Thinking ‘Bric?’ – Overseas Data May Not Paint Big Picture

We heard it in the last century: “The grass always looks greener on the other side of the fence.” In the 21st Century, the adaptation might be, “The grass is not always greener on the other side of the Pacific Ocean.” For the past decade, many business pundits proclaimed that business – especially manufacturing and assembly had to head to Asia – or else.

As Manuel Molano, Deputy General Director of the Mexican Institute for Competitiveness in Mexico City, pointed out, think twice.

You call for caution on the part of business people before jumping on the bandwagon to go to a country after seeing numbers where size and growth look appealing. Why do you make that statement in the face of what could be compelling data?

Manuel Molano: Anyone who has done business in India or China would know what I am talking about. These are difficult places to live in and to establish operations. There are very huge cultural differences with the western world. Mexico has none of those hassles.

China has become the factory of the world in many things. India has become our information technology hub and provider of human capital for that sector, but that does not mean those are the best places to do business. To put it another way China is not Shanghai and India is not Bangalore. They are very huge countries and with very backward areas.

There is much interest in the “BRIC” countries of Brazil, Russia, India and China. Why do you maintain that Mexico still has some key advantages?

The demographics play really crucial role. Much of our population is working age and the demographics are pointing that way. Mexico’s working population has grown around 3 percent a year in the last decade, while the population is growing at 1 percent. Our working base is expanding. We’ve also managed to acquire very specific skills that are used for manufacturing and that are used doing services and services related to manufacturing. We have the conscience that we need to prepare our people in math and English — the skills needed to succeed in the global marketplace. We haven’t gotten there yet, but we know we need that and we are working in that direction.

You pointed to some institutional hurdles for Mexico. What are some of the key hurdles? How well is Mexico addressing them?

In the past the over-arching powers made Mexico look like a centrally- planned economy. We have a different balance in the political landscape. We found that some governments have better capabilities than others, and governments are dealing with the rule of law and their property rights and their criminal law in a very different manner than others do.

There are many “Mexicos” and we need to make very informed decisions if we want to succeed in Mexico. There are some very backward places; our justice system is generally very bad. Some states have made reasonable progress with it. I think Chihuahua is one of the states making a great deal of progress in that sense. It is important to talk to other business people who come to specific cities and states, to find out what their experience was and where the hurdles remain.

You point to consumer purchasing power from Mexico. So many people in the U.S. feel that the average Mexican does not have much purchasing power. Yet you say take another look at that versus Brazil, Russia, India and China.

You see the problem is that the income distribution in Mexico is so bad. I know we have a lot of poor people, but we also have the richest man in the world. We have a growing middle class. Mexicans go to movie theatres now, Mexicans now have cars. They have mortgages and small houses in the urban setting. They are educating their children. One or two of their children are going to private schools or some sort of private education. This is a phenomenon that is completely different from what happens in China, where you still have a huge mass of people that are living on incomes below $15 a week.

One thing about Mexico and competitiveness gets into language. Obviously English is the business language. What are your thoughts about where Mexico is, and where it needs to be in terms of language skills to be a competitive factor?

The competitive part is the one that is most lacking in that respect. I believe that Mexico needs to have a more practical approach to education, much like the Koreans did. No one would say Koreans are fluent English speakers or that they could succeed in English literature. But they have very basic and good business English. We don’t. We lack them and also the math and sciences.

I think that is something that needs to happen. It is also a huge opportunity. These are people who are eager to be educated, eager to go work for large factories. They are eager to provide services for these large factories in the automotive, aerospace or any high-tech venture that happens in Mexico. I would say that we acknowledge we have a problem. Mexico acknowledges we have a problem there and we just need to source good quality education for our people.

When you compare Mexico with the BRIC countries, you say Mexico is more manufacturing oriented. Why do you say that?

When you see the share of GDP that manufacturing has, it has grown steadily from below 20 percent in the 1980’s to about 70 percent currently. We’ve reached all the management and all the productivity gains of the U.S., Japan, Europe and most of the developed world in our manufacturing. We have some of the best factories of the world, and this has helped in boosting the Mexican economy. It makes us very similar to China. We still have some oil and energy resources in my opinion that will diminish even more because Mexican reserves of oil products are diminishing.

We haven’t had the huge success that the Chinese had because the economy was oriented to protect some vested interests. We have gradually removed these barriers to growth in a very healthy way, and I think the outlook for Mexico in the next two decades is going to be quite good.

Why do you see aerospace as the next auto industry for Mexico?

We succeeded in the auto industry. The auto industry is an example of what needs to be done. When you do the statistical calculations on this you find that the growth in the auto industry income is not attributed to brute force, not to additional workers, nor additional capital. It was management, good practices and good technology. We see the same thing happening in aerospace.

We see whole clusters building around aerospace ventures in Bajio and in the north of the country. It is really interesting because in the past the Mexican government thought these clusters could be grown at the will of the political power.

But what has happened is these clusters are growing as in a natural way and there are very big opportunities for Mexico. The big names of the aerospace industry are taking a look at Mexico and its advantages.

I see a country going from just building cables for the aerospace industry to building whole aircrafts. Much publicity in aerospace has gone toward Brazil because of Embraer. But Embraer also imports much of the technology it uses in its airplanes. We have the Bombardier complex in Mexico.

They are doing pretty amazing stuff over there and I think that these high tech industries that combine advanced knowledge, with advanced state of the art manufacturing will flourish in Mexico.

What’s the potential for the maquiladoras?

The maquiladora industry has moved from low-value added to high-value added. You will see more consolidation — larger facilities with a different perspective and a different way of doing business — than we had during the 1990s and as we had at the beginning of this century. We think there is some strategic interest in Mexico to preserve these operations.

We see that there is an interest in Mexico to bring in more people into these industries, because many, many areas of Mexico are so backward. We can provide the high human capital and also the qualified labor for many of these operations.

I think that state governments will play a crucial role in setting up the institutional build up for these to flourish and grow in the future.

What are the competitive gaps Mexico needs to close?

The rule of law, the corruption and formal institutions are a big, big hurdle. We have a very expensive social security system, not as expensive as the U.S., but very expensive for a country at our stage of development. We have some social assistance programs that work together with these more German- style unions, companies and government pooling resources. We need to move to a more comprehensive social security system. That will require a restructuring of many public finances. The public finances in Mexico have a characteristic wastefulness.

We need to solve the government deficiency problem that we have currently. The rule of the law and the justice system are big areas of opportunity. Some state governments have succeeded better than others in setting up things. Cities like Mexico City a decade ago were really dangerous, probably the most dangerous part of the country. They are now relatively safe as compared to other cities. They build technology and they achieve things. Cities like Juarez and Tijuana have a slight decline in the murder rate, it is not yet significant. But you see a Mexican state really trying very hard to reconstruct the social structure in those cities. We need to refocus many of our government resources for that purpose, which will probably take one or two decades.

We have a growing civil society sector. We think that we will be seeing very quiet and very tiny, but very transformational changes in Mexico. Recently, we had a very important new anti-trust law that will allow Mexico to better tackle many of the monopolies that plague the Mexican economy and that imply higher cost in things like telephones.

You pointed to security concerns. How much effect is that having on the economy?

Few people know this, but during the 1990’s, the murder rate of Mexico was higher than it is now. During the 1990’s we made a very big reform on the social ownership of land.

That reform has yet to complete many things. We need to have more privately-owned land in Mexico. During the 1990s this generated many murders, more than the war on drugs that was declared during this administration. What we see is a growing urban phenomenon and it scares people greatly.

But when you look at the murder rate as compared to many cities in the world, even the U.S., Europe or Asia, you will find the murder rate is not too different. We think there is a security concern and it also to our institutions and our rule of law concern. But it is being tackled; it is being addressed.

Other countries, Columbia for instance, have succeeded in the economic landscape, even though they have areas where security and violence are a concern. We should not believe everything that is in the papers. U.S. papers focus a lot on the security issues. I think that is a strategic mistake for their business because violence does not sell papers any more.

We should speak in the media about other things. We should speak of our trade relationship, about our migration issues. We should speak about our convergence issues in the border, not only about the murders because those happen in Atlanta as much as they happen in Mexican cities.