerging world economies for many years now. “Another plus are the trade agreements Mexico has in place with countries in Asia, Europe and the rest of Latin America; because of its geographical and geopolitical position, an investment in Mexico can easily be used as a trampoline, a powerhouse of sorts, for businesses to engage in many new countries.”
Mr. Bueno is of the opinion that greater North American integration is all but unstoppable, and that it’s great news for investors, as the commercial local market will keep on growing. “One of the most attractive things is the local internal market and its growth in demand for products and services, a business can focus on the local market and have great growth.” Mexico is in the midst of a demographic boom, and this has been reflected in the country’s prospects. “Many international consulting firms place Mexico among their top global economies in the world for their 2025 predictions.”
“I’ve been in contact with many US and Canadian companies which are interested in investing in Mexico,” continues Mr. Bueno, “they are initially cautious about taking the first steps. But I’ve seen many times that, if they can work to engage, understand, and overcome the initial Mexican cultural and language barriers, they can make extraordinary business here.”
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Copyright 2016 Rogers Publishing Ltd. This article first appeared in the Fall 2016 edition of Corporate Risk Canada magazine
Mexico: Beyond sun and shadows
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