MEXICO & NAFTA ,WHO WILL BENEFIT ?
MEXICO & NAFTA ,WHO WILL BENEFIT ?
2003-12-27 at 10:08:00 am #4359
Headline: state of flux
Mexico has become a modern nation with an export-driven economy. Who will benefit?
It’s inescapable. Mexico has joined the likes of Japan, the US and several European countries on the world map of trading. For one, there is the constant reminder of the North American Free Trade Agreement (NAFTA) and encroaching Americanism, with Coca-Cola, Sony televisions, Nike shoes or Wal-Mart stores all over the country.
Add to that 30 plus other trading agreements and there you have it – central and Latin America’s strongest economy and one of the world’s most prolific trading nations.
When NAFTA was signed in 1994, it was in dire straits – the stock market had collapsed and the peso went into freefall. The deal aimed to encourage an easier flow of goods across the US/Mexican border while a free market was supposed to boost investment, bringing prosperity and jobs.
It hasn’t quite worked out like that, at least not for everybody. Instead, as in any competitive free market, a kind of Darwinesque survival of the fittest scenario has emerged. True, more than $132 billion has been invested in the country since NAFTA, but at a cost. Many small family businesses have not been able to withstand the international onslaught and have gone under, unable to compete with the size, range, price and distribution capabilities of their often US competitors. As a result, phenomenal affluence and extreme poverty continue to rub shoulders.
The office products industry has also been transformed as a result of Mexico’s coming of age. Exact figures as to the size of the industry are difficult to come by (an industry association valued the OP market, including computer products, at $500 million in 2000). One thing is certain, however – the power is shifting towards the power channel, much like it did in the US.
The office supplies sector has boosted overall Mexican retail figures in the first nine months of this year. Retail sales rose 2.7% during the period and stationery was quoted as a prime driver. According to the Mexican National Statistics Institute, stationery sales rose while a decrease was seen in the clothing and footwear sectors.
Office products continue to represent a fragmented industry sector and there is a considerable amount of channel blurring. A large proportion of sales is still generated by small family-run businesses called papelerias. Most of these are based near schools or residential districts rather than in wealthy business areas.
However, NAFTA has endangered the very existence of papelerias as well as other local players as they have had to lock horns with larger US equivalents in the battle for supremacy or, in many cases, plain survival.
Of course, the global invaders must be doing something right, otherwise they wouldn’t be so successful. Joining forces with a local firm has often been the answer.
Take Office Depot, for example. The US-based OP giant took the plunge south of the border the same year NAFTA was signed. It joined forces with Mexico City-based Grupo Gigante with the aim to expand the Depot concept nationally. The first two stores were opened in Guadalajara in March 1995, at a time when many companies were shutting their doors and firing people.
Depot currently has 74 stores as well as several distribution and call centres, bringing total staff in Central America to 3,000. More than 50% of its superstores (40) are in medium to small cities, while the other 34 are based in Mexico’s commercial centres, Mexico City, Guadalajara and Monterrey.
Arturo Hernandez, marketing manager of Office Depot Mexico, says: “We are competing with the likes of Costco, Sam’s Club, Wal-Mart and OfficeMax here. Besides, we have to deal with the fragmented local competitors: the traditional mom and pop stores, local retailers, and countless resellers that offer a really good battle for low prices, assortment and customer satisfaction.”
Nevertheless, Depot is without a doubt the biggest force in Mexico. Jorge Ahedo Gaudry, operations director at Mexico City-based Papeleria Tauro, says: “Apart from having 8,000 products on offer, it has lots of stores, high inventories, telemarketing, a good catalogue, and both B2B and B2C internet facilities. Most importantly – it has money.”
He adds that one of the first things that happened was increased price transparency. “Product prices became very public which meant a certain amount of pricing pressure. Distributors were often forced to cut prices and ultimately, due to margins becoming lower and lower, many lost their businesses.”
In line with several of its competitors in the country, Papeleria Tauro offers a mixed bag of products and services. It offers five product categories – office products, computer consumables, computer hardware/software and janitorial products. About 80% of sales are generated from end-users and from contract orders while 15% are derived from small distributors and 5% from sales to the government.
Ahedo admits that despite the often tense relationship between the US and Mexico, a lot of companies measure themselves against Depot as well as other US players such as the omnipresent Wal-Mart (611 stores) and Costco.
Customers are increasingly looking for a one-stop shop and this presents a real challenge. In OP terms, Depot is the only player with anything close to nationwide coverage. Says Ahedo: “We don’t have companies such as United Stationers in Mexico. There’s Azerty, but they don’t deal with pure office products. Some wholesalers have started to include office products, such as DC Mayoristas in Mexico City, but its catalogue is very small. To be able to complete a customer order, we often need several wholesalers.
“Tauro is about to launch a service that should achieve fill rates of over 95%, but we need to use several suppliers and pay approximately 10% more on normal prices. Using courier services such as Fedex is another option, but that’s expensive too. One of Depot’s strengths is that it offers the same price and the same service wherever its clients are.”
While NAFTA and other such trading agreements have created a fair amount of bad feeling locally, there is no doubt that it has done a lot of good. It has boosted investment as well as competition, brought e-commerce to the market, and in all likelihood resulted in an all-round better service to the customer.
And of course, an open market works both ways, and many Mexican manufacturers have developed export lines. According to the Economist Intelligence Unit (EIU), exports in 2002 totalled $161 billion, compared to $169 billion in imports, creating a trade deficit of $8 billion. The EIU says: “We expect the peso to weaken further in 2004-2005 which will give a much needed boost to Mexican competitiveness. Growth will depend largely on external demand, which we expect to strengthen.”
As far as OP is concerned, it faces a series of challenges. Papeleria 100% Latinoamericana magazine’s analyst Oscar Aljejandro Culhuac Troop says: “One is the increasing number of Chinese manufacturers that offer product at reduced prices. Counterfeit is another danger (see ‘stamping it out’, page 64), as is product theft.”
For the time being, all industry sectors are struggling to revive the country’s sluggish economy, worsened by Chinese competition. But as the US hopefully emerges from recession, it is hoped Mexico will follow suit.
Alonso Cervera, analyst at Credit Suisse First Boston, says: “We’re starting to see recovery in the market. Last September showed the highest growth rates in non-oil exports and total imports since April 2002. Also in October, we saw a significant and unexpected rise in job creation in the private sector. As a result of these developments, we forecast GDP growth of 3.5% in 2004.”
Culhuac Troop adds: “The relationship between Mexico and the USA has always been complex but both heavily depend on each other. The US sees Mexico as an important commercial partner and huge investments take place. Also, Mexico represents a virtual bridge to Latin America and is strategically located while Mexican manufacturing is also cheap.
“Commercially speaking, the relationship between Mexico and the USA these days is fairly good. We are neighbours, have a free trade agreement and other political, economic and commercial issues in common.”
stamping it out
Mexico counterfeiting has reached worrying proportions. Not only is the country known for its abundance of counterfeit, but also for the vast amount of fakes distributed by organised crime networks. And while clothes and music are worst affected, the OP and IT industries suffer too with software and imaging supplies among the favoured counterfeits.
Price alone is no longer indicative of a counterfeit as, in an attempt to convince buyers they are getting the genuine article, sales prices are broadly on a par. Common thinking is that, unless you buy direct from a trusted source, there is a good chance you’ll get a copy. Most activities of this kind take place in urban areas such as Mexico City, Guadalajara, Monterrey, Puebla and Guanajuato before being sold all over the country.
Mexican attorney Alfredo Medina of Arochi, Marroquin & Lindner says counterfeiting has spiraled out of control, due to the lack of effective tools, legislatively or operationally. But changes are afoot. This year, the government stepped up its fight against counterfeiters, starting with a restructure of the Attorney General’s Office (AGO). A special division to fight intellectual property (IP) crimes was set up, but due to a lack of support, equipment and co-ordination, this was soon considered ineffective.
Medina says: “The big change came when a division with nationwide capabilities was created. This was assigned over 20 IP-specialised prosecutors, as well as equipment and police back-up to execute raids. In addition, the general prosecutor for Mexico instructed each state representative to assign prosecutors to handle only IP cases. The change has resulted in important seizures and a dramatic rise not only in raids but also in the time of response and quality of work carried out by this special division.”
Bill Duffy, CEO of the US-based Imaging Supplies Coalition for International Intellectual Property Protection, adds: “This year, we have seen a precedent-setting enforcement action on some retail stores in Mexico City. It was the first time that a brand owner, Epson, initiated a raid on a location housing multiple violators of intellectual property rights. The result was the seizure of hundreds of counterfeit Epson ink cartridges. A second raid resulted in the seizure of thousands of Epson and Canon ink cartridges and, in another enforcement action, Mexican customs seized two containers entering Mexico City. Each container held 3,000 counterfeit ink cartridges.”
Manufacturers can also do their bit in helping to combat the problem, says Medina: “They should make sure that their products – or the packaging – incorporate a security measure, such as holograms, invisible marks or any other type of security tag. We are dealing with very well-organised people, and sometimes with criminals involved not only in counterfeiting but also with drugs. The AGO does not want to spend the whole night trying to decide whether it is dealing with an original or a counterfeit product.
“If we can provide the official appraisers, who determine whether the product is an original or a knock off, with training and tools to easily detect fake products, not only would seizure be easier but the cases, once in court, would be robust and won more easily.”