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Following up to our January’s newsletter, several articles on various leading publications have been confirming what we were informing then: Mexico is back as a strong alternative for those companies pursuing new markets or looking for additional manufacturing capabilities.

Mexico’s new administration is vigorously moving forward fundamental reforms to Mexico’s tax, labor, education and possibly energy sector and these reforms will certainly provide us with positive material to keep you inform of Mexico’s impressive economic performance.

Despite that the main economies around the world have slowed down its economic growth, Mexico has steadily growing, maintaining a low unemployment rate as well as keeping trade with its main partners.

           The Globe and Mail

“High unemployment, slow growth and crippling debt are common themes in many industrialized countries around the world, but not in Mexico. The unemployment rate in Latin America’s second largest economy has fallen to its lowest level in more than four years, at 4.5 percent. Economic growth is outperforming most other countries and the stock market is hitting records high. A solid jobs market and stable economy is bolstering the country’s middle class. But it could also carry benefits to Canada too. Mexico is Canada’s fifth largest destination for exports and many Canadians firms are setting their sights on Mexico, betting prospects will keep improving.

…

Trade between Canada and Mexico grew 8 percent between 2002 and 2011 (at compound annual growth rates), and EDC expects growth to continue. Mexico’s large population, at 112 million and upbeat economic prospects ‘will have positive effects on their demand for Canadian products as well as open business opportunities for Canadian companies looking at doing business in that market’ the agency said. The country’s economy is expected to expand 3.5 percent this year – a little less than last year but still stronger than projected rates for Canada, the United States and much of Latin America.

‘While much of the world’s economies, such as China and Brazil, slid in a slowdown last summer, Mexico was a rare and notable exception, generating remarkably smooth growth,’ said Mr. Peter Hall, chief economist at Export Development Bank in a note.”

     By: Tavia Grant – The Globe and Mail

              Click here to read full article

 Another thing that should be pointed out is the great number of Free Trade Agreements that Mexico has currently in place, which are 12 with 44 countries, and advantage that allows companies therein to have access to more markets than any other country.

           The New York Times

“Mexico has signed 44 (sic) free trade agreements – more than any country in the world – which according to the Financial Times is more than twice as China and four times more than Brazil. Mexico has also greatly increased the number of engineers and skilled laborers graduating from its schools. Put all that together with a massive natural gas finds and rising wage and transportation costs in China, and it is not surprise that Mexico now is taking manufacturing market share back from Asia and attracting more global investment than ever in autos, aerospace and household goods.

…

’Today, Mexico exports more manufactured products than the rest of Latin America put together.’ The Financial Times reported on Sept. 19, 2012. Chrysler, for example, is using Mexico as base to supply some of its Fiat 500s to the Chinese market.

 …Better integration of Mexico’s manufacturing and innovation prowess into America is a win-win situation, because it makes U.S. [and Canadian too, sic] companies more profitable and competitive, so they can expand at home and abroad.”

                                                               By: Thomas L. Friedman – The New York Times

                                                                                                   Click here to read full article

 Consequently, investors have in the last months decided to put their money in Mexico in larger quantities than in other countries of the region.

           The Financial Times

“Foreign investors have poured money in. During the first nine months of 2012, they funneled $57bn into Mexican stock and bonds, more than five times the amount they invested in Brazil during the same period.”

By: Adam Thompson- The Financial Times

                                                                                                             Click here to read full article

Mexico seems to be back on track, regaining its 1^st place as an the best option for those companies interested in both, expanding their markets as well as setting up additional manufacturing capabilities.

At Solorzano Corporation we continue to be attentive to bring you current and relevant information on the markets we follow closely, Mexico and Colombia. We also continue to be committed to assisting you with all your needs in those two markets.

Canada´s industries reaching maximum capacity

As the industries in Canada have been recovering from the financial crisis of 2008, the production capacity is reaching new highs resulting in longer delivery times, labor shortages, and cost increases. Consequently, several companies facing these problems are losing opportunities, limiting companies’ growth.

According to Statistics Canada, the industrial capacity utilization rates on the second quarter of 2012 are 81%, which has been increasing steadily since the third quarter of 2011. This capacity utilization rate was increased in 11 of the 21 major manufacturing industries in the second quarter of this year, with some industries reaching almost 90% like the oil and gas extraction and machinery manufacturing.

The rates are even higher than the ones prior the financial crisis, as the table below shows:

Source: Statistics Canada

Companies are resisting from increasing production capacity as it poses multiple financial and human resources challenges, which is time consuming and represents an undesired risk in case of potential economy downturns.

 Mexico an alternative

Considering its strategic location, Mexico represents an attractive option for those companies that are seeking alternatives to offset its restraints of industrial capacity.

Mexico has 12 FTAs with a total of 44 countries, becoming one of the most open countries to international trade, with preferential access to more than one billion potential consumers with income representing 60% of the Gross Domestic Product. At this pace, according to a HSBC trade forecast, Mexico will become the most important trading partner of United States by 2018.

Moreover, if we consider that Mexico offers significant savings on labor costs when compared to other investment options in the Americas, Europe and Asia.

Mexico’s manufacturing capacity

Mexico has established as a strategic manufacturer for several international companies, namely BOMBARDIER, NISSAN, ERICSSON and other important companies, considering several advantages, i.e. 8 out of the 10 largest manufacturers of electronic products in the world have activities in Mexico, as it is one of the world’s top exporters and accounts for almost third of the products that Latin America trades overseas.

In terms of infrastructure, Mexico has:

• 76 airports (12 nationals and 64 internationals)
• 117 ports
• 372,000 kms. of roads
• 26,715 kms. of train routes

However, there are other international companies that just decide to use Mexican manufacturers as suppliers of a multiplicity of components of the products/devices they trade. Such companies are for example, manufacturers of oil and gas equipment, medical equipment and for the aeronautical industry.

In conclusion, due to the increase of production capacity in Canada, Mexico represents an interesting option, which can eventually offset the manufacturing capacity of companies, even more considering that the NAFTA zone may be the final destination for most of the products.

“At Solorzano Corporation we will be pleased to assisting you with your business opportunities in Mexico”

Early 2010 PEMEX’s new rules for buying and contracting the acquisition of products and services, as well as the execution of public works were published in Mexico’s Official Daily Gazette. It is a single set of rules mixing provisions from the Acquisition, Leasing and Public Services Law [Ley de Adquisiciones, Arrendamientos y Servicios del Sector Público], the Public Works and Related Services Law [Ley de Obras Públicas y Servicios Relacionados con las mismas] and a new tailored code that will control exclusively the acquisitions and public works execution between PEMEX and/or its subsidiary entities and its multiple contractors.
As expected, it continues with the trend established by the energy reform (end of 2008) of assimilating the state owned company to any of its counterparts, international oil companies that operate independently and totally under corporate governance rules.
They are directly related with the also brand new regulations of PEMEX published at the end of last year, and all together incorporate important changes that range from transferring of technology to the way in which PEMEX and its subsidiaries will maximize the economic value of their projects, including the improvement of the contract’s transparent mechanisms.

Interestingly, the regulations have an especial section for exploration and production contracts, which highlights the new approach of PEMEX in addressing the urgency in developing new projects and increasing proven reserves.
The most important features are:
1.) Sets up the bases for the so called “Incentive-based contracts”, which are precisely designed to overcome the difficulties of the current regime and encourage contractors to be more efficient by rewarding them fairly. Although the payment to contractors must be in cash and not in kind since production sharing agreements continue to be forbidden under Mexican law, the new regulations allows PEMEX to compensate throughout a performance criteria.
2.) According with its article 62, the remunerations can be established “in function of the goals accomplished or in function of explicit and quantifiable indicators, expressed in measurement units, such as production, capacity, reserves replacement ratio, incorporation of reserves, costs reductions, the obtaining of any surplus, and others that have a direct impact in the profitability of PEMEX, its subsidiaries or the outcome of the project.”

3.) These incentive based contracts must be registered at the National Hydrocarbon Commission [Comisión Nacional de Hidrocarburos], who will be responsible, among others, for auditing and revising the way in which PEMEX grants these incentives.
4.) PEMEX and its subsidiaries will have the ability to relate the training of PEMEX’s personnel by contractors. Contracts involving new processes, products, activities, models or services will be revised in order to incorporate provisions for transferring of rights (technology) agreements.
5.) The establishing of blocks as it occurs in licensing systems, namely the United Kingdom Continental Shelf. These working areas will be identified by their latitude and longitude and will be granted to contractors according with the programmes authorized by PEMEX.
6.) Unitization provisions are also envisaged, mainly due to the possibility that hydrocarbons could be underlying between 2 or more blocks, assigned to different companies.
7.) Paradoxically, regarding exploration contracts, the payment to the contractor could be subject to the condition that the subsidiary entity, specifically PEMEX Exploration & Production, determines whether the discovered reservoir is commercial or not. This characteristic becomes relevant since it constitutes an expected disposition on risk contracts, common within the petroleum industry but completely contradictory and forbidden by Mexican Law. Moreover, it represents the starting point for further changes of prohibitions that now, distinguish the petroleum industry in Mexico from the rest.
By: Iván Carvallo & Carlos Solorzano

Click Here to see PEMEX – New Contracting Rules

Click Here to see the Edmonton Energy Summit presentation.