Mexico, with its population of 120 million people and its openness to foreign investment, can be a great place for Canadian companies to do business. And the numbers tell the tale—in 2013, Canada’s export sales to Mexico exceeded USD4.6 billion, making the country our fifth-largest foreign market. In the same year, we were Mexico’s fourth-largest foreign investor, with only the United States, the Netherlands and Spain investing more.
If figures like these suggest that Mexico could be a promising market for your company, here are some strategies that can help turn that promise into a reality.
1. Know where the opportunities are
There are opportunities right across the Mexican economy, but the following sectors offer a particularly good match for Canadian investment and export strengths.
Oil, gas and electricity — Until recently, Mexico’s energy sector was dominated solely by state-owned industries and didn’t allow foreign investment. Major reforms, however, have opened up the energy market to participation by non-Mexican companies and this is expected to increase opportunities for Canadian companies.
Automotive — Mexico has become the world’s eighth-largest vehicle producer. It’s now one of the most promising industries for Canadian investors because of its competitive costs, skilled labour and strategic location.
Mining — Many of the larger mines in the country are Canadian-owned operations or are owned by TSX-listed mining companies.
Aerospace — Aerospace is a priority sector for development, and the government aims to place Mexico among the world’s top 10 aerospace sector providers by 2020.
Telecommunications — Recent reforms in the mobile telephony, broadband and broadcasting sectors are expected to increase growth and competition in the sector by opening up the market and improving the regulatory environment.
Infrastructure — Mexico recently announced a new National Infrastructure Program for 2014–2018. Under this program, close to USD600 billion in private and public money will be invested in new and upgraded infrastructure.
Light manufacturing — Mexico has become an ideal location for light manufacturing and assembly operations in subsectors such as medical devices, plastics, environmental technologies, packaging, and safety and security.
2. Understand Mexico’s investment environment
Recent reforms have opened Mexico’s financial, energy and telecommunications sectors to foreign participation, and these changes will transform much of the country’s investment environment. That being said, existing NAFTA investment rules remain the same, and Mexican affiliates of Canadian companies will continue to be treated exactly like Mexican-owned businesses.
Mexico has various federal-level incentives for foreign investors, such as the maquiladora/IMMEX program, which can provide certain types of tax relief. Several Mexican states have also developed their own industrial development policies to attract investors. In addition, Mexico has four free trade zones that allow the duty-free import of raw materials for manufacturing, assembly and other services.
Mexico continues to be a highly attractive investment destination. A 2014 KPMG study of 10 countries found that it was the most competitive of all of them, based on factors such as labour costs, taxes, regulation and infrastructure.
3. Find the best entry strategy
You can enter the Mexican market in several ways:
Set up an affiliate — There are three major ways to incorporate a Mexican affiliate. The one most commonly used by Canadian companies is the Sociedad Anónima (S.A.), which is the equivalent of a privately traded Canadian corporation. Then there’s the Sociedad de Responsabilidad Limitada (S. de R.L.), which is a limited-liability partnership. The Sociedad Civil (S.C.) is normally used by service providers.
Set up a branch — You can open a branch instead of incorporating. A branch’s rights and responsibilities resemble those of a corporation, including tax liability and access to local courts.
Establish a joint venture — A joint venture between a Canadian and a Mexican firm is considered to be independent of its parent companies and must be registered as a separate business.
Use agents or distributors — You can operate in Mexico by using sales representatives, such as agents and distributors, instead of setting up a local presence. In this case, you are considered a non-resident business, which will limit the activities you can engage in.
4. Get your logistics right
If you’re an exporter, your Mexican customer is the importer and should take responsibility for clearing your goods through customs. If you operate an affiliate in Mexico, however, your affiliate will be the importer and thus will be responsible for customs clearance.
Beginning in 2015, Mexican importers don’t have to use licensed Mexican brokers to clear their shipments through customs. However, Mexico’s customs laws are very strict and errors can lead to severe penalties. This means that letting your affiliate manage its own customs clearance is extremely risky, so use a licensed broker even if it’s not required.
5. Make sure you get paid
Mexican lending rates are high, so potential customers may be unwilling to bear the costs of secure payment terms such as letters of credit. As a result, demanding these terms may cost you sales. At the same time, offering over-lenient credit terms is risky—if a Mexican customer doesn’t pay, it can be very difficult to collect on the debt.
The best solution to the payment problem is two-pronged. First, always negotiate your sales contracts very carefully, using qualified local counsel. Second, use accounts receivable insurance (ARI). Export Development Canada (EDC) has several ARI solutions, which will typically cover up to 90 per cent of your losses if your customer doesn’t pay.
To learn more about exporting to Mexico or operating an affiliate there, be sure to visit EDC’s info pages for Mexico.