COVER

READY, SET, GO

MEXICO PUTS OUT THE WELCOME MAT

DEIRDRE McMURDY December 14 1992
COVER

READY, SET, GO

MEXICO PUTS OUT THE WELCOME MAT

DEIRDRE McMURDY December 14 1992

READY, SET, GO

COVER

MEXICO PUTS OUT THE WELCOME MAT

DEIRDRE McMURDY

Douglas Clark says that when he emerged from a recent 45-minute business meeting in Mexico City, his Mexican driver was worried. The driver, Clark recalls, was convinced that something had gone terribly wrong because the meeting was so short. Said Clark, president of the Northern Telecom subsidiary based in Mexico City: “I had to reassure him that everything was fine—that it is possible to do business in that time.” The Mexican emphasis on strong personal relations in business, which tends to lead to long meetings and even longer lunches, is just one of the differences encountered by Canadians exploring those markets in anticipation of the North American Free Trade Agreement (NAFTA). Because Canada’s largest trade partner, the United States, shares the same language, legal conventions and popular culture, many Canadian executives have not needed to adapt to various business styles and standards. Said Antonio Uribe, who represents the Bank of Nova Scotia in Mexico: “The pace

here is radically different. It’s considered very impolite to go straight to business, whereas in Canada, it’s rude to ask personal questions.”

One Canadian company that learned about the potential for cultural clashes the hard way is Bombardier Ltd. of Montreal. After buying a railcar manufacturer from the Mexican government in April, Bombardier was outraged when its bid for a $ 150-million contract to build subway cars for Mexico City’s transit authority failed in August. Said one senior Canadian government official, who helped to smooth the ensuing furor: “Bombardier had no grasp of the local business culture and no established presence in the market—so they grossly miscalculated.” But while many of the Canadians eyeing the Mexican market admit that they have a lot to learn, they are clearly eager to get started.

Already in the first five months of this year, federal figures show that Canadian exports to Mexico soared by 105 per cent over the same period last year to $316 million, while imports from Mexico climbed to $1.3 billion. For 1992

overall, Ottawa is projecting Canadian exports to Mexico will reach $800 million, compared to $524 million shipped last year. In 1991 total trade between Canada and Mexico was $3 billion. David Winfield, Canada’s ambassador to Mexico and a former trade commissioner to Tokyo, said that the number of Canadian business inquiries to the embassy about trade with Mexico has climbed to about 11,000 this year from 2,000 in 1989. He added: “Mexicans are approaching us specifically asking for the names of Canadian companies they can deal with. They are absolutely delighted to have a choice aside from the Americans.”

As the Harvard-educated President Carlos Salinas de Gortari and his advisers, many of whom were also educated in the United States, have gradually reformed and modernized the Mexican economy since 1988 through such policies as deficit reduction, deregulation, privatization and inflation control, Canadian companies stand to benefit. The country’s national transportation and telecommunications infrastructure needs to catch up with its recent economic growth, creating markets for engineering, construction and technology firms.

Deals: Emerging retail markets are also leading to new consumer demands. In the recently privatized Mexican banking sector, Canadian banks are already striking lucrative deals to sell employee-training services as well as banking technology—something that U.S. banks cannot offer because they do not have national networks. Since the government introduced mandatory pension savings accounts for workers, retail banking has boomed in a country where, in the past, only about five per

cent of the population had a bank account.

The legacy of protectionism, however, is proving difficult to discard—even with strong foreign partners. Until Salinas opened Mexico to international competition, it was a tightly closed market. That meant that businesses there had a captive domestic client base of 83 million people but were able to neglect both customer service and qualitycontrol standards because of the lack of competition. Those shortcomings were traditionally reinforced by paternalistic managers who assigned a low priority on such human resource issues. “This is not a service-oriented, people-oriented economy—those are first-world luxuries,” said Roberto Salinas de Leon, an economist with the Centre for Free Enterprise Studies in Mexico City.

Labor: As a result, for Canadian and U.S. companies planning to locate operations in Mexico, the attraction of an abundant labor force is frequently offset by its lack of experience. For each worker hired at a plant, thousands of applicants need to be vetted—and even then, because few have ever worked in an industrial setting, they need weeks of basic training. For Ford Motor Co., the problem of employee turnover was so severe— workers would save some money, then leave—that the company had to construct a town nearby to ensure that employees stayed in the area even after they had earned enough money to live on for a few months. “It’s a northern myth that Mexico is the land of cheap production,” said the Bank of Nova Scotia’s Uribe. “Transportation and distribution costs are high, not to mention the training issue.” Employers are also hit at various levels of government for social security contributions and special payroll taxes.

But at the same time as Mexico is struggling to come of age economically, it is also embroiled in a political transition. Unlike Canada and the United States, there is no tradition of liberal democracy in Mexico. Instead, the country has been dominated for decades by strong leaders and a handful of wealthy families on a feudal agrarian model. For the past 63 years Mexico has been run by the Institutional Revolutionary Party, which effectively appoints a new president every six years. Until relatively recently, that system was not challenged. But now, increases in prosperity have led to the emergence of an urban middle class that is now joining in the push for a more democratic, decentralized government. Claude Boucher, a policy adviser at the Canadian embassy, noted, “As village life erodes, it’s impossible to use the same, traditional tactics to preserve political control.”

While foreigners who do business in

Mexico must learn how to contend with a highly centralized and bureaucratic federal system, state governments are also part of the complex mix. “Always cover the bases in Mexico City—all roads lead to the presidential palace,” said one Canadian businessman, who requested anonymity. Nevertheless, he added,

it is also unwise to overlook state and local officials, who have their own bases of power. Despite Mexico’s reputation for widespread graft and corruption, Ambassador Winfield says that the embassy receives few complaints. “The government is extremely scrupulous

about such matters and repeatedly asks us to pass along any complaints,” he said. “International confidence is vital.”

The image of a stable and progressive regime is clearly a top priority with Salinas, whose advisers assiduously massage and manage his international image. Indeed, Salinas created the unlikely alliance between the traditional adversaries of labor, government and business—known as El Pacto—in 1988 specifically to ensure economic stability and, at the same time, to curb inflation and attract foreign funds. But for those economic reforms to take root, Mexico must somehow manage to replace that volatile foreign capital with more permanent, direct investment from companies in Canada and the United States. The country’s restrictive foreign investment laws will soon be amended to allow outsiders to own 100 per cent of Mexican companies (excluding such strategic areas as financial services and energy). Said José Angel Gurria, undersecretary for international affairs at the Mexican department of finance: “NAFTA is also a key part of our pitch for investment. We know that if we want people to invest millions here, they need to be comfortable that a solid structural framework is in place.”

Capital: A stable inflow of foreign capital is also essential because of Mexico’s growing current account deficit. As Mexican businesses struggle feverishly to modernize, they have to import more than they are able to export. This protracted imbalance could lead the country back into a much-feared inflationary spiral. Indeed, the government rigidly adheres to its campaign to reduce inflation, which reached 52 per cent in 1988, the year Salinas was elected. This year, inflation will be about 11 per cent, and the government projects it to drop to eight per cent in 1993.

Although the Mexican government’s focused strategy has allowed it to shift from fundamental macroeconomic issues to a more microeconomic emphasis on small business and trade, it is still prone to reversals and jolts. Jitters about Mexico’s slowing growth caused its stock market to crash in June after a strong two-year rally. To keep foreign capital in the country, the government was forced to increase interest rates sharply, a move which hurt the same smalland mediumsized businesses it is trying to encourage. But for Canadian companies struggling to understand the Mexican economic and social environments, that country’s economic struggles should make them feel very much at home.

DEIRDRE McMURDY in Mexico City

Canada U.S. Mexico

Percentage of population over 65

Life expectancy (in years)

Men

Women

Total fertility rate

(children born per woman)

Number of pupils per teacher

(primary)

Cinema visits annually

(per person)

Number of AIDS cases reported per 100,000 inhabitants

'Statistics are the latest available

11

73

80

1.7

17

12

13

72

79

1.9

21

46

66

72

3.4

32

1