Gateway to the Americas - Export Report Final-ECA … · 9. Doing Business in Mexico 43 Choosing the Appropriate Mexican Corporate Structure 43 Steps to Incorporating a Mexican Entity

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Mexico: Gateway to the Americas

1 | Mexico: Gateway to the Americas

All rights reserved © 2016 ISBN: 978-0-9942686-7-9

Disclaimer

The information contained in this report reflects the interpretation of publicly-available information, or information supplied by contacts in Australia and Mexico as interpreted by the Export Council of Australia (ECA). All due care has been taken to ensure that the publication is free from errors or omissions. At the time of going to the press the publishers believe that all information submitted for publication was correct and accurate. However, the ECA does not guarantee or warrant the accuracy, reliability, completeness or currency of the information in this publication nor its usefulness in achieving any purpose. Readers are responsible for assessing the relevance and accuracy of the content of this publication. No responsibility whatsoever can be accepted by the publishers, editor, researchers or any other person or company involved in the preparation of this publication for accuracy or usefulness of any information contained therein. Any consequential loss or damage suffered as a result of reliance on this information is the sole responsibility of the user. No warranty, express or implied, is given and no legal responsibility is assumed by the ECA, its servants or contractors.

Mexico: Gateway to the Americas

Researchers

Niels Strazdins, Head Research Manager, Export Council of Australia

Stacey Mills-Smith, Trade Policy and Research Manager, Export Council of Australia

Editor and Product Development

Collins Rex, Head of Product Development, Export Council of Australia

Sponsors

Australian International Trade and Transport Industry Development Fund

Australian Trade Commission

Research Partners

PwC Mexico

Harris Gomez Group

FTI Consulting

Published by Export Council of Australia

Level 2, 22 Pitt Street Sydney NSW 2000

Ph: 02 8243 7400 Fax: 02 9251 6492

Email: [email protected]

Website: www.export.org.au

Education & Training: www.aiex.com.au

Twitter: twitter.com/Aussieexport

Publication date: January 2016

e-publication: RRP: $30

Export Council of Australia | 2

CONTENTS

1. Foreword 3

2. Introduction to Mexico 4

3. Politics and the Reform Agenda 4

4. The Economy 5

5. Mexico as a Gateway 7

6. Mexico and the TPP 11

7. The Bilateral Relationship 13

8. Sector Analysis 16

Energy 16

Agriculture and Agri-Technology 24

Telecommunications 27

Manufacturing 31

Mining and METS 38

9. Doing Business in Mexico 43

Choosing the Appropriate Mexican Corporate Structure 43

Steps to Incorporating a Mexican Entity 45

Opening a Bank Account 47

Tax Considerations 48

Tips for Importing into Mexico 50

Cross-Cultural Understanding 54

Practical Business Information 54

Key Contacts 55

Building capability through two-way exchange 56

10. REFERENCES 57

11. ABOUT US 60

Supported by 60

Export Council of Australia 60

Research Partners 61

Authors 62

Methodology 62


Mexico is going through a period of significant economic reform, creating new opportunities for Australian companies to enter in this dynamic market. Moreover, the successful conclusion of the Trans-Pacific Partnership Agreement negotiations in October 2015 and the subsequent signing of the TPP in February 2016 has helped to bring Mexico to the fore. Yet there remains much to be done in terms of increasing Australian businesses’ understanding and awareness of Mexico and the wide-ranging market opportunities.

The Export Council of Australia’s (ECA’s) timely report aims to help fill this information gap. It provides a practical examination of the opportunities for greater engagement by Australian businesses in a reforming Mexico, examines the current business environment and Australian experience in the country, discusses the ongoing economic reforms and clarifies what they mean for Australian businesses on sector-by-sector basis.

The Reform Agenda

Mexico’s ambitious reform agenda aims to disrupt the anticompetitive climate that exists in some parts of the Mexican economy, targeting monopolies and reforming ineffectual or onerous regulation. This is aimed at increasing competition and attracting needed foreign investment and expertise in the process.

This opens new opportunity for Australian businesses either eyeing the market for the first time or looking for new opportunities in Mexico. Reforms in the energy sector in particular may be very attractive to Australian businesses, for example, as these generate significant downstream and upstream opportunities.

Connectivity

Mexico is the second largest and most interconnected economy in Latin America, as well as Australia’s largest trading partner in the region. Its network of FTAs with North and South America make the country an exceptional gateway to the Americas. The report explores this concept and highlights how Australian companies can benefit

from using Mexico as a regional launching pad.

How to do business in Mexico

Entering a new market can often be a complex and costly process, especially when there are cultural and language barriers to navigate. This report provides practical information on establishing a business in Mexico, as well as advice for cross-cultural understanding and how to mitigate business risks.

A mobile app accompanies this report, providing an easily accessible synthesised version of the most pertinent content.

We also plan to deliver a course on doing business in Mexico through the Australian Institute of Export (AIEx) in 2016.

We hope you find this report enlightening, and that you consider exploring the market opportunities in Mexico and beyond.

In closing, I would like to thank our sponsors Austrade and the International Trade Development

Fund for their support.

Lisa McAuley CEO, Export Council of Australia

1. FOREWORD


These proposals broadly encompassed the further democratisation of Mexico’s economy and politics, expanding social rights and citizens’ participation in public policy and increasing Mexico’s attractiveness to foreign investment in all sectors. The reforms are aimed at breaking monopolies, increasing energy production and reforming taxation and education.3

Significant areas of Mexico’s economy are dominated by state ownership, monopolies and duopolies, such as energy, transportation and telecommunications. This lack of private involvement has also led to investment shortfalls across the board, particularly in infrastructure.

These reforms are aimed at disrupting this anti-competitive climate by targeting monopolies to break their market dominance, as well as reform ineffectual or onerous regulation and regulatory bodies.

The hope is that this will attract needed foreign investment and expertise, and promote increased competition to the benefit of Mexican consumers and the economy as a whole.

Reforms have so far been introduced in the education, energy, fiscal policy, internal security, telecommunications and political spheres.

Most of these passed through Congress in late 2014 and are expected to boost Mexico’s potential output growth by 0.75 per cent to 3.5 per cent to 4 per cent per year.4

Infrastructure improvements are also coming, through the National Infrastructure Plan, which includes USD 500 billion in port, water, road, air and rail investments by 2018.

While still promising, the reform process has yet to meet heightened expectations, exemplified in the poor response by foreign companies to recent tenders. For example, a tender for the planned Mexico City-Queretaro high-speed rail line attracted a single bid, and just two oil exploration blocks out of 14 were successfully auctioned in July 2015 - though this was not the round expected to attract the most foreign interest.5

President Peña Nieto’s party maintained its majority during Senate elections in mid-2015, though smaller rivals gained ground on all major parties – potentially complicating the passage of further legislation.6

Mexico is the twelfth largest country in the world by size and the second most populous in Latin America after Brazil. At nearly 121 million people, Mexico is the most populous Spanish-speaking country in the world.1

Though Spanish is the official national language, English is also widely understood by many members of the business community in larger cities, as well as along the northern border regions. A majority of Mexicans consider themselves active members of the Roman Catholic Church, though its influence has been gradually reduced since the separation of church and state in the 1860s.

Mexico is a federal democratic republic, divided into 32 states, including the Federal District (Mexico City). It adopts a federal presidential system of government consisting of an executive, bicameral congress and separate judiciary. The President is the chief executive and is elected for a single six-year term.

State governments are headed by popularly-elected governors, who also serve single six year terms. States have their own legislatures and judicial systems.

In general, Mexican legislation follows the pattern of codified law originally based on the Napoleonic Code, with separate federal and state civil and other codes, in addition to separate laws and decrees covering specific subjects. Corporate law, as well as foreign investment, intellectual property protection and incomes and value-added tax laws, among others, are federally created.2

3. POLITICS AND THE REFORM AGENDADespite its potential and solid fundamentals, Mexico’s economic growth has long been held back by weak competition, underinvestment in a number of sectors, an inflexible labour market and capital access issues.

In 2012, newly-elected President Peña Nieto ushered in the “Pact for Mexico”, a bipartisan national policy agreement that introduced 95 public policy proposals to help Mexico overcome some of these issues.

2. INTRODUCTION TO MEXICO


4. THE ECONOMYThough sitting in the shadow of a superpower, Mexico is an economic powerhouse in its own right. It is the fourteenth biggest economy in the world, with a large and youthful population. It is predicted to become the world’s eighth largest economy by 2050.7

Table 1: Sector contribution to Mexico’s GDP (%)

Sector 2011 2012 2013

Manufacturing 16.45 17.30 17.11

Commerce 14.93 15.09 15.61

Mining 8.92 8.46 7.58

Construction 7.92 7.88 7.24

Transportation, freight and storage 5.92 6.06 6.19

Agriculture, fishing, livestock, forestry 3.24 3.41 3.35

Financial services and insurance 3.11 3.03 3.17

Mass media 2.39 2.24 2.21

Electricity, water and gas services 1.08 1.61 1.60

Other 34.99 34.86 35.41

Total GDP 100.00 100.00 100.00*Dollar figures converted from Mexican Pesos to Australian Dollars on 04/08/015

Source: Study of Public Finances Centre, Chamber of Deputies. Bank of Mexico.

Figure 1: Mexico GDP growth

-6

-4

-2

0

2

4

6

8

10 Peru

Mexico

Colombia

Chile

Brazil

Source: World Bank, ECA

The Mexican economy is fairly broad-based. The largest sectors by contribution to GDP are manufacturing, commerce, construction and mining (see Table 1).

As with most major economies, Mexico’s GDP growth rate plummeted during the Global Financial Crisis (GFC) on an annual percentage basis (see Figure 1).


The country was hit harder than its Latin American neighbours, as growth declined nearly 5 per cent in 2009, potentially owing to Mexico’s larger reliance on international markets for manufacturing exports. Brazil and Chile experienced only slight dips into negative territory, while growth remained positive in Colombia and Peru. These countries are more reliant on commodities exports, which remained buoyant on the back of sustained Chinese demand.

However, growth quickly recovered to pre-crisis levels the following year, as the Calderón administration undertook a unilateral trade liberalisation program beginning in 2009, making Mexico one of the few countries to respond to the crisis in such a pragmatic fashion.8 This lowered tariffs on a wide range of manufactured goods, simplified Mexico’s tariff structure and customs procedures and reduced import costs.9

In 2014, estimated GDP was around USD 1.3 trillion and Mexico’s central bank expects growth of 2.5-3.5 per cent in 2015 and then 2.9-3.9 per cent growth in 2016.10

Mexico employs a liberal foreign investment regime overall and there is a growing trend toward re-privatising state-owned enterprises. Only a handful of strategic sectors are not yet open to private investment.

Mexico’s stock market – the Bolsa Mexicana de Valores – is promising. While not as robust as others in Latin America, this may change now that it has been integrated together with the bourses of Chile, Colombia and Peru, into the Latin American Integrated Market (MILA). MILA is the Pacific Alliance’s largest economic integration initiative to-date and is discussed further in the following section of the report.

Mexico shows discipline in its fiscal and monetary policy, so as to promote an attractive and stable environment for foreign investment. Most Mexican states also offer certain types of investment incentives. The country received a record USD 35.2 billion in FDI in 201311, signalling investors’ confidence in the country and its future prospects. Mexico became only the second country in Latin America, after Chile, to receive an ‘A’ credit rating by Moody’s in 2014.12

Mexico has not been immune to the worldwide commodities slump, with the sharp drop in oil having the most pronounced impact so far since one-third of the federal budget is funded by oil export receipts.13 Though the government hedges against price swings to ensure a fixed income level, this usually does not protect against price declines that are sustained for one year or longer.14 However, oil prices would need to stay low for several years in order to influence major adjustments in the government’s budgeting.15

Productivity is also a concern, especially in Mexico’s large informal sector and among smaller businesses. While large businesses (over 500 workers) have exhibited healthy productivity growth of 5.8 per cent per year since 1999, productivity at smaller Mexican firms (ten workers or less) declined from 28 per cent of that of large firms in 1999 to just 9 per cent in 2009.16 Arresting this slide is a complex long-term issue involving a number of factors, including reforms to education and administrative processes.

Mexico’s informal economy is in part driven by the wealth inequality and poverty that still exists in the country. Nearly half the population live in poverty and the top 1 per cent of society control the majority of Mexico’s wealth.17 Up to 60 per cent of the population do not participate in formal economic activities or pay taxes, according to some estimates.18, 19


5. MEXICO AS A GATEWAYIn response to a survey on current or prospective Mexican engagement conducted by the Export Council of Australia (ECA), three-quarters of respondents indicated they are doing business in Latin America outside of Mexico. A continental hub to centralise operations and act as a gateway to the wider region can therefore be beneficial; and what better gateway exists than Mexico, the most connected country in Latin America.

Mexico can be especially beneficial as a continental gateway for Australian businesses active in Pacific Alliance countries, two of which – Chile and Peru – are in the top three Latin American countries in which survey respondents are doing business (see Figure 2).

Looking forward, Mexico is participating as one of the 12 founding countries in the TPP negotiations. Should it enter into force, the TPP will open new opportunities for Mexican companies in countries with which Mexico does not currently have a trade agreement – such as Australia – and vice versa; the agreement will reduce entry barriers for foreign companies in Mexico.

Distribution

Mexico’s infrastructure and distribution network suffers somewhat from poor infrastructure in places, but current and planned works will improve this.

Transport and distribution costs can be high, with logistics accounting for up to eight to 15 per cent of production costs in Mexico, compared to five to seven per cent in more developed countries.27

Mexico boasts a modern highway system comprised of toll roads connecting the main industrial areas in the Mexico City-Guadalajara-Monterrey triangle. The quality of roads deteriorates outside of this triangle, but the Peña Nieto administration has prioritised infrastructure improvements under the National Infrastructure Plan, so the situation is expected to improve in the medium-to-long term.

Mexico has four large maritime ports along its Gulf coast – Altamira, Tampico, Veracruz and Progreso – and five along its Pacific coast – Ensenada, Guayamas, Lazaro Cardenas, Manzanillo and Puerto Chizpas (see Figure 3). These facilities have the infrastructure in place to facilitate intermodal door-to-door merchandise transportation.28

Mexico’s network of 13 Free Trade Agreements (FTAs) with 45 countries—more than those of the US and China combined—allows it to benefit from both strong domestic demand and preferential access to many of the country’s key export markets. 20 This will expand further if the Trans-Pacific Partnership (TPP) agreement enters into force.

Its network of trade agreements makes it one of the most connected economies in the world, and an excellent gateway to the Americas for foreign companies. Trade statistics reinforce this, with exports of goods and services constituting 32 per cent of Mexico’s GDP, compared to 22 per cent in China, 20 per cent in Australia, 13 per cent in the US and 11.5 per cent in Brazil, according to the World Bank.21

Mexican firms enjoy tariff-free access to the US and Canada through the North America Free Trade Agreement (NAFTA), which entered into force in 1994. Thanks to this agreement, Mexico now exports around USD 1 billion in goods per day to Canada and the US, up tenfold from when NAFTA was implemented.22 In 2013, Mexico’s exports to the US were valued at USD 244 billion. 23

The US is Mexico’s largest trading partner by far, typically receiving roughly 70-85 per cent of Mexico’s exports and sourcing around the same percentage of Mexico’s imports. Total US imports increased 603 per cent between 1993 and 2003. 24

While countries like Brazil may have a larger economic profile internationally, Mexico’s trade profile is uniquely globalised compared to its Latin American neighbours. In Brazil’s case, just 17 per cent of its total exports were destined to its largest trading partner, China, in 2013, totalling just USD 41.3 million.25

Mexican firms also enjoy tariff-free access on virtually all traded goods with Chile, Colombia and Peru—and potentially soon Panama and Costa Rica—as a founding member of the Pacific Alliance.

Mexico is also party to several multilateral and bilateral trade agreements with Central America, Chile, Colombia, the EU, the European Free Trade Association, Israel and Japan. Economic cooperation agreements are in place with Argentina, Brazil and Paraguay under the MERCOSUR framework.26


Upgrades are slated for these port facilities, including a doubling of capacity at the Port of Veracruz and proposed intermodal corridors to connect Gulf and Pacific ports, as well as improve their connectivity with NAFTA trade corridors.29

The mining sector in particular stands to benefit from the development of the Port of Mazatlan,

Figure 2: ECA survey results: doing business in Latin AmericaAre you currently doing business in any Latin American countries (excluding Mexico)? Multiple answers permitted.

0 5 10 15 20 25 30

Cuba

French GuianaHonduras

Paraguay

Suriname

El Salvador

Guatemala

Guyana

Nicaragua

VenezuelaBolivia

Costa RicaPanamaEcuador

UruguayColombiaArgentina

PeruChileBrazil

Figure 3: Mexico’s ports

Ensenada

Puerto Vallarta

Lázaro CárdenasManzanillo

Puerto Chiapas

Progreso

Dos Bocas

Salina Cruz

Veracruz

Tuxpan

TampicoAltamiraMazatlán

Topolobampo

Guaymas

Quintana RooS.P. Veracruzano

Baja California Sur

Tabasco

Campeche

Tamaulipas

State administered ports

Federally administered ports

Source: Mexico Transport Secretariat

which will improve connectivity between nearby mines and port facilities.

The majority of products are shipped by truck (56 per cent), followed by sea (32 per cent), rail (12.5 per cent) and air (0.1 per cent).30


Mexico as a gateway to North America

Goods that meet NAFTA’s rules of origin requirements may enter the US and Canada from Mexico tariff-free. Products qualifying as North American must use the NAFTA Certificate of Origin to receive preferential treatment under the agreement.

Mexico classifies as a Category 1 country under US export control regulations, meaning it is grouped amongst the least restrictive countries and is therefore eligible to receive US high technology products.31 This is essential for companies in Mexico that require US high-tech imports in their production or operation processes.

Specific import requirements do, however, still apply in a number of sectors and can be very specific. A detailed review, potentially with professional assistance, is needed to determine the exact nature of import processes in Canada and the US from Mexico.

Mexico as a gateway to South America

Mexico is a founding member of the Pacific Alliance, a trade bloc that also includes Colombia, Chile and Peru, and soon Costa Rica and potentially Panama (see Figure 4). It is aimed at boosting the growth, competitiveness and development of member economies with an ultimate goal of free movement of goods, services, capital and people between member states. It is also aimed at boosting trade between the Alliance and the Asia-Pacific region.

All members are some of the freest trading nations in Latin America, having embraced unilateral trade liberalisation initiatives or entered into FTAs beginning in the 1980s and 1990s.

The Alliance currently constitutes a market of around 214 million people, with an average GDP per capita of USD 16,500 (in PPP terms).32 Together, the four member countries account for 37 per cent of Latin America’s population, 37 per cent of GDP, 47 per cent of exports and 46 per cent of imports.33

Mexico

Chile

Peru

Colombia

United States

Canada

China

United Kingdom

Costa RicaPanama

Uruguay

Australia

New Zealand

Japan

South Korea

Singapore

India

El SalvadorGuatemala

Honduras

Dominican Republic

Ecuador

Israel

Italy

Morocco

Portugal

Paraguay

TurkeySpain

France

Germany

Switzerland

Netherlands

Finland

Figure 4: Pacific Alliance members and observers

Source: US Congressional Research Service

5. MEXICO AS A GATEWAY


Australia is one of 30 observer states to the Alliance. Being an observer helps understand the issues being negotiated and facilitates participation in activities such as educational seminars and trade forums. Members and observers are detailed in Figure 4.

Mexico is the economic giant of the group, accounting for 60 per cent of the Alliance’s combined GDP.34

All members have FTAs in place between them and in February 2014, tariffs were eliminated on 92 per cent of goods traded between the four countries.

In terms of labour mobility, remaining visa requirements between member countries have been largely relaxed since the Alliance’s formal launch. For example, in November 2012, Mexico eliminated visa requirements for nationals of Peru and Colombia for stays up to 180 days (Chileans were already allowed visa-free travel to Mexico). This includes business people, provided they do not carry out paid activities in the country of destination.35 Further liberalisation is under negotiation.

In terms of financial integration, negotiations are still taking place on a number of initiatives to allow free movement of services and capital between member states. The goal is to position the Alliance as an attractive destination for international investment and international services, as well as increased investment flows and service provision amongst member states.36

The most tangible outcome so far has been the integration of the stock exchanges of Chile, Colombia and Peru into the Latin American Integrated Market (MILA) in 2011. Mexico joined in 2014. MILA aims to boost liquidity across the region and create more business for the financial services sector across the member states, having created a joint market valued at over USD 1 trillion.37

As of December 2014, MILA included 136 Mexican corporations and 780 corporations in total, making it the largest market by listed companies and by market size in Latin America.38

Member Countries:

Mexico, Colombia, Peru, Chile

Observer Countries:

Australia, Canada, China, Costa Rica, Dominican Republic, Ecuador, El Salvador, Finland, France, Germany, Guatemala, Honduras, India, Israel, Italy, Japan, Morocco, Netherlands, New Zealand, Panama, Paraguay, Portugal, South Korea, Singapore, Spain, Switzerland, Turkey, UK, US and Uruguay

Candidate Countries:

Costa Rica, PanamaMexico

Chile

Peru

Colombia

United States

Canada

China

United Kingdom

Costa RicaPanama

Uruguay

Australia

New Zealand

Japan

South Korea

Singapore

India

El SalvadorGuatemala

Honduras

Dominican Republic

Ecuador

Israel

Italy

Morocco

Portugal

Paraguay

TurkeySpain

France

Germany

Switzerland

Netherlands

Finland


Mexico as a gateway for Australia

Both NAFTA and the Pacific Alliance offer readily accessible tariff benefits to Australian companies in Mexico.

NAFTA is long-standing, and the existing business ties, experience and infrastructure are in place to support Australian firms establishing themselves in Mexico to serve markets to the north.

The Pacific Alliance is a much more recent initiative than NAFTA, though it has great long term potential considering the Alliance’s mandate to extend liberalisation to the free movement of labour and capital, in addition to goods and services.

Once fully implemented, this will allow a more efficient allocation of people and financial resources across the region to suit individual business needs. Australian companies may, for example, be able to allocate production and management personnel anywhere across the Alliance member countries.

Numerous challenges await such an ambitious initiative, however, including basic issues such as the low level of trade that is currently conducted between Alliance member states. The development of regional supply chains is still nascent, and would be one of the major attractions for foreign investors.

Infrastructure connectivity between member states is also poor – though the impetus provided by integration efforts will no doubt spur demand for international investment and expertise, and thus could create long-term opportunities for Australian and other foreign firms in the infrastructure and logistics fields.

Finally, it is useful to keep in mind that three Pacific Alliance members – Chile, Mexico and Peru – are also party to the TPP Agreement. Successful entry into force of the TPP could boost complementary opportunities between Alliance members and this newfound network of agreements with TPP members, such as Australia.

In the ECA’s survey, 73 per cent of 26 respondents think the TPP will benefit their business (see Figure 5). Though this is a small sample size, indicating the positive impact the TPP is likely to have on Australia-Mexico commercial opportunity.

6. MEXICO AND THE TPPMexico is expected to be the biggest winner among the TPP’s Latin American participants, due to its manufacturing prowess and the integrated nature of its economy with the US and Canada. The Agreement’s provisions go far beyond the existing trade agreements Mexico has in place.

The TPP also paves the way for greater Mexico-Australia trade, as well as Mexico-Asia trade in general, as Japan is currently the only Asian nation with which Mexico has a trade agreement.

The exclusion – for the moment – of China provides extra confidence that Mexico can leverage its manufacturing prowess and become an even stronger export platform from North America to Asia as Mexican goods become more cost-effective through preferential access to the TPP’s Asian markets.

Measures relating to Mexico-Australia trade are outlined in the box on the following page.

Figure 5: ECA survey results: TPP impactIf the Trans-Pacific Partnership (TPP) Agreement enters into force, do you think it will benefit your business?

Yes73%

No27%

5. MEXICO AS A GATEWAY


TPP and the Pacific Alliance

Colombia is the only Pacific Alliance member not party to the TPP, though there does not appear to be serious impediments to its eventually accession and it has expressed an interest in joining. It is also the only TPP member that is not part of APEC, though it has applied for membership.

Colombia joining the bloc would be “critical” to regional supply chain development in the Pacific Alliance, the Council of the Americas notes.39A

The deepening of these regional supply chains, a reduction in remaining tariffs and greater access to potentially lucrative Pacific markets like Japan and Australia are likely to be the TPPs biggest impact on its Latin American participants.39B

TPP implementation timeline

The full text of the agreement was released on 5 November, 2015, and was signed on 4 February 2016 in Auckland, New Zealand. When a country has completed its domestic treaty-making process, it will notify other TPP countries that it has done all that is required for the Agreement to enter into force. The TPP will enter into force 60 days after all original signatories have notified completion of their domestic legal procedures. If this has not occurred within two years of signature, the TPP will enter into force 60 days after the expiry of that two-year period if at least six original signatories accounting for 85% of the combined GDP of the original signatories have ratified the agreement.

BEEF

Elimination of tariffs on beef and beef products into Mexico within 10 years

CEREALS

Elimination of tariffs on wheat and barley into Mexico within 10 years

DAIRY

New preferential access into Mexico

EDUCATION

Australian universities and vocational education providers benefit from guaranteed market access to Mexico

GOVERNMENT PROCUREMENT

New opportunities for Australian businesses to bid for government procurement services contracts in accounting, auditing and taxation services; management consulting services; computer and related services, including maintenance of office machinery; architectural engineering and other technical services; environmental protection services; education services.

TPP goods and services outcomes for Australia-Mexico trade

HEALTH SERVICES

Greater certainty regarding access and operating conditions for Australian providers of private health and allied services

HOSPITALITY AND TOURISM SERVICES

Guaranteed access for Australian suppliers of travel agency and tour operator services

MANUFACTURING

Elimination of tariffs on pharmaceutical, machinery, mechanical and electrical appliances, and automotive parts to Mexico within 10 years

SEAFOOD

Elimination of all tariffs into Mexico within 15 years

TEMPORARY ENTRY OF BUSINESS PEOPLE

Preferential temporary entry arrangements for Australian business people and their spouses into Mexico, including waiving of work permits and provision of work rights for spouses

WINE

Elimination of tariffs into Mexico in 3-to-10 years


Figure 6: ECA survey results: selling to Mexico and reform awarenessAre you aware of the recent economic reforms taking place in Mexico and the opportunities they might represent for your business?

Yes44%

No35%

Unsure21%

Mexico is Australia’s largest merchandise trading partner in Latin America, with total two-way trade worth AUD 2.8 billion in 2014.39C Coal dominates exports to Mexico and imports are fairly evenly spread between telecom equipment, alcoholic beverages, medical instruments and passenger vehicles.40

While small in comparison to Australia’s other trading partners, the commercial relationship has plenty of potential to blossom – especially with a barrier-reducing TPP on the horizon and increased interest in Mexico shown by Australian firms such as BHP Billiton, WorleyParsons, Amcor and others.

Opportunities for further engagement exist in the energy, agriculture and agri-tech, telecommunications, manufacturing and mining sectors, as outlined in this report.

A platform for engagement already exists in the number of bilateral agreements in place between Australia and Mexico. These include MOUs on agriculture, mining, education and training, energy and political consultations, as well as a 2007 investment promotion agreement, and a 2004 double taxation agreement.

When respondents to the ECA’s survey were asked if they are currently doing business with Mexico, 60 per cent said yes. However, only 44 per cent of respondents, doing business in Mexico or not, were aware of the economic reforms taking place and the opportunities this provided (see Figure 6).

Taking advantage of current or future opportunity in Mexico relies on overcoming both tariff and non-tariff barriers to trade. The ECA’s survey results show that many non-tariff barriers are actually more important than tariff barriers to Australian businesses, led by obtaining permits or import licenses (over 30 per cent of respondents).

7. THE BILATERAL RELATIONSHIPOver 70 per cent of respondents said differences in making purchasing decisions, language barriers and obtaining information on local regulations were important barriers (see Figure 7).

The vast majority of survey respondents were optimistic about future market opportunities in Mexico, primarily because of strong growth prospects in Mexico and the wider region (see Figure 8). Over 40 per cent of respondents were also optimistic because of the potential of trade agreements such as the TPP and Pacific Alliance.


0% 20% 40% 60% 80% 100%

Not importantModerately importantVery important

Meeting local productspecifications/ingredients

controls

Acceptance of Australiantesting methods and standards

Transferring paymentsor profits o�shore

Impact of local taxation rates

The requirement to partnerwith a local firm

Tari� barriers

Obtaining informationon local regulation

Language barriers

Di�erences innegotiation strategies

Di�erences in makingpurchasing decisions

Regulations thatfavour local firms

Cultural di�erences in buildinglong-term relationships

Obtaining permits orimport licences

33% 38% 29%

29% 37% 33%

29% 17% 54%

25% 50% 25%

26% 43% 30%

21% 50% 29%

17% 57% 26%

17% 33% 50%

13% 43% 43%

13% 39% 48%

9% 22% 70%

4% 43% 52%

35% 65%

Figure 7: ECA survey results: barriers to doing business in MexicoWhat are the main barriers you face when doing business in Mexico?


Figure 8: ECA survey results: future optimismOverall, are you optimistic about future market opportunities in Mexico?

Yes86%

No14%

If yes, why?

0

10%

20%

30%

40%

50%

60%

70%

80%

Other Changing consumer

preferences

The potential expansion of free trade networks

through TPP and/or the Pacific Alliance

Economic growth in the region

Strong growth prospects

7. THE BILATERAL RELATIONSHIP


Prior to opening to foreign bids, Pemex was allowed to reserve rights to certain geographic areas in a so-called “Round 0”. The areas it did not reserve for itself would be open to new contractual arrangement between Pemex and foreign firms, including:

• Services contracts, paid in cash;

• Shared use contracts, where profits are shared with the investor;

• Shared production contracts, where companies are paid with a part of production; and

• Exploration and production licenses.45

In August 2014, Pemex was awarded 83 per cent of Mexico’s “proven and probable” reserves and 21 per cent of the country’s prospective reserves.46 Most of Mexico’s unproven reserves are in deep water, from which Pemex lacks the expertise to extract.

Regulators will be given renewed independence and responsibilities under the reforms. Relevant regulators include:

• Energy Regulatory Commission (CRE): Regulates and manages contracts and concessions in all midstream and downstream activities

• National Hydrocarbons Commission (CNH): Technical body responsible for administering exploration and production contracts, together with Energy Secretariat (Sener)47

• National Natural Gas Control Centre: Decentralised body responsible for the operation of Mexico’s pipelines and storage systems

• National Energy Control Centre: Decentralised body responsible for operational control of the Mexican electricity system

• National Agency of Industrial Security and Environmental Protection in the Hydrocarbons Sector: Administrative body linked to the Environment Secretariat48

The reforms do not include any privatisations and Pemex, though no longer enjoying a monopoly position, will still be the dominant player in the oil sector.

ENERGYMexico’s energy reform initiatives cover the oil and gas and electricity sectors.

What reform means

• Oil and gas production open to foreign competition, breaking 76-year state-monopoly by national oil company Petroleos Mexicanos (Pemex)

• Foreign oil and gas firms can enter shared production contracts and upstream licenses

• Goal: increase oil production by 40 per cent to 3.4m barrels per day (4 per cent of global production)

• Electricity market open to foreign competition in electricity production and trading – transmission and distribution still state-run

Oil and gas

Mexico is the world’s eighth largest producer of crude oil, just behind Iraq and Iran.41 Oil not only provides export earnings, but taxes on the energy sector also contribute to a substantial proportion of government revenue.42

The sector has been closed to foreign investment for nearly 80 years, leaving a state monopoly through national oil company Pemex to dominate the space. Inefficiency, accusations of corruption, insufficient capital and a lack of technical expertise to explore offshore deposits and onshore gas fields that require hydraulic fracturing to exploit are some of the factors that have driven the President to reform the sector.

Ending Pemex’s monopoly is expected to add 1.5 per cent to GDP from 2018, while USD 50 billion in investment is expected from foreign firms in the exploration blocks they win.43

Mexico’s energy reform bill was passed in December 2014, opening the sector to private participation. It also converted Pemex into a “Public Productive Company”, making the firm independent and restructuring it to meet international standards. Pemex reportedly welcomes international competitors, considering it has its own plate full with internal reform and reversing declining output.44

8. SECTOR ANALYSIS


Figure 9: Round Zero Extraction and Exploration Areas

Source: Ministry of Energy, Mexico

Figure 10: Round One Extraction and Exploration Areas

Source: Ministry of Energy, Mexico

8. SECTOR ANALYSIS


The sector has plenty of growth potential, though significant foreign investment will be needed to exploit recently discovered deep water offshore fields. Private sector participation is also expected to increase production levels and investment in both up-stream and down-stream sectors which will generate employment and economic growth.49

These include a total of 670 exploration areas and 244 fields already in production, which will be auctioned off in four rounds between 2015 and 2019.50 Bidding on the first deep water blocks is planned for early 2016.

The first auction round was held in July 2015 and just two of the 14 exploration blocks were successfully auctioned. Some of the largest energy firms declined to submit bids, including Exxon Mobil, Chevron and Total.51 The low price of oil – hovering around USD 50 during the auction – was partially to blame, as was restrictive bidding criteria and the fact that more lucrative deep water blocks were not yet included.52

Expectations prior to bidding were lowered, with the government stating this round would be considered a success if 30-50 per cent of the blocks were auctioned.53 Anticipating a lack of interest in the current environment, auctions for some of the more lucrative blocks were delayed until oil prices recover.54 Extraction costs at many of the blocks range from USD40-45 per barrel55, lowering the margin for profit considerably when oil is trading only slightly above this.

Of the two blocks successfully auctioned, 56 per cent from one and 69 per cent of the other blocks’ operating profits will go the government.57 This demonstrates the potential windfall that awaits further auctions.

The second round of bids for shallow-water blocks in the Gulf of Mexico was more successful with three of five blocks sold, including to Italian gas giant ENI.

Foreign interest is expected to increase once the deep water blocks become available, especially those adjacent to American production fields, US pipeline networks and refineries.56

What happens now

Private investors can participate in the Mexican oil and gas sector in three ways (note: concessions are explicitly prohibited under the reforms58):

1. Through the migration of existing contracts for exploration, drilling, production and publicly-financed works to new contractual schemes set out in the new legislation – these areas will not be tendered as they already have a contractor and were tendered in the past

2. Through strategic partnerships with Pemex for the development of fields awarded in Round 0, especially in ten projects identified by Pemex where private sector involvement is necessary for exploration and exploitation, divided into four packages:

i. Mature fields, containing 248m barrels and requiring a minimum investment of USD 1.7bn over five years

ii. Marine oil fields with heavy crude, containing reserves of 747m barrels and requiring a minimum investment of USD 6.2bn over ten years

iii. Deep water gas fields, containing reserves of 212m barrels and requiring a minimum investment of USD 6.8bn over ten years

iv. Recently discovered deep water fields with an estimated potential of 500m barrels and requiring a minimum investment of USD 11bn over eight years

3. Through the oil auction bidding process, where areas not awarded to Pemex will be opened to the private sector, the first round of which has recently concluded.

Source: Herbert Smith Freehills

Many major Mexican corporations are investing heavily in the energy markets. Groupo Bal, for example, announced it is partnering with US based power company AES Corp and together plan to invest up to US 2.5 billion over the next five years, mostly in Mexico’s newly opened power sector.59 Group Bal also recently announced the creation of Mexico’s first private oil company, Petro Bal.60


Mark Trueman - Managing Director of Latin America

WorleyParsons delivers projects, provides expertise in engineering, procurement and construction and offers a wide range of consulting and advisory services. It covers the full lifecycle, from creating new assets to sustaining and enhancing operating assets, in the hydrocarbons, mineral, metals, chemicals and infrastructure sectors.

WORLEYPARSONS

8. SECTOR ANALYSIS

How is WorleyParsons approaching the Mexican market?

WorleyParsons has been doing work in Mexico for over 20 years but we only recently decided to invest in establishing an office and putting feet permanently on the ground.

Latin America is the youngest region for us; until now we have been focussing on establishing our presence in South America, namely Chile, Brazil, Peru, Colombia, and Ecuador. Mexico is a large, complex market and for that reason we’ve been taking a more cautious approach but things are now starting to ramp up; we are in the process of recruiting a permanent Country Manager and securing office space to lead the growth of a full local operation.

After consulting various stakeholders we have come to the conclusion that the best strategy for us is to establish 100 per cent in our own right and remain independent—although we are not ruling out acquisitions or some joint ventures in the future.

Why is Mexico an important market for WorleyParsons?

After completing a strategic review of the region 12 months ago we felt it was the right time to take our next move in the region and Mexico was the obvious choice.

For WorleyParsons the bulk of our work is providing services in to oil and gas industry, both upstream and downstream. Mexico is by far the largest oil producing country where we don’t have a significant presence. Even without the energy reforms, we would probably be establishing ourselves here at this time.

How can WorleyParsons take advantage of the energy reforms?

The energy reforms mean that Pemex, a company that has enjoyed monopoly power for many years, will soon have to compete with the private sector. They will have to improve efficiency and drive the outcomes of their projects harder. WorleyParsons is able to add value through its ability to handle the very complex and technical issues. The energy reforms also pave the way for the International Oil Companies (IOCs), our largest customers, to enter the Mexican market.


WORLEYPARSONS CONTINUED

What are the key opportunities of interest for WorleyParsons in Mexico?

We are interested in the extraction (upstream) and refining (downstream) of hydrocarbons markets as well as mining, power generation and distribution, and infrastructure. We are currently working on a couple of sulphur plants for Pemex, an offshore oil processing platform, some environmental work and a pipeline. While our focus is hydrocarbons we have a strong power business and are looking to pursue opportunities in power generation and distribution in Mexico.

There is a massive program of pipelines in Mexico which will bring gas from the US down to Mexico and move it around the country. There are already a substantial number of pipelines under construction and being planned. In North America we engineered and managed the construction of more than half of the pipelines so we are very well established in that space.

On the infrastructure side we are doing some port work but there are other opportunities as well in roads, rail and terminals.

Do you have any advice for businesses looking to do business in Mexico?

We have learnt through experience that doing business in Latin America is generally harder than it first appears. In addition to this we are operating in a business environment where our clients are spending less money and commodity prices are low. Despite this, we remain optimistic about the market and its future growth prospects.

• As with anywhere in Latin America – you have to remember that what people say and what they then actually do are not necessarily the same. There can be a lot of changes during the tendering process for example.

• Things are a lot more informal although they might be dressed up as being more formal.

• The importance of building strong relationships cannot be understated.

• You need to be mindful that corruption exists in Mexico, as in many other parts of the world.

• In terms of security, Mexico is not as bad as people think—in general it is quite safe. There are parts of the country where things are very unstable and the government has little control over the situation and it goes without saying that these areas should be avoided. There is a cost to managing the risks but we believe it is manageable.


Mexico will increasingly rely on natural gas in the coming years and is already implementing a strategy to promote Mexican imports of natural gas from the US. The Federal Electricity Commission (CFE) recently announced it would tender a new round of 24 energy infrastructure projects totaling USD 10 billion, including a USD 3 billion underwater pipeline, to bring US natural gas from Texas to Tuxpan, Veracruz. This is part of the government’s plan to increase the nation’s pipeline infrastructure by 75 per cent by 2018.61

There is some government support for expanding Mexico’s nuclear energy sector to reduce the reliance on hydrocarbons but this has been overshadowed by the low gas prices. There are currently two nuclear reactors generating almost four per cent of Mexico’s electricity.62

Electricity

Mexico’s electricity market is also open to foreign competition under new legislation. Electricity generation and distribution is currently dominated by the state-owned Federal Electricity Commission (CFE). Like Pemex, the CFE has been made independent, converted into a Public Productive Company and restructured to meet international standards under the reforms. It will no longer be the only firm commercializing electric power in Mexico, thereby introducing competition to win end consumers. The CFE still controls transmission and distribution.

Reforms are aimed at strengthening competition in power generation, accelerating the expansion of transmission networks, improving the quality of supply and offering more competitive prices to end consumers.63

Some consider electricity reform the most important component of Mexico’s energy initiatives, considering it likely means cheaper electricity rates for consumers as well as manufacturers.64

Electricity prices in Mexico are significantly higher relative to other countries, and bringing these down will be crucial to bolstering overall economic growth. In 2012, average electricity rates were 73 per cent higher in Mexico than in the US.

Private companies will now be allowed to sell energy and add capacity to Mexico’s electricity grid. They already generate around one-third of Mexico’s electricity but must sell it to the CFE.65

8. SECTOR ANALYSIS

Now, private generators can bid for access to Mexico’s electricity grid and compete for clients. The National Energy Control Centre (CENACE) became independent of CFE under the reforms and will ensure non-discriminatory open access to the Mexican grid for competitors.66

As with oil and gas, no state-owned electricity assets will be privatised as part of the reforms.

The government recently revised down its clean energy target from 8.2 per cent by 2018, as outlined in its draft policy, to five per cent by 2018. The long-term goal to source 35 per cent of Mexico’s energy from clean sources by 2024 remains, according to the national development plan issued by Mexico’s Energy Secretary.67 Hydropower and wind power are two of the most financially attractive sources of renewable energy in Mexico at the moment.

Energy reform: Opportunities for Australia

The energy sector is a beachhead for Australian trade and investment in Mexico, and opens investment opportunities throughout the sector’s value chains.

Australian firms BHP Billiton and WorleyParsons have both entered the Mexican market and are eyeing both onshore and offshore opportunities.68 BHP was one of seven international majors authorised to pay for access to data and information about 14 exploratory areas in the Gulf of Mexico prior to their auction.69 Some larger Australian companies, including BHP, have a stronger interest in the deep water rounds.

BHP petroleum and potash president, Tim Cutt, called Mexico’s energy reforms unprecedented and said the firm is “excited” to be part of the process.70

More widely in Latin America, Woodside holds exploration permits in Peru and Karoon Energy undertakes exploration activities in Peru and Brazil.71

Significant investments by these top-tier resource and engineering firms may pique the interest of suppliers across the value chain in Australia.

Australia is recognised as having the capacity and knowledge to support long-term investment and manage critical safety and environmental concerns – all of which will help build the country’s profile in the Mexican market.


Australians also have a strong track record when it comes to engagement with local communities and corporate social responsibility, which can be leveraged.

There are opportunities for Australian universities to partner with Mexican institutions to collaborate on research and update existing programs to help build capacity and human capability to meet the growing demand of this sector.

Pemex meanwhile acknowledges the need for foreign investment in the sector, and is seeking partners for pipelines, storage terminals and industrial facilities such as power plants or fertilizer production sites, according to CEO, Emilio Lozoya.72

The significant drop in the price of oil since the beginning of the reform program has led to concern over foreign interest in the sector, though Mr Lozoya does not believe this will have a major impact on international investors considering, Mexico’s low production costs.73

On the electricity side, Australian firms with electricity generation knowledge and expertise could see opportunity in power generation, transmission

and distribution through contracts with the CFE, in the context of a more competitive electric power sector in Mexico under these reforms.74

Here is considerable additional opportunity for Australian companies in greenfield generation projects. Macquarie have a hydro and wind farm, while Whitehelm Capital (representing Prime Super) have significant ownership of last mile gas provider, Igasamex.

PPP projects may be implemented by the CFE to develop new transmission lines and simplify the interconnection of renewable energy projects, as well as potentially reducing network losses.75

Increasing the use of combined-cycle equipment, and modernising outdated electricity plants by installing clean and efficient technologies, also presents opportunities for Australian investors.76

Domestic capacity is likely to fall short of demand, increasing opportunity for foreign operators and investors to help bridge this gap. Electricity demand is projected to grow 75 per cent by 2026, though CFE only plans to increase transmission capacity by around 17 per cent during this period.77

Figure 11: Investment opportunities throughout the energy sector’s value chains

• Gradual liberalisation of retail sale of gasoline, diesel and LNG

• Refineries and petrochemical centres

Downstream

• National goal of clean power generation of 35% by 2024

• Secondary market of Clean Energy Certificates

Clean energies

• Pipelines and storage terminals

• Maintenance and inspection

Midstream

• Access to capital and state of the art technology

• Exploration and development of frontier fields and unconventional resources

• Revert Mexico’s oil production decline

• Multiplication of potential clients for service providers

Upstream

• New wholesale electricity market

• Competitive prices

• Independent dispatch operator

Power sector

• 10,000km of additional pipelines

• Open access

• Independent dispatch operator

Natural gas


8. SECTOR ANALYSIS

MACQUARIE MEXICO - INFRASTRUCTURE AND REAL ASSETS

Jonathan Walbridge - CEO

Macquarie Infrastructure and Real Assets (MIRA) is the world’s largest infrastructure asset manager with growing portfolios in real estate, agriculture and energy. It has been investing in and managing infrastructure for 20 years.

Do you see real opportunity for Macquarie as a result of the recent reforms?

I think there is enormous opportunity. I believe there is broad recognition that private sector solutions will help provide Mexico with access to the technical expertise they need, as well as an injection of capital.

How is Macquarie involved in the first Public-Private Partnership University in Mexico?

The Universidad Politécnica de San Luis Potosí is a public university founded in 2011 and is the first Public-Private Partnership (PPP) project in the public higher education system in Mexico. It is held up as a very good example of PPPs and their ability to bring a private sector solution to education.

Macquarie brought 100 per cent of the university facilities post-construction from ACCIONA who continue to provide operational and maintenance services. The project has been highly successful and I understand that through its National Infrastructure Plan the Mexican Government is looking to replicate the model.

What is the security situation like in Mexico?

The headlines you read tend to create a distorted perception of reality. The incidents tend to be localised within certain states, within cities and even within areas of certain cities. Both our real estate business and our towers businesses have a presence in every state. To-date we have not seen any of our business operations in any way materially interrupted or damaged due to security concerns, but I think you have to choose where you operate carefully.

What sort of footprint does Macquarie have in Mexico?

Macquarie has been operating in Mexico for six years and has a team of 40 professional staff on the ground in Mexico City. We are the largest manager of real assets in Mexico, with roughly USD 2 billion of equity under management. This includes a highway, a PPP University, a mini hydro project under construction, and a windfarm under development. Macquarie is also the third largest independent telecommunications tower operator in Mexico. Supplementing this we have a portfolio of industrial and retail real estate and are the second largest industrial owner of real estate in the country. In the future, we intend to increase the scope of our operations across infrastructure and real estate.

What is your take on the energy reforms taking place in Mexico?

If you look at the energy sector around the world over the last 30 years, Mexico’s energy reform is the most transformational in terms of size and scope. Mexico sits in the top ten in the world in terms of oil and gas reserves and up until recently these sectors were effectively closed to the private sector.

The reforms are aimed at reversing the decline in the extraction of natural resources, namely oil and gas, and lowering the cost of power. I think structurally the reforms will be effective as they are very well designed. In terms of increasing the extraction of resources, we are likely to see this goal realised in the next three to five years, however, lowering the cost of power may take more time.


AGRICULTURE AND AGRI-TECHNOLOGYAgriculture is not included in Mexico’s reform program but is nevertheless an area of opportunity for Australian firms.

Direct foreign investment in Mexico’s agriculture, cattle raising, forestry and fishing sectors has been very limited because of former constitutional and other restrictions.

Mexico’s key agricultural exports are tomatoes, broccoli, onions, mango, peppers, avocados, and other vegetables.78 The country is largely self-sufficient in food in a normal crop year, with irrigation increasing the amount of cultivated land, though corn and wheat are notable exceptions where imports are needed to bridge domestic production shortfalls.

Private corporations have been able to own farms, grazing and timber land since ownership legislation was liberalised in the early 1990s. Foreign investment in such corporations is allowed, but is capped at 49 per cent.79

Agriculture: Opportunities for Australia

Improving productivity and standards of living in many agricultural areas is a challenge for Mexico as it lacks the equipment and know-how.80 This presents opportunity for Australian agri-business and agri-tech firms.

One of the largest unsatisfied markets in Mexico is for agricultural equipment.81

Both Mexico and Australia face similar challenges in agricultural production, given our similar climates, and both countries aim to improve production in the space. Mexico is thus keen to strengthen ties with Australia in agriculture, especially in sub-tropical and tropical climates.82

Likewise, Australia is keen to enhance its agricultural relationship with Mexico, especially in niche sectors and in preparation for the entry into force of the TPP.83

Perth headquartered company Austar, is successfully selling its Plant Growth Regulator products throughout Mexico and in a number of other countries in Latin America. The products are helping producers of a range of agricultural goods, including mangoes, avocados and tomatoes,

improve productivity and yields.

In August 2015, the Australian Government negotiated new health protocols with Mexico, as well as Chile and Colombia, to allow Australian companies to export a wider range of animal genetic material to these countries. New market access has been secured for bovine semen to Mexico, and the Australian government is continuing its negotiations with the Mexican government to secure greater access for other ruminant genetics. This is a growing market and there is increasing demand for Australian ruminant genetics in Mexico and in Latin America more generally. Australian producers have identified Latin American markets as high priority, so it is expected that exports will continue to increase to Mexico and across the region.84

There is potential for research and commercial collaboration in a number of areas, including:

• Tropical livestock health and welfare

• High-value horticultural products

• Nanotechnology vaccines

• Biomedical production from sugar cane

• Plant protection

This would build on Australia’s existing and long-standing research commitments in wheat with Mexico, which can be also be extended to other crops such as avocados, mangoes, macadamias, and sugar cane, and areas such as beef production.85

In the livestock sector, research and technology exchange is the most likely area of collaboration, as both countries seek to increase productivity while serving geographically closer markets.86

Austrade notes that bodies such as Meat & Livestock Australia and the Sheepmeat Council of Australia have a strong interest in Mexico, evidenced by technical collaboration agreements signed with their Mexican counterparts.87

An example is the trilateral MoU on sheepmeat cooperation signed by the Sheepmeat Council of Australia, Beef+Lamb New Zealand and the National Mexican Sheep Producers’ Organisation. The agreement covers cooperation in research and development in animal production, information sharing on industry systems, marketing and promotion experiences in building demand, and information sharing on global sheepmeat market


Maria Elena – Business Development Director

Rubicon Water provides advanced technology solutions to improve the management of water in open canal distribution systems

RUBICON WATER

8. SECTOR ANALYSIS

A self-determining entity will be created to regulate and oversee activities relating to industrial safety and environmental protection in the hydrocarbon sector. We hope that this leads to more clean technologies, such as ours, being applied to future projects.

What are some of the challenges you have faced doing business in Mexico and how have you overcome them?

Language: While it is expected that most Australian’s won’t speak Spanish, showing a willingness to try (even a few words) goes a long way. Many senior level managers and government officials will understand and speak English although they might not feel comfortable speaking it openly with native English speakers for fear of making a mistake. It is very worthwhile having a Spanish speaker with you during business meetings in Mexico as they can help ensure there are no misunderstandings.

Resistance to change: Rubicon has encountered some initial resistance because customers or end users struggle to accept that our technology is able to manage the manual work traditionally required. This is particularly true when the end users are agricultural producers that resist the concept of doing more with less water and having their water use measured. However, it’s a problem we encounter all over the world. We have overcome this challenge through persistence and encouraging people to see the systems working first hand.

Industry: Environmental/manufacturing/software

Years exporting: 11

Years exporting to Mexico: 4 years

How does Rubicon service the Mexican market?

To distribute our solutions in Mexico we have a partner called Nortech Water Specialities. They carry out our sales, project delivery and after sales support functions. Nortech have a great reputation and client base, which is really important in a fragmented market like Mexico. We also have a Rubicon employee based in Mexico City. This helps us support our partner and stay close to the customer. We also have set up a dedicated international projects office based in our Melbourne head office. The office is there to support Nortech in delivering projects, along with our other international operations. It means that we can be really responsive and quickly find solutions to any issues. We also regularly send out technicians from Australia to assist Nortech with project implementation. It’s a great opportunity to pass on knowledge that our technicians have built up over many years.

What are your views on the reforms taking place in Mexico? Do you think they present a real opportunity for Rubicon Water?

In general terms I think that the reforms that Mexico is implementing are very important. The energy reform might present opportunities for Rubicon because it promotes sustainability and environmental protection, by establishing obligations for participants in the electricity industry to generate clean energy and reduce polluting emissions.


RUBICON WATER CONTINUED

Customs clearance: Of all the countries that we export to, Mexico is the hardest to get our products into. We use a freight forwarder/customers broker called Deugro. They are great, but the amount of paperwork and administration required before and after the merchandise arrives at port is arduous. And every port has different requirements. Our customers are generally exempt from paying the 16 per cent VAT, however, we have to go through quite a lot of bureaucracy to establish this for each customer.

How do you manage the security risks of doing business in Mexico?

We take our employees’ safety very seriously; we try to avoid certain areas where we know there are security risks. When we do have to be in certain risky areas we keep a low profile. We are in the process of commissioning a consultant to conduct a company-wide travel security management review, which is to be followed by the development and implementation of a travel security management program. In terms of our projects, fortunately we have not received any reports of vandalism. Our partner has done a very good job of modifying the presentation of our system and including a perimeter fence that protects our products.

Do you perceive Mexico to be a gateway to the Americas?

Mexico will be one of the most important economies in the near future not only because of the population growth but also because of the implementation of important reforms that will fast track development. Although challenges, such as corruption and the unstable global economic situation, do remain.

Mexico represents our largest market in Latin America and so we are well positioned in terms of opportunities to come. Rubicon represents a very successful business in Mexico. While our scale is small so far, our profile is growing and I think there are huge opportunities for us moving forward.

What advice would you give other Australian businesses considering Mexico as a market for their goods/services?

• Have a good business partner that is willing to take risks, but you also need to support them with resources and people who have the right skills.

• Opening a small representative office, as in our case, can afford you the leverage you need to develop and maintain good quality and prompt interaction with your stakeholders.

• Have patience, it takes time to build a business in Mexico and in the rest of Latin America as well.


developments.88

Exports of Australian meat, processed food and beverage products to Mexico is currently relatively low. In part this is due to the competitive advantage enjoyed by Canada, the US and Europe through their FTAs with Mexico, which afford them a significant price advantage over Australian products. It is hoped the pending TPP will help level the playing field between Australian and North American producers in Mexico.

Australian wine also suffers from a lack of a trade agreement with Mexico. Australian, along with New Zealand and South African wines are the only ones facing taxes in Mexico. Some Australian wine producers have successfully established an export market for themselves there, though lower barriers to entry are sure to encourage others to test the market.

TELECOMMUNICATIONSReforms to Mexico’s telecoms sector entered into law in June 2014 and are aimed at broadening the use of digital technology, increasing competition and offering internet connectivity to all.

This involves breaking the monopolies and market dominance by a few firms that has long been characteristic of the space in Mexico, in particular curbing the power of America Movil and Televisa in telecoms and broadcasting.

Full 100 per cent foreign investment is now allowed in Mexico’s telecommunications and satellite communications sector, having previously been limited to 49 per cent.89

The creation of a new regulatory agency with constitutional status, the Federal Telecommunications Institute (Ifetel), is the backbone of these reform efforts. It replaces former regulator Cofetel which was constrained by a lack of autonomy from the executive branch, politically motivated commissioner selection, a lack of legal

Mexico telecoms highlights

• Second biggest telecoms market in Latin America, dominated by America Movil, growing at nearly 2 per cent p/a

• 104m mobile subscribers, 85 per cent pre-paid

• 13 per cent broadband penetration, 49 per cent mobile broadband penetration

• 14m broadband internet users, dominated by Telmex, expected to grow to 23.4m by 2017

Telcel70.7%

Telefonica18.6%

AT&T7.9%

Nextel2.8%

Figure 12: Mobile operator market share

Source: PwC Mexico

8. SECTOR ANALYSIS


authority and weak sanctioning authority.90

Ifetel’s wide-ranging powers are detailed in the box below.

Ifetel powers and responsibilities:

• Independent from executive and legislative branches of government for the first time

• Sole regulator for entire telecoms sector, including TV, radio, internet and fixed and cellular phone services

• Power to eliminate any hurdles to free competition

• Can impose limits to concentration of frequencies, operating licenses and market share and if necessary, force asset sales

• Award and revoke operating licenses

• Establish costs for granting licenses

• Power to issue fines up to ten per cent of yearly income if rules are repeatedly violated

Ifetel’s governing body is appointed by a three-step process which is seen as more stringent than the criteria for appointing Supreme Court justices.91 A technical evaluations committee together with higher education institutions submit three-to-five candidates to the president and then one is proposed to the Senate for confirmation.92

The reforms also call for the establishment of a non-profit, public service broadcasting company to provide “objective” information and broadcast independently produced content.93 Its director and governing council are Senate-appointed.

A backbone network to ensure equal access for all broadband and other telecommunications services is to be operational by 2018.

Most large telecom businesses were built or acquired during the 1990s through privileged and opaque relationships between entrepreneurs and Mexico’s long-dominant Institutional Revolutionary Party (PRI), which held power for 71 years.94

America Movil holds a 70 per cent share of Mexico’s mobile market and over 60 per cent of the fixed-line communications market.95 The company said it would sell assets to avoid certain regulations that would force it to lower connection costs and share

infrastructure with competitors.96

As of July 2015, America Movil has yet to present its asset break-up plan announced in 2014.97 It has, however, proposed plans to spin off up to 11,000 wireless towers, which would create Mexico’s second-largest renter of tower space.98

Such market concentration is evident across the telecommunications spectrum in Mexico.

In television, 94 per cent of commercial frequencies (and 62 per cent of all frequencies) are controlled by just two mass media companies: Televisa and the new TV Azteca.99

In radio, 80 per cent of commercial stations are in the hands of 13 media groups.100

Telmex and Televisa subsidiaries dominate internet access.101

The new reforms state no market participant can hold more than a 50 per cent share of their market. Both America Movil and Televisa were declared dominant players by IFETEL and both are required to open to foreign and domestic competitors in a positive step toward diversification and greater competition.

Ifetel changes

• Telephone companies stopped charging long-distance rates for all calls within Mexico from January 1, 2015

• Mobile providers are prohibited from charging more to connect calls to their customers from outside their network

• Mobile providers must roll over minutes remaining on prepaid cards upon renewal

• All phone numbers must become portable within 24hrs of contract termination, and phones must become unlocked at the end of contracts

• Net neutrality is ensured

• Cable companies must include all open television channels in their basic package


Telecoms reform: Opportunities for Australia

The reforms have created a number of opportunities for international companies by allowing increased competition in the Mexican telecommunications space. According to the OECD, Mexico is far behind comparative countries in terms of penetration rates, high tariffs for voice data, poor quality of service and weak consumer purchasing power.

There are several large international telecommunications companies, such as Spain’s Telefonica, already active in Mexico that are either partnering with Mexican firms or holding minority shares in them.

Foreign investors on the whole have so far been reluctant to take full advantage of openings in the space. A recent tender that was to result in two new television networks to challenge the Televisa/TV Azteca duopoly did not attract any foreign bids, and just two domestic bids, with one since cancelled.102A

Telecommunications concessions will no longer be issued for individual telecom services – instead, single concessions that allow operators to provide any and all telecom services will be undertaken.103

This allows Australian and foreign providers to compete in every sector of the industry – open and pay TV, radio, internet, cellular and fixed-line telephony.

Given our NBN experience, there is significant interest from Mexican firms in working with Australian telecommunication companies and fund managers to build city-to-city fibre networks.

Australia’s Crowd Mobile, an operator of crowd-sourced question and answer apps, selected Mexico as its first expansion destination in Central and South America on account of the market’s size and the growth rate of Mexico’s mobile market.102B

8. SECTOR ANALYSIS


Opmantek publishes Network Management Information System (NMIS). NMIS is used by over 70,000 organizations globally and can be downloaded free.

Omar Vadillo Martínez, Commercial Manager LATAM

OPMANTEK

How and when did you enter the Mexican market?

Opmantek entered the Mexican market three years ago through a partnership with a local company. About one year ago we decided to create an independent legal entity and go our own way and we subcontract all the administrative work as it is more cost effective.

Why Mexico?

Mexico is a large market with the appetite for our product and we managed to secure some good wins early, which got the ball rolling. There is a lot of competition in this sector in Mexico but our key differentiating factor is the scalability of the product and its capacity to connect with other Network Management Software providers.

We work with some of the largest telecommunications companies in Mexico, including Telmex and América Móvil, and we are starting to work with some key government departments as well.

What does the future hold for Opmantek in Latin America?

Management decided to expand the vision for the business in Latin America and we have plans to open offices in Brazil, Argentina and Colombia. We will service all of our LATAM markets from Mexico and expect to start this process in the next 12 months. Central America also holds a lot of promise and opportunity.

Currently Claro Guatemala, Claro Dominican Republic and Claro Ecuador are all clients and, as we already have our foot in the door, we hope to keep expanding that network. However, our new offices will have a key focus on bringing in new private clients.

What’s it like working for an Australian company in Mexico?

It’s great. We work closely with the team in Australia (HQ) as they are the software developers and undertake all of the R&D. In Mexico, we manage the installation and technical support but we also feedback information about what the market wants and any new intelligence we gather to Australia.

Many customers in Mexico ask, “why Australia?” and I say, “why not?” Australia is not well known in Mexico for software development but we encourage our prospective clients to contact existing clients to get their direct feedback and this approach has been successful because, quite simply, the system works.

Do you have any advice for Australian companies looking to do business in Mexico?

1. You need to have passion – it’s not an easy market.

2. You should know what the differentiating factor of your product or service is and promote that.

3. Make contact with other Australian companies in the market.


Figure 13: Mexico auto investment

Mexico is the fourth largest exporter behind Japan, Germany and South Korea.

Prior to these investments, production was estimated to be 4.3 billion light vehicles. With an additional $11bn+ production will

likely to now exceed 6 million.

$11bn+ Mexico Auto Investment

Source: Austrade

June 2014Renault-Nissan/ Daimler JV extends to build

Mercedes Benz luxury vehicles in MexicoScale: US$1.4bn 300,000 capacity

April 2014Toyota expected to announce

new plant in GuanajuatoScale: US$0.75bn 200,000 vehicles

April 2014Ford expected to announce

two separate expansionsScale: US$3.5bn

March 2014VW expands investment in Puebla

Scale: US$1bn

July 2014BMW announces new plant in San Luis Potosi

Scale: US$1.4bn 300,000 capacity

September 2014Kia announces first investment in Mexico

Scale: US$1bn 300,000 capacity

December 2014GM announces plans to extend

investment to $5bnScale of new investment: US$3.6bn

8. SECTOR ANALYSIS

MANUFACTURINGMexico is a world-leading manufacturer and the sector is one of the most promising areas of the Mexican economy. Manufacturing accounts for 80 per cent of Mexican exports and the country now exports more manufactured goods than the rest of Latin America combined.

Led by auto manufacturing’s double-digit growth rates, the country’s manufacturing output increased by a healthy 3.2 per cent year-on-year during quarter one 2015.104

A skilled workforce, stable currency, sector-friendly government policies and advantageous geographic position all contribute to this success. As does a friendly macro environment, considering Mexico’s network of liberalising and framework-setting trade agreements.

Mexico’s access to North America through NAFTA is the most important of these agreements from a manufacturing point of view, considering the size of the combined American and Canadian consumer market, proximity and Mexico’s lower labour costs.

More information on cross-border opportunity from Mexico can be found in Section 5, Mexico as a Gateway.

Relatively low labour costs are also a key ingredient in Mexico’s manufacturing success. In Boston Consulting Group’s (BGG) most recent Global Manufacturing Cost-Competitiveness Index, only India and Indonesia offered lower labour costs among the world’s 25 biggest manufacturing exporting economies105, neither of which offer Mexico’s geographic advantages for the Americas.

Lower energy costs in recent times have increased Mexico’s attractiveness as a manufacturing base, considering subsequent lower transportation costs when accessing the North or South American markets, especially compared with overseas alternatives.

Rising labour costs in markets like China are also a positive gain for Mexico, whose average labour costs are now lower than China’s.106


Automobiles and auto parts are a big component of Mexican manufacturing, though the sector also includes steel manufacturers, textiles, glass, food and beverage processing, chemicals and petrochemicals, cement and the production of other materials for the construction industry.

Mexico is one the world’s top five auto exporters and foreign carmakers are very active in the market. For Nissan, Mexico ranks just behind China and ahead of home-country Japan as a production base.107 Chrysler and Audi both invested over USD 1 billion in manufacturing plants in the country in 2013.108 BMW plans to spend USD 1 billion building a plant in San Luis Potosi, with production to begin in 2019.109

In 2014 alone, Honda opened a USD 800 million plant in Guanajuato, Mazda opened its first North American plant in Mexico and Kia announced plans for a new USD 1 billion plant in Nuevo Leon.110

Mexico is expected to overtake Japan and Canada to become the US’ largest source of imported cars in 2015, and the auto industry is now a bigger source of foreign currency than migrant remittances.111 The auto sector is not only a domestic strength, but it is also regarded as one of the bright spots of Latin American manufacturing in general.112

Table 2: Mexico manufacturing production forecast, 2015-2016 (annual percentage change)

2015 (F) 2016 (F)

Food and beverages 1.3 2.5

Nonmetallic mineral products 1.1 2.7

Paper and paper products 0.7 1.6

Motor vehicles, trailers, semi-trailers 0.5 4.1

Electrical machinery and apparatus -0.3 2.4

Chemicals and chemical products -0.6 1.3

Rubber and plastic products -0.8 1.3

Basic metals -1.2 2.9

Fabricated metal products -1.2 1.9

Wood products (excluding furniture) -2.5 -0.5

Coke, refined petroleum products, nuclear fuel -3.2 0.9

Machinery and equipment n.e.c. -3.6 1.6

Other transport equipment -5.1 2.2

Latin American Manufacturing Index -0.9 1.9F= Forecast

Source: MAPI Foundation

One-third of US auto part manufacturer exports are destined for Mexico, and this is growing at nearly ten per cent per annum.113 Mexico auto investment is detailed further in Figures 13 and 14, and market opportunity in Mexico’s automotive supply chain is detailed in Figure 15.

Mexico has strengths and shows promise in other manufacturing areas as well, for example in IT, which is expected to account for 13 per cent of the increase in Mexican exports from 2017 to 2020.114

Mexico’s overall manufacturing sector is expected to grow 2.8 per cent in 2015 and 3.4 per cent in 2016, according to manufacturing research firm MAPI Foundation’s projections.115 This will be led by automakers (+7.3 per cent y-o-y in 2015), computing and electronic equipment (+5.8 per cent) and fabricated metal products (+4.8 per cent). More details can be found in Table 2.

While proximity to the American and Canadian markets means a large proportion of Mexican exports tends to be shipped north, demand from other markets is increasing. For example, China is expected to become Mexico’s second largest export market by 2030.116


Futuris delivers full seating systems for all different types and levels of vehicles: from high-volume, small and low-cost cars to niche, luxury sports cars.

Tell us about Futuris and its interest in Mexico?

Futuris is an Australian-based company that started in the late 60s. We produce seats for GM and Ford in Australia, but we also have a heavy interest in China and in Thailand. Our interest in coming to Mexico is that we feel it will open a lot of opportunities for a company like ours. The market is experiencing a lot of growth at this time.

How important is Mexico as part of your company’s broader North American strategy?

Futuris feels that it is highly important to come to Mexico at this time. We felt like we were being left out. With our heavy focus on China and Thailand we were forgetting about the huge opportunities that exist in Mexico for the automotive sector.

With Mexico being the 4th largest exporter of vehicles and 7th largest producer of vehicles overall, we feel like it is a very important market for Futuris. Why? Because everyone is here – VW, GM, Ford, Nissan, Audi are building a new plant – and Futuris understands that we can win new contracts in this part of the world.

How did Futuris go about understanding the market better and feeling comfortable about making an investment?

Futuris really counted on Austrade to help calm our fears. In other words, this journey started about a year ago, travelling around Mexico with Austrade, meeting the Secretaries of Economic Development and the Governor’s offices. They also provided a lot of the data we were looking for. They do good research at Austrade in regards to the automotive industry in Mexico. So I think that partnership in the early stages with Austrade was very important.

Now that the investment has been made, how satisfied are you with how things are progressing?

We’re very satisfied. We travelled through every part of Mexico with Austrade to make sure we found what the best fit was for Futuris. We made the decision to do an acquisition with a company already established in Mexico, as a way to mitigate the risk. This company is already doing business with the Big 3 and a lot of the OEMs that we are interested in providing our products to.

Tell us about some of your additional considerations in entering Mexico.

Of course, with Mexico being a new market to Futuris, one of the reasons we decided on the acquisition was to get that experience in issues such as labour and the currency here. So we’re taking that opportunity to gain experience so that we can better understand any future opportunities on our own.

What do you view as the future for the market here in Mexico?

Within Mexico, the growth will continue, other OEMs or carmakers will continue to enter. For example, Toyota doesn’t have too many facilities in Mexico and I feel, eventually, they will also join others in Mexico. Also, we’re very excited about electric vehicles – the ED market. We are a seat provider to Tesla motors in California; we provide all their seats and other interior products. We feel like there are other opportunities with quite a few EDs that are starting to pop up in California, so that’s another market that is very important to Futuris.

Rigoberto Ibarra J.R. – Manager, Business Development

FUTURIS

8. SECTOR ANALYSIS


What are your expansion plans for Mexico?

In general terms, Futuris wants to win contracts in Mexico. We want to produce interior products for Ford, GM, Chrysler, and Nissan - all these different companies. However, it’s risky for these companies to give us contracts unless we are already doing business in Mexico. So one of the reasons we made this acquisition here at the border is so that we can show we’re serious about staying in Mexico and winning business.

Finally, what has been the highlight of your own personal experience in doing business in Mexico?

The work ethic is really good, the people are a lot of fun. They really believe in relationships, the food is a treat, the temperature – it’s always nice in Mexico. It’s the people. The people are friendly, warm, happy people – great to do business with.

What is your advice to other Australian companies wishing to enter the market?

Futuris feels that other Australian companies – with whom we are very familiar with, and have worked with in Australia – should come to Mexico. They should schedule a visit with Austrade so that they can see for themselves what’s going on here. As a first step I’d say they should come and take a look.

FUTURIS CONTINUED


8. SECTOR ANALYSIS

Figure 15: Mexico Automotive Supply Chain OpportunityTotal market value and business opportunity in 10 processes that represent 70% of the opportunities in the Mexican Automotive supply chain, 2013 (billion US dollars)

Source: ProMexico

* Value of demand not produced in Mexico

0

4

8

12

16Market Opportunity* Domestic Production

Cable & Wires

Die Casting

Design & Engineering

Injection Molding (plastic)

Semi-conductors

Automotive Interiors

MachiningForgingFoundaryStamping

Bill

ions

US

do

llars

14.9

12.9

11.4 11.0

9.3

8.0

6.8

5.8

3.3 2.9

9.7

9.7

9.17.7

8.0

8.04.4

5.2

3.2 3.3

1.32.3 2.4

0.3

5.5

2.6 2.2

0.7 0.7

Figure 14: Mexico’s automotive sector

Source: ProMexico with information of AMIA, OICA, Ministry of Economy, INEGI, ANPACT and the GTA

7thWorldwide provider of light vehicles (3.22 millions of units)

4thExporter of light vehicles (2.64 millions of units)

7th

Worlds largest vehicle producer (3.39 millions of units)

100% of the top leading OEM’s are located in Mexco

More than 300 Teir 1 suppliers established in Mexico

3% of the National GDP

17% of the manufacturing GDP

20% of the FDI

32% of Mexican total exports

The automotive industry in Mexico accounts for:


The in-bond processing industry

The in-bond processing industry, the operators are commonly referred to as maquila companies or maquiladoras, is an important and fast growing element of Mexico’s manufacturing sector.

It is made up of firms that process or assemble temporarily-imported materials into finished goods for export. They are usually wholly-owned by a foreign corporation with which the maquiladora contracts to produce sub-assemblies, semi-finished or finished goods for shipment to the foreign company. Manufacturing inputs are usually imported duty-free under bond and remain the property of the foreign company.

Full 100 per cent foreign ownership is allowed in the space, and though originally limited to the US-Mexico border area, maquiladoras can now be established anywhere in Mexico.117

In-bond processing plants throughout the country often achieve productivity rates 20-30 per cent higher than those in the US, particularly at plants along the US border.118

US import duties are usually only levied on value-added goods in Mexico, though even with duty applied there are substantial savings to be achieved by carrying out labour-intensive processes in Mexico due to substantially lower wages.119

Manufacturing: Opportunities for Australia

Mexico serves as an attractive base for Australian manufacturing firms seeking a lower cost platform to serve markets across the Americas.

Distance, and therefore transportation costs, is the biggest impediment for Australian manufacturers in the Americas, preventing them from accessing lucrative opportunities.

For Australian auto manufacturing, Mexico may present an opportunity to offset declining opportunity domestically and tap into existing continent-wide supply chains for auto components and manufacturing in general.

Australian companies can establish their own manufacturing facilities in Mexico and then take advantage of tariff-free access to the US and Canadian markets through NAFTA, or look south to the markets of the Pacific Alliance, not to mention the opportunity to service the 120-million-strong domestic Mexican market.

A number of Australian manufacturers already operate sites in Mexico (see Figure 16).

Amcor, for example, a multinational Australian-based packaging firm, operates five manufacturing sites across Mexico, producing rigid plastics and tobacco packaging from Nuevo Leon in the north to Veracruz in the east.120

Incitec Pivot, an Australian multinational fertiliser manufacturer, operates manufacturing sites in Guadalajara and Durango.

Figure 16: Australian manufacturing in Mexico

Amcor

Incitec

NOJA Power

Ansell

Strategic Marine

Arrium

Futurisl Mexcio City

l San Luis Potosí

lMatamoros

l Mexicali

lOaxaca

lPuebla

lCancúnMéridalLeónl

TorreónlMonterreyl

Chihuahual

Ciudad JuarezlTijuanal

Acaulcol

Tolucal

Source: Austrade


NOJA Power Switchgear develops and manufactures a range of medium voltage recloser products and low voltage motor control centre switchboards.

Neil O’Sullivan - Managing Director

NOJA POWER SWITCHGEAR

How did you establish a footprint in Mexico?

NOJA Power has been active in Mexico for more than a decade; it was one of the first international markets we targeted. We had to adapt all of our product literature, including marketing material, user manuals, the software and the control panel displays, for the Mexican market, which meant translating everything into Spanish. Because of that, we were then able to target other Spanish speaking countries in South America with relative ease.

How do you service the market?

We originally started off with an exclusive distributor and that exclusive distributor has evolved into a manufacturing partner.

What is the benefit of having a local partner?

Our manufacturing partner has an exclusive agreement with us where we supply them with unfinished goods and they finish those goods locally in our factory in Irapuato. The advantage of doing that is that it gives us local content, turning us into a local manufacturer. That in turn gives us certain preferences with the electricity utility, which has allowed us to become the dominant supplier in Mexico. We effectively have close to 100 per cent market share, with roughly 4,000 of our high voltage circuit breakers protecting the entire high voltage network in Mexico. Our ability to achieve this has been largely the result of the local manufacturing capability.

What is the security situation like?

Security is definitely a factor in Mexico and you have to watch your personal security but I don’t feel that I have to watch my personal security any more in Mexico than in any other country

in South America. We have never had anyone who has been injured or had their security threatened. I don’t feel like it is a market you should stay away from because of security risks. I think the necessary security can be addressed and it can be a successful market for your business.

Key pieces of advice for those considering doing business in Mexico:

• Make sure you take a ‘never give up approach’ in Mexico because there are barriers to entry that you may have to address one-by-one to get the end result you want.

• Mexico is like most other Latin American markets; they have very strict approval processes. They tend to hold their suppliers, and in particular first world suppliers, to a higher standard than they hold themselves. As a result, it can be frustrating early on to get all the necessary approvals to supply equipment or to establish entities, for example.

• Leverage Austrade. The badge of government is well respected in Mexico and they can help you overcome certain barriers and connect you with the right people in the market.

• Consider the North American Free Trade Agreement (NAFTA) region—Mexico, Canada and the US—as a single market. So rather than looking at Mexico as a single market, look at it as part of the broader region. Mexico has a much lower cost base, which is why it may be a better location to target first to then expand into the US and/or Canada.

8. SECTOR ANALYSIS


MINING AND METSMexico is endowed with mineral resources. It is one of the world’s largest producers of silver and is abundant in copper, lead, zinc, gold, sulphur, fluoride, coal, iron ore and manganese. It is a top-ten producer of 17 minerals, including gold, graphite, lead, salt and zinc.121

Mexico’s mining sector is one of the most attractive in the world, according to consulting firm Behre Dolbear, ranking just behind mining powerhouses Australia, Canada, Chile and the US.122

Mining accounts for 8.5 per cent of Mexico’s industrial GDP and 2.9 per cent of national GDP and in some states over 20 per cent of local GDP.123 An overview of the sector can be found in Table 3.

Table 4: Mining and exploration investment in Mexico

Mining investment 2003-2013

Year US$ million

2003 348

2004 585

2005 912

2006 1,257

2007 2,156

2008 6,656

2009 2,858

2010 3,316

2011 5,612

2012 8,043

2013 6,576Source: Camimex, Mining Journal

Exploration investment in Mexico

Year US$ million

2010 663

2011 922

2012 1,165

2013 841.8

2014 886.4

2015 673*Source: Camimex *estimate, Mining Journal

Table 3: Mexico mining sector overview, 2003 to 2012

2003 2012 Change

Overall investment:

USD 348m

USD 6.6bn +34%

Direct jobs 240,000 340,000 +42$

In 2013 there were 870 active mining projects broken down into:

Exploration 636 Gold & silver 573

Production 94 polymetallic 117

Development 36 Copper 100

Suspended 104 Others 80Source: Mexico Mining Chamber (Camimex)

Mexico’s mining strengths include not just abundant resources, but also a long history of mining that has developed a skilled workforce and regulatory competence in the sector, as well as strong mining infrastructure.

A number of foreign players operate in the sector, dominated by Canada, which is responsible for 70 per cent of all mining operations in Mexico.127 Some have termed the 2003-2013 boom an “incandescent lamp” attracting foreign miners to Mexico.128 Overall mining investment increased from USD 348 million in 2003 to USD 6.5 billion in 2013 (see Table 4).

The country has been riding a mining boom since reform-minded polices were launched in the early 2000s under the Fox and Calderón administrations, lowering regulatory barriers and challenging powerful mining unions.124

Sonora and Zacatecas are two of Mexico’s most important mining states. Sonora is the largest copper mining state (open pit) and Zacatecas is the largest silver mining state (underground).125

Investment-friendly reforms have continued under the Peña Nieto administration, opening the Mexican mining sector to FDI through a process largely regarded by foreign investors as fair, transparent and free of corruption.126

Mexico’s mining sector is not just dominated by one or two minerals like other regional competitors, and includes a number of base metals and industrial minerals. The majority of production is focused on gold (26 per cent in 2013), silver (22 per cent) and copper (17 per cent).129


Impact of reforms

Mexico’s reforms have been partially funded by an increased tax burden on the mining sector, effective from 2014. These changes dropped Mexico from 71st to 103rd on the fiscal regime index for investment attractiveness, compiled by the Fraser Institute, a competitive market and government intervention think tank.130

This included a particularly onerous 7.5 per cent special mining duty on EBITDA as well as a 0.5 per cent environmental fee on precious metal revenue.131

A 2 per cent increase in corporate tax from 28 per cent to 30 per cent also impacts the sector, as does a change in the method for calculating tax deduction on exploration expenses; more than ten years on the straight line basis, rather than total investment being deductible in the year it occurred.132

Mining firms generally accepted that some sort of royalty was inevitable, as this is common in most other jurisdictions, though its size exceeded expectations of a 3-5 per cent levy.133

The poor timing of the tax, considering the general drop in commodity prices, was also unfortunate, though overall this is not expected to heavily impact on planned development in Mexico for the time being.134

In the longer run, legal challenges currently making their way through the courts, as well as the potential negative impact resulting from new taxes, could induce some moderation in the tax regime but this remains to be seen.

Mining: Opportunities for Australia

Mexico’s potential in the mining space is exemplified by the fact that 70 per cent of its territory is still unexplored, making it a relatively young jurisdiction.135 Australia is a perfect match for this opportunity, considering our strengths in mining and exploration.

The country’s untapped precious metal reserves present one of the largest areas of opportunity, and competition is expected across the board, from large global miners to smaller mid-tier and junior firms. The state of Guerrero in particular holds a lot of potential, particularly in gold mining, yet there are a relatively small number of mining companies operating there.

Australia’s current mining presence in Mexico lags behind that in other Latin American markets.136

Australia’s presence in Mexico is led by Rio Tinto, which took a stake in Azure Minerals’ Promontorio Copper Project in September 2014, though BHP Billiton said it plans to develop copper assets in Mexico in the future.137

Australian mining equipment, technology and services (METS) companies enjoy particular opportunity in Mexico, especially in the following areas:

• Productivity: Companies are being pushed to become low-cost producers through operational efficiencies, productivity optimisation and overall cost reduction.

• Innovation: This is seen as key to making the industry more cost-effective and resilient to downturns.

• Education: Mexico does not produce enough capital to satisfy the strong demand for engineers with specialised knowledge and experience in extraction-related areas.

• Environment: Mining is under great public pressure to comply with international practices around mine planning and operation, waste treatment and management and energy efficiency, as general awareness of these issues increases.

• Community: New approaches to community engagement are being sought to ensure mining operations help improve the provision of jobs, infrastructure, community services and fair play in the use of land – while at the same time ensuring this does not impact on the industry’s competitiveness.138

8. SECTOR ANALYSIS


Tony Rovira, Managing Director

Azure Minerals Limited is Australia’s leading mineral exploration company in Mexico.

AZURE MINERALS

How long have you been operating in Mexico and why is it an attractive market to you?

We’re an Australian company listed on the Australian Stock Exchange and we take the capital we raise in Australia to undertake mining exploration work in Mexico.

Our head office is located in Perth and all the people we have working on the ground in Mexico are locally engaged. Azure Minerals has been active in the market for 10 years because it is a mineral-rich, low cost, mining friendly country brimming with potential.

What projects is Azure working on in Mexico?

Azure is progressing two advanced-stage copper projects in partnership with two of the world’s major mining companies – the Alacrán Copper Project with Teck Resources and the Promontorio Copper Project with the Rio Tinto Group.

What is your view on the reforms taking place in Mexico at the moment?

There have been both positive and negative changes in our industry (and others) as a result of the reforms, but for us the positives still definitely outweigh the negatives. On the upside, there is a more streamlined approach to mining regulation and environmental approvals.

The negatives are that they introduced a royalty on production, which is a disincentive for mineral exploration and mining. In addition, the Government is delaying refunding GST (or VAT in Mexico) to companies, which is a significant inconvenience to the companies’ cash flow.

Has the mining royalty had a significant impact?

Yes, it has an impact on mining companies in production. Although, the royalty is calculated differently to how it is in Australia. They allow you to make deductions so it’s more like a tax

than a royalty and it’s calculated on the value of what you’re mining minus your costs to get the materials out of the ground.

Are you optimistic about Mexico’s growth prospects?

Yes, definitely and the Federal Government is doing well in terms of opening up the market to overseas companies, especially in the oil and gas, finance and manufacturing sectors.

Why should Australian companies in the mining sector consider Mexico?

From our perspective, it’s an easy place to do business. Australian’s can enter Mexico without a visa, for business or pleasure, and stay for 180 days. English is also quite widely spoken, particularly in the northern part of the country, because of the US’s influence. Their way of thinking is similar to ours because of the American influence.

In the mining industry, Mexico feels that the country is overly reliant on Northern American mining companies, particularly Canadian companies, so they are looking for diversification by attracting in Australian exploration and mining companies. In mining services, the Canadian and American companies have an advantage in that they understand Mexico better than most Australians, they have experience in the market, and have the benefit of operating in the same time zone. Therefore, it is very important for Australian METS companies wanting to work in Mexico to establish a physical presence and have boots on the ground so you can match their level of service.

If companies do want to work in Mexico, seek the assistance of DFAT and Austrade; they have been very helpful to us over the years. And finally, don’t let security concerns hold you back but do your research. Violence does occur but not really in the areas that we work and we haven’t had an incident in the 10 years we have worked there.


Mexican mining companies are becoming more technologically-savvy and are keen to bring in international partners to improve efficiencies.

They are aware of the high level of expertise and innovative nature of Australian firms, however, there is a perception that Australian technology is geared more towards coal mining. Engaging with Mexican mining companies offers an opportunity to dispel this misconception.

Mexican mining companies typically buy from North America and Europe, hence these countries tend to be top-of-mind. They are not always positive about pitches from new providers of whom they have never heard of before. Therefore utilising the services of Austrade, or participating in trade missions and mining conferences, can help with initial introductions and get you in front of the right people. It is important to remember that clients look at quality, price, service and experience.

Becoming involved in one or more of Mexico’s mining clusters can also be beneficial. These clusters are civil associations owned by the mining companies in the region and supported by state and federal governments, as well as by Mexico’s mining chamber CAMIMEX. The clusters are similar to chambers but have a broader mandate and include a number of committees that focus on areas such as the environment and investment attraction.

There are currently three such clusters in Mexico: one each in Sonora, Zacatecas and Chihuahua. Engaging with local and state governments is important and working with the clusters and CAMIMEX can be an effective way to navigate that process. Australian companies can also use these clusters as platforms to be exposed to various industry players and to seek assistance when establishing themselves in the market.

Mexico has a number of large conglomerates that operate across a number of industries including the mining sector, such as Grupo Mexico and Industry Peñoles. These companies have significant regional networks that can provide supply chain opportunities for Australian METS providers.

As mentioned, community-related issues are of increasing importance in the Mexican mining space. Australia has a good reputation in Mexico for management of community issues and corporate social responsibility.

Partnerships between mining juniors and larger firms are also an area of potential. Rio Tinto’s partnership with junior Azure Minerals is the firm’s biggest JV with a junior in Latin America.139A

The impending entry into force of the TPP is expected to greatly benefit the Australian METS space in markets like Mexico, with some commentators calling the agreement “absolutely critical” for the sector.139B

Australia’s competitive advantage in METS can be eroded by market access issues and regulatory barriers, owing in part to a lack of a bilateral FTA. The TPP is likely to reduce some of these barriers and at least put Australian METS providers on an even playing field with our North American and European competitors.

One Australian METS provider that runs mineral processing plants in Mexico notes they operate at a 10-15 per cent price disadvantage compared to Canadian competitors who enjoy tariff-access to Mexico under NAFTA.140 The TPP can help reduce this disadvantage.

Aside from market access and regulatory issues, Australian METS companies can be reluctant to set up an office in Mexico. The dominance of US and Canadian companies in the market, and their geographic proximity, is a factor Australian firms need to carefully considering as they will need to be compete with the level of service these companies offer.

8. SECTOR ANALYSIS


ISG Pit to Ship Solutions supplies container rotation systems for the mining, grain and ship loading industries.

Julie Boden – CFO

ISG - PIT TO SHIP SOLUTIONS

Industry: Engineering/Manufacturing

Years exporting: Over 4 years

Why are you considering entering the Mexican market?

ISG has invested a lot of time and money into marketing our Pit to Ship Solution. With a sound presence in Chile, Peru and Argentina, Mexico proves to be another area we think our system will be of benefit and allow us to expand our presence in Latin America. Research and trade missions have shown that Mexico is a growing market and ISG would like to be there to be a part of that growth.

What is your market entry strategy for Mexico?

Our current strategy is to attend mining conferences and missions, advertise and have our agents to follow up on leads. We are also working with Austrade and specifically the Trade Commissioner in Mexico as we find them a valuable source of local knowledge and introductions.

When we attend conferences we try to advertise as well as have a booth. This usually involves either an editorial in the magazine that is distributed at the show, or a flyer in every delegate’s bag. As mentioned we have local agents so we have a Spanish speaking person with us at our stand.

We all constantly read and research to try to get to the customer at the right stage of their project. This is very important but not always easy. Usually we want to reach them at the feasibility stage when they are doing their costings.

What challenges/barriers have you encountered thus far and how have you overcome them?

One challenge is language of course. To overcome this barrier we have local agents that meet with customers and converse in Spanish and we have made our website user friendly by providing a Spanish language option. Our flyers, brochures and videos have all been translated into Spanish as well.

Another barrier is distance. Potential customers like to see and feel a product. At first we invited our customers to visit our showcase in Australia where they could see our system working. Now, with our system operating in Peru, Chile and Argentina, we have more localised showcases for customers to visit, helping to overcome the tyranny of distance.

Another challenge is identifying and speaking to the right person at the right level. While this was a challenge initially, with experience and the help of Austrade, as well as attending the right conferences and having local agents, this is now becoming easier.

With Mexico being a new market for us we have to understand the customer’s needs, the transport they use, the volume of commodity they wish to move etc. We find that fast response times to customer’s enquiries and our willingness to get on a plane and meet the customer face-to-face is a big advantage. Now we have a strong presence in South America this should be a little easier as our customers in the region can talk to someone from their own culture that speaks their language to see if the system suits them.


9. DOING BUSINESS IN MEXICO

CHOOSING THE APPROPRIATE MEXICAN CORPORATE STRUCTUREInformation provided by Harris Gomez Group

In order to take full advantage of the growing opportunities in Mexico, taking a long-term view of the region is recommended. Similar to other Latin American countries, Mexican businesses prefer partners who have a local presence. This assures your clients that your business will be able to provide the after sales support and assistance needed once a sale is complete.

Setting up a business in Mexico does not need to be an expensive exercise. Choosing the right partner is the key to ensuring your set up is both stress-free and cost effective. The right partner will help you navigate the legal system, the tax system and provide advice on choosing the right corporate structure.

Choosing the right structure is important because it has legal and tax implications for the future of your business. Implementing the correct business structure now will save your company time and money down the road.

The General Corporation Law in Mexico recognizes the existence of six types of commercial organizations or structures. However, in daily corporate practice in Mexico, the types of companies most utilized are:

1. Limited liability stock corporation or “sociedad anónima”

2. The limited liability company or “sociedad de responsabilidad limitada”

These types of companies may be organized with variable capital, which allows the business to alter its capital (the variable portion) with a minimum of formalities.


Sociedad de Responsabilidad Limitada (S. de R. L.)

Members of a limited liability company have a liability that is limited to their capital contribution to the company. However, their ownership interests cannot be represented by negotiable certificates, either in ‘registered’ or ‘bearer’ form. Such contributions are transferable only in the specific cases provided by the General Corporation Law. After the limited liability stock corporation, the S. de R.L is the most commonly used business structure in Mexico, and is similar to a limited partnership in Australia.

A limited liability company may not have more than 50 members. There is no mandatory minimum capital stock required by law. Capital stock is represented by ‘equity participations’ that may be unequal as regards value and category, and must always represent $1.00 peso or a multiple of this amount. They cannot be formed nor may their capital be increased through public subscription.

Practical Points:

The S. de R. L has less regulation than the S.A. The S. de R. L. was created as the ideal prototype for small and medium-sized companies, since it has a simple and flexible legal regime.

General meetings are held at the company’s principal place of business at least once a year, on a date specified in the articles of association.

Each partner has the right to participate in decisions taken at general meetings, with one vote for each $1.00 peso of his capital contribution.

Another important advantage is that in the liquidation or dissolution of an S. de R. L., it is optional to publish the final balance sheet in the Official Gazette (Diario Oficial) of the State (Art. 247). This is mandatory for the S.A.

Sociedad Anónima (S.A)

The sociedad anónima is the most used and accepted business structure in Mexico. It operates under a company name and ownership is in the form of shares in the capital of the company. Shareholders’ liability is limited to making capital contributions to the company for the purchase of shares.

The creation of a sociedad anónima requires a minimum of two stockholders and there is minimum share capital. However, upon incorporation, shareholders must set a minimum capital stock that must be fully subscribed within one year of the establishment of the company. The management of the corporation is entrusted to two or more directors or to a sole administrator, who need not be a shareholder.

Practical Points:

In June 2014 reforms were made to Mexico’s General Law of Commercial Companies that increased the flexibility of the S.A’s by-laws. For example, the by-laws now expressly allow rules regarding the settlements of disputes among the shareholders (“deadlock”) or the establishment of mechanisms for joint sale of shares (“tag along” and “drag along”). Due to these reforms, the S.A has become the favourite corporate structure in Mexico. In particular, the S.A is especially favoured by companies in which two or more groups are involved or where the protection of minority rights isn’t a concern.

An S.A will normally distribute shares of equal value and rights. However, certain privileges or restrictions on shares can be created within the company’s deed of incorporation. For Example, certain shares may not confer a voting right, or may limit the voting right; etc.

An S.A has more corporate governance requirements than some of the other corporate vehicles. For Example, ordinary general meetings must be held at least once a year, and must be within four months following the termination of the business year. These ordinary general meetings are used to approve the financial statements and to appoint or, as the case may be, ratify the appointment of the directors and auditor(s).


STEPS TO INCORPORATING A MEXICAN ENTITYInformation provided by Harris Gomez Group

In Australia generally, a company can be set up in a matter of days but in Latin America it is not uncommon for this process to take weeks and even months.

In order to successfully incorporate a company in Mexico, it is important to understand the steps and timing involved. This will help ensure that business activities—including sales—are planned accordingly. There is nothing worse than having a contract ready to be signed while waiting for your entity to be set up.

In the case of Mexico, we recommend allowing four to six weeks for the complete incorporation process, although it is possible to shorten this timeframe in some cases. This timeframe also takes into account the need for documents to be legalised in Australia and sent to Mexico before the process can begin.

Below is a basic outline of the incorporation process:

1. Requesting authorization from the Ministry of Economy for permission to use the company name. The time it takes for the Ministry of Economy to issue a permit to incorporate a Mexican company in Mexico under a particular name may vary, but normally it takes one to ten working days.

2. Drafting the powers of attorney to represent the foreign partners/shareholders in the incorporation of the company. Granting of said powers of attorney abroad before a Notary Public and legalisation (in its case apostille in accordance to the “Convention de La Haye du 5 Octobre 1961”).

3. Translation of the powers of attorney and certification by the official translator;

4. Drafting the articles of incorporation and by-laws of the company. In order to draft the by-laws, your legal counsel will need to receive the following information:

i. Name of the company: In order to request authorization to use the company name, your legal counsel will need three name options in order of preference. This is a routine matter in which the Ministry of Economy verifies if the names requested are available or in use by another company.

ii. Partners/Shareholders: To incorporate a company in Mexico your legal counsel will need to have at least 2 partners/shareholders.

iii. Directors/Managers and Statutory Auditor (may vary depending on the company to be incorporated): Your legal counsel will need a list of the Directors/Managers of the company, specifying who will be Chairman and Secretary of the company. Please note that there is neither a minimum nor maximum number of Directors/Managers that have to be appointed. However, if only one is appointed, the same shall act as Sole Administrator/Sole Manager, with full powers to represent the company.

iv. Powers of Attorney to be granted by the company: Unless it is specifically provided by the by-laws of the company, the Directors/Managers and Officers of the company do not have specific powers of attorney, and therefore, powers must be granted separately. It is important to note that powers of attorney may be granted to any person, even if he is not a Director/Manager or Officer of the company.

5. Completing the anti-money laundering procedure

6. Liaison with Notary Public in Mexico to carry out the notarisation of the powers of attorney and incorporation of the company

7. Carrying out the registration of the company before the Public Registry of Commerce

8. Filing notices with the National Registry of Foreign Investment in relation to the incorporation of the company and with respect to its foreign partners/shareholder;

9. Liaising with the accountants for the registration of the company before the Mexican Tax authorities, with the purpose of obtaining its Tax ID (in most cases this step may be carried out by the Notary Public). It is important to note that in order to obtain the Tax ID Number, the company needs a domicile for tax purposes; usually the domicile used is the same as the accountants’, at least during the first months.

10. Opening the corporate books (partners/shareholder registry book, meetings and capital variations books in case of a variable capital company).



Practical Points:

• We recommend appointing a legal representative who is based in Mexico in order to deal with any urgent matters that may arise and to avoid any issues with the banks. When appointing a legal representative it is prudent to put in place special safeguards that will ensure the role is not abused.

• The corporate domicile of the company (different from the tax domicile) may be registered in any State of the Mexican Republic. We recommend the corporate domicile be located in Mexico City due to the faster recordation process before the Public Registry of Commerce (required for the incorporation of the company, modification of its by-laws and articles of incorporation and granting of some powers of attorney).

• In Mexico there are four kinds of general powers of attorney:

i. Powers of attorneys for lawsuits and collections: This power is used to represent the company in litigations and in administrative procedures, normally it is also granted to the attorneys of the company.

ii. Powers of attorney for acts of administration: This power is used to represent the company in all kinds of agreements, which usually do not imply the disposition of fixed assets or the issuance of negotiable instruments.

iii. Power of attorney for acts of dominion: This power allows the attorney to dispose of the fixed assets of the company, including real estate.

iv. Power of attorney to subscribe and grant negotiable instruments: This power of attorney is granted to subscribe negotiable instruments, to obtain loans and to open and close bank accounts.


OPENING A BANK ACCOUNTInformation provided by Harris Gomez Group

Once a company is incorporated, opening a bank account is the next logical step. For most new companies entering Mexico, the one thing that cannot be taken for granted is the ease of opening a bank account. In Australia, Canada or the UK, one can set up an account with a single visit to the bank.

It will become apparent quickly that this is not the case in Latin America where having a bank account is a privilege and not a right.

Mexican banks are conservative and prefer to play it safe when in doubt about the credit worthiness of client. This is especially true when applicants are foreigners without residency in Mexico and where unknown legal entities are involved. This is especially problematic for foreigners, as often the partners in the new company have no credit history of their own inside the country and the new company has very little capital or assets.

With that being said, most legal firms have relationships with the banks and understand the procedures involved. Therefore, a company’s legal representatives can help minimise costs and streamline the process of opening up a bank account.

Remember, even with established relationships, the process to open an account can take three to four weeks and can only be started once your entity has a Tax ID number.

The bank will request the following documents and information:

1. Public Deed through which the company was incorporated and through which powers of attorney were granted in favour of the legal representatives of the company;

2. Evidence of the recordation before the Public Registry of Commerce of the Public Deed referred to above (or a certificate issued by the Mexican Public Notary evidencing that said Public Deed is in process of recordation);

3. Copy of the Tax ID Certificate of the company (Cédula de Identificación Fiscal);

4. Copy of a document evidencing the domicile of the company and the persons authorised to sign in the bank accounts (service bills);

5. Copy of the official IDs of the people that will be authorised to sign in the bank accounts of the company; and

6. Official documents to be provided by the bank duly signed by the above-mentioned persons.

Practical Points:

• We recommend appointing a person who is located in Mexico as the legal representative of the company in order to avoid problems when executing documents at the bank.

• Please note that all the above information regarding bank accounts may vary depending on the particular credit institution with which the company decides to open its bank accounts.



TAX CONSIDERATIONSInformation provided by PwC Mexico

As of 2014, corporations in Mexico are taxed at a rate of 30 per cent on taxable income, and dividends paid out from a Mexican company are subject to a ten per cent withholding tax for foreign corporations. A similar ten per cent corporate tax is applicable to profits generated by a Mexican branch (permanent establishment) of a foreign entity. Under Australia’s taxation agreement with Mexico, no withholding tax would apply if the beneficial owner of the dividend (except for civil partnerships) directly owns at least ten per cent of the capital of the distributing corporation. In Mexico, compulsory profit sharing, equal to ten per cent of taxable income as adjusted for this purpose, is payable each year to employees in Mexico, which is deductable for tax purposes.

Mexican branches of foreign entities are taxed in the same way as corporations, aside from the fact that payments for interest, commissions, royalties, or fees to the home office of the same legal entity are not tax deductable. However, some branches may deduct reasonable allocations of home office expenses. Mexican law generally follows the OECD model treaty definition of a permanent establishment.141

Double taxation relief is given by way of (limited) credit for foreign taxes paid.142 Mexico has more than 50 double taxation conventions in force, including with Australia, and is continually looking to broaden its treaty network.

The first tax treaty between Australia and Mexico was signed on 9 September 2002 and includes a protocol, which was signed at the same time. A limited ‘force of attraction’ rule is included in the Business Profits Article in accordance with Mexico’s reservation to the OECD Model. This rule provides that:

Where a permanent establishment exists in one country, business profits derived by an enterprise of the other country from the sale of goods directly by its head office situated in the other country may be taxed in the first country, provided that those goods are similar to the ones sold through that permanent establishment.

This rule does not apply, however, where the sale of those goods was carried out in that manner for bona fide commercial reasons and not merely to obtain a benefit under the treaty.143

According to the Australian Taxation office,

…the Protocol inserts a provision into the Business Profits Article to ensure that profits derived by a non-resident beneficiary through a permanent establishment of a trust can be taxed in the country where the permanent establishment is located. Another provision in the Protocol ensures that Australian residents who do not have a permanent establishment in Mexico are not subject to the Mexican assets tax. However, this exclusion does not apply to assets covered by the definition of royalties that are used by a Mexican resident.144

No special tax concessions are offered to encourage foreign business to locate to Mexico. However, special tax incentives are granted to tax payers that wish to contribute qualified film and theatre projects and to taxpayers involved in the agriculture, livestock, fishing or timber industries.145

The Ministry of the Economy in Mexico maintains Sectoral Relief Programs (SRP) that are designed to support domestic manufacturers by allowing them to import components, raw materials, and equipment under a preferential import duty rate, regardless of their origin, provided the items are used in the production of goods authorised by the corresponding SRP. Most duty rates granted under these programs range from 0 per cent to 5 per cent.146

Value added tax is charged on imports of goods and services at 16 per cent but there are specific duty deferral programs in place that allow temporary imports through the government’s maquiladora program or IMMEX program.147 The main benefits of the IMMEX program are that it gives companies the ability to defer taxes on goods that are temporarily imported into Mexico and the ability to consolidate import declarations.

Other points to consider:

• Sales people or agents with authority to execute contracts constitute a taxable permanent establishment.

• Goods held in bonded warehouses within Mexico do not constitute a permanent establishment. The Mexican customer is considered the importer at the time the goods are released from the warehouse.

• Liaison or representative offices can operate tax free in certain circumstances. However, if they employ local staff, they are subject to normal payroll obligations.


Ecotech is an Australian owned company with over 30 years’ experience in the design, manufacture, integration, installation, maintenance and operation of turn-key ambient air and emissions monitoring systems.

Felicity Sharp: International Business Development Manager, Europe, Southern Africa & Americas

ECOTECH PTY LTD

Industry: Environmental/Manufacturing

Years exporting: over 20 years

Years exporting to Mexico: over 20 years

What were the key drivers behind your decision to do business in Mexico?

We made the decision in Ecotech’s early days to move from being a company that services and distributes other companies’ products to manufacturing and distributing our own. In taking that step, we had an opportunity to partner with a Mexican company (Representaciones Mexicanas de Maq y Equipo SA de CV) in the environmental sector that would distribute our products. The door to Mexico was open and so we walked through. We are still partnering with that same company 20 years later.

How have the economic reforms taking place in Mexico affected your business, if at all?

We will be watching the reforms in the energy sector closely as this could open up new business for Ecotech. CFE (the Federal Electrical Commission) have been a long term customer of Ecotech.

How do you service the market and has this changed over time?

We service the market through a local distributor who has been with us since our first steps into Mexico. This has worked for us as they understand the business climate in Mexico and have formed very strong bonds with our key customers.

In addition to this, our commitment to our distributor is to provide them with continual technical training and commercial support so that they can always be working at their best for us. We have increased the level of support to our distributor over time as they are our eyes and ears in Mexico.

Do you perceive Mexico to be a gateway to the Americas for your business?

Yes. It is, however, we don’t leverage this currently. With the NAFTA and TPP in the pipeline there are opportunities in the future that we may choose to leverage.

How do you manage the security risks of doing business in Mexico?

We do not have our own office in Mexico. We minimise the financial risks by partnering with our trusted distributor.

What are the top challenges/barriers you face in doing business in Mexico?

Understanding the culture can be the biggest challenge. Currency fluctuations can make life difficult at times, however it is the cultural aspects that can limit opportunities or conquer them. Growing relationships is key as a strong relationships will survive through the good and bad times.

What advice would you give other Australian businesses considering Mexico as a market for their goods/services?

Plan your entry with some short and long term goals that are achievable. This may be as simple as identifying a partner or a market sector to focus on in the beginning. Creating a plan allows you to look back and see the progress over time. This should include a marketing budget so that you can begin growing your brand in the new market. Also account for trips to visit potential partners and clients as visually assessing competencies and opportunities is crucial. One visit will unlock more information than countless emails and phone calls ever could.



TIPS FOR IMPORTING INTO MEXICO• There a total of 49 ports of entry: 19 on the

Northern border, 2 on the Southern border, 17 marine customs and 11 internal customs points.148

• The main port of entry on the West Coast of Mexico is Manzanillo, followed by the smaller port of Lazaro Cardenas is a located further south.

• The type of goods being imported will determine the best port to use. It is not only the port infrastructure that needs to be considered but also the availability and quality of transport infrastructure to the good’s final destination. It is recommended that you consult your freight forwarder or customs broker for professional advice.

• The main entry point for airfreight is Mexico City.

• An import licence is required to import any goods into Mexico and the exact licence type will depend on the goods being imported. The designated importer needs to be a registered person or legal entity in Mexico.

• Any special import license, when required, should always be obtained before the arrival of merchandise at a Mexican Customs office and presented at the time of the customs clearance.

• Exporters should use an experienced freight forwarder and Mexican customs broker. As your customs broker is responsible for managing the customs clearance process and can be instrumental in ensuring the process goes smoothly, it is important you engage a reputable company. To maximise the possibility that your goods will clear customs without delay, it is recommended that all necessary information is sent to the customs broker seven to 10 days in advance of the goods arriving at the port or airport of destination.149

• In Mexico, government regulation requires that freight forwarders and customs brokers operate independently. In Australia freight forwarders can have a team of customs brokers working within the one company, but this is not the case in Mexico.

• At least two pieces of documentation are required for any shipment going into Mexico: a commercial invoice and a packing list. A bill of lading is also required for sea freight and an airway bill for air freight. Depending on the goods, you may require a quality certificate or a certificate of origin to receive any duty concessions that may apply. It is recommended that you speak to your customs broker in advance of the shipment to clarify whether any additional documentation might be required for your goods. Your buyer in Mexico might also be able to assist you with this.

• Your commercial invoice must include the following:

• Tax ID of the importer

• Full goods description and HS code/s

• Merchandise unit cost, quantity and currency

• Applicable incoterms

• If you are sending your merchandise via sea it is best to use either the Incoterm® CIP (Carriage and Insurance Paid To) or the Incoterm® CPT (Carriage Paid To) depending on the company’s preferences/requirements*. Using these terms means the seller in Australia relinquishes responsibility for the goods when they are delivered to the carrier or cargo consolidator. This allows the importer in Mexico to manage the clearance process once the goods have arrived at the port of destination.1

• The Incoterm FCA (Free Carrier) might also be suitable, again depending on the company’s individual preferences/requirements. Shipping FCA is suitable if the service provider in Mexico can arrange the freight from Australia through a trusted agent.

• The VAT in Mexico is 16 per cent.

• Customs fees and other duties will depend on the Harmonised Tariff Code2

• As tariffs and duty rates are subject to change without notice, it is recommended that you confirm these prior to selling to Mexico.

• Broker fees will depend on the shipment value.

1 More information about Incoterms® can be found on the International Chamber of Commerce website: http://www.iccwbo.org/products-and-services/trade-facilitation/incoterms-2010/. You can also contact the Australian Institute of Export: www.aiex.com.au or call 02 8243 7400.2 For information about HS codes and product classification, you can visit the Department of Immigration and Border Protection website: http://www.border.gov.au/Busi/Tari.


• The government requires the importer to re-label the products in Spanish and include the relevant information about the contents, name and country of origin of the producer, and information about the import, port of entry, etc. For information and advice specific to your merchandise, contact your customs broker.

• All imported merchandise should meet minimum sanitary and safety standards.

• Strict record keeping is recommended as Customs authorities may carry out physical inspections; it is common that they request legal documents that support the legal status of any foreign merchandise (including machinery and equipment).

• There are no free trade zones in Mexico.

• Be conscious of security when transporting goods to and from some ports as this may require passing through higher risk areas, including states such as Guerrero and Michoacán. Security conditions can change so keep up-to-date with the latest news and seek professional advice.

• Mexico’s single window for customs clearance can be accessed by:

• Visiting www.ventanillaunica.gob.mx. This can be done directly by the importer of reference or it’s Customs Broker.

• The digital information is sent to the relevant government agencies for approval and then the system generates an electronic certificate (COVE) and e-documents.

• Taxes are calculated and deducted automatically from a designated bank account related to the importer of reference or Customs Broker.

• A simplified customs declaration (pedimento simplificado) is then presented.150

*Carriage paid to (CPT): The seller pays the freight for the carriage of the goods to the named destination. The risk of loss of damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered to the carrier, is transferred from the seller to the buyer when the goods have been delivered into the custody of the carrier.

The seller’s primary duties are to contract for the carriage and pay the freight to the named destination, deliver the goods into the custody of the first carrier, obtain an export licence and pay export taxes and fees, if required, and furnish to the buyer the invoice and the usual transport documents.

The buyer’s primary duty is to accept the delivery of the goods when they are delivered by the first carrier and when the invoice and the usual transport documents are delivered to him. The buyer is responsible for clearing the goods for import.

Carriage and Insurance paid to (CIP): The seller has the same obligations as under CPT but with the addition that the seller has to procure cargo insurance against the buyer’s risk of loss of or damage to the goods during the carriage. The seller contracts for insurance and pays the insurance premium.

The buyer should note that under the CIP term the seller is only required to obtain minimum insurance coverage. The CIP term requires the seller to clear the goods for export and like with CPT, this term may be used for any mode of transport, including multimodal transport.

Free Carrier (FCA): The seller fulfils his obligation to deliver when he has handed over the goods, cleared for export, into the charge of the first independent carrier named by the buyer at the named place or point. This term may be used for any mode of transport, including multimodal transport.

These are the recommended incoterms® for shipments by container as set out in the International Chamber of Commerce’s Incoterms® 2010 rules.



UNDERSTANDING THE RISKS TO REAP THE REWARDS IN MEXICOInformation provided by FTI Consulting

In recent years, Mexico has pursued economic growth through ambitious reforms and increased trade. Mexico is already Australia’s largest merchandise trading partner in Latin America and with a population of 121 million, close proximity to the Unites States, a large industrial base and active trade agreement participation, there is good reason to consider Mexico an attractive target for Australian companies. Capitalising on the opportunities, however, requires an understanding of the unique risks and a management plan tailored to your specific business.

Poverty and inequality are underlying factors that contribute to Mexico’s key socio-economic challenges. According to recent government figures 46 per cent of the population live in poverty. While government measures have sought to address poverty, the President recently acknowledged these had not gone far enough.

In part due to this poverty, there exists a large informal economy. Some estimates suggest up to 60 per cent of Mexican citizens do not participate in formal economic activities including paying taxes. The result is many businesses are not motivated to keep accurate records and any claims made by possible partners regarding revenue, personnel or tax standing need to be carefully scrutinised.

Criminal Activity

Mexico’s ongoing fight against organised drug-trafficking cartels has been well publicised over recent years. While the current government has been reluctant to aggressively target the cartels to avoid escalating the violence, they have successfully arrested a number of key cartel leaders. The Institute for Economics and Peace ranks it as 144 of 162 countries on the Global Peace Index.

While the overall rate of crime has continued to decline in recent years (down 31 per cent this year) Mexico still has a high crime rate compared to other parts of North America. Anyone travelling to Mexico should exercise a high degree of caution. Petty crime including pickpocketing and theft is common as are ‘express kidnappings’ - where the victim is required to withdraw large sums of cash to secure their release. If you are travelling outside of known tourist areas, it is recommended you obtain specific security advice. The threat of serious crime varies between regions and is higher in states to the north and south of the country.

In part due to the good relations Mexico has with its neighbours, the threat of terrorism is no higher than what is experienced in other tourist destinations. Despite its issues with law and order, the Mexican government has remained stable and largely committed to democratic means of government.


Bribery and Corruption Risk

Bribery and corruption are commonplace in Mexico affecting all levels of government and law enforcement. Transparency International ranks Mexico 103rd of 177 countries in terms of corruption perception.

The President’s family and members of cabinet were the subject of allegations of corruption in 2014, following which, the President launched a full investigation and has since advanced a stronger anti-corruption reform agenda. Reforms introduced in 2015 include a federal anti-corruption framework and significantly tightened auditing of public finances and tender processes. While the legislation provides for a strong legal framework, poor enforcement particularly at local levels has hampered effectiveness.

Legal and Regulatory Risk

With higher levels of corruption, it is not surprising Mexico experiences higher levels of collusion between law enforcement, the judiciary and criminal groups. This results in reduced enforceability of laws and contracts and can become particularly problematic for businesses that compete with interests of influential competitors.

In general, the court system in Mexico is slow, suffering from a lack of resourcing and deterrent sentences and poor communication between law enforcement and other government agencies. As a result legal proceedings can become protracted and costly to pursue.

Enforcement of intellectual property also remains a key issue in Mexico. The existence of a significant black market means piracy and counterfeiting is common. Despite recognition of the problem and government attempts to improve legislative protections, enforcement remains particularly weak at the local level due to a lack of experience in IP protection. The government has committed to further enhancing the IP protection framework and copyright mechanisms, however significant change is unlikely in the short-term.

Reputational and other risks

Human rights violations are regularly reported in Mexico including cases of torture and disappearances. Reports of intimidation of journalists and human rights representatives are not uncommon.

While enforced labour is not commonly noted, significant poverty can lead to increased risk of exploitation. Even though Mexico allows for organised labour unions, workers are often poorly represented by union leaders who maintain well-paying jobs often gained through nepotism.

Large-scale projects are regularly advanced without consultation or consideration of impacts on local communities, particularly in rural areas where developments have proceeded at the expense of local communities and environmental concerns.

Mitigating the Risks

Despite the complex risk environment, many foreign businesses successfully manage to navigate the environment and growth their business. Most do so by taking steps to research the specific risks to their business model and ensuring they maintain an ongoing process of review.

Engaging a trusted local adviser can assist in understanding the normal business practices in Mexico, navigate the cultural differences and assist in identifying practices which may be less than above board.

Due diligence on potential business partners should be conducted to identify beneficial ownership and counterparties, understand local issues and reputational concerns and identify any other red-flags before entering into any formal partnerships or distribution agreements.

Finally, a well-designed compliance program should be implemented from day one of operations. Engaging in corrupt practices is illegal under Australian and Mexican laws and investing in a robust compliance framework from the start will help mitigate risks to both the revenues and reputation of your business.



CROSS-CULTURAL UNDERSTANDINGMexico is considered a high-context culture, which means that generally the people are relational, collectivist, intuitive, and contemplative. People in these cultures generally emphasise interpersonal relationships and developing trust as an important first step to any business transaction. Moreover, people in these cultures are less governed by reason than by intuition or feelings. Words are not as important as context, which might include the speaker’s tone of voice, facial expression, gestures, posture and even the person’s family history and status.

Here are some important points to consider with regards to high-context communication.

• Communication is indirect and more formal.

• Meaning is indirect, implied, and derived from the context.

• Non-verbals are very important.

• Lots of inferences need to be drawn.

• Words are considered to promote harmony.

• Conflict is avoided.

• People say ‘no’ without using the word ‘no’.

• Flowery language, humility, and elaborate apologies are typical.

Business relationships tend to be more formal than in Australia and the use of first names is not as widespread. Meetings with customers and advisors are often held over breakfast or lunch, and lunches can tend to be quite lengthy.151

PRACTICAL BUSINESS INFORMATION

Office Hours

Business office hours vary but are generally from 9.00am to 6.00-7.00pm. Most executives take lunch hours between 2.00-4.00pm.

Government offices usually open to the public from 8.00am to 6.00pm.

Time Zones

Most of the country uses Mexico’s Central Time, which is 16 hours behind Australian Eastern Standard Time (AEST). The only exceptions are the States of Baja California, Baja California Sur, Sinaloa, Sonora, Chihuahua and Nayarit, which use Pacific Standard Time.

International calling codes

Mexico’s country code is 52.

For calls to Mexico from Australia dial: 0011 + 52 + area code + telephone number.

For calls from Mexico to Australia dial: 00 + 61 + area code + telephone number.

Visas

Australian citizens are able to enter to Mexico as tourists, visitors in transit or business visitors for up to 180 days without needing a visa.

Public Holidays

January 1 New Year’s Day

February 4 Constitution Day

March 16 Benito Juarez Day

April 9 Maundy Thursday

April 10 Good Friday

May 1 Labour Day

May 5 Anniversary of Battle of Puebla

September 16 Independence Day

October 12 Dia de la Raza/Columbus Day

November 2 Day of the Dead

November 20 Anniversary of the Revolution

December 12 Day of Our Lady of Guadalupe

December 25 Christmas Day


Measurement

Mexico uses the metric system.

Doing Business Tips

Being able to speak Spanish fluently, having employees that speak Spanish, or having a Spanish-speaking local partner is key to success in Mexico. Most managers in large international companies will speak English but might be more comfortable speaking Spanish. It is highly advisable that a Spanish speaking person attends business meetings to translate to avoid any misunderstandings.

When attending a meeting in Mexico, be sure to take plenty of business cards but don’t necessarily expect to always receive one in return.

Unsurprisingly, Mexicans like to do business with people they know and trust, therefore developing strong personal and professional relationships is very important.

It is recommended to confirm meetings a number of times before they are due to take place, even on the day.

Business in Mexico may be more political than in Australia and Mexico’s state governments are very influential in regional industries.

Do your research before your meetings. In Mexico, social status and family names are important so it is beneficial to know about the reputation of any potential business partner before the fact.

The badge of government is well regarded in Mexico, hence it is important to make contact with Austrade as they can assist you by providing introductions and local contacts.

IP Protection:

• Patent protection is available for a non-extendable term of 20 years.

• Trademark protection is available for a ten-year period, renewable after ten years.

• Copyright piracy is severely punished.


KEY CONTACTS

Austrade (office located in the Australian Embassy)

Australian Embassy Ruben Dario #55, Esquina Campos Eliseos Col Polanco DF 11580 Austrade contact details:

Tel: +52 55 1101 2267 Fax: +52 55 5728 6459

Department of Foreign Affairs and Trade

Australian Embassy Ruben Dario #55, Esquina Campos Eliseos Col Polanco DF 11580

Tel: +52-55-11012200 Fax: +52-55-1101-2201

ProMexico:

Camino a Santa Teresa No. 1679, Colonia Jardines del Pedregal Delegación álvaro Obregón, Mexico City, C.P. 01900, México

Tel: (55) 5447 7000 Ext. 1167 E-mail: [email protected]

Australia, New Zealand & México Business Council (ANZMEX)

Rio de la Plata #30 Col. Cuauhtemoc D.F. 06500 México

Tel: +52 (55) 5211 6233 Web: www.anzmex.org


BUILDING CAPABILITY THROUGH TWO-WAY EXCHANGE

Internships, or similar programs, can offer both the Australian company and the international intern involved with the opportunity to mutually benefit from the exchange of knowledge and experience.

Through an internship program, for example, an Australian company has the opportunity to take on a student or skilled professional from overseas to work on a specific project over a set period.

Not only do the interns gain valuable international professional work experience, the company can leverage their skills and knowledge to help advance their international business endeavours.

NOJA Power, an award winning Queensland exporter (see case study on page 39), did exactly that in 2006 when it took on Brazilian intern, Bruno Kimura, who was completing his electrical engineering degree at the University of São Paulo at the time. Internships Australia—also a successful Australian exporter—facilitated the arrangement, eliminating much of the guess work and hassle.

NOJA Power specialises in the research and development, manufacture, marketing, sale and service of low and medium-voltage switchgear products. Initially tasked with translating the man-machine interface strings, manuals and other documents from English to Portuguese, Bruno was soon tasked with assembling reclosers, manufactured cables and testing communications between modules. Bruno also provided technical support to Festimport, NOJA Power’s distributor on Brazil.

Before the end of his internship Bruno was asked to design a new low-voltage test bench and a 20-kV high-voltage test source. He had to not only design the equipment, but also build it and train the staff, as well as going through the process of selecting and ordering the parts and drafting the required documentation. Through this process, Bruno earnt the respect and trust of NOJA Power’s management team and, after returning to Brazil to complete his degree, Bruno kept in touch with NOJA Power and Festimport.

Following his graduation, Bruno accepted a role with Festimport in Brazil. NOJA Power Brazil was later founded in January 2012 to service the growing demand for the company’s products in the market. Bruno took on various positions with NOJA Power Brazil over the years before being appointed Managing Director of the Company’s Brazilian operation.

While this story presents a particularly fortuitous turn of events, this model has the potential to be more widely adopted by Australian companies expanding internationally, into markets such as Mexico, as an avenue through which to increase internal capabilities and fill knowledge gaps.


1 “People and Society: Mexico.” CIA World Fact Book, accessed July 01, 2015. https://www.cia.gov/library/publications/the-world-factbook/geos/mx.html

2 Ibid.

3 “Conducting Business in Mexico: Australian Companies Must Understand the Risks to Reap the Rewards.” FTI Consulting, July 29, 2015.

4 “What Tony Abbott and Bill Shorten could learn from Mexico.” Australian Financial Review, November 16, 2014. http://www.afr.com/news/what-tony-abbott-and-billshorten-could-learn-from-mexico-20141115-11nccm.

5 “Mexico’s Foreign Investment Problem.” The Huffington Post, May 14, 2015. http://www.huffingtonpost.com/rodrigo-aguilera/mexicos-foreign-investmen_b_7285512.html; “Mexico auctions oil blocks to foreigners, but sells only two.” Australian Financial Review, July 16, 2015. http://www.afr.com/news/world/mexico-auctions-oil-blocks-to-foreigners-but-sells-only-two-20150716-gidiym.


7 “What’s Driving Mexico’s Growth?” Forbes, July 22, 2014. http://www.forbes.com/sites/hsbc/2014/07/22/whats-driving-mexicos-growth/.

8 “Trade Policy Review: Mexico.” World Trade Organisation, April 19, 2013. https://www.wto.org/english/tratop_e/tpr_e/s279_sum_e.pdf.

9 Ibid.

10 “Mexico Central Bank Cuts ’15 GDP forecast for Second Time.” Bloomberg, February 19, 2015. http://www.bloomberg.com/news/articles/2015-02-18/mexico-central-bank-cuts-15-gdp-growth-forecast-for-second-time.

11 “Mexico saw record $35 bln in foreign direct investment in 2013.” Reuters, February 23, 2014. http://www.reuters.com/article/2014/02/23/mexico-fdi-idUSL1N0LS0A220140223.

12 “Mexico secures A-grade credit rating from Moody’s.” Financial Times, February 5, 2014. http://www.ft.com/cms/s/0/b5cd9cfa-8e9e-11e3-b6f1-00144feab7de.html#axzz3f5LHMrLW.

13 “Spillovers From Falling Oil Prices: Risks to Mexico and the United States.” Council on Foreign Relations, December 2014. http://www.cfr.org/mexico/spillovers-falling-oil-prices-risks-mexico-united-states/p33951.

14 Ibid.

15 Ibid.

16 “Life after the commodity boom.” The Economist, May 29, 2014. http://www.economist.com/news/americas/21599782-instead-crises-past-mediocre-growth-big-riskunless-productivity-rises-life


18 “Informal economy makes up 26 per cent of Mexico’s GDP.” Telesur, August 8, 2014. http://www.telesurtv.net/english/news/Informal-Economy-Makes-Up-26-of-Mexicos-GDP-20140808-0044.html.



21 “Exports of goods and service ( per cent of GDP).” The World Bank, accessed July 01, 2015. http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS.

22 Ibid.

23 Ibid.

24 “Latin America in 2015: Manufacturing Aces, Commodity Bases and Basket Cases.” Knowledge@Wharton, January 09, 2015. http://knowledge.wharton.upenn.edu/article/latin-america-in-2015-growth-for-some-trouble-for-others/.

25 Ibid.

26 “Doing Business in Mexico.” PwC, January 2015. http://read.pwc.com/i/434024-doing-business-in-mexico-2015.

27 “Doing Business in Mexico: 2014 Country Commercial Guide for U.S. Companies.” US Commercial Service, accessed July 01, 2015. http://export.gov/mexico/static/CCGFINAL2014_Latest_eg_mx_076936.pdf.

28 Ibid.

29 Ibid.

30 Ibid.

31 Ibid.

32 “Business and Investment.” Pacific Alliance, accessed July 15, 2015. http://alianzapacifico.net/en/#home.

33 “The Pacific Alliance: A Trade Integration Initiative in Latin America.” US Congressional Research Service, October 2, 2014. http://fas.org/sgp/crs/row/R43748.pdf.

34 Ibid.

35 Ibid.

36 Ibid.

37 “Pacific Alliance integrated stock markets, MILA, begins operations from Mexico.” MercoPress, December 04, 2014. http://en.mercopress.com/2014/12/04/pacific-alliance-integrated-stock-markets-mila-begins-operations-from-mexico.

38 Ibid.

39A “Latin America hails TPP trade opening.” Financial Times, October 6, 2015. http://www.ft.com/intl/cms/s/0/e01c1fe0-6bb0-11e5-8608-a0853fb4e1fe.html#axzz3qJLhVcuS.

39B “What Does the TPP Mean for Latin America?” Council on Foreign Relations, May 19, 2015. http://www.cfr.org/latin-america-and-the-caribbean/does-tpp-mean-latin-america/p36556.

39C “Mexico Fact Sheet.” Australian Department of Foreign Affairs and Trade, June 2015. http://dfat.gov.au/trade/resources/Documents/mexi.pdf.

40 Ibid.

41 “Crude oil – production”. CIA World Factbook, accessed July 01, 2015. https://www.cia.gov/library/publications/the-world-factbook/rankorder/2241rank.html

42 “Doing Business in Mexico.” PwC Mexico, January 2015. http://read.pwc.com/i/434024-doing-business-in-mexico-2015.

43 “A new Mexican revolution.” The Economist, November 15, 2014. http://www.economist.com/news/business/21632504-countrys-energy-reforms-may-transform-not-just-oil-and-gas-business-whole-its.

44 Ibid.

45 “Energy Reform in Mexico.” Herbert Smith Freehills, January 14, 2015. http://www.herbertsmithfreehills.com/-/media/Files/ebulletins/20140114 per cent20Energy per cent20reform per cent20in per cent20Mexico.htm.

46 “Pemex awarded 83 per cent of 2P, 21 per cent of prospective reserves.” BN Americas, August 13, 2014. http://www.bnamericas.com/news/oilandgas/pemex-awarded-83-of-2p-21-of-prospective-reserves.

47 “Energy Reform in Mexico.” Herbert Smith Freehills, January 14, 2015. http://www.herbertsmithfreehills.com/-/media/Files/ebulletins/20140114 per cent20Energy per cent20reform per cent20in per cent20Mexico.htm.

48 Ibid.


10. REFERENCES


50 “Mexico auctions oil blocks to foreigners, but sells only two.” Australian Financial Review, July 16, 2015. http://www.afr.com/news/world/mexico-auctions-oil-blocks-to-foreigners-but-sells-only-two-20150716-gidiym.

51 Ibid.

52 Ibid.

53 Ibid.

54 “Mexico’s Foreign Investment Problem.” The Huffington Post, May 15, 2015. http://www.huffingtonpost.com/rodrigo-aguilera/mexicos-foreign-investmen_b_7285512.html.

55 “A new Mexican revolution.” The Economist, November 15, 2014. http://www.economist.com/news/business/21632504-countrys-energy-reforms-may-transform-not-just-oil-and-gas-business-whole-its.

56 “Mexico auctions oil blocks to foreigners, but sells only two.” Australian Financial Review, July 16, 2015. http://www.afr.com/news/world/mexico-auctions-oil-blocks-to-foreigners-but-sells-only-two-20150716-gidiym.

57 Ibid.

58 “Mexican Energy Reform.” Columbia University SIPA Center on Global Energy Policy, June 2014. http://www.goldmansachs.com/our-thinking/pages/north-american-energy-summit/reports/cgep-mexican-energy-reform.pdf.

59 AES, Groupo Bal to invest up to $2.5 billion in Mexico energy sector.” Reuter, August 10, 2015. http://www.reuters.com/article/2015/08/10/mexico-aes-corp-grupobal-idUSL1N10L1II20150810.

60 “Petrobal the first private oil company of Mexico.” Mexico News Network, March 21, 2015. http://www.mexiconewsnetwork.com/news/petrobal-oil/

61 “Mexico moving forward with major natural gas pipeline.” OilPrice.com, June 30, 2015. http://oilprice.com/Energy/Natural-Gas/Mexico-Moving-Forward-with-Major-Natural-Gas-Pipeline.html

62 “Nuclear Power in Mexico.” World Nuclear Association, July 2015. http://www.world-nuclear.org/info/Country-Profiles/Countries-G-N/Mexico/

63 “Mexican Energy Reform.” Columbia University SIPA Center on Global Energy Policy, June 2014. http://www.goldmansachs.com/our-thinking/pages/north-american-energy-summit/reports/cgep-mexican-energy-reform.pdf.

64 “Electricity reform: what Mexico deserves.” Financial Times, February 24, 2015. http://blogs.ft.com/beyond-brics/2015/02/24/electricity-reform-what-mexico-deserves/.

65 “Mexico Opens Its Grid to Competition.” IEEE Spectrum, August 14, 2014. http://spectrum.ieee.org/energywise/energy/policy/mexico-opens-its-grid-to-competition.


67 “Mexico sets National target of 5% renewable energy by 2018.” Bloomberg Business, April 1, 2015. http://www.bloomberg.com/news/articles/2015-03-31/mexico-sets-national-target-of-5-renewable-energy-by-2018.

68 “Strong prospects for Australian companies in Latin America oil and gas sector.” Austrade, April 10, 2015. http://www.austrade.gov.au/about-austrade/news/latest-from-austrade/2015/strong-prospects-for-australian-companies-in-latin-american-oil-and-gas-sector.

69 “BHP prepares Mexico oil bid, despite price slump and shale cuts.” Australian Financial Review, January 23, 2015. http://www.afr.com/news/policy/climate/bhp-prepares-mexico-oil-bid-despite-price-slump-and-shale-cuts-20150122-12wgff.

70 Ibid.

71 “Strong prospects for Australian companies in Latin America oil and gas sector.” Austrade, April 10, 2015. http://www.austrade.gov.au/about-austrade/news/latest-from-austrade/2015/strong-prospects-for-australian-companies-in-latin-american-oil-and-gas-sector.

72 “Falling Oil Prices Could Affect Supply, Pemex CEO Says.” Wall Street Journal, December 19, 2014. http://www.wsj.com/articles/falling-oil-prices-could-affect-supply-pemex-ceo-says-1419023926.

73 Ibid.

74 “Mexican Energy Reform: Implications and opportunities in the national electricity network.” PwC Mexico, January 2014, http://www.pwc.com/es_MX/mx/industrias/archivo/2014-01-mexican-energy-reform-implications.pdf.

75 Ibid.


77 “Mexico Opens Its Grid to Competition.” IEEE Spectrum, August 14, 2014. http://spectrum.ieee.org/energywise/energy/policy/mexico-opens-its-grid-to-competition.


79 Ibid.

80 Ibid.

81 Ibid.

82 “Mexico looks to Australia for innovation in tropical agriculture.” Austrade, November 19, 2014. http://www.austrade.gov.au/about-austrade/news/latest-from-austrade/2014/mexico-looks-to-australia-for-innovation-in-tropical-agriculture.

83 Ibid.

84 “New market access opportunities for Australian animal genetics.” The Hon. Barnaby Joyce MP, Minister for Agriculture, August 20, 2015. http://www.agricultureminister.gov.au/Pages/Media-Releases/market-access-for-animal-genetics.aspx

85 “Mexico looks to Australia for innovation in tropical agriculture.” Austrade, November 19, 2014. http://www.austrade.gov.au/about-austrade/news/latest-from-austrade/2014/mexico-looks-to-australia-for-innovation-in-tropical-agriculture.

86 Ibid.

87 Ibid.

88 “Meating in the middle on sheep markets.” The Land, November 04, 2014. http://www.theland.com.au/news/agriculture/sheep/meat/meating-in-the-middle-on-sheep-markets/2716487.aspx?storypage=0.


90 “Mexico’s telecom Reform.” Manatt Jones, September 2014. https://www.manatt.com/uploadedFiles/Content/3_Practices/Manatt_Jones_Global_Strategies/MJGS-Mexico-Telecom-Reform.pdf.

91 “Telecommunications: Mexico’s New Reform.” Americas Quarterly, Sumer 2013. http://www.americasquarterly.org/content/telecommunications-mexicos-new-reform.

92 Ibid.

93 Ibid.

94 Ibid.

95 “Mexico’s president signs telecoms reform rules into law.” Reuters, July 14, 2014. http://www.reuters.com/article/2014/07/14/us-mexico-reforms-idUSKBN0FJ2DU20140714.

96 Ibid.

97 “America Movil Misses Profit Estimates Amid Fines in Mexico.” Bloomberg, July 17, 2015. http://www.bloomberg.com/news/articles/2015-07-16/america-movil-misses-profit-estimates-as-fines-in-mexico-hurt.

98 Ibid.



“Mexico’s president signs telecoms reform rules into law.” Reuters, July 14, 2014. http://www.reuters.com/article/2014/07/14/us-mexico-reforms-idUSKBN0FJ2DU20140714.


101 Ibid.

102A “Mexico’s Foreign Investment Problem.” The Huffington Post, May 14, 2015. http://www.huffingtonpost.com/rodrigo-aguilera/mexicos-foreign-investmen_b_7285512.html.

102B Crowd Mobile to launch into Mexico & expands language capabilities. Australian Stock Exchange, May 25, 2015. http://www.asx.com.au/asxpdf/20150525/pdf/42yrtmsjpng5k5.pdf”).

103 “Mexico’s telecom Reform.” Manatt Jones, September 2014. https://www.manatt.com/uploadedFiles/Content/3_Practices/Manatt_Jones_Global_Strategies/MJGS-Mexico-Telecom-Reform.pdf.

104 “Latin American Manufacturing Outlook July 2015.” MAPI Foundation, July 13, 2015. https://www.mapi.net/research/publications/latin-america-manufacturing-outlook-july-2015.

105 “The BCG Global Manufacturing Cost-Competitiveness Index.” BCG Perspectives, August 19, 2014. https://www.bcgperspectives.com/content/interactive/lean_manufacturing_globalization_bcg_global_manufacturing_cost_competitiveness_index/.

106 “Mexico: auto-export powerhouse in the TPP? Lower average manufacturing costs than China.” American Chamber of Commerce in Vietnam, accessed July 01, 2015. http://www.amchamvietnam.com/30446327/mexico-auto-export-powerhouse-in-tpp/.

107 Ibid.


109 “BMW to Invest $1 Billion in Mexican Assembly Plant” Wall Street Journal, July 3, 2014. http://www.wsj.com/articles/bmw-to-invest-1-billion-in-mexican-assembly-plant-1404415693

110 “Latin America in 2015: Manufacturing Aces, Commodity Bases and Basket Cases.” Knowledge@Wharton, January 09, 2015. http://knowledge.wharton.upenn.edu/article/latin-america-in-2015-growth-for-some-trouble-for-others/.








118 Ibid.

119 Ibid.

120 “Mexico: Pivot To The Globe.” Australian Trade Commission, accessed June 01, 2015. https://www.austrade.gov.au/ArticleDocuments/1418/Mexico-Pivot-to-the-Globe.pdf.aspx.

121 “Mexico draws miners despite, social headwinds.” Mining Journal, July 03, 2015. http://www.mining-journal.com/world/north-america/mexico-draws-miners-despite-tax-social-headwinds/.

122 Ibid.

123 “Mining to Mexico.” Australian Trade Commission, May 13, 2015. http://www.austrade.gov.au/export/export-markets/countries/mexico/industries/mining#.VbS93XgxHSK.


125 “Mexico: Mining Opportunities.” Presentation by Australian Trade Commission, July 2, 2015.

126 “Mexico draws miners despite tax, social headwinds.” Mining Journal, July 03, 2015. http://www.mining-journal.com/world/north-america/mexico-draws-miners-despite-tax-social-headwinds/.

127 Ibid.

128 Ibid.

129 Ibid.

130 Ibid.

131 Ibid.


133 Ibid.

134 Ibid.

135 Ibid.

136 “Mining to Mexico.” Australian Trade Commission, May 13, 2015. http://www.austrade.gov.au/export/export-markets/countries/mexico/industries/mining#.VbS93XgxHSK.

137 Ibid.

138 Ibid.

139A Rio, Azure tap into Mexico.” The Australian Business Review, September 09, 2014. http://www.theaustralian.com.au/business/wealth/rio-azure-tap-into-mexico/news-story/3503a9a89812d3222b28b72b89c907d6 “).

139B “TPP: Mining and energy services will be big winners, says Andrew Robb.” Australian Financial Review, July 26, 2015. http://www.afr.com/news/world/asia/tpp-mining-and-energy-services-will-be-big-winners-says-andrew-robb-20150726-giktx3.

140 Ibid.

141 “Doing Business in Mexico.” PwC Mexico, January 2015. http://www.pwc.com/mx/es/publicaciones/doing-business-mexico.jhtml.

142 Ibid

143 “Australia and Mexico treaty - key points.” Australian Tax Office, December 2007, accessed 22 July 2015. https://www.ato.gov.au/General/International-tax-agreements/In-detail/Tax-treaties/Australia-and-Mexico-treaty---key-points/

144 Ibid


146 Ibid

147 Ibid

148 “Importing into Mexico”, presentation by Sandler & Travis de Mexico, July 30, 2015.

149 Temblador, Carlos, Clipper Solutions. Interview by Stacey Mills-Smith. Telephone interview. July 15, 2015.

150 “Importing into Mexico”, presentation by Sandler & Travis de Mexico, July 30, 2015.


10. REFERENCES


11. ABOUT US

The Australian International Trade and Transport Industry Development Fund, trading as ITDF, is a not for profit organisation whose objective is to provide grants to Australian international trade and transport industry participants to promote, support, advance or enhance:

i. e-Commerce projects in Australia which benefit the commercial, operational, legislative and regulatory processes supporting Australia’s International Trade and Transport Industry;

ii. Projects in Australia to assist Australian industry to facilitate international trade with its trading partners;

iii. Projects in Australia that encourage more efficient international supply chain solutions for Australian industry; and

iv. Projects in Australia aimed at measurably increasing the level of skills and training in the international trade and transport industry, including participants in that industry.

SUPPORTED BY

The Australian Trade Commission (Austrade) contributes to Australia’s economic prosperity by helping Australian businesses, education institutions, tourism operators, governments and citizens as they develop international markets, win productive foreign direct investment, promote international education, strengthen Australia’s tourism industry and seek consular and passport services.

EXPORT COUNCIL OF AUSTRALIAThe Export Council of Australia is the peak industry body for the Australian export community. Owned by its members and steered by a Board and Council of Industry specialists, the ECA is a not-for-profit organisation that has the development of Australia’s resources via the promotion of Australian industry in international markets as its primary goal.

THINK GLOBAL TRADE: THINK ECA.


PwC helps organisations and individuals create the value they’re looking for. We’re a network of firms in 157 countries with more than 195,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at: www.pwc.com.

PwC refers to the PwC network and/ or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

Harris Gómez Group is an Australian-Latin American legal and business advisory firm. In 2001, HGG was the first Australian law firm to have a local office in Latin America. The firm specialises in Common Law and Latin American cross-border issues in areas such as Mining and Energy, Corporate, Mergers and Acquisitions, Tax, Intellectual Property and Business Enterprises. With over 21 years of experience immersed in the respective legal and business cultures of Australia and Latin America, we create a seamless bridge between the two regions and have become an essential partner to many multinational enterprises.

FTI Consulting is a global leader in helping businesses protect and enhance their enterprise value.

The Global Risk and Investigations Practice (“GRIP”) of FTI Consulting provides a multidisciplinary approach to a broad range of critical investigations including business intelligence and due diligence services. We have offices in Australia and Mexico City.

RESEARCH PARTNERS

11. ABOUT US


Niels Strazdins is the Head Research Manager at the Export Council of Australia. He holds a Master of International Business and Master of International Relations from Macquarie University, Sydney, as well as Bachelor’s in Business Administration from York University in Toronto.

He has professional experience in a number of countries across four continents, ranging from aviation and infrastructure to corporate banking.

He is a keen observer of international events and is involved in a number of regional initiatives to boost Australian engagement with emerging markets. He can be reached at [email protected].

Stacey Mills-Smith is the Trade Policy and Research Manager at the Export Council of Australia. In this role she works with industry and government to advance the interests of Australian businesses engaged in international trade.

Stacey graduated from the University of Queensland with

a Bachelor of Economics and a Bachelor of Arts and following her graduation she worked for PricewaterhouseCoopers in the Economics and Policy division. Later, her interest in international trade saw her join Trade and Investment Queensland as a business analyst and gain international experience working in Santiago, Chile. Stacey joined the Export Council of Australia in 2013 and can be reached at [email protected].

This report is a review of some the reforms taking place in Mexico and the opportunities these might afford Australian companies. It contains information, including contributed material from subject matter experts, which provide insights and advice on the practicalities of doing business in Mexico. A number of case studies from Australian businesses operating in Mexico, or looking to do business there, offer insights into their experiences and perceptions of the market.

The report is primarily based on secondary research conducted by the ECA over four months, sourced from both online and printed materials. All attempts have been made to reference secondary material where utilised.

Primary information was gathered through interviews and surveys of Australian businesses, Australian and Mexican officials and Mexican industry bodies. This includes documents and publications supplied by them. Sources are referenced in some cases and omitted in others by request.

The online survey conducted by the ECA was targeted at Australian companies doing business in Mexico. Responses from 48 businesses were recorded, reflecting the relatively low number of Australian companies currently active in the market.

All attempts have been made to ensure the contents of this report are as up-to-date as possible at the time of publication, however, as the reform process is ongoing, no guarantee can be made about the accuracy of the claims made in this report.

AUTHORS METHODOLOGY


Export Council of AustraliaExport House, Level 2, 22 Pitt Street, Sydney NSW 2000 t: 02 8243 7400 e: [email protected] www.export.org.au www.aiex.com.au