MEXICOInvesting inFINANCIAL TIMES SPECIAL REPORT | Friday June 24 2011

OnlineThe nation’s tourism industryis working hard to persuadevisitors there is more todiscover

Inside this issuePoliticsThe PRI istipped toregain thepresidency,withEnriquePeñaNieto, right, a likelycandidate Page 2

Competition A tusslebetween media tycoonsmay help provideconsumers with morechoice Page 2

Personal view Mexico’sproblems may loom largebut they are not intractablePage 2

IndustryHighlyskilledworkers arehelpingMexicoclimb thevalue chainand move

from basic manufacturingmethods into high­techsectors such as aerospacePage 3

View from WashingtonThe complex relationshipbetween the US and itssouthern neighbour hasturned much warmer, yetentrenched difficultiesremain Page 3

Stock market Technicaladvances have helpedreinvigorate the once sleepyboursePage 4

John Authers The FT’shead of Lex considers thenation’s rivalrywith Braziland askswhetherthere is allstill to playfor Page 4

Monterrey is a city ofgleaming skyscrap-ers and low-slungfactories nestled

against a dusty spur of theSierra Madre Oriental. A two-hour drive south of the Texanborder, it is a can-do place of 4mpeople, known for its good hos-pitals and universities, safestreets and smoothly movingrush-hour traffic.

For many years, Monterrey’sprosperity made it a shiningsymbol of the Mexico to be. Thecountry’s third city accounts for8 per cent of economic outputand its inhabitants enjoy a per-capita income of $17,000 a year,twice the national average.

More recently, Monterrey hasbecome emblematic of a promis-ing story gone wrong, like LatinAmerica’s second biggest econ-omy itself. Monterrey’s story isMexico’s in miniature.

With the 1994 enactment ofthe North American Free TradeAgreement (Nafta), it became aregional base for multinationalsalongside Monterrey’s very ownCemex, the world’s third biggestcement maker. Six years ago, itwas voted Latin America’s saf-est city by a business magazine.

Today, the city’s strategiclocation on north-south traderoutes has spawned a deadlyturf war between drugs gangs.

Some fearful business leadershave moved to San Antonio,Texas, where, over desultorygames of golf, they bemoanthe fate of their homeland just a

short aircraft ride away. “Thereis an atmosphere of fear,”admits Lorenzo Zambrano,Cemex’s chief executive. “Peo-ple no longer feel they can dowhat they used to – althoughanyone who leaves is a coward.”

Mr Zambrano broadcasts suchfiery messages on his Twitteraccount. Yet despite a recentspate of killings – two teenagershung from a motorway bridgeand more than 32 deaths thefollowing week, including twobodyguards of the stategovernor – Monterrey’s homi-

cide rate is about 6 per 100,000people, double the rate fiveyears ago, but far less thanthe national average of 18, orBrazil’s rate of about 25.

That suggests Mexico has notslipped into some Mad Max-likenightmare, and that it remainsfar from being a failed state.Still, it does have some failedmunicipalities, especially amongMonterrey’s northern neigh-bours, from where the drug vio-lence has started to spread.

“The whole country is at acurious nexus, where business

is booming even as security con-fidence is falling,” says JoshMiller, general director of Con-trol Risks, a business consul-tancy. “It’s a complex andnuanced environment, but theunderlying message we get fromcompanies is that you can abso-lutely do good business here.”

Certainly, the vibrant night-life of Mexico’s national capital,700km south of Monterrey,contradicts any notion of uni-form Mexican lawlessness.Indeed, tourist centres such asCancún have Canadian-style

crime statistics. A better ques-tion, therefore, is how much bet-ter Mexico might be doing with-out the violence that haserupted since Felipe Calderón,the president, launched a mili-tary offensive against organisedcrime in 2006, a battle that hascost some 40,000 lives.

Monterrey, for example, ex-pects more than $2bn of foreigninvestment this year, slightlydown from the year before.The state economy is alsoforecast to expand about 5 percent, healthy but less than cen-

tral Mexico’s safer states, whichare experiencing double-digitgrowth thanks to the boomingaeronautical and car manufac-turing industries.

That is another sign of chang-ing times.

When Nafta began, Mexicowas seen as a source of low-cost,low-skilled labour, epitomisedby light-assembly maquiladoraexport assembly plants alongthe border. Now, investors viewit as a high-skill logistics

Boom times despite safety fearsThere has been a risein violent crime insome areas, but thecountry is still a goodplace for business, saysJohn Paul Rathbone

Monterrey, a northern industrial centre and Mexico’s third city, has become emblematic of the country’s problems as a whole AP

Continued on Page 2

www.ft.com/investing­mexico­2011 | twitter.com/ftreports

2 ★ FINANCIAL TIMES FRIDAY JUNE 24 2011

Boom times in spite of fears over safetyplatform for manufacturedexports to the Americas andbeyond.

“Mexico is not just aboutcheap labour and preferen-tial market access,” saysJosé Muñoz, president anddirector-general of NissanMexicana, the Japanese carmanufacturer, which lastyear announced it wouldinvest $600m in its Mexicanplants. “It has a skilledlabour force and know-how.”

The reasons for such bull-ishness – at odds with manynews headlines – are plain.The macroeconomy is virtu-ally bulletproof. Inflation isabout 3 per cent. There are

no fiscal or current accountdeficits to speak of, and,unlike many Latin peers,exchange rate strength isnot an issue. When adjustedfor inflation, Mexico’s trade-weighted peso is4 per cent more competitivethan its 10-year average; theBrazilian currency is 50 percent less.

Meanwhile, the huge cost-advantage that Chinesemanufacturers enjoyed in2001, when China accededto the World Trade Organi-sation, has shrunk “toabout 14 per cent”, saysErnesto Cordero, financeminister. As transport costshave risen with energyprices, manufacturers haveincreased their share of the

US market and found newmarkets abroad.

Nonetheless, much inMexico remains a source ofgenuine despair.

The country’s labour lawsare obsolete, domestic mar-kets are stifled by near-monopolies in telecommuni-cations, energy and trans-port, and there is a long listof pending structuralreforms – much discussed,but never approved.

Then there is the drugswar itself. AgustínCarstens, governor of thecentral bank, calls it Mex-ico’s most important struc-tural reform. “There arevery high short-term costs,but you have to think whatthe counterfactual would

be,” he says. “If we canmake the quantum leap to acountry of law and order,the benefits will be huge.”

As with many structuralreforms, there is increasingcriticism. A growing anti-war movement insists thegovernment should matchits military offensive withless bloody initiatives, suchas more social spending anda greater squeeze on moneylaundering.

There is also the ambiva-lent role of the US as thebiggest drugs market, andthe source of most firearmsused by the cartels. As nei-ther of these things is goingto change soon, two formerpresidents have advocatedlegalising drugs.

The government’s posi-tion is that the legalisationdebate will take years toplay out. In the meantime,it must act to improve citi-zen security, but huge prob-lems lie ahead. The statehas attacked organisedcrime without first improv-ing the police and judiciary.

Monterrey, for example,aims to double its 7,000-strong police force. That ithad to fire 3,000 corruptofficers first shows thetough task it faces.

Ironically, the fact thatviolence has been concen-trated in the north has pre-vented a more urgent orunified response. “There isno shared sense of pain,”notes one diplomat. “That’s

why the offensive is oftencalled ‘Calderon’s war’rather than Mexico’s.”

Allied to this is frustra-tion over Mexico’s weakinstitutional framework.The democratic transitionin 2000, when the Institu-tional Revolutionary Partywas replaced for the firsttime in 71 years, brokethe traditional, top-downapproach to governing for-ever. But it failed to installanother system in its stead.

“The transition was inevi-table. It is also incomplete,”says Enrique Krauze, aneminent historian.

Jorge Castañeda, a formerforeign minister, suggestedin a recent book that Mexi-cans are too individualistic

to work as the team playersa modern liberal democracyrequires, a gloomy progno-sis.

Mr Zambrano is moreoptimistic. “It’s a shamethat it took a crisis to galva-nise opinion, but people arenow starting to push back,to demand more,” he says.“Democracies need to beforged. We will not letMonterrey fail.”

To mordant Mexican sen-sibilities, that may seemlike a pipe dream. But ifanyone had said 25 yearsago that Mexico wouldtoday have better publicfinances than the US, theywould have been laughedout of the room. Now it istaken for granted.

‘If we can makethe quantum leapto a country oflaw and order,the benefits willbe huge’

Media warsgive hope ofmore choice

This February, somethingstrange happened: a fightbroke out in Mexico’s nor-mally amicable, almost cosyclub of leading business-men.

The fracas began whenCarlos Slim, the telecomstycoon, fell out with EmilioAzcárraga and Ricardo Sali-nas Pliego, owners of thecountry’s two largest broad-casters, over televisionadvertising rates for 2011.

Then the courts, govern-ment and regulators startedto throw their weightaround.

In the space of a fewweeks, the Supreme Courtsaid Mr Slim could not usethe justice system to stallcompetitors, the govern-ment turned down thetycoon’s long-standingrequest to enter the paytelevision market and thecompetition watchdog hitTelcel, Mr Slim’s mobile-phone operator, with a$1bn fine for “monopolisticpractices”.

For many bystanders, thefight between Mr Slim,Televisa and Azteca, thetwo broadcasters respec-tively controlled by MrAzcárraga and Mr SalinasPliego, is a refreshing signthat fierce competition mayfinally be at work in twostrategic economic sectors:media and telecoms.

That is a relative noveltyin Mexico, a country inwhich competition has onlybeen an infrequent andoften timid visitor.

You do not have to drivea car in Mexico very far torealise that you can onlybuy petrol at a fixed priceand only from Pemex, thestate oil monopoly.

Try to buy a beer, and,until recently, the chancesare that you would only beoffered a choice from one oftwo national brewers.

Want to paint yourhouse? It is hard to avoidthe country’s Comex brand.

Indeed, the monopolies oroligopolies have been soprevalent that centre-rightPresident Felipe Calderónconcluded last month: “Thelack of greater competitionhas reduced efficiency andcompetitiveness in oureconomy.”

But for many monopoliesand oligopolies, the lack ofcompetition was extremelyconvenient.

As Eduardo Pérez Motta,who heads the country’santitrust watchdog, says:

“The logic for many yearswas ‘each man stays on hispatch, nobody fights and weall do well’.”

The outcome has been alack of choice for consum-ers, accompanied by pricesthat have remained stub-bornly high.

What is helping shake uptelecoms and media is“convergence”, the techno-logical process by which itis increasingly easy totransmit voice, data andvideo along a single net-work.

Thanks to new technolo-gies, both Televisa, theworld’s largest Spanish-speaking media company,and Azteca, Mexico’s secondbiggest broadcaster, areoffering consumers so-called “triple play” pack-ages of internet, televisionand telephone at attractiveprices.

In doing so, the two com-panies have started to chipaway at the once armour-plated telecoms empire ofMr Slim, a billionaire andthe world’s richest individ-ual.

Only five years ago, Tel-mex, Mr Slim’s fixed-lineprovider and a former statemonopoly, had 94 per centof the fixed-line market.Today, it has about 76 percent. At the same time, Tel-cel, his mobile company,now has about 70 per centof the market comparedwith more than 80 per centjust a few years ago.

Experts such as IreneLevy, who heads Observa-tel, a consumer defenceorganisation for the tele-communications sector,says the fighting presentsthe best chance in years toestablish true competitionin the sector.

“This is a moment toclear the field of all theundergrowth,” she says.“It’s a first but vital stepbefore you can really startto build something solid.”

Most observers agree thatthere is still a long way togo. Many argue, for exam-ple, that the government’sdecision to prohibit MrSlim’s entry into pay televi-sion does little to benefitconsumers or prices.

Suspicions abound thatthe “No” he received waslargely to avoid annoyingthe broadcasters so close toan election.

Unsurprisingly, perhaps,Mr Slim agrees. In a recentinterview, he told the FT:“What the public wants is alot of competition . . .[offering pay TV] wouldmean better conditions forour customers, betterprices, and we couldpackage it with our otherproducts.”

‘World’s richest man staysdown to earth’, Mr Slimis interviewed online at:ft.com/management

RegulationCompetition, oncean infrequent andtimid visitor, ismaking a loudreturn, saysAdam Thomson

An old adage notes thatthe Stone Age did not endbecause of lack of stones.

Many of Mexico’sproblems – a violent battleagainst organised crime,mediocre economic growth,and endemic corruption –might appearoverwhelming, judgingfrom the news headlines.

But contrary to whatmany might believe,these problems are notintractable.

For one, they are a verydifferent set from thoseMexico used to face.

Indeed, many of theproblems are the result ofchanges that are settingthe foundations for abetter future. The StoneAge eventually endedbecause humans devisedbetter technology thanusing stones. The same istrue of Mexico.

Mexico today is a nationconstructing its futurewhile struggling with itspast.

The 1992 North AmericanFree Trade Agreement(Nafta) began a profoundprocess of economictransformation.

Similarly, the 2000

electoral defeat of theruling InstitutionalRevolutionary Party, thefirst alternation ofpresidential power in morethan 70 years, began apolitically profoundtransformation.

However, neither of thesetransitions has yetdelivered the expectedresults.

Structural reforms in the1990s liberalised theeconomy. They expandedopportunities for privateinvestors, but did not helpthe economy to reach, andthen sustain, high rates ofgrowth. Meanwhile, thepolitical system remainsfar from perfect.

Even so, there isfrequent alternation ofparties at all levels ofgovernment, greatertransparency and even amodicum of accountability.At the same time, anumber of world-classindustries have developedin Mexico. A middle classhas also emerged.

These are considerableaccomplishments in acountry where more than40 per cent of thepopulation lives below thepoverty line.

Nonetheless, Mexico’stroubles largely stem fromthe shortcomings of the

reform process itself. Thechanges it unleashed werealmost cataclysmic.

It forced an inward-looking economy to faceworld competition.

It also loosened thestranglehold that onepolitical party, the PRI,had long held over thenation.

Unfortunately, thesechanges were not properlythought through; nor wasthere a political consensusabout what should happenafter they took place.

The result has beentwofold.

In the political sphere,decentralisation of powerhas not been accompaniedby the development ofstronger state and localinstitutions – a sine quanon for the maintenance ofpublic peace andaccountability.

Further complicating theprocess, criminal organi-sations simultaneouslybegan to expand theirbusinesses and move intonew territories. Weak lawenforcement institutions,including the police andthe judiciary, have proveda very poor matchagainst these emboldenedcriminal mafias.

A similarly incompletereform process took place

in the economy. In the1990s, the privatisation oflocal banks and publicmonopolies was moreconcerned with raisingrevenue than changingmarket structures. As aresult, private monopoliesstill dominate some sectorsof the domestic economy.

Meanwhile, banks,having survived near-bankruptcy following the1995 peso crisis, are nowstrong enough to lend andfinance growth again – yetthey are hardly doing so.

The main sources of thecountry’s troubles do notlie abroad, as someMexicans might claim.They are home-grown.

Some Mexican andforeigner observers despairthat the country’sproblems are so huge it isimpossible for it to moveahead.

This is, indeed, areasonable conclusion.Politicians never seem toreach agreement amongthemselves. There appears

to be no end to crime, bothbig and small. Theeconomy is growing, butcreating few jobs. Thecountry is faced with yetanother electoral season,which will consumeleaders’ attention for thenext year and a half. Thefuture certainly lookscomplex.

There have been twoeconomically successfuleras in Mexico’s history:one at the end of the 19thcentury, the other duringthe good years of PRI rule,particularly from the 1940sto the 1960s. The commontrait of both eras wasstrong central government.

The lesson for the futureis that Mexico can functioneither with a strongcentral government orstrong institutions. Butit cannot functionwithout either.

Mexico’s experience withdemocracy over the pasttwo decades shows thepitfalls of decentralisationwithout strong institutions.

Power and budgets havebeen devolved to states.Rather than an effectivefederal system, however,this created regionalbaronetcies instead.

As one sharpcommentator has observed,Mexico is the only nation

in the world to have gonefrom monarchy tofeudalism.

Mexico’s experience ofdecentralisation, however,is more than just a joke.It is the main task thecountry faces.

The challenge is toconsolidate – amid greatpolitical complexity – anextraordinary recentaccomplishment: the factthat most Mexicans arenow middle class. How todo that is the centralquestion the country faces.

Mexico is notungovernable, as somemight believe. It hassimply not been governedvery well of late, which isa very differentproposition. That is whybetter government andsmarter leadership,combined with strategicvision, could change thecountry very swiftly.

As with the end of theStone Age, the Mexicangovernment just has to geton and do it.

Luis Rubio is a Mexicanpolitical analyst andnewspaper columnist. Hislatest book is “Mexico as aMiddle Class Society: PoorNo More, Developed NotYet” with Luis de la Calle(CIDAC, 2011)

Personal ViewLUIS RUBIO

Country’s problems are not intractable

Reform onhold as alleyes turnto elections

Mexico’s finance minis-ter has declared hisburning ambition tobecome president,

two leftwing hopefuls are jostlingawkwardly, and a long-time oppo-sition politician has been arrestedfor weapons possession on the eveof a pivotal state election.

Presidential elections are still 12months away, but you can feel therumble of the political machineryas it kicks into gear for anotherelectoral cycle. Most analysts arealready busy crunching the resultsof the latest polls, trying to workout what they mean for the futureof Latin America’s second-largesteconomy.

Inevitably, perhaps, their firstconclusion is that the administra-tion of President Felipe Calderón isall but over. Ever since 2009, whenhis conservative National Actionparty (PAN) lost its position as thelargest single force in the country’slower chamber of congress, thecentre-right leader’s attempts topush his reform agenda have metmounting resistance.

And with all eyes now fixed on2012, first within each party forthe candidacies, and, later, thepresidential contest itself, fewmembers of congress have theappetite to spend time or politicalcapital on reforms.

As Roy Campos, who heads theMitofsky polling group in MexicoCity, puts it: “The shop has pretty

much closed for business.”The second conclusion is that

the centrist Institutional Revolu-tionary Party (PRI) is almost cer-tain to regain the presidency afterit lost power for the first time in71 years in 2000.

According to a recent Mitofskypoll, 36.8 per cent of the popula-tion would vote for the PRI com-pared with just 17 per cent for thePAN, and 15.1 per cent for theleftwing Democratic RevolutionParty (PRD).

Turn to the names of thosemost likely to be candidates, andthe PRI’s advantage is even moreimpressive: Enrique Peña Nieto,the party’s telegenic governor ofthe state of Mexico, commands33.9 per cent, with just 11.6 percent for Andrés Manuel LópezObrador, the leftwing leader andhis closest rival.

“This time round, it looks asthough the PRI has both the bestracing car and the best driver,”says Mr Campos.

Feted by the media, the PRI’sMr Peña Nieto may therefore bethe best candidate. But would healso be the best president? Afterall, when the PRI finally lost itsgrip on the presidency 11 yearsago, many political analysts pre-dicted its glory days were over.The party had a fearsome reputa-tion for corruption, and many ofits members were seen as oldguard and anti-democratic.

Mr Peña Nieto, who will be 45next month, has worked hard togroom himself for the presidency.He has hired a team of young andbright advisers, and they arebriefing him on issues as diverseas justice reform, the environ-ment, energy policy and taxreform. It is even understood thathe is brushing up his English.

What has so far emerged is aprogressive agenda that encour-

ages business and the role of theprivate sector while pushing forgreater social investment andinfrastructure. That Mr PeñaNieto has a reasonable reputationfor efficiency and project execu-tion in a country where things

happen frustratingly slowly hasonly added to his appeal.

Mr Peña Nieto’s problem, if hebecomes president, is twofold: thechanging nature of his politicalparty; and the nature of Mexico’spolitical system itself.

Alfonso Zárate, a political scien-tist in Mexico City, says the PRI’sinternal discipline is not what itused to be.

Before 2000, its various centresof power would fall into line withthe successful candidate, in effecthanding him hyper-presidentialpowers.

Today, that once centralisedand concentrated power structurehas ebbed to the periphery, hand-ing more control and influence tothe party’s 19 state governors (outof 32 states) than at any timesince the party’s formation in1929. “Today, we have 32 inde-pendent kings,” says Mr Zárate.

That will make gaining supportfor reform projects considerablyharder than when the PRI lastheld office.

The second problem is that it isdifficult, if not impossible, to wina simple majority in Congress

because the country has threelarge parties, rather than the twothat are typical of most othercountries.

As Marcelo Ebrard, Mexico Citymayor and a presidential hopefulfor the leftwing PRD party, toldthe FT in a recent interview: “Itjust doesn’t make sense.”

Carlos Elizondo, a political ana-lyst at CIDE, a Mexican centre ofteaching and investigation,argues that the prospect of a PRIgovernment without a majoritycould be positive because it wouldact as a political counterbalance.

“It would ensure a certain disci-pline to ensure that they stay inline,” he says.

Perhaps. But the risk for Mexicois continued political deadlockover reforms in areas such aslabour, tax, energy and even poli-tics itself – all of which are con-sidered long overdue.

PoliticsThe PRI is tipped toregain the presidencybut it is not allplain sailing, writesAdam Thomson

Presidential hopeful: Enrique Peña Nieto, the PRI’s governor of Mexico state Getty

‘This time around,it looks like the PRIhas both thebest racing car andthe best driver’

Luis Rubio:‘Mexicohas not beengovernedvery wellof late’

Continued from Page 1

Investing in Mexico

ContributorsJohn Paul RathboneFT Latin American Editor

John AuthersFT Head of Lex

Adam ThomsonMexico Bureau Chief

Anna FifieldFT US PoliticalCorrespondent

Nick SmithJearelle WolhuterSub­Editors

Adam JezardCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

For advertising, contact:John Moncure on +1 212641 6362, or email:john.moncure@ft.comHope Kaye on +1 212 6416548, or emailhope.kaye@ft.comor your usual representative

All FT Reports are availableat www.ft.com/reports

FINANCIAL TIMES FRIDAY JUNE 24 2011 ★ 3

Investing in Mexico

Barack Obama, US presi-dent, and his Mexican coun-terpart, Felipe Calderón,were all warm smiles anddiplomatic niceties as theystood side-by-side in theWhite House rose garden inMay.

The US president talkedabout Mr Calderón as “anoutstanding partner” andhailed him as “a leader whois guiding his countrythrough very difficulttimes with vision and withcourage”.

The Mexican was a littleless effusive, but still notedthat the relationshipbetween the two countrieswas characterised by “anhonest and open dialoguebased on trust, respect, andco-responsibility”.

Their words masked arocky few months in thiscomplicated relationship,which is bedevilled by secu-rity concerns relating to theflow of drugs, guns andillegal immigrants over theborder with the US.

Mr Calderón has com-plained that Washingtonhas not done enough tocurb the demand for drugsin the US or to stem the

tide of weapons into Mex-ico, while Mr Obama’sadministration has grownincreasingly worried thatviolence is spilling over theborder.

Drug violence hasclaimed as many as 40,000lives in Mexico, mostly withguns smuggled from the US,since Mr Calderón launchedan ambitious crackdownfour years ago. Links havebeen further strained byleaked diplomatic cables inwhich US officials criticisedMexican attempts to dealwith these issues, prompt-ing Mr Calderón to deridethe “ignorance” of Ameri-can diplomats and leadingto the resignation this yearof the US ambassador.

Still, analysts say the rela-tionship, historically one ofenormous distrust, is stead-ily improving. “The politicaltone goes up and down.That’s the reality of therelationship,” says AndrewSelee, director of the MexicoInstitute at the WoodrowWilson International Centerfor Scholars in Washington.“But on an operationallevel, it’s never been better.”

He points to a new will-ingness to share informa-tion about organised crimegroups, the US’s training ofMexican police, and closersecurity ties.

Indeed, there have beenadvances on efforts to makethe border work more effi-ciently. The two leaders

have this year resolved along-running dispute overtrucks crossing the border,as allowed by the 1994North American Free TradeAgreement (Nafta). Move-ment has been constrainedby US concerns about thesafety of Mexican lorries.

Michael Shifter, presidentof the Inter-American Dia-logue, a think-tank, agreesbureaucratic co-operation isgetting better.

The Obama administra-tion is now seeking to insti-tutionalise security ties inthe same way it institution-alised trade almost twodecades ago.

“Nafta was a way to putthe trade relationship onautomatic pilot. We’reessentially moving into asecond stage and areputting this relationship onautopilot in law enforce-ment,” says a State Depart-ment official.

“With Canada, we havehad law enforcement opera-tions working automaticallyfor generations. With Mex-ico, until quite recently, lawenforcement co-operationwas ad hoc.”

Even compared with fouryears ago, the level ofco-operation, despite “all itsfrustrations”, has increased,the official says. “Whateverbumps along the road, bothcountries are going fullsteam ahead on pursuinglaw enforcement co-opera-tion,” the official says.

In fact, ChristopherSabatini, senior director ofpolicy at the Council of theAmericas, says the bumpsare a sign of a new phase inthe relationship.

He says: “For the firsttime, it’s a relationship ofsomewhat equals,” he says.“We allow Calderón to criti-cise us on gun control anddrugs and we have not triedto act with imperialumbrage. That makes for aclose relationship, with allits ups and downs.”

But making progress oncore issues such as guncontrol and immigrationremains politically difficult.Mr Shifter of the Inter-American Dialogue says:“It’s stuck at a level ofexhortation.”

Progress will becomemore difficult as both coun-tries edge towards presiden-tial elections in 2012 andpoliticians seek to advancetheir own agendas.

Curbing the flow of gunsinto Mexico is a high prior-ity south of the border butMr Obama has been reluc-tant to talk about controlsbecause of the sensitivity ofthe issue among Americanswho assert their constitu-tional right to bear arms.

Any attempt to address itbefore his re-election cam-paign begins would open upa new front of attack fromconservatives.

Likewise immigration. MrObama won huge supportamong Hispanics in 2008 onpromises to allow a path tocitizenship for some of the13m illegal immigrants andundocumented workers inthe US, but has found itimpossible to advance theissue when unemploymenthas been above 9 per centand voters are struggling tofind jobs.

Bumps on roadto better linksUS relationshipDifferences persiston guns, drugs andillegal migrants,says Anna Fifield

FelipeCalderóncalls Mexico’srelationshipwith the US‘honest’

When China burst on tothe world’s manufactur-ing platform at the begin-ning of the decade, many

people assumed it was a death knellfor Mexican industry, in particular forthe maquiladora model of importationfor assembly and re-export.

China, so the argument went, wassimply too big and too competitive forLatin America’s second largest econ-omy. And in case there were anyremaining doubts, it manufacturedthe same sorts of products, too.

A decade on, and Mexico’s manufac-turing export sector is not onlysurviving – it is expanding. Accordingto the National Council of Maqui-ladora and Manufacturing Exports(CNIMME), manufactured exportsgrew more than 20 per cent during thefirst three months of this year com-pared with last.

Overall, the sector’s trade balancewas $5bn, making it Mexico’s second

largest source of foreign currencyafter oil. More telling, perhaps, Mex-ico’s share of total US imports nowstands at about 12.5 per cent com-pared with 11 per cent in 2009, steal-ing market share from the likes ofCanada and even China.

“Simply put, Mexico is becomingmore competitive,” says Bruno Fer-rari, the country’s economy minister.

One reason for manufacturing’ssurvival is that it has climbed thevalue chain, swapping the basic tex-tile and shoe manufacturing opera-tions of yesteryear for high-techplants that produce chips for use inmobile telephones, radio and trans-mission equipment, as well as flat-screen television sets.

“The maquiladora industry hasevolved from simple assembly toautonomous manufacturing,” explainsCarlos Palencia, director-general ofCNIMME.

The latest technical sector to springup in Mexico is probably aerospace.From virtually nothing a decade ago,there are now 238 aerospace compa-nies operating in the country, withexports of roughly $3.5bn a year.Annual average growth has been 20per cent a year since 2002.

Carlos Bello, director-general of theMexican Federation of Aerospace

Industries (Femia), says he expectsexports to reach $12bn by 2020, andfor Mexico to jump into the world’s 10most important aerospace manufac-turers from about 14th today.

Much of that optimism is based onthe fact that Mexico is on the doorstepof the US, which accounts for morethan 60 per cent of the world’s $500bna year aerospace industry. Proximityis important, because it allows forimmediate adaptation of a productand for just-in-time delivery – both ofwhich are much harder to pull offfrom China.

“US executives are tired of receivingphone calls at 3am,” says Mr Bello.“Mexico is in the same timezone andwe are part of the North Americanmanufacturing platform.”

The country also has a skilled andrelatively cheap labour force. Withaggressive inflation in Chinese wagecosts consistently erasing previousadvantages over Mexico, many compa-nies have started to conclude it isbetter to stay close to the US.

Moreover, companies are using Mex-ico’s long tradition of skilled labour tocarry out ever more complicated pro-duction and design tasks. At businessand manufacturing clusters such asthe ones in Querétaro and Chihuahuastates, industry has worked with local

authorities to adapt college and tech-nical university curriculums to meettheir increasingly specialised needs.

The result is a stepping up of multi-national companies’ use of Mexicandesign. At Ford’s design centre at therevamped Cuautitlán plant, to thenorth of Mexico City, hundreds ofengineers labour at computer screensas they design systems for Ford vehi-cles produced all over the world.

Until a couple of years ago, theplant, which now produces all FordFiestas for the Americas region, usedto be a truck plant. Ford has investedabout $5bn in Mexico over the pastfive years.

At General Electric’s AdvancedEngineering Centre in Querétaro,1,300 aeronautical engineers designcomponents such as the GENX turbo-fan jet engine, which is used in Boe-ing’s 787 aircraft.

The centre, which is the only one ofits kind in Latin America, is expectedto employ up to 1,500 engineers bynext year.

Hugo Beteta, who heads the Mexicooffice of the Economic Commissionfor Latin America and the Caribbean(Cepal), argues that Mexico still hassome way to go in terms of competingwith other emerging markets.

He points out, for example, that the

country only invests the equivalent of0.3 per cent of its gross domestic prod-uct in science and technology com-pared with 3 per cent in the case ofother countries belonging to theOrganisation for Economic Co-opera-tion and Development.

“The gap is very big, and it haslong-term consequences,” he says.

There is also a shortage of credit, inparticular for smaller suppliers ofmanufacturing operations.

In general, however, the effects ofNafta, low wages and proximity havemade Mexico an increasingly impor-tant part of the North American sup-ply chain.

Aerospace sector helpshigh­tech economy f lyIndustryAdvanced manufacturingskills are boosting exports,writes Adam Thomson

Employees busy on a Bombardier jet in Querétaro, a Mexican manufacturing cluster with highly skilled workers Bloomberg

4 ★ FINANCIAL TIMES FRIDAY JUNE 24 2011

Investing in Mexico

Mexico’s stock exchangeused to be the financialequivalent of a slow-movingriver meandering throughthe country’s unchangingcorporate landscape: pro-gress was steady but lessthan thrilling. Then thesluice gates opened andthings started moving.

Over the past two years,the BMV exchange hasintroduced sweeping tech-nological change that hasaffected the manner and thespeed with which broker-ages dispatch orders.

Since last August, broker-ages have been able to setup multi-channel links tothe BMV, which enablethem to organise ordersefficiently instead of send-ing them in one long queueas previously.

That, in turn, has openedthe possibility of algorith-mic trading, an increasinglydominant method of buyingand selling. Orders are gen-erated by computer pro-grammes and sent automat-ically.

Other changes include co-location, in which broker-ages physically house theirservers in the bourse itself,shaving potentially vitalmilliseconds off electronicorder delivery times.

Also “crosses”, in which abrokerage carries out atransaction through thestock exchange betweentwo of its clients, are nowpermitted.

Until the change occurredin January last year, bro-kers would normally carryout such transactionsbetween Mexican compa-nies’ American DepositaryReceipts (ADRs) in NewYork, with a resulting lossof business for the BMV.

All these advances, whichhave come about thankslargely to the exchange’sdemutualisation and subse-quent listing in 2008, havecoincided with rule changesgoverning the way that

Mexico’s pension funds orafores can invest.

A few years ago, theafores, whose portfolioshave grown about 20 percent a year during the pasttwo years and now repre-sent about $120bn, or 11 percent of the country’s grossdomestic product, had toinvest almost entirely ingovernment paper – most ofit short term.

Today, the funds areallowed to invest up toabout 25 per cent, on aweighted-average basis, inindividual stocks andshares, and another 12 percent in so-called structuredinstruments, such as therelatively new CKDs. Theseare a hybrid of debt andcapital through which pri-vate companies can raisefunds to expand their busi-nesses.

Those restrictions are stillconsiderably tighter than insome other Latin Americancountries. But Oscar FrancoLópez Portillo, president ofAmafore, the pension funds’association, says that theafores still feel comfortable.

“It really isn’t a strait-jacket,” he said recently.“We still have plenty ofroom for movement.”

Taken together, the

changes have turned theBMV into a thriving placeto do business. Last year,for example, the exchangehosted a record six initialpublic offerings. In total,companies raised a record47bn pesos of equity, andclose to 240bn in medium-and long-term debt.

“It’s a virtuous circle,”says Javier Artigas, theexchange’s head of strategicplanning. “The pensionfunds can now invest more,

which generates more activ-ity, and that, in turn, leadsto more interest.”

Underlining the point, theBMV reported a 22 per centjump in earnings last year,with operating incomeincreasing 70 per cent inthe last three months to238m pesos ($19.8m). Over-all, trading volumes rose 50per cent compared with2009.

Last year, it signed an

order-routing agreementwith Chicago’s CME Group,which helped open Mexico’sderivatives market to theworld.

The heightened activityand greater ease withwhich foreigners can investin the exchange’s range ofproducts have made apotentially big difference tothe country’s medium-sizedcompanies.

Many family owned busi-nesses have long com-plained that it is almostimpossible to grow becausethe banking system pro-vides little credit. Banklending to the private sec-tor is less than 20 per centof GDP, a tiny amount com-pared with Brazil or Chile.

Against that backdrop,the possibility of listing onthe BMV, or raising capitalthrough structured instru-ments such as CKDs, hasbeen a lifeline to an increas-ing number of companieslooking to make the leapand complete their nextphase of growth.

Just over a year ago,Grupo Comercial Chedraui,Mexico’s fourth-largestsupermarket chain, raised$400m in an initial publicoffering. A week later, Act-inver, an investment group,saw its share price rise onlisting, even as emergingmarkets faltered because ofGreece’s financial crisis.

And this month, Interjet,Mexico’s second-biggestcommercial airline, said itplanned to raise at least$300m through an imminentIPO.

For all the changes, theBMV remains small com-pared with BM&FBovespa,its Brazilian counterpart,with less than a third thenumber of listed companies,and with less than $500bnin total market capitalisa-tion.

Even so, its success hasspawned talk of a merger oreven an offer by a largeinternational exchange.

For now, the talk appearsto be just that. In a recentinterview with the FT, LuisTéllez, the BMV’s president,said such a deal was out ofthe question. “There isvalue to be created by stay-ing a Mexican exchange,”he says.

Changes give vigour toonce­somnolent bourseStock marketTechnical and otheralterations facilitatebusiness, reportsAdam Thomson

The Mexican stock exchange Bloomberg

‘The pension fundscan now investmore, whichgenerates moreactivity’

A decade ago, when I arrivedin Mexico City to start a happystint reporting for theFinancial Times, there was alively debate about Brazil. Whowas the true economic leaderof Latin America? To Mexicans,the debate seemed unnecessary.

Although Mexico has asmaller population, it hadcompleted its recovery from theTequila Crisis of 1994.

It had at last made ademocratic transition, with thewresting of the presidency fromthe Institutional RevolutionaryParty in 2000.

It even had a robust bankingsystem. And to judge by itsweighting in the MSCIEmerging Markets index, thewidely used benchmark, Mexicowas the biggest of all theemerging markets.

Brazil, meanwhile, was onlyjust emerging from its owncurrency crisis, while investorswere terrified it was about toelect a dangerous leftwinger,Luiz Inácio Lula da Silva.

Any battle appeared over.Mexico had established itself asLatin America’s leading light.

The story of the rivalrybetween Brazil and Mexico inthe 10 years since then ispainful, at least for those of uswho care about Mexico.

Brazil is now one of the“Bric” nations, ranking behindonly China among emergingmarkets. Mexico has been leftfar behind.

What went wrong?Some reasons are well

rehearsed. First, politics.Mexico’s institutions wereweak, and have weakenedfurther as a result of thedemocratic transition. Withouta strong PRI president bindingthe system together withpatronage, power has splinteredto the regions.

Constitutional reform isnecessary, but is almostimpossible to achieve.

Further, Mexico chose thewrong politicians. Vicente Fox,the centre-right politician who

broke the PRI’s stranglehold in2000, had a mandate but turnedout to be a very poorpolitician.

His successor, FelipeCalderón, had a much weakermandate after a bitterlycontested election. Although amuch sharper politician, hemade the strategic mistake ofpicking a fight he could notguarantee he would win, withthe drug barons. This hasbogged down his presidency.

In Lula, we now know,Brazilians chose themselves agreat politician.

Then there is the problem ofMexico’s place in the globaleconomy. It is tightly linked tothe US, and pulled itself out oftrouble after 1994 in large partthrough its membership of theNorth American Free TradeAgreement (Nafta).

But China’s entry to theWorld Trade Organisationdrastically undercut itsmanufacturers, who lostbusiness to a bigger rival withcheaper labour costs.

Brazil had it in reverse. Itseconomic model benefits fromthe growth of China, the

destination for many rawmaterials exports, and is not soreliant on the US. UnlikeMexico, it had the rightcommodities to sell at the righttime.

Finally, there is the issue ofpolitical and business culture.Mexico is controlled byoligarchies and oligopolies. It ischronically uncompetitive. Thesame is true to an extent ofBrazil, but it has found betterways to deal with it.

Look at the contrastingfortunes of the two countries’attempts to persuade

companies to list on the stockexchange.

In Brazil, the Bovespa’s NovoMercado, launched in 2000,soon turned into a vibrantforum to raise funds, hostingmore than 100 initial publicofferings.

Mexico’s repeated efforts todo something similar have beenstifled by the entrenchedinterests of its oligarchies.

But perhaps the deepestreason why Mexico came upshort has to do withoutsourcing. By joining Nafta,Mexico’s political elite forced

the country into accepting theregulatory norms of the rest ofNorth America. Companies thatnow had the chance to competein the US and Canada wouldhave to behave like their USand Canadian competitors.

Meanwhile the result of thesuccessful resolution of the1995 banking disaster – whichsaw more than half of Mexicanloans written off – was tooutsource virtually the entirebanking system’s balance sheetto foreign banks. By the timeHSBC bought Bital in 2002,more than 90 per cent of thecountry’s banking system wasin foreign hands.

This was in many ways anenlightened policy. With strongbanks, it was easier to run thetight fiscal and monetarypolicies that have solved thecountry’s inflation problem. Itnow runs at barely 3 per cent –a lower rate even than in theUK, let alone Brazil.

The problem is that byenlisting the help of Citigroup,BBVA, Santander and others,Mexico inadvertently importedthe post-Lehman credit crunch.Its recession in 2009 wasappalling, as the economycontracted more than 9 percent.

Meanwhile, Brazil and thebig South American commodityproducers suffered only a briefand shallow contraction.

This, more than anything,explains why investors haveflocked to Brazil. The appeal ofemerging markets and theBrics lies in providing a hedgeto the travails of the US andwestern Europe. This issomething Mexico does notoffer.

But Brazilian triumphalismwould be no better placed thanMexico’s confidence was adecade ago.

After years of macroeconomicorthodoxy, Mexico has thebuilding blocks in place tosurprise many. It needs itspowerful northern neighbour tofare well, and it needspoliticians who can break adecade of deadlock, but theremay yet be something todebate.

Still everything to play for in face­off with Brazil

John Authers

Mexico’s institutionswere weak and haveweakened furtheras a result of thedemocratic transition

Brazil’s President Da Silva andMexico’s President Calderónat a news conference duringfree trade talks in 2010 Reuters