A closer look at the hottest sectors of Mexico’s economy.
BY GUILLAUME CORPART
Mexico is a country of multiple realities – from the well-documented drug violence in the northern part of the country to the hosting of the G20 summit in Los Cabos in June 2012 – yet despite all its contrasts and contradictions, the country is drawing attention as its prospects for long-term growth augur well. Indeed, so much so that investment outfits such as Goldman Sachs even forecast that Mexico has high possibilities of outgrowing Brazil as the leading economy in Latin America.
While Brazil remains the current darling of Latin America, the prospects are favorable for the tide to eventually change in favor of Mexico. What accounts for this remarkable turnaround of fortunes and where is growth concentrated in the Mexican economy?
Mexico’s economic turnaround stems from two main factors: the recovery of the U.S. economy (which accounts for 80 percent of Mexican exports) and the country’s sound macroeconomic policies, which have effectively shielded the economy against the effects of the global crisis. In May 2012 Mexico’s central bank raised its growth forecast for the year by 0.25 percent to a range of 3.25 percent to 4.25 percent. Raising the expected growth rate during an election year is a bold move that is rarely seen; it testifies to the Central Bank’s confidence in the incoming administration and Mr. Peña Nieto’s (and the PRI’s) ability to ensure continuity of the macroeconomic policies already in place.
The return to growth and the continuity in economic policy are ideal for allowing the strongest areas of Mexico’s economy to thrive. What is striking about Mexico’s growth prospects is how concentrated they are by location and by sector, making decisions to invest a lot easier. There are also a number of niche markets that offer enticing opportunities.
Mexico has 93 cities with a population of over 100,000 inhabitants, which together account for 88 percent of the total gross domestic production. Mexico’s six largest urban areas account for 44 percent of the country’s total production, employ 40 percent of the total labor force, and continue to grow. This geographic concentration of economic activity acts as a magnet for foreign direct investment, especially in the top six urban areas: Valle de Mexico (Mexico City and surroundings), Monterrey, Guadalajara, Puebla/Tlaxcala, Toluca and Saltillo.
The leading sectors are manufacturing (including, specifically, the automotive industry), which accounts for 19 percent of GDP; retail (17 percent); and mining (11 percent); other important industries include construction, transport and warehousing, and real estate services.
Manufacturing (19 percent of GDP)
Fueled by demand from U.S. consumers, Mexico’s manufacturing industry is driven by the automotive industry (4 percent of GDP); food production (5 percent of GDP, including beverage & tobacco); chemicals & plastics (2 percent of the GDP) and metal, mechanical & machinery (3 percent of the GDP).
The automotive industry — both auto assembly as well as auto parts and components — is a critical engine of economic growth, representing 20 percent of the national manufacturing industry and 23 percent of total exports. There are over 200 companies employing approximately 1.5 million jobs between them; Mexico is the 8th largest automobile producer in the world and the 2nd in Latin America, manufacturing 2.7 million units per year, a third of which are sold domestically. In 2011 906,000 cars were sold domestically, compared to 755,000 in 2009.
The Ministry of Economy forecasts that Mexico will produce over 3 million vehicles by 2015, doubling its 2009 production. And with increased competition from low-cost Asian manufacturers, Mexico’s automotive industry is moving away from its traditional low-cost manufacturing base and is increasingly competing based on value, with cost just being one competitive element alongside others, such as proximity to the target market, skilled labor, R&D, and overall time to market.
Retail (17 percent of GDP)
Mexico’s retail sector continues to grow on the heels of sustained expansion of the active labor force, the growth of consumer credit expansion that began in the early 2000s, and increased consumer confidence. Mexico’s highly aspirational and status-driven consumer base is the ideal breeding ground for brand differentiation and cultivating loyalty around carefully segmented consumer identities. Leading categories within the retail segment include electronics (mobile phones, televisions and computers), clothing and accessories, food and beverage, and health and wellness products.
Mining and natural resources (11 percent of GDP)
Mexico is blessed with abundant natural resources, with oil and gas, copper, and iron accounting for 80 percent of the economic activity in the extraction industry. While Pemex remains Mexico’s state-run oil and gas extraction arm, Canadian companies dominate the minerals mining sector. International leaders such as Goldcorp, Pan American Silver, Farallon Resources, Agnico Eagle, Kings Minerals, Frontera Copper, ArcelorMittal, Minco PLC, Hecla Mining, Teck Cominco, Glamis Gd and Constellation are present throughout the country, and specifically in Mexico’s northern region.
ENTICING NICHE OPPORTUNITIES
Aside from the leading industrial sectors, a few specific niche opportunities are appearing on the radar. Since 2008 Mexico has been diversifying its export partners, turning to non-traditional markets such as Asia and other Latin American countries. Simultaneously, internal demand is becoming more diversified, allowing new industries to flourish. While these sectors still represent a small portion of the overall economy, their growth is noteworthy.
The agricultural sector is turning from commodities (such as corn) to more value-added, export-driven products, such as fruits (berries, mangoes, pineapple, papaya, tuna fruit, melon, Persian lemon), fortified foods and dietary supplements, vegetables (lettuce, tomato, cucumber, chilies and avocado) and flowers (traditional and exotic). Over the last decade agricultural land for value-added produce grew by 7 percent while the land dedicated to growing corn has decreased by 1 percent. This trend has important ramifications for all related industries such as herbicides, pesticides, growth stimulators, agricultural technologies and equipment, warehousing, transport and logistics.
After recovering from a drop in demand during the influenza outbreak of 2009, Mexico’s hospitality business has been growing steadily. Demand for hotel and restaurant services grew by 5 percent over the past 7 years and 8 percent since the recovery from the influenza outbreak. Traditional vacation spots continue to attract tourists, with Cancun, Los Cabos and Huatulco among top destinations. However, the industry’s growth comes predominantly from second-tier and niche market destinations.
Companies are also capitalizing on domestic business travelers: hotels are addressing the needs of this segment by tailoring their “value proposition” to offer clean, comfortable rooms with Internet access, but with few additional frills, at a reasonable rate. The market for domestic vacationers has also seen growth. Unlike the traditional foreign tourist, the domestic traveler will likely travel by road and stay only 1 or 2 nights at a hotel before moving on to the next destination. Ecotourism is still small but showing signs of growth within the young adult consumer segment.
The healthcare and medical services industry continues to grow at an upbeat pace: healthcare spending as a percentage of GDP has increased from 5.1 percent in 2000 to 6.4 percent in 2010. The generic drug market holds the largest share in the public healthcare sector. The Mexican government is using public-private partnerships to create more and better healthcare infrastructure and services. The first high-specialty hospital built under this scheme started operations in March 2007.
Other private sector operators have expanded their services, notably to foreign patients. Mexico has consistently enhanced and increased its reputation for providing medical healthcare services at nearly half the cost of North American providers, with a focus on hip replacement surgeries, dental care, and cosmetic and plastic surgical procedures. Mexico offers international medical tourism clients a multitude of world-class medical services, procedures and techniques at affordable prices. Multinationals are taking advantage of this trend by strengthening their Mexican subsidiaries.
With a dynamic internal market, a stable economy and a young labor force, it is not surprising that many see a bright future for the Mexican economy. Let’s hope that Mr. Peña Nieto demonstrates the necessary leadership to capitalize on the favorable economic perspectives. So far, the signs are promising, including the continuity in macroeconomic policies.
Guillaume Corpart is the Managing Director of Americas Market Intelligence and a veteran of Latin American competitive intelligence and strategy consulting.