International companies, especially American businesses, have become a topic of political rhetoric from the Trump Administration. From promises that the country will pay for a wall along the southern U.S. border to threats of tariffs or sanctions against those funding operations there, the pros and cons of doing business in Mexico would seem as if they are not worth considering for the average company.
Mexican consumers not only recognize American products and branding, but they are also not shy about wanting to purchase these items. When there is an active presence in Mexico, then the added labor expenses that would normally increase prices for local consumers can disappear. Where the Trump Administration sees a problem is in the exporting of these items back to the U.S. since that action theoretically takes jobs away.
Americans aren’t the only country where businesses are considering doing some work in Mexico. It is a thriving, developmental economy that offers more stability and safety than many other nations of a similar status. That is why evaluating the pros and cons of being present in the Mexican economy is worth considering for an organization of any size.
List of the Pros of Doing Business in Mexico
1. It is an emerging economy.
When you start doing business in Mexico, then you are working with an emerging market where you have a ground-floor opportunity. There are still options available where you can corner the market for specific goods or services because what you offer is not readily available. That means you can be viewed as the industry expert, establish your branding with ease, and then export those benefits to the other markets around the world where you’re doing business. Even if you can’t take full advantage of this benefit, the chance to build a series of partnerships is a strong enough reason to consider a presence here.
The size of the Mexican market stands at 110 million consumers and growing. The Middle Class in the economy is seeing a surge. That’s why thousands of companies from the U.S., Canada, and the rest of the world are accessing this market.
2. There is access to more capital potential.
Because Mexico is an emerging market, you’ll find that there is more access to new capital here than in more mature landscapes. That means you have more ways to boost your credibility in your industry. As the economy becomes more developed, an increase in available funds will make it easier to expand your reach or offer products in other markets. You’ll see boosts in product availability and innovation potential. That’s why industries who feel like they’ve reached their maximum potential in an established market make their way into this country to see what can happen.
3. The economy of Mexico has remained stable over the years.
When the rest of the world went into a financial crisis in 2008, there were only two countries that remained relatively unscathed by the change in market status: Australia and Mexico. The stability in their economy comes from a diversified portfolio in the banking sector for the country. Even when the threat of a recession does arrive, the risks are spread out enough to limit the potential of financial loss. This country also grows when the rest of the world sees an upward push of GDP, so that makes it an excellent place to expand your current business or invest in new resources.
4. There is robust word-of-mouth marketing in Mexico.
One of the primary benefits that businesses discover with a presence in Mexico is the strong family connections that consumers have with one another. Their culture is willing to accept international brands as long as there is value in their investment. That makes it easier to launch a new product because the connectivity of the family spreads the word of new products quickly. This advantage leads to a faster increase in product recognition as well, making it a simple process to create expansion opportunities.
5. The exchange rate in Mexico is favorable for most countries.
As of August 12, 2019, the conversion rate for $1 equals 19.57 Mexican Pesos. That means it is a lot cheaper for many international businesses to create new opportunities to reach customers in Mexico. This exchange rate has stayed relatively stable since 2018, which means you have a reliable reduction in the costs of construction needs, equipment acquisition, and real estate expenditures. Your purchasing power remains constant if you keep the money obtained in Mexico for reinvestment, and then there is always the opportunity to funnel more capital into the country to expand operations as needed.
6. There is access to a skilled workforce.
When a company starts doing business in Mexico, they will discover that the labor force in this country is highly skilled in a variety of industries. There are large numbers of available workers in many STEM fields, and companies don’t need to worry about the legal status of the employees they hire to the same extent that they would in the United States. There are advantages in regulations as well, with permitting requirements costing much less than in other nations. Environmental and safety rules are more relaxed here as well, which contributes to a lower overall overhead cost too budget each year.
7. The cost of labor in Mexico is extremely competitive.
The cost of labor in Mexico is comparable to what companies find when establishing operations in China. The average wage is only 20% more than what Chinese firms offer, and there is a significant advantage of being present in the North American economy. Even if one excludes the threat of tariffs from the U.S. by eliminating that market completely, the benefits of having access to Canada can be quite lucrative for a business of almost any size.
The transportation costs of goods sold in the export market are far less in Mexico than they are in China.
8. Mexico has a very open economy compared to other countries.
According to information published by the Entrada Group, Mexico currently maintains 17 free-trade agreements with a total of 49 different countries. Only Singapore outperforms the open economy with its 23 agreements that are currently active. That means you’ll have access to Japan and Europe with a presence in Mexico is far more effective ways than a company might have in their home country.
Canadian agencies are a prime example of this benefit. Companies with a Canada headquarters and a presence in Mexico can import products from third countries without the cost of tariffs, then ship the items home to the domestic market for significantly less than a direct import agreement would typically allow.
List of the Cons of Doing Business in Mexico
1. It is still a complex process to start a business in Mexico.
Although it is still easier to start a business today in Mexico than in previous years, the process is still one that is quite complex. You need to have some connections in place to create a smooth creation process. There are several procedures that you must navigate, which can be somewhat tricky if you’re not familiar with the requirements in place. If you make a mistake during the initial steps, the government could make you start over from scratch. Then there are the “unofficial” government officials from some of the cartels that you’ll need to manage as well.
2. There can be a culture shock for some agencies.
Meetings typically start slowly when you begin to conduct operations in Mexico. You’re not going to be making any decisions until you reach the end of that discussion as well. Many businesses are surprised to find that there is a significant gap between the leadership team and the various other levels of management that are present in the average business. Most companies rely on the decision-making power of a single person instead of the entire Board of Directors. If you’re not used to that process or your business is not structured to accept it, then your first days of development could get off to a rocky start.
3. You will still have some regulations to navigate.
Even though the safety and environmental regulations are an advantage to many businesses in most industries in Mexico, the taxation rules are not included for a very good reason. The only country with a more complex tax code is the United States. Companies spend an average of 337 human hours each year to prepare their returns. Then the corporate tax rate typically hovers around 30%. You’ll find that the social security and VAT filing procedures can take up a significant chunk of your time as well. It gets easier once you get used to the process, but the first year can be a tough one if you’re a small business owner.
4. Registering property in Mexico can be equally challenging.
If you need to register real estate transactions in Mexico before you start business operations, then be prepared to get moving on this issue at least two months in advance. The average amount of time to register a property in the developed world is 26 days, but it is more than 70 days when trying to establish a company to work with Mexican consumers. Obtaining a certificate that represents your good standing with the water utility and the zoning certificates tend to be the biggest time-wasters of them all. This disadvantage is another area where a single mistake could set back your time frame for opening by several months.
5. Enforcing a contract in Mexico is a long and arduous process.
It takes over 400 days to enforce a contract when you start doing business in Mexico. Your company will need to follow 38 separate procedures to have a successful outcome because of this disadvantage. The complexity of this system, even with the favorable exchange rates, can be enough to dissuade some companies from pursuing an opportunity in this country. The only benefit in this specific point is that the process to resolve insolvency is much smoother than it is in the Caribbean or South America, taking less than two years to complete instead of the three years that occur on average.
6. There is a lack of resources for small businesses.
The lack of international SMBs and SMEs in Mexico is problematic for a variety of reasons. It’s the same disadvantage that many Mexican women face when trying to establish a company in Canada or the United States. There is already an increase in difficulty when moving abroad when compared to a larger company because of the expenses involved. Differences in language and culture combine with the lack of resources to create a high enough level of risk to consider abandoning an opportunity. Even something as minor as a fear of the unknown can hold some firms back from their full potential.
7. It can be more expensive to import and export goods from Mexico.
Even though there are definite advantages to doing business in Mexico, firms must analyze the levels of importing and exporting that they will need to be successful. When you compare the container costs here to those of the Caribbean or South America, the Mexican market is significantly higher. The average cost per container for importing is $1,450, while the average export charge is $1,780. When you add in the tax advantages that some smaller island nations offer to provide employment opportunities, you might find it to be cheaper to do business somewhere else and then export items to the Mexican economy.
8. There are problems with corruption in the economy.
Mexico ranked 103 out of 175 countries in 2013 for the levels of corruption that were present in their public sector. Transparency International publishes a Corruption Perception Index each year, and the nation scored 35 out of 100 that year. Higher scores indicate less corruption, whereas a score of 0 would indicate the worst corruption possible. In 2018, their rating dropped to 28, placing them 138 out of 180 countries. In comparison, the United States scored a 71 and Canada placed 9th overall on the list with a score of 81. Denmark had the top marks with an 88, followed by New Zealand at 87.
The pros and cons of doing business in Mexico depend on three specific points: what you hope to accomplish, the capital you have, and what your eventual goals are with this effort. Manufacturers are turning their attention to this country from all over the world because of the lower costs and improved access to North America. If you can navigate the linguistic, cultural, and administrative differences successfully, then this option can be a highly rewarding experience.
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