Tiempo Development In the News

Doing Business in Mexico

July 8, 2008
By Russ Wiles

With soaring fuel prices and rising inflation in China, it might be time to consider going south of the border to diversify your operations. Here's what you need to know.

The rapid economic emergence of China and India has pushed Mexico a bit out of the spotlight. Maquiladora plants have closed as Mexican labor costs got undercut by cheaper workers in Asia. NAFTA issues have taken a back seat to rapid trade expansion with the giant developing
countries of Asia.

"Mexico got hit hard when China joined the World Trade Organization," says Roy Nelson, professor of international studies at the Thunderbird School of Global Management in Glendale. "A lot of low-cost manufacturing operations moved to China."

But a few stars might be lining up in Mexico's favor, perhaps putting the country back in the limelight. For some Arizona firms, it might make sense to consider building or expanding ties south of the border.

For example, soaring fuel prices make it more expensive to ship goods from Asia and more costly to fly executives to and from meetings overseas. Plus, the weaker dollar and rising inflation in China have pushed up manufacturing costs there, while congestion at the major Southern California ports can mean snafus for importers who don't plan ahead.

While nobody expects Mexico to rival China in any significant way soon, the stable peso, faster delivery times and shorter transport distances could play in the country's favor.

"The dynamics of the time-zone differences and vast distances to Asia were impossible for us to overcome," says Eric Walton, chief operating officer of Tiempo Development, a specialty software
firm headquartered in Tempe. Most of the company's staff, primarily engineers and developers, are in Hermosillo.

Another reason Mexico has largely stayed out of business headlines is a drop in volatility. The country has avoided the currency devaluations and other economic calamities that often gave it a black eye in the past.

"Mexico is a more mature market in terms of investment-banking services, stock market comfort level, stability of the local currency and so on," says veteran banker and former Arizona Department of Commerce Director Gil Jimenez, whose 35-year career has included postings on both sides of the border. He's president of Colonia Bank, a new Phoenix institution that, among other things, hopes to lure wealthy Mexicans as clients.

Nelson says the country has become more economically diversified in the 14 years since the last peso devaluation, and it has signed an impressive number of free-trade agreements, kept its budget deficits under control and otherwise shown stability.

Mexico remains the dominant export market for Arizona companies, according to the state Department of Commerce. The added maturity and stability make Mexico a somewhat less risky place to do business than in years past.

TESTING THE WATERS

Meanwhile, the country also has diverse marketing opportunities underscored by a gradually expanding middle class. As such, Mexico can be an attractive place to test the waters of globalization for Arizona firms that haven't yet taken any steps outside the country.

"Mexico is a good test market for exporters because we're so close," says Fernando Jimenez, an international business development manager at the Arizona Department of Commerce. "Many companies learn they're not ready for it."

Yet firms with good products, reliable service and a sensible plan can add to their profits by dealing with Mexico.

"(U.S.) companies facing challenges in the U.S. economy can find in Mexico a way to diversify their operations," says economic-development consultant Luis Ramirez of Ramirez Advisors in Glendale.

Manufacturers on a tight timeline also may prefer dealing with suppliers just a few hours away.

"Mexico has an advantage supplying products that are needed in the market quickly, such as certain cellphones," Nelson says. "You can manufacture something in Monterrey and get it to the U.S. in a day by truck."
BE PREPARED

So what's it like doing business in or with Mexico? Here are some factors to consider:

Staying power:
Two things experts stress repeatedly with Mexico are the need to build relationships and the need to have patience.

"It's not a question of meeting once or twice and getting everything done," says Gil Jimenez, who has lived in Mexico while representing U.S. banks. "It takes a while to develop relationships."

Much business is conducted over meals. Preliminary meetings might involve nothing more than small talk.

"Business and personal relationships overlap a little more down there," says William Herrera, a partner who focuses on international legal issues at Phoenix law firm Jennings, Strouss & Salmon who has lived and worked in Mexico. "You have people over for dinner more often than here."

He and other experts stress the need to invest in Mexican relationships and give a business effort the time to develop.

"You don't just set up shop and hope it runs on its own," Herrera says. "Expect to spend some time down there and have someone on the ground who has a grip on what's
going on 24/7."

Local expertise
"Business practices aren't that different, but they are different," Herrera says. For this reason, he feels U.S. firms should connect with local advisers such as lawyers, accountants, bankers, customs/shipping specialists and insurance professionals.

Ramirez suggests asking for referrals from your professional contacts in the U.S. Government entities such as the Arizona Department of Commerce and commercial services division of the U.S. Department of Commerce also can help.

Local preferences
American exporters need to be attuned to Mexican market conditions, from fashion trends to advertising messages that translate effectively. Even mundane topics such as financing can differ.

"The most important thing is to understand how you're going to be paid," says Bob Cashdollar, chief executive officer of Apache Nitrogen Products Inc., a Benson firm that sells chemicals used, among other things, to help in the manufacture of steel and as blasting agents in mining. The company has customers on both sides of the border.

That means deciding how much credit risk you're going to take with customers and agreeing up front that you want to be paid in dollars. You also should define financial arrangements. Mexican firms, Cashdollar says, tend to prefer 45 to 60 days to pay without penalty while 30 days is more common in the U.S.

"You have to decide if you have an appetite for terms of that length," he says.

Labor relations
In general, labor costs more in Mexico than in Asia, but it's still less than in the U.S. In his industry, Walton feels Mexico is competitive with India and China - and becoming more so as the greenback weakens more dramatically against the currencies of those nations compared with the peso. He says it has been easy to recruit qualified workers to Tiempo Development, and he
praises his Mexican staff in Hermosillo for their loyalty.

However, Mexico also has a history of class strife and resentment against foreigners, especially Americans. Some American executives say they feel Mexican workplace laws are slanted in favor of employees.

"We were told to get a labor lawyer," Walton says. "We laughed at the time, but we did in fact need one."

Language issues
English is widely spoken in commercial circles in Mexico. "English is the lingua franca for doing business in Mexico," Herrera says.

Still, it pays to have someone on staff with an intimate knowledge of Mexican Spanish, especially when it comes time to negotiate contracts and prepare other documents. "You really need someone who has bicultural and bilingual abilities," Ramirez says.

Security and ethics
Much of the news coming out of Mexico involves crime, from gang shootouts along the border to kidnappings in Mexico City. U.S. officials warn against traveling highways at night or patronizing roving taxi cabs, whose drivers sometimes kidnap individuals with the idea of forcing them to
drain their ATM accounts.

While Americans must be mindful of such security risks, most of the crime is directed
against Mexicans, Gil Jimenez says.

"Personal security is still an issue in terms of doing business, but not so much of it affects foreigners," he says.

In a related vein, corruption remains a big problem in Mexico despite recent efforts at the federal level to root it out.

Cashdollar, who has done business in Latin America for more than a decade, stresses the need to operate with the same integrity as in the U.S.

"You're better off doing things the right way, being up front in negotiations and making sure you understand what you're committing to," he says.

Taken as a whole, Mexico can offer opportunities as both an end market and as a source of lower-cost labor. Recent fuel and currency trends might play into the country's favor, especially now that Mexico has had several years of relative calm on the economic front.

A lot of Arizona companies probably aren't up to the challenge of dealing with or in Mexico, but doing so can make sense for some.

"If you have a product that has marketability," says Gil Jimenez, "there's no reason you shouldn't do well there."

BUSINESS CUSTOMS

Mexico takes many of its cues from the U.S., but not all. Here are some observations on business customs in Mexico:

• Workdays tend to run from 9 in the morning to 6 p.m. or 7 p.m., with a long lunch break.
• Business cards and professional titles are used extensively.
• Mexicans tend to be fairly formal in business dealings. Meetings are often preceded by small talk and often take longer than in the U.S.
• Spanish is the official language, yet many Mexicans are comfortable dealing in English.
• Much business is done at meals, at which smoking and drinking are common.
• Mexicans may have a tendency to be tactful and indirect, and might not mean yes when they say it.
• Mexicans often are less punctual arriving at meetings than Americans.

Source: U.S. Department of Commerce's commercial-services division.