Proximity is invariably the first benefit mentioned when discussing near-sourcing in Mexico. But it’s far from being the only one as Mexico morphs into a business friendly country.

The foundation for today’s business climate was laid with NAFTA—the historic North American Free Trade Agreement signed in 1992. With that understanding, Mexico and the U.S. began a process of harmonization that has led to transformations in the transportation infrastructure, energy, telecommunications, and law. Economic reforms have been substantial since then, but many more are needed, according to the Organization for Economic Co-operation and Development (OECD).

“NAFTA caused a tremendous change in business practices,” says Armando Beltran, director general at Schneider National in Mexico City. “Most professionals are much more attuned to the U.S. way of doing things now.” Many have trained in the U.S. or worked with American companies, leading to a convergence of the business cultures of the two countries.

In terms of supply chain performance, the World Bank ranks Mexico 56th of 150 countries. “It’s less popular than India (rank 39) and China (rank 30), but there’s a great opportunity to do more in Mexico,” notes Larry Harding, founder and President of High Street Partners, an international consulting firm providing finance, accounting, compliance, and HR assistance to companies with global operations.

The interdependence of the American and Mexican economies has led to a tight alignment in terms of currency fluctuations. “Probably,” speculates Jorge Pinto, former executive director of the World Bank, “the peso will remain closely linked to the U.S. dollar.” In contrast, he suggests the Chinese yuan likely will be revalued, increasing costs for American importers.

Despite some six years of economic stability, however, Mexico’s economy has grown very little. In response to this, the current national administration has ambitious plans to stimulate the economy through jobs creation, infrastructure improvement, and streamlining bureaucracy.  Rule of law is also being promoted by expanding the authority of the Federal Tribunal of Fiscal and Administrative Justice, creating a professional legal cadre and providing means of notifying the populace of legal rulings and agreements.

All this is good news for American companies because strengthening Mexico strengthens the North American community. “Improving the neighborhood decreases illegal immigration and increases companies’ potential client base,” notes Pinto, now professor of international studies at Pace University.

Human capital

The job creation aspect of the plan includes rural areas as well as cities, giving priority to the poorest parts of the country. Under-employment is Mexico’s chronic problem, too many are only partially employed and many well-educated people can’t find comensurate jobs. Corruption is an issue and is targeted in the plan with language that insists that State Secretariats “be firmly committed to the clear, transparent, efficient running of the programs and eliminate any form of corruption in the assignment or use of resources.”

Behind these improvements lies a growing professional and entrepreneurial class eager to improve their lives and their country. Mexicans are getting university degrees in increasing numbers (one example: 65,000 information technology professionals annually graduate from the country’s more than one hundred universities, making Mexico competitive in outsourcing IT work). 

There is, however, an important factor for U.S. employers to remember when appraising Mexican college graduates. The educational philosophy in Mexico is similar to Spain and France; Mexican students tend to have broader general knowledge but less applied knowledge than their American counterparts. Graduates know the theories, but not necessarily how to put them to work.

Miami-based Neoris, a global consulting firm focusing on emerging technologies, has been near-shoring some of its IT work to Mexico for several years now. “It’s so much easier working with Mexico than India, that I’m astonished,” says Jeff Johnson, U.S. general manager.

Additionally, Johnson says that many of the oft-touted benefits of Asia haven’t worked out as expected. For example, the prevailing wisdom is that Asian counterparts can be resolving a problem while the U.S. is sleeping, so the solution appears within 24 business hours. The reality, he continues, is that “you’d lose time when they had a question.” So, although salaries in Mexico may be 30 percent higher than in Argentina or India, other efficiencies compensate.

The benefits aren’t lost on Mexico’s competitors, either. The UN ranked Mexico highest among Latin American countries in terms of technological achievement, and IT firms from India and other nations are setting up shop there. Technology parks are springing up—Johnson says there are about a dozen now—and there’s plenty of good IT talent in the major cities.

Downside concerns

As the professional class grows, so does the understanding of intellectual property rights. “There are a lot of creative people who want to protect their intellectual property,” Pinto says, so “a culture of respect for the value of intellectual property is emerging.”

“Emerging” is the operative word. The International Intellectual Property Alliance estimated that Mexico accounted for $1 billion in pirated goods, ranking it third on its watch list, behind China and Russia. Since that report came out in spring 2007, Mexico has launched major raids in regions known for counterfeiting. Officials claim to have made significant headway in curbing the problem; strong IP protection under NAFTA helps.

Counterfeiting is hardly the only crime that concerns U.S. companies. The problem of “goods falling off the truck,” theft of cargo in transit, is a long-standing plague. Working together, the U.S. and Mexico are streamlining cross-border shipments to address this situation. One of the problems, traditionally, has been that “too many hands touched the cargo,” recounts Schneider’s Beltran. “After 9/11, things changed a great deal,” he says. “There’s more scrutiny.”

Participation in the Customs-Trade Partnership Against Terrorism (C-TPAT) program is part of that the solution, allowing certain cargos from trusted sources to reduce the percentage of cargo subject to customs inspection. By providing manifests in advance, much of the cargo carried by certified carriers can be cleared within Mexico, before it reaches the border, thus minimizing delays. Likewise, the Free and Secure Trade program coordinates Mexican and American commercial processes for customs clearance.

According to the World Bank, from the time a contract to purchase goods is signed, it takes an average of 17 days to export them from Mexico and deliver them to the customer. Beltran works closely with Schneider’s Mexican partners and with government agencies on both sides of the border to try to shrink that delivery time. “We’re always at the forefront of changes in regulations, through participation in C-TPAT and membership in various business and technical coalitions,” Beltran emphasizes. He works closely with Mexican partners to align their practices to those of the broader Schneider network to those partners move cargo safely and efficiently.

“We’ve worked out a very strict process, using technology and other means,” Beltran says, so that there are records for where each trailer is, each time the trailer door is opened, whether the trailer is full or empty. Although he doesn’t have figures handy, “The amount of theft is far less than I saw in 1995,” he recalls.

Improved infrastructure provides another approach to fighting crime by minimizing the time cargo sits in one place. Mexico’s massive National Infrastructure Plan will infuse some $250 billion into ports, highways, airports, energy and the environment.

A modern tollway recently built between Merida and Cancun, for example, turns a six-hour trip on a speedbump riddled two lane road into a three hour high speed drive, increasing the opportunities for businesses on the Yucatan Peninsula. Public-private partnerships and the private operation of some toll roads will stretch the budget to improve more of the crucial infrastructure.

It’s the ports that are getting the most attention, though. Currently, plans are proceeding for a $6 billion megaport about 150 miles south of San Diego. Called Punta Colonet, the 7,000-acre port and rail complex with be the size of the combined ports of Los Angels and Long Beach. It is designed to handle one million TEUs initially and six million TEUs by 2025. An adjacent city to house of 250,000 residents is also in the master plan.

The ports of Manzanillo, which serves Guadalajara, and Lazaro Cardenas, which serves central Mexico, also are expanding, thereby making it more practical for companies to ship goods into and out of Mexico. Manzanillo is developing a total of 740 hectares, and adding a new container terminal with a 2 million TEU capacity and several new docking stations. Lazaro Cardenas is increasing its container capacity with plans to add a roll-on/roll-off terminal, as well as terminals for bulk metals and minerals.

The other key aspect of Mexico’s transformation is a streamlined bureaucracy. As yet, it’s not as easy as working in the U.S., but the country is making significant strides. In terms of the ease of doing business, Mexico is ranked in the mid-forties of 178 economies (it’s fifth among the 31 Latin American nations, and slightly higher than the region as a whole in terms of transaction transparency and protecting investors). “Compared to Brazil and Argentina, Mexico has a real advantage because of NAFTA,” Johnson says.

Although Mexico’s commercial code is set at the federal level, it is implemented locally, allowing differences in interpretation and implementation. The conditions in individual states vary considerably.

To be sure, Mexico has obvious and growing advantages as a near-sourcing option, but it comes with a caveat. As consultant Larry Harding emphasizes, “there needs to be a realistic set of expectations.” wt

Sidebar: A Good Place to Live Too

Mexico may be a good place to do business, but last year—say the experts who rate such things—it became a good place to live, too. The big change: the ability to get an affordable mortgage and to unquestionably hold title to the property. For companies, that removed one of the last barriers to assigning execs to Mexico.

Although the provision had been in place since NAFTA was signed, the infrastructure that made it practical—the mechanisms to deal with liens, bundle mortgages, organize loans, deal with taxes, handle disputes, etc.—wasn’t in place until 2007. In authorizing such changes, President Felipe Calderon pointed out that this new ease of ownership exemplified the federal government’s concentration on “reinforcing the dynamics of the domestic market by promoting changes and transformations in various sectors and promoting areas such as construction and housing.”

A residential construction boom already is underway, attracting young Mexican couples as well as international buyers. About $7 billion worth of condo complexes are going up in a dozen hot spots throughout the country, which helped fuel a growth rate of more than nine percent for the construction industry in 2006. Growth through 2012 is expected to continue at just under six percent.

Sidebar: Unlocking Opportunity in the Americas, by Dan Brutto

As U.S. businesses continue to focus on China and India as epicenters of economic opportunity, I believe equally significant potential may lie closer to home.

The economies of Latin America—and Mexico in particular—have never looked brighter. Between 1997 and 2020, Latin America’s real GDP is expected to grow faster than Asia (and much faster than the global average). Mexico’s Annual GDP growth is forecast to average 3.4 percent from 2008-2012.

Latin American markets offer U.S. businesses some key advantages, the first of which is geographical proximity.

In addition to proximity, a key advantage of doing business in Mexico is NAFTA—the second biggest trading bloc in the world (behind the European Union) and responsible for 30 percent of all U.S trade (this compares to 11 percent of U.S. trade with China).

That said, however, in the coming years, Mexico and Latin America as a whole will have to adapt or risk becoming less relevant to trade.

A significant area of concern in the Americas is that our transportation infrastructures are not keeping up with the demands of global commerce. 

Mexico is at the bottom half of all nations in terms of infrastructure. By 2030, the government has made a goal of being in the top twenty. To achieve this, the government is implementing a five-year plan to improve and connect airports, roads and seaports, but private and foreign investment will be an essential part of making this plan come to fruition.

Across Latin America, a World Bank report warns that roads in particular remain poor, although there have been important improvements made in the past decade to electricity and telecommunications, as well as ports and airports.

A great start can be seen in a number of ocean port expansions going on now. In El Salvador, they’re doubling the capacity of the La Union Port, which will become the largest and most modern in Central America. Brazil, Argentina, Uruguay and Chile are upgrading or building new ports.

Although the United States and Latin American countries are neighbors, our border and customs policies sometimes make it seem as though we’re enemies.

For example, the average North American-produced vehicle crosses the U.S.-Mexico border more than seven times during production. During the journey, each vehicle faces a staggering 28,200 customs transactions. By comparison, cars imported from Europe or Asia to North America involve a single customs transaction.

If we delay cross-border shipments by just a few days, Mexico loses its proximity advantage over Asia. To speed and simplify border crossings, there are a number of steps governments can take.

For starters, they can work together to harmonize their tariff codes into a single, streamlined customs clearance system so global shippers don’t have to look up different codes every time they ship to a different North or South American country.

Other common-sense steps include raising the minimum dollar value at which imported goods must receive customs clearance, so that low-risk, low-value goods can cross borders without delay. Separating the release of shipments from the collections of duties and fees is another such step.

Another way to help facilitate the flow of trade across the Americas is to improve supply chain visibility by leveraging information technology. With the support of UPS and other express carriers in Latin America, Mexico has made some substantial progress in modernizing its customs clearance process, making it easier for businesses all over the world to trade with Mexico.

In the past, the process by which Mexico customs authorities selected import shipments for inspection was arbitrary, ineffective and slow.

But in 2005, Mexico customs began using a modern risk assessment program, and with the electronic shipment data that UPS provides them, customs can pre-select specific packages for inspection before the shipments even arrive in country, allowing those shipments that won’t be inspected to move expeditiously to their final destination.

As governments and companies work together to grow trade in the Americas, the Panama Canal offers a symbol of the challenges and opportunities we face.

Today, much of world trade goes through the Panama Canal, but it was in danger of losing its position. Shipping traffic is growing; the cargo ships themselves are getting bigger and a growing number simply can’t fit through the Canal.

The Panamanian government knew it had to adapt and modernize or fall forever behind. That’s why Panama approved an ambitious enlargement and modernization of the Panama Canal. When the massive project is completed in 2015, capacity will nearly double.

Adapt or become irrelevant: we stand at the same crossroads in the Americas. While Asia and other regions work to make their countries friendly to trade, we must do the same. wt