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Helping companies get a foothold across the border

Interview - December 30, 2013
Panorama Reports sits down with José García Torres, President of the United States-Mexico Chamber of Commerce, to discuss the reforms, bilateral trade and investment opportunities on both sides of the Río Grande
Please share your views on the evolution of the Mexican economy over the past few years and your prediction for the six-year term 2012-2018.

First of all, I’d like to mention that our bank promotes industrial development and in the past, was one of the institutions that created the highest number of companies and most drove industrial development. Now, during the last two administrations, it’s been more focused on lending, factoring, and other things not related to industrial development but rather getting liquidity to the companies so that they have sources of quick funds with attractive interest rates.

Our bank had an office in Washington for nearly 60 years and in the relationship we were the Mexican government’s main agent for obtaining financing from abroad. The World Bank, the Inter-American Development Bank, USA Citibank and all the Citibanks from around the world, as well as from European credit institutions – such as Germany’s KFW and the various agencies belonging to the Spanish government that promoted investment and loans – were all partners of ours in one way or another.

In Washington, we played an important role because in the 1980s and the beginning of the 90s (and prior to that the issue was much more serious), there were only two providers of foreign currency in Mexico: Pemex and Nacional Financiera. We received the credits in dollars and we spread them through the banking sector. In other words, we loaned dollars to the banks who would have otherwise had a hard time obtaining funding in dollars. The other major source has always been Pemex, because all of its sales in dollars it passed on to the Bank of Mexico and, from there, it flowed on to the banks that required dollars.

So, we were an important player and up until five or six years ago, we were the World Bank’s biggest borrower. That is saying a lot: we owed the most to the World Bank and we were the institution that had the most projects funded from foreign sources. And in comparison with other countries, we were ahead of India, China and well beyond Brazil.

This was fundamental because all of those projects were oriented towards building airports, roads, and developing Cancún, Ixtapa, Loreto in Baja California, Huatulco, etc. We did all of those developments through a trust, the National Trust Fund for Tourism Development (Fonatur), but we provided the resources. We secured the loans.

Trade was another source of resources but it was more for exporters. In the ‘80s, trade wasn’t more than $6 or $7 billion. Now, we’re exporting $1.5 million daily. So, compared to today’s figures, that was very little.

The big push that the Mexican economy has been enjoying dates back to the Free Trade Agreement going into effect some 20 years ago. Though there was a bit of a slowing down in recent years, it’s starting to pick up again. I’m a believer in the FTA, and coupled with some of the other agreements and initiatives that are on their way in, it will continue to be the engine of growth for the Mexican, U.S. and Canadian economies, as well as for the rest of Latin American countries.

The Trans-Pacific Partnership (TPP), which is a global initiative, is going to give an extra push to everything we’ve been negotiating in terms of free trade. And I foresee that the figures over $1 trillion – nearly $1.5 trillion – in trade between Mexico and the U.S. could even reach $2 billion per day by 2017. I think that the process of trade obeys a permanent flow of foreign and domestic investment that has allowed manufacturers and services to generate demand for those services, as well as allowing exports and the inward flow of foreign capital to continue growing.

In 1973, a group of distinguished Mexican and U.S. businessmen established the U.S.-Mexico Chamber of Commerce in Washington, as a bilateral organization to promote trade, investment and joint companies on both sides of the border. What has changed over the past 40 years and how has the chamber helped companies to overcome the differences in the judicial, statutory and economic systems, as well as language and culture?

Our organization was founded by 10 companies. Currently, we have 3,000 members in the U.S. and Mexico, and we have offices in the main U.S. economic centers, like Chicago, NYC, Miami, Dallas, Houston, LA, and a few others that are opening soon. In Mexico we’ve got chapters in Mexico City (which is our biggest office), Monterrey, Guadalajara, Aguascalientes, León, Cancún, Puebla and Veracruz. We’ve got 10 in each country.

This has helped a lot in attracting investment to Mexico because the chapters support the member companies from the get-go – when they arrive in Mexico, doing the official administrative paperwork, introducing them to local authorities and instructing them on what they need to do, how to do it and the precautions they should take. Many companies can vouch for our work.

This has allowed the chamber to not only serve as the first step to bring U.S. companies to Mexico – it has also meant that in the past 10-15 years, the number of Mexican firms going to the U.S. has also risen significantly. Currently, our members are divided pretty much evenly among Americans and Mexicans, and that says that the chamber’s bi-national goal is being fulfilled.

Trade is good for both countries and we’ve really tried in recent years to support Mexican small and medium enterprises who want to get a foothold in the U.S. and penetrate the market using the mechanisms that exist there and support small industry. We use the schemes that Hispanic organizations have in place because they can really be of help in terms of culture, language, etc. It’s been quite beneficial because the number of Mexican companies that ally themselves in the initial stages with Hispanic counterparts has helped raise the number of corporations that go to the U.S.

We’re even encouraging the use of mechanisms that come with the free trade agreement, such as certifying Mexican companies to enable them to become suppliers for the U.S. government – this is something that very few companies even know is possible, 17 years after NAFTA went into effect. But it is possible, just as large American companies come and supply Pemex and CFE for big projects. But I’ve found that you don’t need to be a large company to supply the government. They can be meat, dairy, etc. suppliers because the U.S. government buys everything and in large quantities, because sometimes it’s not easy to source enough from American producers.

That is a niche that we’ve concentrated on and we’ve also highlighted it for Mexican authorities because they’ve not really promoted it very well around here. Recently I was speaking about this with the Secretary of Economy and he’s convinced about it because he was there for the FTA negotiations – in fact that’s where we met. So, we need to take full advantage of this to get more companies going and I’ve got experiences that will help to prove it. This is a way to show that the trade flow is going both ways and it’s adequately benefiting companies.

Quoting President Peña Nieto at last week’s Sun Valley conference: “The U.S. has in Mexico, not a threat, but a commercial partner with huge investment potential.” How do you feel about this statement? What investment opportunities are there right now in the country?

What the President said was accurate. If I’m not mistaken, the reference to a threat was due to the espionage and those are issues that will be discussed among the ministries. But exactly, we are of the idea that from long ago, the U.S. should focus its efforts on solidifying its industrial structure, and we should move forward in that field because we could supply the Americans with a lot of their food requirements – vegetables, meat, dairy, processed foods, etc. If we have a competitive advantage in that, we must take full advantage. And if their competitive advantage lies in technology and industry, we should leverage that and we’ll push the entire continent forward.

The struggle in the coming decades or years will be continent versus continent, and we’re up against the Asians and Europeans. Therefore, we must maintain a solid position in the region and ensure that all countries leverage their competitive advantages in order to remain solid in the face of the competition from other continents.

In this sense, we agree and we spoke about it with many friends who were also close to the negotiations in the 90s. We all agree that if we have that advantage, the Americans can disregard it and we’ll support them and supply them so they can concentrate on other issues.

As far as investment goes, I consider the reforms that President Peña Nieto is pushing through are long overdue and I’m so glad he’s taken the bull by the horns to lead this initiative, bring together all the parties, and move forward. All the reforms are relevant: education, the legal appeal law (Ley de Amparo, which was a thorn in the side for many sectors and it’s great that this is now moving ahead), and telecommunications (a fundamental reform).

There have been many important advances. Of course there’s always something in the laws that needs updating, maybe even from one month to the next, but the progress made have been and will continue to make Mexico more attractive to investors. We’re already seeing proof of this.

In the chamber we have several U.S. telecoms-related companies and they’ve all expressed their interest in entering the Mexican telecoms sector. They see interesting investment opportunities in IT niches. For example, everything uses fiber optics and there are loads of opportunities around this (towers, antennae, DAS systems, private networks, etc.), because even though there are already companies doing this in Mexico, they’ve been doing it with all the restrictions that have been in place, limiting their access to the Telmex networks. There are huge opportunities in the IT sector.

Resorts are another interesting sector. Mexico has enormous tourism potential with its large resorts, but there are other areas with growth potential in the Mayan Riviera, Nayarita, Guerrero, Oaxaa, etc. There’s something for everyone. If you want quite, deserted beaches, you have the coasts of Oaxaca. If you want something more sophisticated, you’ve got Cancún, Playa del Carmen, Los Cabos and Puerto Vallarta. There’s a huge demand for resources there, and huge interest among investors.

Medical tourism is also growing a lot. We’ve been working on this topic for eight years with the chamber in Mexico – it was one of the first to even start talking about it. We held a lot of conferences and meeting about it and bit by bit, some organizations popped up that have continued working for health tourism. We support U.S. and Canadian investors interested in the sector.

It’s going to have a lot of potential and we’re already seeing it in big cities: there used to be just two or three hospitals certified by the U.S. Joint Commission and now, there are between 12 and 15 hospitals that boast the same level as those in Dallas or Houston.

Certification is symmetric and it builds up insurers’ and patients’ trust, many of whom are Mexican-Americans that are seeking treatment through their insurance in Guadalajara, Mexico City or Monterrey, where there are hospitals that comply with the certifications of the big American hospitals.

Mexicans living in the U.S. would always go to Tijuana and other border cities for treatment, but they had to pay in cash because they didn’t have insurance. Now, however, medical tourism is much more formal and the insurance companies cover all the costs. And this works out for the insurers as well, because it costs less. There are estimates that the insurance companies save between 50-60% on shared costs with treatment in the U.S., a country that has a growing problem with its social security because the costs are extremely high and things will have to slow down because if not, there may be problems further along.

Another important topic is assisted living, a new industry that has been growing similar to medical tourism. There are areas, for example Baja California, where there are some developments brewing. Somebody presented to us a project for a Health City on the peninsula, where there would be hospitals that could look after patients and take them out to see the sea, get some sunshine, and help speed up their recovery.

The idea for assisted living sprung up because of the situation in the United States, where a lot of retirees are being forced to move because their fixed pension doesn’t grow more than 1-2% yearly and those $5,000 (to put an average number on it) just aren’t enough. It’s not the same living on $5K in a suburb in the U.S. as it is living in Puerto Vallarta or other places here in Mexico. A lot of people are moving here who want to maintain their living standards at a fraction of the cost. It’s an industry that has a lot of potential.

As for the energy bill, it should have some very relevant points because Pemex is an important industry within the Mexican economy and is a key company in terms of the impact it has on all other sectors. The company could use some major adjustments so as to make it more capable of coping with the needs and requirements of modernization and operation. But first, it needs to bring together the resources to invest in drilling and exploring new fields.

I think that the reform should include the mechanisms that will allow the State to amass more resources so that Pemex can put them towards the many investments it has. Because, for example, a shallow water drilling rig costs around $200 million. A larger one could cost closer to $1 billion. These are considerable investments. The oil banks, the suppliers that have to traverse the whole Gulf of Mexico every day taking food, tools, parts, workers, journalists, etc. is impressive. The figures state that they move some 150,000 people daily.

It’s an industry that with all the new developments that have been discovered in the north part of the Gulf – such as the Perdido project that is underway on the American side – there is going to be a huge demand for investment.

If it all works out as expected, Mexican oil production is going to change practically overnight, rising from 3 million barrels per day to 5 million. But that requires a large investment and the way things stand right now, it’s not going to be easy, especially if we’re closed off to foreign investment. The tax and energy reforms must support the oil industry’s forward movement.

What will be the chamber’s main priorities and challenges in 2014?

The challenge will be to seek and find new investments. Recently I was present at the announcement of the infrastructure investment program (for roads, airports, ports, water treatment plants, telecoms) and there are several airports that are going to be built in the next five years and several ports that will be modified. What surprised me most was how much they’re allocating to telecoms – some $700 billion over the next five years. This indicates how the issue has a big impact on technology, culture, education, etc. The idea is to extend access to fiber-optic and satellite networks to areas that currently do not have it, and this will involve all those companies active in IT infrastructure. It’ll create a boom in their business.

I have the opportunity to participate in events, forums, meetings and missions. The mayor of Tucson and a delegation from Phoenix were here this week and there’s a common interest to see what projects can go to Tucson and that’s what we need to do: facilitate entry to the U.S. for Mexican companies because they have the enthusiasm, technology and they believe in their product, yet they face obstacles in terms of culture, immigration and resources. The mayor mentioned to me that he would help take care of these barriers and would announce something in two or three weeks’ time.

We spoke about it with people from all over and we’re seeing that the efforts being made in trade are very uneven. Texas absorbs a lot of the bilateral trade – more than $20 billion annually – while California takes in about half of that. There’s rivalry to see who can export more, and for some reason it’s not happening. We must find the reasons why and identify what it is that’s preventing it from happening.

What is clear, however, is that the Texans are very aggressive. The mayor of Tucson told me that Arizona exports some $5-6 billion per year, which is quite a considerable amount given the fact that it’s not such a large state and that just 10 years ago, it was only exporting $500 million. That’s not shabby.

Our challenge is to always be on the lookout to see how we can help companies reach their targets and help them find new ways to solve the problems they previously couldn’t solve – not because someone was standing in their way, but because they don’t know how to find the right channels. We try to help them in this way, and sometimes we even help non-members. Once we help them fix their problem, they oftentimes end up joining the chamber.

I had the chance to speak with the Secretary of Communications to invite him to an event we are holding on September 5 in Chicago, and I told him that our very intention is to take advantage of the announcements of important projects (in telecoms and infrastructure), and for him to meet a select group of investors in those sectors so that they may hear first hand the advantages, disadvantages, limitations and barriers that companies may find. This way, officials can take note and correct the problems. There is a wide opening in government, and we need to lay the problems out and not remain quiet about them.

What would your final message to our readers be about the competitive advantages of investing in Mexico today?

I would like to invite companies to carefully evaluate their decisions. I believe, and I say this with all my experience having worked in an industrial bank and knowing the industrial structure of this country, that there are opportunities to spare in various fields. In approaching organizations like ours, we can help them get oriented and advise them on where to enter, whom to work and speak with, whom to touch base with, and what regions to set up in. We can contact them and open the doors to the many offices they’ll need to put a cap on their investment. We also assure them that the problem with security isn’t exclusive to Mexico – it’s everywhere. Here in Mexico there have been instances but in general, it’s a safe and quiet place if you avoid certain areas.
In terms of tourism, we’re rallying. I’ve seen a lot of companies come here with hesitation, and after arriving they realize they were wrong – and they stay indefinitely.