Mexico: Country and Supplier Research

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Introduction

In the recent times, Mexico has been in the news after President Donald Trump accused Mexicans of “stealing” American jobs. Many companies from developed countries have relocated their production to Mexico, owing to a lower cost of production and Mexico’s decision to remove trade barriers. Presently, Mexico rivals China regarding the number of overseas companies that have established production in the country (China). Another factor that has favored Mexico as a destination for these companies is its membership to the North American Free Trade Agreement (NAFTA) and GATT. For instance, goods produced in Mexico enter the US duty-free, unlike those manufactured in China. Additionally, the cost of shipping the goods from China (to the US) is considerably high when compared to shipping similar commodities from the neighboring Mexico. Despite the high instances of gang-related violence, Mexico is a politically stable nation. This situation has attracted foreign investors to the Latin nation. As well, the large Mexican population provides a stable supply of affordable workforce for companies. For instance, Mexico City is the largest metropolitan in the world with a population of over 20 million people.

Country Traits

Mexico, officially known as the United Mexican States, is a federal nation occupying the southern half of the North American continent. It neighbors the United States on the Northern side, the Pacific Ocean to the south and west, Guatemala and Belize to the East, and the Gulf of Mexico to the Southeast. Being a federal republic, Mexico is led by a federal government featuring the national, state, and municipal level governments down the hierarchy, respectively. The current leader of Mexico is President Enrique Peña Nieto. The majority of the Mexicans (99.3 %) speak Spanish, owing to Spain’s occupation of the region for three centuries. Mexico is a large country spanning about 768, 000 square miles and supporting a population of nearly 123 million. Education-wise, Mexico ranks highly with a 97% literacy rate for children fewer than 14, and 91% for those over 15 years of age.

Country Stability

Regarding Mexico’s social setup, the country is known for strong family ties, which according to Miller et al., “take precedence over work and all other aspects of life” (204). For example, while people in the United States define themselves based on their economic occupations, families in Mexico form the basis of personal identity. This attitude may affect the business environment because familial connections often find their way into the commercial setting. Incidentally, nepotism, which is frowned upon in the West, is often tolerated and actually encouraged in Mexico. This observation means that a Mexican employer will likely employ his or her relatives because he or she believes they will be more dedicated when compared to strangers. In the United States, the opposite is true where employers avoid hiring their family because they believe that they will demonstrate less dedication relative to strangers. In addition, due to strong family ties, Mexicans working in the US remit about $21 billion (0.2 % of Mexico’s GDP) to their families in Mexico.

In describing Mexico’s social organization, it would be prudent to point out the aspect of social unrest. Mexico experiences numerous and frequent cases of violence-related murders, owing to the widespread gang activity in the country. According to Semple, the high incidence of violence in the country is caused by rivalry among criminal groups that seek control of the territories for selling their drugs (4). Mexico leads in America with the highest cases of drug trafficking. Consequently, the high incidence of violence has hurt the Mexican economy by scaring away potential investors. Ferreras estimates that the country lost about 2.12 trillion pesos to drug wars in 2015 alone (2). Figure 1 demonstrates how violence influenced Mexico’s economy between 2003 and 2015. Thus, it is safe to conclude that insecurity in the country has hurt its prospects of economic growth.

Fig. 1: Economic Impact of Violence in Mexico. Source: (Ferreras par.2).

Politically, Mexico is a relatively stable nation under the leadership of President Nieto. This situation has attracted both local and foreign investors to the Latin country. Presently, many companies from developed economies have moved parts of (or the entire) chains of production to Mexico. The political climate in the country is shaped by actions, legislations, and policies enacted by both the federal and state governments. Federal decisions affect the business climate across the entire country. On the other hand, different states have varying local legislations, which have also resulted in varying economic climates. For instance, tax rates differ from state to state. As such, the rates may be favorable in one state but not in another. In addition, laws relating to the unionization of workers vary depending on the state.

Currently, Mexico is ranked as a middle-to-advanced economy. The country has the fifteenth-largest nominal Gross Domestic Product (GDP). Between 1995 and 2004, Mexico experienced a robust economic growth, with its GDP expanding at a rate of 5.1% per annum. However, recent years have seen the economy’s growth slacken, particularly, the second quarter of 2016. According to The World Bank, the growth of the Mexican GDP stalled throughout 2016 due to reduced economic activity (par.2). Factors such as pathetic savings and reduced export demand meant that the growth of the country depended on classified expenditure.

Presently, Mexico‘s service industry is the leading contributor to the nation’s GDP (64%) while the industry sector follows at 31%. Consequently, exports are pivotal in the growth of the Mexican economy, with electronics and automobiles being the leading exports. As such, increased external competition has led the Mexican peso to depreciate against the US Dollar in the years 2015 and 2016. Currently, the peso is trading at 0.048 US Dollars, down from 0.075 in 2013. If the peso continues to weaken against the US Dollar, doing business in the country may become increasingly difficult. In addition, inflation in the country rose continuously for six months straight between June and December 2016. As a result, consumer prices rose by 3.36 %. According to Trading Economics, the Central Bank of Mexico expects the rate of inflation to reach 4 % in 2017 given the weakening of the peso. Inflation is likely to lead consumer prices to rise even higher to the extent of leading to decreased consumption and hence lower business prospects.

Lead-Time of Production

Lead-time of production refers to the period between when an order is placed and when the finished product is completed and ready to be shipped to the customer. A short lead time is preferred to a longer one since consumers do not wish to wait for long to have their orders delivered. Manufacturing in Mexico is highly favored due to the prevailing short lead times. As a result, short lead times result from a qualified workforce coupled with a low cost of production. However, due to the country’s over-emphasis on socialization, Mexicans observe far too many holidays. This situation may occasion delays in production, especially where industries have to remain closed during the said holidays. In addition, natural disasters such as the Hurricane Patricia are frequent in the country. Such catastrophes may destroy whole production plants or in the least slow production, thus leading to longer than the expected lead-production times.

Cultural Insights

The cultural aspects of a business environment consist of norms, lifestyles, and values that shape the society immediately to a firm/company. These socio-cultural components influence the company’s ability to obtain resources, manufacture products, and/or operate in the said society (Thornton et al. 106). The socio-cultural factors include any attribute of the society that can influence the organization’s external environment. Some prominent factors in Mexico include population, literacy levels, and views regarding social responsibility. As observed earlier, Mexico has high literacy levels, with over 91 percent of the child population completing primary education. High literacy levels imply that the country produces skilled labor that can be relied on to boost productivity in the motherland. At the same time, Mexicans have registered an acceptance of technology as it is portrayed by the high usage of personal computers. This positive attitude has been reflected in the adoption of technology in production processes.

Mexicans value hard work. Such appreciation may be useful for business since it is likely to encourage high productivity. In addition, traditions in Mexico are respected and valued. As such, Mexican employees will be naturally inclined to observe the culture of an organization, which in turn facilitates organizational success. On the other hand, business leaders seeking to establish themselves in Mexico need to understand the importance of trust and relationships (Miller et al. 205). This awareness is particularly important for business leaders with a working experience from the US where personal qualifications precede social connections. Thus, employee dedication is more dependent on trust compared to individual qualifications. Additionally, being able to speak Spanish can assist a business leader in winning the trust of Mexican employees because speaking Spanish sends a signal that one cares or at least understands how the Mexican society works.

Timeliness is of utmost importance in the Mexican culture. Hence, being slightly late for a meeting can send an undesired message. Leadership in Mexico takes an authoritative stance. This claim means that the leader must demonstrate assertiveness to garner influence among his or her followers. Therefore, for business leaders, the habit of consultation with juniors may not be a desirable leadership approach in Mexico. Instead, employees expect to be handed down instructions. This approach is different from the common practice in the West where leaders must foster teamwork by consulting with juniors, as well as peers.

State of the Apparel and Textile Industry

The textile and apparel industry has contributed immensely to the economy of Mexico and the US. Most of the players in the industry are mainly micro and small-scale companies that makeup 85% of the sector. The overall success of the Mexican textile and apparel industry is attributed to the abolition of trade barriers, which led to the lifting of duties that were invoked by the North American Free Trade Agreement (NAFTA). Mexico’s access to GATT opened up a foreign trade, which was seen as a gateway to increased exports in the textile and apparel industry. Despite the growing success, the dawn of 2000 was marked by competition from China after it joined the World Trade Organization. However, analysts project that the industry still has some strengths due to its proximity to the US and the availability of suppliers from Latin America (“Mexican Textile Industry” 20).

In 2014, the Mexican government introduced six trade policies. Among them was the introduction of four duty implementation mechanisms meant to augment the inspection of apparel procurement from overseas. An additional strategy was the establishment of the lowest chargeable amount for fabric and apparel items. The policy was meant to regulate shipments that were below the stated minimum price. In addition, all importers of textile and apparel products would be listed on a registry for scrutiny (“International Trade Administration” 2). Despite the program collapsing during the peso crisis of 1995, many farmers benefited from it. In 1990, the total number of companies in the textile industry totaled to 2200. Each company accommodated an estimated 49 workers. Presently, the industry employs an estimated 170,000 workers. Currently, a number of these companies are merging, a strategy that is leading to the reduction of companies in the industry. Because of the mergers, most employees are losing their jobs. The situation has resulted in a high unemployment rate in the country.

Suppliers within the Country

Mexico is ranked as the 3^rd largest trading partner for the US. About 4.7% of its GDP is from the textile and apparel industries distributed throughout the country. It is important to note that the Mexican manufacturing segment is concentrated in Guadalajara, Monterrey. According to GMDU.Net, Grupo Tevi is a fabric manufacturing company located in Guadalajara, Mexico. Due to its new products that the company keeps on unveiling, it has managed to maintain a wide customer and supplier base (Montano 2). Guazambaele is another family company that has established itself in the manufacture of women’s thongs. The Guazambaele family established the company in 2003. Most of the customers are located in Riviera Maya and Cancun in Mexico. The company has estimated annual sales of below $1 million. Vivatex is also a textile manufacturing company located in Mexico. It was founded in 1980. Since then, it has established itself as a key textile manufacturing company. Its range of products includes yarn, artificial threads, and cords among others.

Trade Agreements

The overall Mexican economy is affected by the economic conditions in the United States. In 1987, Mexico and the United States entered into a bilateral agreement named the Framework of Principles and Procedures for Consultation Regarding Trade and Investment Relations. The agreement was meant to push for the reduction of trade barriers in key sectors such as the textile industry. A second agreement named the Understanding Regarding Trade and Investment Facilitation was signed in 1989. This move was seen to strengthen the agreement signed in 1987. Its essence was to further open up trade and investment opportunities between the two countries. With these two agreements, the textile and apparel industry in Mexico was able to increase the number of exports to the United States. After signing NAFTA in 1993, Mexico overtook China in exporting apparel to the US due to the duty-free imposition of all Mexican products entering the US. The condition for the duty-free export was that the components from the thread were to be made in Canada, Mexico, or the US. The move also enabled Mexican products to compete fairly in the northern American markets.

Product Classification

The Harmonized Tariff Schedule (HTS) is used to determine customs duties for items that are imported into the US. A Mexican-imported silk garment (men or boys’ suits, jackets, blazers, etc.) has the following code: 6103.29.20.28. The code is in line with the HTS 2017 chapter (“Harmonized Tariff Schedule Search” par.1). More details are shown in Figure 2 below.

Fig. 2: HTS Chapter. Source: (Harmonized Tariff Schedule Search par.1).

Transportation

International ports are busier compared to ports that serve domestic markets in the region. International ports handle high cargo tonnage and volume container shipment. The type of facilities found in the ports is determined by the specialization of load-handling facilities. Ports provide temporary shelter for docking ships, as well as the international distribution of goods. Many port facilities are located in developed countries such as Canada, Russia, China, and the USA (World Fact Book” par. 2). Examples of ports that can service international freight companies are Port of New York, Port of Rotterdam, Port of Shanghai, Port of Singapore, and Port of Hong Kong. Mediterranean shipping company takes 62 days to ship goods from Seattle to New York. Similarly, Matson Navigation Company takes 55 days to ship goods from Seattle to New York. On the other hand, Horizon Lines shipping company takes 72 days to ship goods from Seattle to New York.

Risks and Benefits

The Mexican textile and apparel industry faces threats from the Chinese and Hong Kong textile industries because of the low labor costs in these countries. The effects of low labor costs are that the products will be cheaper compared to those offered by the Mexican industry. The Mexican textile and apparel industry has also received competition from emerging economies such as Pakistan, India, and African countries. Such rivalry has caused a reduction in prices due to the oversupply of textile products. Asian countries are currently emerging as textile powerhouses in textile manufacturing. Studies indicate that the top three countries with high textile exports are of Asian origin. A majority of players in the Mexican textile market are small-scale producers. This situation makes it even more difficult for Mexico to compete effectively on the global scale. On the other hand, the Mexican textile and apparel industry benefits from being centrally located in the North American, Central American, and Caribbean markets. Mexico has also benefited by being a member of NAFTA as reflected in infrastructure improvements, labor costs, and full-package productions.

Conclusion

Numerous factors compound to make Mexico a haven for foreign investment. The factors are political, social, and economic in nature. As a result, Mexico is a leading exporter of electronics and automobiles. The country’s economy has also benefited from the high level of foreign investment. However, recent times have seen the Mexican peso depreciate against the US Dollar, as well as the rising inflation. If these trends continue, doing business in Mexico may become increasingly difficult. Notwithstanding, foreign companies continue to ship their production to the country, owing to the low cost of manufacturing.

Works Cited

Ferreras, Jesse. “Mexico’s Drug War has hurt the Economy just like it has Hurt People.”The Huffington Post. 2016, Web.

“Harmonized Tariff Schedule Search.”Mexican Shirt, 2014, Web.

“Mexican Textile Industry.” ProMexico, 2012, Web.

Miller, Mary, et al. Client Education: Theory and Practice. Jones and Bartlett Publishers, 2011.

Montano, Sylvia. “The Mexican Textile & Apparel Market.”US Commercial Service, Web.

Semple, Kirk. “Mexico Grapples With a Surge in Violence.” The New York Times. 2016, pp. 1-4.

“The World Bank.”Mexico Overview. 2016,

Thornton, Patricia, et al. “Socio-cultural Factors and Entrepreneurial Activity: An Overview.” International Small Business Journal, vol. 29, no. 2, 2011, pp. 105-118.

“World Fact Book.”Library. 2016, Web.

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