Mexico: NAFTA’s third amigo

Despite its troubles, Mexico still offers opportunities.

Cliff Jones is no stranger to international business. The chief operating officer of Pressure Pipe Inspection Co., based in Mississauga, Ont., has worked on water pipelines from the Middle East to Colombia’s Medellín. But one of his most lucrative markets is a lot closer to home than most Canadians realize. It’s Mexico — NAFTA’s third amigo.

Pressure Pipe offers a Canadian-patented technology that inspects aging pipelines for potential water leaks. The idea is to help municipalities and industrial facilities prevent bursts before they happen. Founded in 1997, the company went into Mexico in 2004, when Mexico City hired it to work on a multimillion-dollar contract. The technology worked — a good thing, given that the capital gets 30% of its water from a single pipeline. Since then, Pressure Pipe’s Mexican projects have multiplied; in 2008, the country accounted for as much as 25% of revenue. The company opened a Mexican subsidiary that year. It now employs 18 engineers and support staff — and they’re hiring.

Pressure Pipe’s success mirrors the run-up in trade between Canada and Mexico in recent years. In 2008, bilateral trade jumped 9%, to US$26.2 billion. Mexico does better out of the deal: last year, its trade surplus was US$7.3 billion. That said, there’s now an extensive Canadian presence in everything from mining to auto parts to banking.

Take banking. In 2004, Scotiabank invested $500 million in a local bank, Inverlat, increasing its stake to 97%. The opportunity? A young, growing, yet under-serviced population of 109 million people. (In Canada, 99% of the population have bank accounts. In Mexico, that figure is more like 30%.) At the time, critics charged Mexico was under-banked because the population didn’t have much money. But on balance, Scotia’s Mexico bet has paid off. Its client base there has doubled — from one to two million — along with the number of branches. According to Nicole Reich de Polignac, CEO of Mexican operations, Scotia has consistently returned between 8% and 12% of the parent bank’s revenues.

Reich de Polignac acknowledges the recent swine flu outbreak is likely to “hurt” the bank there, along with the rest of the financial sector. (The public estimate is that GDP is shrinking by 0.3%; private estimates put it much higher.) Yet while exposure to Mexico involves risk other Canadian banks have avoided, Morningstar financial analyst Chris Blumas credits Scotia’s emerging-market strategy — over investments in the competitive U.S. marketplace — for the bank’s strong recent performance. “Scotia’s return on equity for Q1 2009 was 17%,” he says. “That’s the highest of all the Canadian banks.”

Mexico isn’t all sunshine and great ROE, though. There’s the language barrier, currency fluctuations, a minefield of foreign ownership restrictions, random taxes, and security issues. Ralph Cuervo-Lorens, the partner in charge of Mexican initiatives at Toronto-based Fraser Milner Casgrain, says Canadians should do extensive due diligence on future partners and should brace themselves for an array of taxes and regulations around hiring and payroll. For example, Mexican workers expect a Christmas bonus, plus a month off. “What’s more,” he adds, “10% of profits must be shared out to employees.” Another common surprise is the thicket of paperwork Mexican companies rely on to guard against fraud when signing contracts. “Some people take offence,” Cuervo-Lorens explains. “But the paperwork is there for a reason.” Lastly, he says, federal-provincial responsibilities in Mexico are generally the reverse of those in Canada. When engaging with the government, start at the federal level, then work down.

If all this makes Mexico sound like a labyrinth of troubles, both Reich de Polignac and Jones insist that’s not the case. One definite plus, says Jones, is the Mexican work ethic. “It actually got to be a problem,” he laughs. “We’d had bedrooms installed in the office for Canadian and U.S. staff coming in on trips. But the Mexican staff would work till eight or nine at night. We had to split the sleeping quarters off so the U.S. and Canadian staff could have their evening downtime.”