Mexico Country: Micro and Macroeconomic Environment

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Table of Contents

Introduction
Macroeconomic Indicators
Business Environment
Recommendation
References

Introduction

As requested by the Chief Executive Officer, we hereby present a micro and macroeconomic analysis on Mexico, one of the many potential markets that the company is willing to start supplying solar panels and appliances. This undertaking is of vital importance to the company; it provides a view of short run costs that will have to be paid for the company to gain in the long run. In order to explain Mexico’s economic conditions fully, the analysis is subdivided into three sections. The first section explains the basic macroeconomic indicators of the country. The second section stipulates regional and national governments policies towards entrepreneurial environment in the country. The third section compares Mexico’s business environment with those of other countries and consequently provides some recommendations.

Macroeconomic Indicators

Robust economic growth has catapulted Mexico from low development levels to middle-income countries. Indeed, the country is on a fast rise to becoming a fully industrialized country. Economic liberalization that has taken place since early 1990s has been instrumental in the country’s growth (Barry 2002). Continuing with the same vigor would lead to the country improving the living conditions of its people, some of still live in destitute poverty. The current economic conditions in the country is helping place Mexico as one of the fastest rising places to do business, especially in labor intensive industries that uses Mexico’s most abundant resource: labor. The proximity to the Unites States has also made it possible for Mexican goods to get access to one of most lucrative markets in the world. Mexican competitiveness over other countries has been increasing with time. Mexico is poised to becoming a key player in the international market. Due to this reason and many others that would be stipulated in this analysis, it is important that the company starts preparations of providing its services in the country of Mexico.

The population of Mexico currently stands at 100 million people, with 24 percent of them living in rural areas (Carmichael 2004). The 24 million individuals living in rural areas are potential consumers for solar equipment. This size of a market cannot be ignored. This is considering that the country has been experiencing robust economic growth, meaning that the people are ending-up with extra pesos to spend. Owing to the fact that power is a not all available in Mexico’s rural areas, the 24 million people do need some other sources of energy. The other 74 million that live in cities may need to have extra sources of energy, especially those living in fringes of the country’s major cities. The entire country receives enough sunlight year-round, meaning that solar panels are some of the most ideal alternate energy sources. Other than the sunlight, our company’s solar panel and accessories are affordable by sizable number of rural dwellers.

As mentioned in earlier sections, Mexican economy has been on the rise in the past two decades; it currently stands at $ 700 billion and growing at 2.7 percent annually (Randall 2005). Should the current growth keep pace; the size of the Mexican economy would be approaching $ 2 trillion in just two decades (Stokes 2001). Wealth held by individual citizens would also increase rapidly, leading to greater propensity to spend on items such as solar panels. Again, this company should consider embarking on establishing distribution channels in Mexico, which would help in positioning in a market that will continue experiencing upward growth. Ignoring this market despite the distance from Australia would be a wrong choice for the company. The cost of transporting wares from Australia to Mexico should not worry company management. Indeed, transport costs should be of least worry because they have been decreasing rapidly in the last two decades. It is advisable that the management undertakes this measure swiftly because delaying could lead to competitors being ahead of the company, something to be regretted later.

Mexican Consumer Price Index has on average been rising by four percent in recent years, which is impressive considering inflation pressures in countries (Fuentes 2006). This means that Mexican consumers are not faced with the challenge of adjusting their expenses in order to afford buying goods and services. With regard to solar panels, consumers will benefit from competitive prices for long periods of time. Considering that a significant potion of the population might consider the panels as a luxury energy item rather than necessity, any change in prices, even through inflation could lead to decrease in demand. The low inflation rates in Mexico will, however, cushion the company from decreasing demands, which would affect sales. The constant price of the goods in the market will therefore lead to endearment to consumers. This is yet another reason for getting into the Mexican market. Through inflation rates are subject to change depending on country’s monetary and fiscal policies, the 4 percent rate in Mexico in the past few years leads to conclusion that upward trend will be managed well by Mexican authorities (The Economist 2007).

The continuing economic reforms in Mexico are leading to situation where private consumption has been rising, whereas that of the public has been decreasing. As of 2007, the share of private consumption stood at 69 percent, public consumption at 11 percent and investment at 20 percent (Hamilton 2004; The Economist 2007). This means that Mexicans are increasingly participating in economic activities in the country. It addition, it means that the governments in both local and national level are letting citizens to make key decisions regarding their economic well being. Having the rate of private consumption keep rising provides Mexico as a good market, given that more people are making the purchasing. By entering into the Chinese market, the company will therefore be dealing with Mexican consumers directly, which will make it easier to close a sale. The continuing economic reforms in the country provide guarantees that the country will keep preferring private over public consumption. This will essentially lead to continued expansion of the market of consumer goods, of which this company’s products are part.

Increase in private consumption has also been fostered by the impressive economic performance in the last two decades. As a result, Mexicans have been increasing their ownership of consumer electronics, which leads to the increase in the demand for solar panels and appliances that are manufactured by this company. Currently, 90 percent of the Mexican population has access to a television set, 17 percent have mobile phones and 10 percent have access to personal computers (Otero 2006). The wide access to these electronic gadgets means that demand for this company’s products is there but has not been tapped. In this regard, it is advisable that senior management embarks on planning to enter the market. The booming economy in the country means that the demand for solar panels and appliances will continue to rise. As a result, this company’s failure to exploit the market is tantamount to loosing potential profits that could be made in this lucrative market. The rapidly growing economy is exerting pressure on the country’s on the country’s energy resources. Therefore, individual consumers would most likely embark on the process of searching for other sources of energy. This is where solar energy becomes most logical source of energy. This is given that the company manufactures different sizes and types of panels that would meet various needs in the county. Another source of demand for company products is the strengthening communications technology, especially computers. Exploiting this market, would be one of the surest wars to ensure that the company’s long-term strategy of meeting wide range of people’s energy needs.

Business Environment

According to the World Bank’s Doing Business Report, Mexico is the 44^th country in the rank of nations providing most conducive entrepreneurial conditions (World Bank 2007). This position is slightly impressive considering that around 200 countries are included in the World Bank’s annual report. The ease of doing business is an important measure that should not be ignored. Having a good understanding on regulatory frameworks helps investors to understand what they would go through in their day-to-day operations. Just like expected, companies locate in countries with best entrepreneurial framework. This means only 43 countries that have better entrepreneurial framework compared with Mexico, meaning that the country’s competitiveness is well positioned in the global market. Most, if not all, countries that are ahead of Mexico in competitiveness are the developed ones that have had strong economies for longer periods of time. The Mexican economy is on the rise and will in the near future compete effectively at the global arena.

Currently, it takes only for foreign companies to request for permission to register and run operations in the country (World Bank 2007). Other than this extra moth that foreigners have to endure in their registration efforts, the rest of procedures are done similar with those of local business operators. There is no discrimination whatsoever. This equal treatment is the genesis of competitiveness in the economy (Lustig 2008). One of the greatest advantage of treating local and international businesses equally during registration process is that foreigners can easily get information or advice from their local counter parts. The international investors will not have to look for the expensive legal advice; they will just have to ask business people that have participated in the process. In case this company chooses to venture into the Mexican market, it shall be easier to contact enterprises in similar line of business. Some of them could be willing to help despite being competitors. Given that the country has shown greater appetite for local and international investors, government officials as well as the respective investment advisory would provide vital help.

The fewer procedures needed by international investors getting the green-light to register and run operations means that the initial cost for new would be cheaper. The less procedures that have to be followed by the companies also mean that management would use most of their time developing strategies that would benefit their companies in Mexico. In this regard, companies that intend to register and establish operations there are able to deal with licensing issues faster and embark on business operations. Due to this reason, Mexican masses are able to benefit largely, because their goods and services are easily available in the market place. Mexicans themselves benefit from the ease of businesses to register and start operations. To the masses, the speedy registration means employment opportunities that could not have otherwise appeared. This also means faster availability of goods and services of wide variety. Getting accustomed to these procedures has resulted to Mexican people adopting new goods and services. This trend means that the market participants would most likely adopt our company’s products faster than our estimation. This scenario should convince the management that the company’s products would do well in the Mexican market place. All this arises from the authorities’ tactic of processing business registrations in record speeds. Apart from friendly registrations and regulations at the national level, Mexico’s regional and local governments have also been competing on the ones with best entrepreneurial environment. This provides management with the ease of choosing among the preferred regional and local regions to locate. The competition between regions leads to companies being given attractive incentives in order to locate their operations in specific areas. Investors in the county are therefore provided with many choices when it comes to choosing places to locate their operations.

Though the hiring practices in the country are far from being completely competitive, the are slowly gravitating towards making the industry completely free from government influence. Employees in the country are free to form or join labor unions in respective industries, meaning that employers cannot block employees from taking such measures. However, given that labor is one of Mexico’s most abundant resource, more people are willing to work on pay and conditions that union members could be declining. This has made it hard for labor union to channel their grievances, because other people could just take their jobs. Both employers and employees have a legal recourse, to which they can approach for determination. The continuing reform on labor laws is posed to have the country’s sector be at par with those of developed countries. Coupled with competitive labor prices, the increasingly business friendly labor laws is beneficial to investors willing to locate in the country (Newman & Anna 2003).

The government of Mexico does not have any controls on percentage shareholding that should be held by international investors. Foreigners can therefore establish companies without having to waste time looking for individuals for joint ventures. It further means that foreigners would only enter into joint ventures with individuals only when the partnership is mutually beneficial. This makes it possible for investors to take time before embarking on the process of looking for potential partners. Giving investors a free hand to choose people individuals to partner with helps eliminate potential corruption among government officials (Orme 2006). Investors, too, would not be tempted in colluding with government officials so they could get registration certificate faster then the stipulated time. This arrangements is also prone to producing intense competition between local firms and the internationals. Since owners and managers of local firms understand that there is no protection against foreign firms, it is most likely that they would embark on dealing with their affairs in order to improve competitiveness.

Economic reforms undertaken by Mexican authorities have resulted to competitive taxation policies. Currently, profits in Mexican companies are taxed at 22.4 percent compared 20 percent in OECD countries (Kenna 2008). Economic reforms being undertaken by the company is critical for the future of the inflow of investments. Having taxation rates rivaling those of OECD countries is a direct competitive measure against developing nations. Given that the country is close to Canada and the United States that are both big markets, the business-friendly taxation policies lead to companies shifting into the country (Maxfield 2000). The lower tax rates further men that cost of production in the country is lower compared to many other nations. Further, companies are able to sell wares at cheaper market prices that will make the goods more affordable to the masses. The total taxation on companies in the country amounts to 51 percentage of profits, whereas the average for OECD countries amounts to about 46 percent (Rodriguez 2003). This further shows the increasing competitiveness of the Mexican economy in the international market, something that our company should heavily exploit.

As mentioned in earlier sections of the paper, the Mexican population has been experiencing increase in the freedom to run their private affairs. This freedom is extended to trading at the international level, as seen in the country’s only 3 percent trade tariffs on consumer goods such as the ones this company happen to be providing (Weintraub 2001). The lower tax rates mean that individuals in the country would be provided with cheaper goods and services imported from other nations. The low tariffs are something that this Company should take as an advantage. Indeed, the low tariffs in Mexico mean that the company to continue producing in Australia and export to the North American country. Income taxes are also lower in the country, meaning that people in Mexico are increasingly being left with enough finances for consumption. Given that the country’s economy is fast expanding and the government is has been busy reforming economic policies, it is possible that the masses would have even lager amounts of extra finances that can be used in consumption purposes.

Recommendation

The above section of the analysis has shown business environment in Mexico. This section will however deal with issues on how the management should utilize the information for the long run benefit of the company. There are indications that consumers in the country are ripe for solar panels and accessories. Therefore, it is up to the management to develop ways and means of venturing into the market. Though registration processes in Mexico are increasingly friendly to both local and foreign firms, the management should embark on contacting registration experts in Mexico, preferably law firms that will serve as guides. Dealing with individuals who are located in Mexico would help in the registration process. Another benefit is that the professionals could provide advisory that would have otherwise escaped company management. Also, the professionals will save this company significant amount of monetary resources that could have been used in travel expenses to Mexico by executives.

Owing to the friendly tariff regime on imported consumer products, the company could exporting completely assembled products to the Mexican market. The company will thus continue relying on Australian production lines and export goods to the international market, including Mexico. This shall save the company from the agony of establishing production factories in Mexico, which would be a laborious process considering that management will have to employ more labor to run the factories. Despite taking this measure, the company will still need to establish itself in Mexico. This can be achieved in three ways: establishing outlets, liaising with suppliers, having joint ventures with local companies, or establishing production facilities in the country.

Exporting directly to the Mexican market can be achieved through establishing supply chains with independent establishments (Dornbusch 2004) that are most effective in distributing consumer goods. Having independent players distribute the products would save the company from extra costs of establishing own stores. Another great benefit is that the company will be in a position to use if competitive advantage of manufacturing solar panels while leaving marketers with the task of selling the products. Another advantage would be that suppliers used in Mexico are well aware of customer needs and would therefore embark on using best practices to meet those needs. Understanding consumer culture would take the company lots of time and resources. The management should ensure developing strong working relationships with the suppliers. Considering that products to be marketed are foreign, the management should seriously consider engaging in developing clear working relationships, which could help in having the products located in high traffic areas within the stores (Barkin 2007). However, joint ventures should be considered in the case of lower specialized equipment. One major reason for this approach is the technical know-how that has salesmen and installers should possess. The company should seriously embark on training employees of suppliers on how respective technology works. This training should be undertaken constantly to ensure that technical staff are up to date with the technology used in company products. The other option would include establishing production centers in the country. These facilities could also be used to expand the regional market. Considering that Mexico is a low cost producing country, starting production there would be a positive move that will prove beneficial in the long run. Establishing in the country would help the company spread into Central America, Caribbean, and North American markets. Low cost production should indeed be the long run goal for this company; Mexico offers the best place to make this happen.

This analysis has found that Mexico offers positive business environment for investment, which this company should take advantage and exploit to the maximum. The process of registering foreign business in the country is similar to those with 100 percent Mexican owned. Also Mexico does not have a prohibitory ownership laws, meaning that the company can choose to own its businesses in the country without looking for Mexican partners. Similarly, foreign and local businesses are treated equally when it comes to taxation policies, which happen to be at par with those of developed nations. It is due to these reasons that our company should consider venturing into Mexican market. Instead of exporting finished products into the country, company management should also consider establishing production lines in Mexico, given the country’s low cost production factors. Establishing production facilities in the country could help penetrate markets in the entire region, including North and South America as well as the Caribbean.

References

Barkin, D., 2007, Mexico and the Global Economy. Westview, Boulder.

Barry, T. (ed.) 2002. Economic Guide to Mexico, IHERC, Albuquerque.

Cypher, M., 2000, Mexican Development Policy. Westview Press, Boulder.

Carmichael, E., 2004, Changing Structure of Mexico: Social, Economic, and Political, Prospects. M.E. Sharpe, Armonk.

Dornbusch, R., 2004. “Mexico and the IMF. World Bank, Washington DC.

Fuentes, C., 2006, A Time for Mexico. Farrar, Straus & Giroux, New York.

Hamilton, Nora. The Modern State of Mexican Economy. Sage, Sydney.

Randall, Laura. The Changing Structure of Mexican Economy, Sharpe, Caldera.

Kenna, P. & Sondra L., 2004, A Practical Guide to Doing Business Mexico, Basic Books, Sydney.

Lustig, N., 2008. The Remaking of Mexico’ Economy. Brookings, Washington, DC.

Maxfield, S., 2000, Governing Capital through Mexican Politics. Cornell University, Ithaca.

Newman, G. & Anna S., 2003, International Guide To Doing Business in Mexico, McGraHill, Sydney.

Orme, A., 2006, Understanding Nafta Effects on Mexico Trade. UoT, Austin.

Otero, G., (Ed) 2006, Mexico’s Neoliberalism Revisited, Westview, New York.

Rodriguez, J., 2003, The Economic, Labor, and Political Mexico, University of Pennsylvania, Pennsylvania.

Stokes, Erica. The Economy of Mexico, Mason Crest, Boston.

The Economist, 2007, World Pocket in Figures, The Economist, London.

The Economist, 2000, “Mexico’s Economic History”, The Economist. v. 296, no. 7791, p. 22.

Weintraub, S., 2001. North American Industrial Integration. Westview, Boulder.

World Bank, 2007, Doing Business Report, World Bank, Washington DC.

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