Lloyd Mexico Economic Report July 2004
Best place to invest
Announcing that first quarter direct foreign investment totaled 7.425 billion dollars, President Vicente Fox described Mexico as the "best place in the world in which to invest". The year-end figure for foreign direct investment is likely to top 16 billion dollars.
Private sector leaders say the figure would be even higher, between 25 and 30 billion dollars a year, if current initiatives aimed at simplifying regulations and boosting investments in infrastructure are successful.
A recent survey of 405 large firms carried out by the Economy Secretariat found that 240 of them had firm plans to make additional investments in Mexico, and that 73% of them were confident of increasing their total sales this year.
Good news for auto parts
One of many confident companies is Ford. The auto giant is investing 1.5 billion dollars in expanding its 6,800-worker plant in Hermosillo, Sonora, which will turn out 300,000 vehicles for export each year beginning this August. The investment is one of the largest by Ford anywhere in the world in the last decade, and is excellent news for the dozens of domestic suppliers involved in manufacturing components for the company.
A Ford executive said that the major advantages of being in Mexico include the country's large pool of skilled labor, as well as its proximity to the U.S. and easy access to all the world's major markets.
Convention center in Cuernavaca
Plans have been announced for the construction of a convention center in the city of Cuernavaca, the capital of the state of Morelos. At present, Morelos receives 5 million visitors a year but most are weekend visitors, resulting in an average length of stay of only 1.4 days.
Initial projections suggest that the new center, aimed principally at the business community, could double the number of people who visit the state and quadruple the economic activity they generate. Business visitors typically spend up to 600% more than non-business tourists.
The state of Morelos has about 7,000 hotel rooms, most of them in Cuernavaca. Occupancy rates are near capacity on weekends; the convention center would help boost weekday occupancy rates. The 20-million-dollar convention center, which should be opened sometime in 2006, will be capable of hosting events involving up to 1,500 delegates.
Retail glass stores
Vitro, the nation's leading glass maker, has invested 2 million dollars in the launching of its first retail "own-brand" store in its home city of Monterrey. The firm plans to open 150 more Vitromart stores throughout the country over the next few years, to supply all kinds of glass used in the construction industry to designers, home owners and craftsmen.
Demand for locomotives
Bombardier is a Canadian company specializing in designing and manufacturing transportation equipment. Its Mexican plant, located in Ciudad Sahagún, in the state of Hidalgo, has just won a 5-year contract to supply several hundred railway locomotives for the North American market.
The motors and generators for the high-tech locomotives will be supplied by Mexican firm Grupo Coraza and Electro Motive, a division of General Motors.
The first 130 locomotives, worth 250 million dollars, are being supplied to Union Pacific Railroad at a rate of four each week. Following a 20-million-dollar upgrade, the Bombardier plant has an operating capacity of 250 locomotives a year.
Entrepreneurs see opportunities
An interesting new company, Grupo Mixbal (from a Maya word meaning "beginning from nothing"), has been in the news recently. Three young entrepreneurs, Richard le Lorrier, Jean Pierre le Lorrier and Marcelo Wohlmuth, have joined forces to launch a range of very different enterprises.
They include the manufacture and marketing of safety harnesses for children (Kid Clip), software (Optisoft) for fleets of delivery trucks (enabling transportation companies to calculate routes and schedules taking into account traffic flows, weights, deadlines and a host of other factors), Italian fast-food restaurants (Vicoletto), and Latin America's first "virtual" golf club (O´Yes Golf Virtual) in Mexico City, where players challenge their choice of 38 of the world's top golf courses.
Players use regular equipment and hit shots into a net. High-tech equipment enables the calculation of each shot's trajectory, before displaying a view of the player's next shot on a big screen. Given the relative scarcity of golf courses in Mexico City and the high costs of memberships, virtual golf may well prove to be a financial success. The firm plans to open similar facilities in other cities in the near future.
Pre-paid internet cards
According to Fernando Ramírez, the CEO of Yahoo México, the national market for dial-up connections to the Internet is worth 600 million dollars. The latest development in the competition to provide easier Internet access for the general public is the provision of pre-paid Internet access cards that do not require any long term contracts or commitments.
For instance, Yahoo has teamed up with telephone provider Avantel to launch pre-paid cards called Yahoo! Net Prepago. Each 100 peso (8.75 dollar) card offers 15 hours of connection time in a six-month period, with the use of a 50-megabyte mailbox. The cards are available in any of the 57 cities across the nation where Avantel currently offers local telephone access. Pre-paid cards are expected to capture up to 10% of the total dial-up market.
Boost for Pacific Coast ports
The ports of Lázaro Cárdenas and Manzanillo are in direct competition to handle an additional 800,000 containers each year. The containers were previously shipped from Asia to the U.S. west coast port of Longbeach, before completing their journey to Mexico by rail, entering via Laredo, Tijuana or Ciudad Juárez.
Revised security measures imposed by the International Maritime Organization (Organización Marítima Internacional, IMO) took effect at the start of this month. Now, all containers destined for Mexico must be shipped direct to Mexican ports and may no longer enter and cross the U.S. as they did previously, sealed as in-transit freight.
Only the U.S. has a larger market for time-share developments than Mexico, and sales in Mexico have been booming in recent months. The latest time share projects include Solaris (Quintana Roo), Villa del Palmar and Mayan Palace (Los Cabos, Baja California Sur), Mansión Imperial (Acapulco, Guerrero) and Pueblo Bonito (Nuevo Vallarta, Nayarit).
Many conventional hotels are now opting to sell some of their units as time shares in order to help finance renovation and expansion plans. Nationwide, there are 330 time share complexes, offering a total of 56,700 accommodation units.
The average occupancy rate for time shares is around 80%, which compares very favorably with the equivalent figure (50%) for conventional hotels, with an average length of stay of 7.8 nights per visitor per year.
Home depot expands
U.S.-based home improvement retailer Home Depot has acquired Home Mart, one of its main rivals in Mexico, for an undisclosed sum. The 20 Home Mart stores will be assimilated into Home Depot's network of 39 stores in central and northen Mexico. New Home Depot stores are due to open later this month in Torreón and Saltillo (both in the state of Coahuila) and Tampico (Tamaulipas).
Home Depot estimates that the home improvement market in Mexico is worth up to 15 billion dollars a year; this figure is growing rapidly, so future prospects look very bright.
The government estimates that five million new homes are needed to meet demand and is stepping up the number of mortgages available for low-income housing from 500,000 last year to 700,000 by 2006. About 80% of the product lines in Home Depot stores are made by domestic manufacturers.
Rising gas prices
Motorists now have to pay slightly higher gas prices. Low-sulfur 92-octane Premium gasoline, reformulated last month, is 7.25 pesos (64 cents U.S.) a liter (2.9% higher than previously), while unleaded 87-octane Magna now costs 6.13 pesos a liter (up 0.33%). Prices are about 27 cents a liter lower in the northern border zone, where they are adjusted monthly to remain competitive with prices on the other side of the border. Premium gasoline accounts for 18% of the total domestic sales of 629,000 barrels of gasoline a day.
Tackling air pollution
Dr. Mario Molina Pasquel, the Mexican scientist who won the 1995 Nobel Prize for Chemistry, is backing a proposal aiming to reduce the nation's urban air pollution levels. The proposal, formulated by a team of experts from Mexico and the U.S., acknowledges the considerable advances already made in reducing the levels of lead, nitrogen dioxide, sulfur dioxide, and carbon monoxide in Mexican cities.
The team now wants the focus to be on reducing the levels of ozone and those particulates that are between 2.5 and 10 micros in size (known to provoke respiratory problems) by further reducing the sulfur content of gasoline and diesel. Upgrading Pemex refineries could cost up to 3 billion dollars, and the group proposes that this sum be recovered through a fuel tax.
The economic costs of air pollution are already being paid in sick days, missed schooling and medical visits. Dr. Mauricio Hernandéz, the head of the National Institute of Public Health (Instituto Nacional de Salud Pública), says that the proposed measures would save the public health services billions of dollars and prevent 800 premature smog-related deaths each year.
Changed rules for long distance calls
Last month, the Federal Telecommunications Commission revised the regulations governing the provision of international long distance telephone services to permit international providers to establish their own trans-border connections instead of having to use Telmex connections as they did previously. This should stimulate considerable competition among long distance providers.
Long distance traffic is gradually becoming less important to Telmex in terms of its contribution to the company's total revenues. In 1999, long distance calls (national and international) represented 38.5% of total revenues; by 2003 this figure had fallen to 33.9%, and it is expected to continue to fall in the future.
Further steps have been taken to reduce the congestion of Mexico City airport with the inauguration of international flights from the airports of Puebla, 120 kilometers east of Mexico City, and Toluca, 70 kilometers west of the city. The first regular international flights from both airports are Continental Airlines flights to Houston.
Toluca airport has long been a center for private aviation and served 50,000 passengers last year. The new route is expected to increase this number to 280,000.
The plan to reduce the congestion of Mexico City airport also involves improvements to two other airports: Cuernavaca to the south of Mexico City, and Querétaro to the north.
Alternative mail service
Estafeta USA, a subsidiary of Mexico-based Estafeta, has been appointed an authorized agent of the U.S. Postal Service (USPS), making the company an attractive option for anyone in Mexico who wishes to send letters or packages to the U.S. The service will take about three days and cost 12 dollars, faster and more reliable than the Mexican Postal Service, but less expensive than competing courier companies like DHL or FedEx.
Estafeta will transport the packages into the U.S. and turn them over to the USPS for final delivery. Estafeta is a Mexico-based express shipping company with 500 retail outlets nationwide. The agreement with the USPS, which followed a successful pilot project, could net Estafeta an additional 15 to 20 million dollars in annual revenue within 5 years.
After six years of delay, a ruling by the U.S. Supreme Court has cleared the way for Mexican trucks to use U.S. roads. The terms of the North American Free Trade Agreement (NAFTA) guaranteed Mexican trucks free access to U.S. highways in 1998, but U.S. unions and environmental groups have repeatedly stalled all efforts to enforce NAFTA terms.
On a per kilometer basis, U.S. truckers earn double the amount made by their Mexican counterparts. At present, trucks from both countries can operate freely within a 20-mile buffer zone along each side of the international border.
Several well-financed Mexican trucking firms which operate state-of-the-art vehicles stand to make considerable inroads into the North American market if no more roadblocks are put in their way.
The text of this report was not submitted to any Federal Mexican Authorities or approved by them prior to publication. In preparing it, we have done our own research, using sources we believe to be reliable. However, we do not guarantee its accuracy. Neither the information contained herein nor the opinions expressed, constitute a solicitation by us of the purchase of any security.
Mirrored with permission from Lloyd S.A. de C.V.
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© 2004 Operadora de Fondos Lloyd, S.A.
© 2004 Allen W. Lloyd, S.A. de C.V.