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“What would be the benefits for AHE from setting up a

manufacturing unit in Mexico?”

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Acknowledgement

We would like to take this opportunity to thank all the people who have contributed to our master

thesis by advising, criticising and giving constructive feedback throughout the year.

First of all we would like to thank our thesis tutor, �������������, who has contributed to our

thesis by her valuable advises and criticism. We appreciate her efforts in guiding us throughout all

this period. We also appreciate the efforts of our other teachers and advisors; ��������������

and �������� ������ for their warm assistance and guidance. �����������������, the G.M of

Technical Service of OutoKumpu was helpful through out the year, providing us with the

required information for our paper and we are grateful to him for his support. Finally we would

like to mention the contribution of our group members and our opposition group for providing

their positive feedbacks.

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Table of Contents

Chapter 1: Introduction ........................................................................... 5 1.1 Background ............................................................................................................................ 6

1.2 Problem Identification............................................................................................................ 7

1.3 Purpose................................................................................................................................... 7

1.4 Target Group.......................................................................................................................... 7

Chapter 2: Methodology........................................................................... 8 2.1 Choice of topic ....................................................................................................................... 8

2.2 Building a theoretical Framework. ........................................................................................ 8

2.3 Research Method.................................................................................................................. 10

2.4 Criticism............................................................................................................................... 12

Chapter 3: Theoretical Framework....................................................... 13 3.1 Introduction.......................................................................................................................... 13

3.2 PESTLE Analysis.................................................................................................................. 14

3.3 Cluster and competition ....................................................................................................... 16

Chapter 4: Empirical Findings.............................................................. 21 4.1 Political findings for Mexico................................................................................................ 22

4.2 Economic findings for Mexico.............................................................................................. 25

4.3 Social findings for Mexico.................................................................................................... 28

4.4 Technical findings for Mexico.............................................................................................. 30

4.5 Legal findings for Mexico .................................................................................................... 31

4.6 Ethical findings for Mexico .................................................................................................. 31

4.7 Mexican clusters of auto industry. ....................................................................................... 32

Chapter 5: Analysis ................................................................................ 38 5.1: P.E.S.T.L.E Analysis ........................................................................................................... 38

5.2: Analysis of Clusters............................................................................................................. 42

Chapter 6: Conclusions and Recommendations................................... 46 6.1 Summary............................................................................................................................... 46

6.2Conclusions ........................................................................................................................... 46

6.3Recommendations.................................................................................................................. 47

Chapter 7: Checklist ............................................................................... 49

List of Reference..................................................................................... 50

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Chapter 1: Introduction

1.1 Background

Globalisation has led to fierce competition among the manufacturing industry during the past

decade. They all strive for manufacturing excellence by reducing delivery time, reducing

manufacturing cost and increasing the quality of the product.

(K.C. Ng; Ip Wai Hung, 2001)

Global competition has forced companies to focus on quality, competitive pricing policies and

innovative products. (Cateora &Ghauri 2000, p.247) In this highly competitive market the

companies are considering to enter new countries to gain advantages from their rivals either to

reduce cost or as a strategy for boosting demand.

(Worthington 2003, p 466)

To be competitive in the market a company needs to find out ways to move up on the ladder of

competitive advantage based on low wages and proximity to natural resources.

(Weiss, John 2002, p.175.)

Globalisation allows companies to source capital, goods and technology from anywhere. They

can also locate operations where ever it is less costly. Furthermore Michael Porter has put

forward a theory that gives clusters an outstanding role in terms of providing competitive

advantage to an industry. (Porter 1998, p.197)

Automotive Heat Exchangers (AHE) is a division of Outokumpu copper strips AB with its

production base in Sweden and Holland. It has customers all over the world. United States of

America accounts for 20% of its total sales and is the biggest customer for AHE. Due to

increased global competition it is critical for AHE to maintain its client base by providing them

with quality product to a competitive price. Mexico can be a favoured manufacturing destination

for AHE because of its proximity to USA and Canada which comprises 24% of their total sales.

(P. Morsing, 2004, pers. comm., 15 October)

After Mexico signed the NAFTA agreement the automotive industry has been growing at a

tremendous speed and accounts for a 2% of the Mexican National Gross Domestic Product. With

the growing investment in the automotive sector 18% of the labour force working in the

manufacturing sector has been employed by the automotive industry.

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With its improved infrastructure and well trained workforce, Mexico is poised to produce 4

million vehicles year by 2010. At present it exports 70% of the 1.8 million vehicles produced in

the country. (Tual, 2005)

The American Chamber of Commerce in Mexico has come out with findings that there are

around 300 business parks that are ideal for light industries such as the automotive parts

industries that provide the companies with the required infrastructure. A research done by

BANCOMEXT which is Mexico's National Foreign Trade Bank gives all the necessary

information about the business park and provides with information about where and how

accompany can join a cluster of related and complementary companies.

(Council on Australia Latin America Relations, 2002)

1.2 Problem Identification

In today’s global economy companies are more than ever forced to consider ways that will allow

them to be competitive in a global scale. Elimination of costs is a major priority and under this

reality they set up manufacturing units in global locations where this can be achieved. Apart from

elimination of costs a certain location can be beneficial in many other ways. The problem that this

research will try to answer is:

“What would be the benefits for AHE from setting up a manufacturing unit in Mexico?”

1.3 Purpose

The purpose of our study is to present the benefits for AHE by setting up a manufacturing unit in

Mexico.

1.4 Target Group

The results of this study will be handed to the management of AHE. They can use our research

either for planning or making decision.

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Chapter 2: Methodology

2.1 Choice of topic

During the last year the authors of this study have been preparing under the guidance of their

tutors, some studies related to Business Environment and International Marketing. In order to

carry out our task we contact and finally achieved a co-operation with Automotive Heat

Exchangers which would be the company we would examine and analyse regarding the areas of

our interest.

During one of these studies we came up with a recommendation for AHE that they should set up

a manufacturing unit in Mexico. Our recommendation was based on a number of reasons that our

tutors found logic and so did our contact person within the company. We agreed that this can be a

very interesting research and we decided to go on with it and select it as our master thesis

research.

After a lot of thinking and discussing with our tutors and with our contact person finally we

decided the research question which was formed as “What would be the benefits for AHE from

setting up a manufacturing unit in Mexico?”

We will try to analyse the business environment of Mexico and the relevant local industry which

in our case is the automotive industry. We will do that in order to discover and demonstrate all

the possible benefits that our chosen company would receive if they would decide to set up

operations in Mexico.

2.2 Building a theoretical Framework.

In order to conduct a research one has to refer to wide accepted scientific theories. But in order to

choose the most appropriate theories for our research we had to clearly formulate and identify

what would be the problem area of this study. While we were in this process we had a chance to

make an extensive literature search using databases like elin@malardalen, emerald and ebrary

that allows access to books, journals and articles. This search gave us an opportunity to see what

is written about Mexico and what makes so many companies choosing it for establishing

manufacturing units there.

We also got many ideas of what our conceptual framework should be in order to serve the

purpose of our paper in the best manner. The theories we have chosen are a result of this literature

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search and our previous through the year study of our prescribed books such as “The Business

Environment” by Worthington and Britton, “On Competition” by Michael Porter and

“International Marketing” by Cateora and Ghauri.

We decided to approach Mexico using P.E.S.T.L.E. analysis as our tool. The model was found in

“The business Environment” by Worthington and Britton. We thought that in order to find

potential benefits for AHE, we need to analyse the business environment of the country in all the

aspects that this theoretical model introduces. Political, economical, social, technological, legal

and environmental analysis of Mexico is in our opinion necessary to find out potential benefits

for a foreigner company that decides to move there.

The six factors of this model had to be explained by us so the reader understands the nature and

the importance of them in relation to the purpose of the paper. So we used our literature research

trying to find what is written about those factors and we present them in our theoretical

framework.

From our literature search we found out that one major reason for many companies moving

operations to Mexico is that this country is in Free Trade Agreements with many countries and

especially with U.S.A., Canada and recently Europe. That is a big advantage for companies as it

helps reducing a lot of International Trade related costs such as tariffs and quotas.

That is how we decided to use some of the theories that explain these kinds of International

agreements and try to find how they can be beneficial for our chosen company.

Some other very interesting findings from our literature search shown that a certain location can

be very beneficial to an organization in terms of creating a competitive advantage. Especially

there is a very interesting theory from Michael Porter that indicates the importance of location

and more specifically the importance of existing clusters in gaining competitive advantage. We

found this theory very useful for our research as it can help us identify clusters of auto industry in

Mexico and furthermore it would be excellent for the purpose of this study if we can show that

AHE can gain a competitive advantage if they place themselves in one of those clusters.

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2.3 Research Method

In order to make the research we decided to follow our conceptual framework and find what is

the current situation regarding the factors involved in it. So we decided to divide our research in

two parts. In the first one we have been collecting information about Mexico as a whole and it’s

Free Trade Agreements with other countries and in the second we have done the same regarding

the automotive industry and the local clusters .A brief description of our chosen company serves

as an introduction to the chapter.

In order to have a reliable insight of the situation in Mexico we contacted Jonna Voaré, the head

of Swedish Trade Council in Mexico. We sent her an e-mail requesting her if she can answer our

questionnaire. The information we were looking for was regarding why Mexico is such a popular

destination and what were the experiences of the Swedish companies that have moved to Mexico.

However, her colleague Rozalia Perez Linares from the same department provided us via email a

very interesting work made by the department. This work contained very interesting information

about the business environment of Mexico and the locations where somebody can find different

industries, advantages that come with establishment in Mexico for any foreigner company and

therefore it was very useful for our research.

Another source for this study comes from personal interviews we had through out the year with

Mr Peter Morsing, manager of Technical Sales and Service. We were in contact with him almost

every week throughout the year. In those interviews he provided us with information about the

company, the production, logistics and market areas that they cover. The interviews were

conducted in his office in Västerås. As written above we have used this information as a brief

description of AHE.

We have used Elin@malardalen, a database that contains various journals and articles that gave

us access to important information about P.E.S.T.L.E. factors, the automotive industry as well as

information about clusters in Mexico. The way we were finding information was for example by

simply searching for each factor of the P.E.S.T.L.E. model adding the word Mexico. Eventually

we came across a lot of articles and websites. We selected those we found more reliable and

relevant. . We tried to contact and give out a questionnaire to Swedish companies but also other

International companies that operate in Mexico. The answers to the questionnaire would allow us

to get a deeper understanding of how companies have experienced their presence in Mexico.

Unfortunately we did not receive any response until now.

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With the following diagram we explain how we proceeded with our research.

Problem

Identification

Purpose rpose

Building the Theoretical

Framework

Choice of Research Method

Conducting the research

Presentation of findings

Conclusions,

Recommendations and

Checklist

Analysis

Choice of Topic

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2.4 Criticism

We believe that in order to serve the purpose of this research would be preferable if we had

achieved to conduct some personal interviews with managers from international companies that

have already set up manufacturing facilities in Mexico. That would maybe increase the breadth of

the information. It is also in our opinion that the research would be more complete if we had

received some answers from our questionnaire. For example we would be in a position to

understand if the presence of a company in a cluster has been beneficial in terms of innovation.

This kind of information was not available either from case studies or web pages. However we

believe that the information we present is valid, interesting and reliable to a large extent. We

believe so because of the variety of the sources and the commonality of the opinions we found in

this information.

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Chapter 3: Theoretical Framework

3.1 Introduction

In order to serve the purpose of our paper we believe it is necessary to make an analysis of the

macro-economic environment of Mexico and the likely changes that may happen in the future.

The way we decided to do that is by using the theoretical model known as

P.E.S.T.L.E. analysis. The model is found in Ian’s Worthington and Chris Britton’s work “The

Business Environment” (2003). Since we want to examine in what way setting up a

manufacturing unit in Mexico could be beneficial to AHE, we believe that one of the things that

would serve this purpose is to understand how a certain location can bring a competitive

advantage to a company. Therefore this will be the next step in our theoretical framework. We

believe that the most appropriate theoretical model that we could use is found in Michael Porter’s

work “On Competition”. From this book we will use theories that while underlining the

importance of location in competition, manage to analyse the three broad ways that clusters affect

competition.

To be able to identify clusters in Mexico we need to know what a cluster consists of. That is why

we are using Porter’s definition of a cluster.

If we identify clusters in Mexico how can they be beneficial to AHE? It is interesting to see how

clusters can affect competition.

Therefore we tried to find what the theories say about the advantages a company gains if it

locates itself within a cluster. But it will be also interesting to see if there are any disadvantages in

such a situation. This way we can be able later to examine if these disadvantages have existed in

the Mexican clusters and if they have affected companies that operate within them.

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3.2 PESTLE Analysis

PESTLE or PEST analysis, as it is known widely looks at the likely changes in the political,

economic, socio-cultural and technical environment and seeks to predict the extent to which the

changes are likely to occur and its possible consequences for the organisation”.

(Worthington & Britton, 2003 p. 466)

Such external factors are beyond the control of the company and at times they can be a threat to

the company. However the PESTLE factors can sometimes create new opportunities for the

company. To go in a broader manner we have to a description of all the factors.

3.2a Political Factor

Political changes are responsible for the fiscal policies of the government and the way business is

conducted in a country. Government interventions can change the way a company plans its

marketing strategy. The government defines the rule under which the companies should operate.

The environment laws, tax policies, trade restrictions and tariffs play a vital role in determining

the marketing strategy of the country. (Cheverton P., 2004, p.72-74), (Worthington & Britton,

2003 p.467), (Strategy, PEST analysis)

http://www.quickmba.com/strategy/pest/

3.2b Economic Factor

The economic policy of the country has a larger impact on the business because it includes cycles

of growth and decline. Economic factors are responsible for the purchasing power of the

customer and the firm’s capital cost. The economic growth rate, infrastructure, stability of the

economy, the cost of labour all plays a major role in determining the operational policy of the

company. (Cheverton P., 2004, p.72-74), (Worthington & Britton, 2003 p.467), (Strategy, PEST

analysis)

3.2c Social Factor

Social factor such as the family structure of the society, the culture of the society are responsible

for size and the marketing operation of the company. Some of the social factor include Career

attitudes (Educational system), population growth rate and age distribution among the society.

(Cheverton P., 2004, p.72-74), (Worthington & Britton, 2003 p.467),(Strategy, PEST analysis)

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3.2d Technological Factor

Technological factors plays a major role in analysing the current state of technical advances in the

country as technology can effectively reduce the barrier to entry and can benefit the company in

various ways. Some of the technical factors are research and development, Logistics and

technology incentives.

(Cheverton P., 2004, p.72-74), (Worthington & Britton, 2003 p.467),(Strategy, PEST analysis)

3.2e Legal Factor

The legal frame work of the country has an instant impact on the business. The legal framework

decides how the business should run. Changes in the legal laws can raise various opportunities for

e.g. deregulation of the airline industry in Europe changed the entire scenario of the air travel in

the continent. Some of the legal factors are the tax laws, the employment laws and the trade laws.

(Cheverton P., 2004, p.72-74), (Worthington & Britton, 2003 p.467), (Strategy, PEST analysis)

3.2f Ethical factor

The ethical standards of a location affect business and operations. It is necessary for companies to

make adjustments in the ethical environment of the location they operate and fulfil the ethical

expectations of the host country. This becomes one of the most important considerations for

companies as their operation has a great impact on the community and the natural environment.

(Worthington & Britton, 2003 p.8).

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3.3 Cluster and competition

Clusters affect competition in 3 ways: Increase of productivity, innovation and new business

formation. (Porter 1998, p.213)

3.3a What is a cluster

When we think about competition and strategy at the company level it is more a question of what

goes on inside companies. When we think about competitiveness of nations and states the focus

goes to the economy as a whole underlining as major influence the national economic policy.

Both in competition and competitiveness you can not see the role of location.

(Porter 1998, p.197)

Globalisation allows companies to source capital, goods and technology from anywhere. They

can also locate operations where ever it is less costly. This creates the impression that

governments are losing their influence over competition to global forces but this impression does

not agree with competitive reality and that gave space for a new theory about national, state and

local competitiveness within the context of a global economy. This theory gives clusters a major

role. (Porter 1998, p.197)

“A cluster is a geographically proximate group of interconnected companies and associated

institutions in a particular field, linked by commonalities and complementarities. The geographic

scope of a cluster can range from a single city or state to a country or even a network of

neighbouring countries.” (Porter 1998, p.199)

Clusters take various forms that depend on their depth and sophistication. Mostly they include

end-product or service companies, suppliers of specialized inputs, machinery, components,

services, financial institutions and firms in related industries. They can also include firms in

downstream industries, producers of complementary products specialized infrastructure

providers, government and other institutions that provide specialized training, education,

information, research, technical support (such as universities, think tanks, vocational training

providers and standard setting -agencies. In addition, government agencies that strongly influence

a cluster can be considered part of it. Finally, trade associations and other collective private sector

bodies that support cluster members can be included in some clusters.

(Porter 1998, p.199-200)

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3.3b Clusters and Competitive Advantage

“Clusters affect competition in three broad ways: first by increasing the productivity of

constituent firms or industries; second, by increasing their capacity for innovation and thus for

productivity growth; and third, by stimulating new business formation that supports innovation

and expands the cluster.” (Porter 1998, p.213)

3.3c Clusters and Productivity

• Access to Specialized Inputs and Employees

When a company locates itself within a cluster can get superior or lower-cost access to

specialized inputs such as components, machinery, business services but also personnel. If within

the cluster there are available competitive suppliers, that will be a good environment for the most

efficient and effective way of assembling inputs. Sourcing outside cluster would not be the ideal

arrangement but would be necessary when local competent suppliers would not be available.

(Porter 1998, p. 214-216)

“Local” outsourcing can decrease transaction costs in contrast with “distant” one. It also

minimizes the need for inventory and eliminates importing costs and delays. Local relationships

do not allow suppliers to overprice or renege on commitments as it would give damage their

reputation within the cluster. “Local” outsourcing also eases communication reduces the cost of

tailoring and helps services such as installation, debugging, user training, troubleshooting and

timely repair. (Porter 1998, p. 214-216)

Access to inputs within the cluster can also help the company in terms of efficiency. This happens

when there are cost effective specialists within the cluster. Those specialists are usually more cost

effective and responsive than in house units. (Porter 1998, p. 214-216)

The presence of more than one industry within the same cluster is also very usual. This gives

place for more opportunities to suppliers as they are located next to customers with same or

similar needs in inputs. That makes the breadth and depth of a cluster more important for

competitive advantage than the size of the individual firms or industries within it. Clusters also

offer sourcing advantages of specialized and experienced employees. Search and transaction costs

for recruiting are lower and matching the right jobs to the right people is easier as the presence of

a cluster attracts valuable employees even from other locations. (Porter 1998, p. 214-216)

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Further more the presence of a cluster reassures the continuous existence of sources both in inputs

and personnel as the increased demand is coming with increased supply. The absence of capable

locally based suppliers is reducing the benefits of a cluster and therefore weak suppliers are

encouraged to upgrade as well as strong else where located suppliers are encouraged to enter.

(Porter 1998, p. 214-216)

• Access to Information

When a company is situated within a cluster it gains better and at lower cost access to extensive

market, technical and other specialized information. This allows the company to enhance

productivity. The flow of communication is easier not only within the cluster but even between

units of the same company. The reasons for this come from proximity, supply and technological

linkages and the existence of repeated, personal relationships and community ties. An important

informational benefit is that information about current buyer needs is available. Since buyers are

part of the clusters then other cluster participants gain and share information about their needs.

(Porter 1998, p. 216-217)

• Access to Institutions and Public Goods

A company that exists in a cluster can benefit in terms of costs in inputs that otherwise would be

expensive. For example recruitment of employees trained in local programs cut the costs of

internal training. From the research going on in the local university the company can use the

expertise of the local experts. Specialized infrastructure or advice from experts in local

institutions can be available at very low cost. (Porter 1998, p.218-219)

Where there is a cluster there is common to find private initiatives resulting in public goods. For

example private investments in training programs, infrastructure. There are private or partially

private institutions within clusters that make common investments as they target to common

benefits. Investments like that take place via trade associations or other collective

mechanisms.(Porter 1998, p.218-219)

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3.3d Cluster and Innovation

The benefit for a company to be located in a cluster is very high in terms of innovation and

productivity growth, if compared to an isolated location. Firm within the cluster are often fast and

clear to recognise the new buyer needs and this leads to innovation in the products they bring out

in the market. The companies that are located in the cluster are often fast in recognising the

buying trend of the buyers in comparison to the companies that are located in an isolated area.

Companies located in a cluster have the benefit to know the evolving technologies, components

and available machinery. They learn the latest service concepts and the marketing trends. This

occurs because of the relationship the company develops with other cluster entities because of the

frequent face to face contact and ease of visiting various sites. A company within a cluster has the

advantage of sourcing new components, service, machinery and other elements needed to

implement innovations. Other factor that helps the firm to innovate is the peer pressure they face

because of continuous comparison and competition. In a cluster where the operating cost is the

same the companies tries to distinguish themselves with continuous innovation.

(Porter 1998, p.220-222)

3.3e Clusters and New Business Formation

The existence of a cluster is a signal for opportunities. This makes it often that new businesses

start within a cluster. Individuals that are working in areas close to clusters can very easy identify

gaps in products, services, or suppliers to fill and they take initiatives to start new firms. (Porter

1998, p.224)

“Barriers to entry are lower than elsewhere” at cluster locations. Needed skills, inputs and staff

often exist already within the cluster. Local financial institutions and investors being familiar

with a cluster may require a lower risk premium on capital. The cluster itself usually is an

important local market. (Porter 1998, p.224)

Established companies that are based in non-cluster locations (foreign and domestic) often

establish subsidiaries at clusters, seeking the productivity benefits and innovation advantages that

were described previously. The presence of a cluster makes entry barriers low and that is

something that companies outside clusters would not ignore. Especially when other “foreign”

companies have already moved there, the perceived risk gets even lower.

(Porter 1998, p.224)

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3.3f Disadvantages of Clusters

In general the presence of a company within a cluster gives the company the advantages we

described in the previous paragraphs. But there are some concerns regarding the impact of a high

concentration within a limited geographical area of many companies. That could increase

competition on firm costs such as rents, labour and inputs

Regarding labour there is a concern that congestion and increased competition could increase

demand for certain skills and consequently exceed supply. That would result in higher labour

costs .Another problem in terms of innovation and technology is that an advantage in these fields

of a certain company could be lost to other firms within the cluster. In addition to that many times

companies within a cluster could lose their focus in continuous innovation. This way they would

lose the developments that take place out of the cluster and all the latest trends Also a cluster

could become locked in to what they use to do well. That is a reason for the decline of some

clusters

One more possible problem is that sometimes companies within clusters form tight bonds and

therefore is difficult for new companies to enter. The result would be that companies would have

limited access to new suppliers or customers

Increased competition within a cluster could also lead to reduced sales, prices, profits, market

share and growth at least in the short term.

(Taggart, J. H, 2001, p.14)

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Chapter 4: Empirical Findings Introduction

Outokumpu group is a leading metal and technology group with it’s headquarter in Finland. The

group is divided into three broad organisations and they operate independently with their own

management head who finally reports to the parent company. Outokumpu copper has five divisions

as we see below in the diagram.

(Source: Self drawn, P. Morsing, 2004, pers. Comm., 15 October)

Automotive Heat Exchangers is involved in manufacturing of special copper stripes for the

radiator manufacturers around the world who are specialised in the manufacturing of copper and

brass radiators for automotive vehicles. AHE was incorporated in the year 1950 .Today it has 770

employees with two production unit based in Sweden and Holland. It has 300 customers in 75

countries around the world. It controls 70% of the market share in its segment. The major markets

are USA 20, Singapore 8, Middle East 6, Italy 4, Thailand 4, Spain 4, UK 4, Canada 4, Iran 3,

South America 3 (All figure are in total % of the sales).They have a sales force based in United

States of America which takes care of all the marketing and sales activities. The product is shipped

from Europe and is stored in storage facilities in USA.

(P. Morsing, 2004, pers. comm., 15 October)

Mexico is a country situated in the continent on North America and shares its northern borders

with United States of America. In the south east it shares its border with Belize and Guatemala.

With a population of 100 million it is the fifth largest oil producer in the world.

(Top World Oil Producers, Exporters, Consumers, and Importers, 2003)

In 1994 Mexico joined Canada and the United States in the North American Free Trade Agreement

(NAFTA). Soon it became a major exporter to United States with around 90% of its export going

to US. (The world fact book 2005)

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In the following paragraphs we will present some empirical findings regarding the political

economic, social, technical, legal and ethical aspects of Mexico.

4.1 Political findings for Mexico

Mexico was ruled by Spain for nearly 300 years until 1810 when the Mexican revolted. They

finally gained independence in 1821.After the world war II the Mexicans looked forward to an

economic growth due to its oil reserves but its earning were reduced by the fall in the global oil

price in 1986. In the year 1994 Mexico joined NAFTA and in 1996 it became one of the founding

members of World Trade Organisation. (Mexico 2005)

• 4.1 a Tax Policy

In 2002 the tax rate for all taxable income for Mexican companies was 35%. The rate had been

decreased one percent per year and has been fixed at 32% from 2005 onwards. Large companies

that exports more that US dollar 2,000,000 representing 40% or more of its total production (every

year) are benefited by the preferential tax payment.

Companies exporting at least 10% of their total annual sales may temporarily import their raw

material without paying any duties. This policy also goes for parts destined to be incorporated into

export goods, containers and packaging materials, fuel, spare parts and consumable goods used in

the manufacturing process. This program is known as PITEX (Temporary Import Program for

Exporting).

The Mexican government has taken efficient steps to prevent double taxation. Today, agreements

prevent double taxation are in effect with Canada, France, Germany, Great Britain, Italy,

Netherlands, Northern Ireland, Singapore, Spain, Sweden, Switzerland, and the United States.

(How to invest in Mexico, 2002)

• 4.1b Political stability

The constitution of 1917 provides Mexico with powers separated into independent executive,

legislative, and judicial branches. The head of the state is the president who executes the law of the

congress. On July 2000 after a period of 71 years there was a change in the ruling party and

Vicente Fox Quesada of the opposition "Alliance for Change" coalition, headed by the National

Action Party (PAN), was elected president. It was considered to have been the most free and fair

elections in Mexico's history.(Mexico, 2005), (The world fact book 2005)

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• 4.1c Environment Regulations

Despite being a signatory to NAFTA, Mexico has a very lax environmental regulations and

enforcement. There are various problems that plague the Mexican government like the lack of

sufficient funds to implement high environmental standards. This has led to a polluted environment

with scarce natural fresh water throughout the country. There is a scarcity of hazardous waste

disposal facilities and raw sewage and industrial effluents are polluting rivers in urban areas.

Deforestation; widespread erosion; desertification; deteriorating agricultural lands are other major

environmental issues and are plaguing the urban centres along the US-Mexican border. However

there has been an increased awareness among the Mexican government to overcome this

ecological disaster. A legislation introduced in 1988 that requires environmental impact statements

is more stringent compared to U.S. law. The government is forcing the polluting units to relocate

or to adopt a greener emission standard. Mexico is signatory to various environmental programme

like :-Biodiversity, Climate Change, Climate Change-Kyoto Protocol, Desertification, Endangered

Species, Hazardous Wastes, Law of the Sea, Marine Dumping, Marine Life Conservation, Ozone

Layer Protection, Ship Pollution, Wetlands, Whaling.

“Green Herrings: NAFTA and the Environment” (Salinas-León), (The world fact book 2005)

• 4.1d Trade agreements

Mexico has various trade agreements with different countries. Broadly we can classify them as

trade agreements with North America, Central and South America and European Union. These

agreements are as follows:

NAFTA: - USA, Canada, Mexico 1994

The North American Free Trade Agreement was signed between the Mexican government and the

governments of Canada and US in the year 1994. They agreed to withdraw tariffs completely

among the tree countries by the year 2001 and now most of the goods including the automotive

goods come under this agreement.

Costa Rica and Mexico Took effect January 1, 1995

This agreement was signed between the Costa Rican and the Mexican government in the year 1995

and they agreed to abolish tariffs on 70% of the non agricultural goods. On January 1, 1999, 90%

non agricultural goods were covered under this agreement and finally in the year 2004, all the non-

agricultural goods were exempted from tariffs.

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Mexico, Colombia, Venezuela Took effect in Jan. 1, 1995.

Signed June 1994, this agreement took effect in Jan. 1, 1995. The Mexican government agreed

with the Venezuelan government to abolish tariff in the next 10 years schedule. With the

Columbian government they decided on an immediate bilateral 40% elimination of tariffs, 5 %

more within five years and with further negotiations. There is a clause that will allow the inclusion

of other Latin American countries.

Mexico, Bolivia Took effect on Jan. 1, 1995

Signed on Jan. 1, 1995 97% of the Mexican exports were covered under this agreement and were

termed duty free whereas 99% of the Bolivian exports were immediately termed duty free.

Mexico-EU Took effect 1st of July, 2000

On January 18, 2000 the Mexican government signed a free trade agreement with the European

Union in Lisbon. Under this treaty there will be immediate tariff reductions on goods from Mexico

to the EU. The EU export will be given the same treatment as the North American goods under

NAFTA. This agreement is on the similar platform as of NAFTA but on a mush faster track. All

tariffs have been lifted from Mexican exports to the EU in 2003 and all tariffs will be removed

from EU goods to Mexico by 2007.

Other Treaties

Mexico, Nicaragua Took effect July 1st, 1998

Mexico, Chile Took effect August 1st, 1999

Mexico, El Salvador, Guatemala, Honduras Took effect March 15, 2001.

(Mexico-Free Trade Agreement, 2005)

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4.2 Economic findings for Mexico

Mexico is a free market economy dominated by the private sector. The per capita income of

Mexico is the highest in Latin America according to the data provided by the World Bank. Mexico

had an impressive recovery after its economic debacle in 1994-1995.However the economy is

plagued by uneven distribution of income, low wages and underemployment.

(The world fact book, 2005), (Mexico, 2005),

• 4.2a Economic growth

After the economic debacle of 1994-1995, which was mainly because of devaluation of peso, the

country has made an impressive recovery in the last few years. This was mainly because of the

strong export sector which was the result of NAFTA. Mexico had an impressive growth rate of

6.9%, however due to economic slowdown in the US, which is the principle importer of Mexican

exports; the GDP grew by 0.3% in 2001, 0.9% in 2002, and 1.2% in 2003 but recovered with a

growth rate of 4% in 2004, the highest in the recent years. There had been positive development in

the economy which includes drop in inflation to 4.5%, a fall in the interest rate and the emergence

of a stronger Peso against the US dollar. (The world fact book, 2005), (Mexico, 2005), (Doing

Business in Mexico)

• 4.2b labour cost

Labour cost in Mexico is quite cheap compared to other countries with a minimum daily salary of

US$ 3.77 (2004 estimates). Average hourly salary in manufacturing sector is US$ 2.5 (2003

estimates). The working hours are 40-48 hours a week and the worker has the right to take a day

off every week. Overtime is allowed and the workers salary is doubled for the first nine hours

every week. The hourly salary is tripled if the worker works more than nine hours every week. The

worker is entitled to a 25% bonus of his salary if he works on Sunday.

All employers pay 5% of the workers salary to a housing program, known as Infonavit. A

Christmas bonus equivalent to the workers 15 days of work is paid to the workers on 20th

of

December. All the employees are obliged to register the worker with the social security system by

paying 17-21% of the worker’s salary depending on how much risk is involved in his work. Then

the workers pay 3-4% of their salary every month to this system. The minimum vacation is six

days after one year of work.

There is a huge population of educated people to serve the labour force and there is an annual

increase of about 0.5 million in the labour force.

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Fox government has improved the educational level and the country provides the companies with a

good mixture of university educated and high school educated people. The diagram below shows

the division of population according to their education level.

(Rosalia Perez Linares 2005, pers. Comm., 20 April)

No education Primary School Secondary School High School College/University

Figure 1

(Rosalia Perez Linares 2005, pers. Comm., 20 April)

• 4.2c Natural resource

Mexico has an impressive deposit of natural resource. It ranks 5th

in the world as a producer of

petroleum products. Apart from petroleum products Mexico is rich in silver, copper, gold, lead,

zinc, natural gas, timber.

(The world fact book, 2005),

• 4.2d Foreign direct investment

Foreign direct Investment is one of the major growth factor for the Mexican economy. United

States of America has always been the main source for foreign direct investment specially after

Mexico signed NAFTA. The companies of United States invested around $ 3.2 billion making the

country the largest recipient of FDI in Latin America. Most of the investment went in the

automotive sector while banking sector ranked the second. In the table below we can see the

comprehensive data about the FDI during the recent years.

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Foreign Direct Investment in Mexico

1998 1999 2000 2001 2002 2003*

TOTAL 12200.0 13007.2 15847.4 26 109,4 13968.1 2570.3

New

Investment

6046.8 5550.0 6836.1 19304.5 6852.3 78806

Reinvest-

ment

Earnings

2864.0 2303.2 3783.4 3732.5 2126.7 1129.6

Inter-

company

1178.7 2376.0 2244.9 864.2 2945.6 177.2

Maquiladoras 2110.5 2778.0 2983.0 2172.2 2043.5 474.9

Figure 2. (Rosalia Perez Linares 2005, pers. Comm., 20 April)

Units: US $ Millions

Figure 3: Foreign Direct Investment by Sectors, 1997-2001, (Millions of US$)

“Foreign Direct Investment, Exports and Imports in Mexico” (Pacheco-López)

In the recent years due to liberalisation of the financial sector there has been a huge inflow of

foreign capital in this sector. In 2001 when Citicorp (an investment bank) acquired BANAMEX

(the biggest commercial bank of Mexico),it was the largest FDI ever made in the history of Mexico

and comprised of 50% of the total FDI made in 2001. “Foreign Direct Investment, Exports and

Imports in Mexico” (Pacheco-López), (Mexico, 2005)

Sectors 1997 1998 1999 2000 2001 1994-2001

Value Share (%)

Total 12,112 7,986 12,767 15,318 25,221 74,850 100.0

Agriculture 10 29 81 88 5 266 0.4

Extractive 130 42 127 181 33 775 1.0

Manufacturing 7,281 5,022 8,732 8,824 4,791 50,392 67.3

Electricity and Water 5 27 140 117 248 554 0.7

Construction 110 83 129 168 72 874 1.2

Commerce 1,899 937 1,156 2,165 1,533 10,675 14.3

Transport and Communication 686 374 256 2,458 2,864 3,745 5.0

Financial Services 1,087 708 714 4,586 13,571 23,889 31.9

Other Services 1,158 407

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• 4.2e Infrastructure

Mexico has good network of railroads and highways connecting the entire country. The country

has 20 ports, harbours and 1,827 airports throughout the country. The railroad stretches 19,510

kms and the length of the highway network is 329,532 km which includes 6,429 km of

expressways. The Mexican government has taken drastic steps to upgrade their infrastructure to the

world level. Large investments have helped in improving the road connection between the major

cities. The government has signed treaty with the private sector to promote the growth in the

transportation system. Ferromex, the Mexican railway company has decided to invest US$ 15

million annually to improve the railroad network and to come up with 10 advanced terminals by

the year 2009.

(The world factbook 2005) (Rosalia Perez Linares 2005, pers. Comm., 20 April)

• 4.2f Economic stability

Fox government in Mexico is considered as the most democratic and freely elected government,

Mexico has ever seen. President Fox has introduced a lot of reforms in order to make the economy

more stable. With a stronger peso against the dollar the economy is recovering. The foreign direct

investment has been flowing in and with the recovery in the US economy the GDP made a growth

of 4% in the year 2004.The government has been able to control the inflation rate which was

around 16.6% in 1999 but came down to 4.0% in 2003. Export is increasing every year with

$164.9 billion of exports in the year 2003.

(Bureau of Western Hemisphere Affairs 2004), (Mexico changes harmoniously and builds

economic stability 2003)

4.3 Social findings for Mexico

The country has a total population of 100 million with an ethnic combination of Mestizo

(Amerindian-Spanish) 60%, Amerindian or predominantly Amerindian 30%, white 9%, other 1%.

The population consist of 89% Roman Catholic, 6% Protestant and 5% others.

(The world factbook 2005)

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• 4.3a Career attitudes( Educational system)

The Fox government has introduced a lot of reforms to improve the educational structure of the

country and the population had spent 8 years at an average within the educational system in2003

compared to 7.5 years in 1999. 16% of the population has completed their high school and 16%

have finished their university and college education. The chart below shows the area of education

by the university graduates.

Social Science 2%

Natural Science 20%

Medicine 9%

Agriculture 2%

Engineering/Technology 29%

Humanities 4%

Administration 34%

Figure 4: (Rosalia Perez Linares 2005, pers. Comm., 20 April)

There are a number of technical universities in the country that are giving tailor made courses that

are in beneficial for the local industries. Although the education level is raising ,the dropout rate of

the students from the primary school is alarming and the government has taken this matter as a

serious threat to the national development.

(Rosalia Perez Linares 2005, pers. Comm., 20 April), (Education n.d)

29%

4%

34%

20%

2%

9% 2%

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• 4.3b Population growth rate

With a population of 104,959,594 (July 2004 est.), the country has a population growth rate of

1.18% (2004 est.). They have 21.44 births/1,000 population (2004 est.) and the death rate is

4.73 deaths/1,000 population (2004 est.). The age structure is as follows.

0-14 years: 31.6% 15-64 years: 62.9% 65 years and over: 5.5%.

The life expectancy of the male is 72.18 years and the life expectancy of the female is 77.83 years.

(The world factbook 2005)

4.4 Technical findings for Mexico

Mexico is going through a development in their technical field and the country is spending a lot in

research and development as well as setting up tailored made courses for the industries. With the

flow of investment in the auto sector there is an increased sophistication in the R&D sector.

(Smith & Malkin 1998)

• 4.4aResearch and Development

There has been an increased spending on the R&D in the current years and especially after the

patent protection law was passed in the year 1991 there has been a five fold increase in R&D. The

government has decided to establish a ‘Science cabinet' and a mechanism for planning and

budgeting for R&D .They will be responsible for allocation and administration of public funds for

research. (André, 2005)

• 4.4b Technology incentives

The government has lots of steps to boost investment in R&D. In 1999 the government announced

tax breaks and incentives for the private companies which are involved in spending on R&D for

innovation. The tax credit program is intended to persuade the private companies to invest more in

their R&D. (Mexico n.d)

• 4.4c Logistics

Mexico has a good network of rail roads but it still need a lot of development so that the cost of

logistics can be brought down. The most popular mode of transportation is the road ways which

accounts for the 80% of the freight. Although the cost of transportation is higher compared to

developed nations like US, UK and Japan, it is still cheaper in comparison to China. The

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government has signed various agreements with different private companies to improve the

railroads and the roadways.

There are 20 ports and harbours and one can drop its supply to US in an average eight hours by

ship, whereas it takes around 21-23 days to ship from China to United States.

(Atkinson 2003), (Rosalia Perez Linares 2005, pers. Comm., 20 April)

4.5 Legal findings for Mexico

• 4.5a Legal framework

The Legal system of Mexico is based on the civil law system. All the laws that are related with

trade, commerce and investment are federal in nature and apply throughout the country. The

foreign investment act states that all the foreign corporations are entitled to own 100% of the

stocks in any company operating in Mexico. The foreign corporation are entitled to buy any kind

of fixed assets, take up new business activities, expand or open new business establishments except

the reserved or regulated economic activities.

(How to invest in Mexico n.d), (Mexico Business Opportunities and Legal Framework n.d)

• 4.5b Foreign Exchange Policy

Mexico has a floating exchange rate which it adopted in the year 1995, which means that there is

no intervention by the central bank and the currency may rise or fall according to the demand and

supply in the market. The companies are allowed to have checking and deposit accounts in US

dollars anywhere in the country by paying the minimum fees required. The companies are not

restricted on their profit, royalty, dividend, interest payment and capital repatriation.

(How to invest in Mexico n.d )

4.6 Ethical findings for Mexico

The business environment of Mexico is good and it is one of the countries that advocates free trade

to a great extent. However there are various other factors that plague the business environment of

the country. The country faces a major problem with corruption in every level of the government.

There is lot of bribery in every level. The government has taken considerable steps to fight

corruption on the local and the national level. Strict laws have been passed to combat bribery and

corruption with average penalty of five to ten years in prison if caught taking a bribe. The

government has passed a new law on freedom of information access to increase the accountability

of the government. The government is also recently implemented merit based civil servant for the

federal government. With all these steps there is an increasing awareness to fight corruption,

however it will take time. (Doing Business in Mexico 2005)

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4.7 Mexican clusters of auto industry.

4.7.1 The automotive industry in Mexico.

One of the most important manufacturing locations in the world is Mexico. Especially its

automotive industry with a two digit annual growth rate in total units manufactured of

automobiles, trucks and buses, has became a target market for automotive related industries,

including parts, sub assemblies, consumables and services for the industry.

13.5% of the manufacturing sector and 2.9% of the country’s GDP is covered by the automotive

sector with an impressive growth of 6.1% annually from 1985 until 2000.

The success of the industry can be seen both in terms of increased exports and investment making

Mexico a world class player. According to WTO, Mexico was the third biggest exporter to U.S.,

Canadian and Japanese automotive industries under 2000 and the sixth exporter of auto and auto-

parts globally.

The amount of total exports in automotive products were more than US$ 33 billion in 2001 more

than 6 times the number of 1990. In 2001 the number of vehicles produced was 1.8 million,

doubled from 1993 when it was 900,000.

After the implementation of NAFTA the Mexican auto industry has been modernised and

innovative. Sophisticated industrial processes have been introduced and due to advanced research

centres and high skilled labour innovative solutions have been developed. Giant companies that

manufacture in Mexico like General Motors, Nissan, Volkswagen and Delphi have developed

amazing capability of improving and creating new processes and products.

(Mexican Automotive Industry: A World-Class Player n.d)

4.7.2 The case of Aguascalientes

Aguascalientes is located in the centre of Mexico and in its automotive cluster is dominated by

Nissan. Nissan has made a big investment in a large motor plant facility. Later they decided to

expand this plant and introduce full manufacturing activities in an alliance with French Giants

Renault. Around these giants there are about 40 other companies and they are all serving as

suppliers not only to them but also to other automotive companies in or out of Mexico. It is really

impressive that 85% of the state’s GDP comes from the automotive industry.

(Automotive Cluster in Aguascalientes Mexico, 2005)

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The population of Aguascalientes is estimated to be 643,419 people according to the 2000census,

while the number for 2002 was estimated to be 688,458 people. The number of people that join the

workforce every year is about 13,000. The whole state of Aguascalientes has a population of

1,012,893 people.(Aguascalientes n.d)

Education in this state is of a high importance and certainly in a good level. The literacy rate is

95.8% one of the highest in the country. There are 6 universities and 14 technological schools that

offer education to approximately 20,000 students in over than 85 major courses while the highest

demand is engineering.

There are a lot of job training programs including automotive technician, automotive mechanic and

automotive electronics among others and the government of the state is currently offering 883

courses and 9,300 training scholarships to 20,000 unemployed workers each year. One very

important initiative of the state is the “School of Technological Education of Aguascalientes"

which is tailored to the needs of the automotive-related local industry.

(Aguascalientes n.d) (Aguascalientes-The people n.d)

The workforce is recognised not only for their productivity but also for their quality and the

companies in this state are using modern technological and organizational operating and training

systems. In addition to that the unions in this area are the most cooperative as there have not been

any strikes for the last 30 years.

(Aguascalientes n.d)

The wide range of the cluster is enhancing productivity and the 40 companies that are located

there, can benefit from each other. One example of this comes from the alliance of the two

dominating powers, Nissan and Renault. 100,000 Renault vehicles or vehicles engineered in

cooperation with Renault were planned to be manufactured in the Nissan plants in 2003. Ithas been

estimated that due to this alliance until 2010 there will be a production of 800,000vehicles for

Nissan and 400,000 for Renault. If we take in consideration that Nissan is also increasing

production for their “Sentra” model destined for the close markets of U.S. and Canada, Nissan

Mexicana plants nearly achieve full capacity utilization. Further more the cost benefits from

common purchasing and common use of back-office; make this alliance a success story to be

admired. US$400 million for the 1999-2006 period only are supporting this cooperative venture

(Automotive Cluster in Aguascalientes Mexico, 2005)

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On 15th

of July 2004 Aisin Group established a new company to produce door frame for automakers

in Aguascalientes. AISIN MFG. AGUASCALIENTES S.A. is planning to start production

operations in fall 2005. This company will be the third production company of the same Group to

be located in Mexico and its goal is to serve the Mexican market. The investment will reach the

amount of $5.8 million including land, equipment and buildings. The company has estimated to

employ 66 people in 2006 and achieve $10.6 million under the same year.

(New body components manufacturing company established in Mexico, 2004)

It worth’s mentioning that located in the cluster of Aguascalientes are Calsonic Mexicana, a

company which produce Automotive heating, cooling and exhaust systems and Unipres Mexicana

which manufactures Radiators, Shock absorbers and engine mounts. These two companies are

potential customers for AHE. (Automotive Cluster in Aguascalientes Mexico, 2005)

4.7.3 The case of Coahuila (SALTILLO)

Saltillo is the capital of the Mexican state Coahuila and in this area we can find automotive giants

such as General Motors with a $500 million car factory which is the most productive in the world

according to the states economic secretary, Jose Antonio Murra Giacoma. Chrysler has a $350

million plant that produces 120,000 Ram pickup trucks for the US export market each year, We

can also find operations of Renault and others. It has been named as a “mecca” for industrial

manufacturing as a large supplier base can be found there.

(Introduction to Saltillo,2004)

The city has population of 700,000 people and is the second most important in terms of

international exporting. The automotive industry is the dominating force as out of the $3 billion

worth of Foreign Direct Investments into Coahuila, more than $2 billion has gone into the auto

sector and so is called “Little Detroit” 11% of the working force is employed within auto sector

while 66% of export revenues also connect with the same sector.

(Introduction to Saltillo,2004),(Darwent,1997)

The big concentration of educational institutes (14 universities, 12 research centres and 31

technical schools) that are clustered in the city makes the local population very well educated so

that the city is also known as “Athens of Mexico”. (Saltillo nd) (Introduction to Saltillo,2004)

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There are seven sub-campuses of Monterrey Institute of Technology that ensure continuing supply

of newly-qualified technocrats. Many of them have qualifications tailor-made to the needs of local

industries. Further more there is a state organized special training program for inexperienced

workers that last 30 to 60 days. The program is paid from the state and each person receives the

minimum wage while the social security taxes are also paid by the state. The workers that attend

this program are selected by the companies and in return they must hire 70% of the people who

successfully completed the program. (Saltillo nd), (Darwent 1997)

In addition to that, the attitude of this well educated work force is very good as US dashboard

makers Textron operation’s manager Daniel Mills admits. According to his words you will never

hear an employee saying “this is not my job”. Further more the turnover rates are very low in the

whole state of Coahuila while the six working days week gives companies an advantage of lower

costs in paying overtimes. (Darwent 1997)

The access in specialized inputs in the wider area of Coahuila is getting easier as the cluster

develops something that is confirmed by Matthew Jahnke who is the director-general of fluid

systems maker Fabex. Jahnke says that it is noticed to be a real change of products available in the

area. Things like auto-grade steel, seamless tubing, looms are all sourced locally something that

was not possible in the past. (Darwent 1997)

The number of automotive related companies located in the state of Coahuila was 25 by the end of

2002 and the number is growing. Recently the governor of Coahuila Mr Enrique Martnez y

Martnez announced the establishment of the Canadian company Inter Automotive Closures de

Mexico at Saltillo. This development would generate 650 jobs and that was start operating back in

November of 2004. The investment would be 18 Million US Dollars in a plant that will

manufacture auto parts, such as electric seats, windows, locks and doors devices. This company

employees more than 24,000 people all over the world and consists of 73 production plants, 15

development, engineering and tests centres and 17 sales offices. Another example of new business

formation is the announcement of the decision of Warn Industries to Manufacture in Mexico. As it

was announced on the 15th

of March of 2005 the company has signed a contract to set up a

manufacturing unit under The Offshore Group’s Shelter program at the La Angostura industrial

park in Saltillo.

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The new unit will occupy 70 people and will aim to expand the production capacity of the

company in order to meet a growing demand for their products as Mr John Vandecovering, the

firm’s V.P. of Business Development said. The company is well known for producing off-road

equipment. (Warn Industries to Manufacture in Mexico,2005)

New suppliers are regularly being attracted to Saltillo, encouraged by a series of expansion

announcements from the already existing companies as well as from Toyota’s 800 million

U.S. Dollars assembly plant in nearby San Antonio, Texas.(Automotive supply chain trade mission

to Monterrey and Saltillo, Mexico, 2004),(New company coming to Saltillo,2004)

A well developed infrastructure, a proximity to south U.S., research facilities, a huge base of local

suppliers and materials including foundries, a well educated population, the low price of land (the

cost of land in Saltillo’s industrial park was just $13.50 per square meter in the mid 90’s) and

many universities and schools, make Saltillo and the whole state of Coahuila a very preferable

place for any company that wants to locate in Mexico. (Darwent 1997), (Saltillo nd),

4.7.4 The case of Guanajuato (Silao)

Silao is a small city located in the state of Guanajuato in the centre of Mexico and hosts

automotive giant General Motors. Despite its small size, Silao is considered as one of the most

important automotive industry clusters in Mexico. That is among other reasons due to that almost

99% of Silao’s exports are related with the automotive industry.

GM‘s decision to construct a production plant back in the 90’s was the crucial point in Silao’s

industrial development. This award winning facility produces light trucks and SUVs(Sports Utility

Vehicles) for the North American market and has become a pole of attraction for a number of other

companies that had the ambition to become its supplier base.

A recent development from GM that decided to expand its facilities made it possible to be space

for all kind of suppliers of parts including axels, brake sensors, interior roofs, etc. These suppliers

are not limited to serve GM but they supply products to other automotive manufacturers in the

region and beyond, such as Chrysler, Nissan, Volkswagen or Ford.

(Automotive cluster in Silao, 2005)

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The city of Silao has a population of 76,706 and the city has an annual growth of 1.57%. More

than half of the population is 19 years or older. The educational reality in Silao is limited due to the

small size of the city. There are 2 university schools, 3 technical schools and 4 high schools with a

total enrolment of around 1750 students in 2002. The skill level of the workforce was not very high

until GM’s arrival but today is increased and well experienced in the automotive industry although

there is still a need for improvements as well as a need for any newcomer to look in neighbour

areas for specialized employees. (Silao nd)

In contrast, since the population is young, there is a big pool of labour that is willing to be trained.

The range of the cluster is not as wide as there are mostly suppliers of auto parts for GM’S

facilities. The problem is that the connection between them is not in a satisfactory level and that is

one of the objectives of the state’s government. The way to engage those suppliers is stated in a

document by the local government where the local supply of auto parts, components and raw

materials in one place with these characteristics, which is clearly acknowledged in a document by

the government of Guanajuato The three major objectives for the state government is to increase

local materials integration such as steel and iron, to develop training and education schemes for

both technicians and managers and finally to attract new firms in the cluster. The number of

companies that form this automotive cluster was 12 in the end of 2002 and there is a continuous

growth. A recent example of new business formation is the decision of an International automotive

supplier such as Continental AG. to create a subsidiary with the name Continental Teves. The

company will produce brake components in a 9,300 square metres facility to serve not only the

North American market but also as Bill Kozyra, President of Continental Teves North America

said to allow the company stay competitive in the global market. This investment is of $50 million,

will give employment to 400 people within 2006 and is a follow up to the first production facility

of the company in Silao. The news was released on February of 2004.

(Automotive supplier Continental opens new plant, 2004)

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Chapter 5: Analysis

5.1: P.E.S.T.L.E Analysis

In this chapter we analyse and present our conclusion .The conclusions will answer the purpose of

this study and present which would be the benefits for AHE if they decide to set up a

manufacturing unit in Mexico. This chapter is broadly divided into parts and they are the PESTLE

analysis and the Cluster analysis. In every part we analyse

5.1a.Introduction

Here we analyse the six factors of this theoretical model. We do that to identify the potential

benefits that AHE would gain from the business environment of Mexico.

5.1b.Political Analysis

The fiscal policies of the country are dependent on the political situation of the country and

therefore the political condition of the country plays a vital role in deciding if the country is

suitable for investment or for the operation of the company. Here in the following paragraph we

will analyse the various aspects of political factors one by one.

• Tax Policy: The tax initiative taken by the Mexican government is quite encouraging for

the companies to start their operations. The companies which plan to export at least 40% of

their total production are benefited by the preferential tax payment. This has been done to

encourage exports and this special tax policy will be quite beneficial for AHE as their 20%

of the total annual sales goes to USA. Under the PITEX system AHE will be benefited by

temporarily importing their raw material and other goods without paying any duties. Since

AHE is a Swedish company and the Mexican government has signed a treaty with the

Swedish government to avoid dual taxation, AHE will benefit by not paying double taxes.

• Political stability: Political stability is quite necessary for the country to grow at a stable

pace and a free and fair election is an important factor in the development of the country. In

the year 2000 after a period of 71 years Vicente Fox Quesada was elected as the president

and the world hailed this election as the first free election in the history of Mexico where

the representative of the people won.

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• Environment Regulations: Mexican environment is a matter of concern for the local

government as well as the international community. Although the country is a signatory to

various environmental programs but the environmental condition is quite alarming. Under

the pressure from the international organisations and especially from USA, the Mexican

government has been doing a lot during the recent years to improve the situation. AHE

which has a environmental standard ISO 14001 will not be required to invest in upgrading

their environmental standards as they are years ahead of Mexican environment policies.

• Trade agreements: Mexico is one of the founding countries of WTO and it encourages

free trade like no other country does in this world. It has signed free trade agreement with

most of the countries around the world. The most significant trade agreement was NAFTA

with US and Canada and this made Mexico the highest receiver of FDI in Latin America.

AHE is a major exporter to the US and Canada which comprises 24% of their total sales

and thus they can benefit a lot by saving their cost in tariffs. Furthermore Mexico has a

treaty with Chile to boost trade and AHE will benefit with this agreement as Chile is one of

their customers.

5.1c.Economic Analysis:

The economic policies of a country play a vital role in the development of the country. The

economy of Mexico has been improving since the debacle in 1994-1995 and is attracting a lot of

FDI from various countries especially from USA. In the following paragraph we will analyse all

the aspects of the Mexican economy.

• Economic growth: The economic growth of Mexico has been quite slow after the

economic debacle of 1994-1995. But because of its strong export sector the economy has

been growing and inflation is coming down. As the peso gets stronger in compared to the

USD, the interest rate has decreased which is beneficial for companies operating there as

they can get cheaper loan from the local banks.

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• Labour cost: One of the major advantages of Mexico is availability of the labour. It has an

average hourly labour cost of US$ 2.5 (2003 estimates) in the manufacturing sector. There

is a huge pool of specialised labour that can be used for complex operations. There is a

huge population of educated people to serve the labour force and there is an annual increase

of about 0.5 million people in the labour force. Although AHE is planning to automate all

its production facility, it will gain a lot in terms of labour cost compared to what it spends

here in EU.

• Natural resource: With ample supply of natural gas, petrol, petroleum, copper lead and

zinc, AHE can acquire all the raw material it requires to produce copper strips.

• Foreign direct investment: Mexico has received 74,850 (Millions of US$) between 1994

and 2001.Out of which 50,392 (Millions of US$) was for the manufacturing sector. These

investments have led to a strong manufacturing sector with qualified labour force.

Takeover of BANAMEX (the biggest commercial bank of Mexico), BY Citicorp has made

the financial institutions more competitive and less corrupt, which definitely helps the

foreign companies. FDI usually brings in much required capital which can be used in the

development of the infrastructure of the country.

• Infrastructure: The infrastructure of Mexico is good and the government is continuously

trying to upgrade the facilities so that the companies that are located there can have access

to better facilities. The government has tied up with the local private companies to upgrade

the infrastructure of the country. Although most of the transportation is being done by the

roadways the Mexican government is trying to improve the Mexican railway system by

investing US$ 15 million annually and by creating 10 advanced terminal by the year

2009.This will help the companies located there to utilize the infrastructure in a more

efficient manner.

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5.1d.Social Analysis:

The society of a country is responsible for providing the economy with educated labour, and

generating demand for the products. For the companies that plan to sell locally a detailed study of

the society is quite necessary. However for AHE, the main area of interest will be the educational

system and the growth rate of the labour force. The educational system of Mexico is good when

compared to other Latin American countries and the Government is taking a keen interest in

improving the educational facilities around the country. There are fair numbers of graduates from

the university every year and 29% of the University educated study Engineering/Technology,

whereas 34% of the graduates go for administration studies. Sixty two percent of the population is

between the productive ages, i.e between 15-64 years old. This gives AHE an opportunity to get

cheap labour as well as educated labour which can be helpful for complex jobs. Other advantage is

that the labour force here can speak English.

5.1e.Technical Analysis:

The technical factor of a country plays an important role in the development of the country. A

country that wants growth has always come up with incentives to promote technical advances and

promote research and development.

Research and Development: Mexican government has been bringing up lots of policies to boost up

research and development in the country. The government has set up science cabinet to oversee

proper disposal of funds in order to increase spending on Research and developments. The

government has come up with tax breaks in order to encourage private companies to spend in

research and development. These favourable policies by the government will be favourable for

AHE as it develops its machinery in house and spends a huge amount of money in R&D. AHE can

use the local institution in order to co-operate with their research.

Logistics: With the huge amount of investment the government wants to make in the improvement

of the infrastructure, there will be a further reduction in the logistics cost which at present is lower

than China. It takes average eight hour to ship out to USA from Mexico and this is a good

advantage for AHE as it will save a lot of cost and time when they start shipping from Mexico.

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5.1f. Legal analysis:

Mexico is an interesting investment destination for any foreign company as it allows them to own

100% stock of their company. They do not need to collaborate with the local companies in order to

start their operations. The foreign exchange policy is also quite relaxed and the companies are

allowed to open their checking account in USD at any part of the country. AHE will have a benefit

of a 100% ownership in Mexico. However the technical terms of their law needs to be evaluated

thoroughly by AHE.

5.1j.Ethical Analysis

The business environment of the country is crucial for the development of business in the country.

Although Mexico advocates free trade to a great extent however there is high level of corruption in

the country. Most of the government officials are corrupt and this hinders the smooth run of daily

business.

5.2: Analysis of Clusters

5.2a.Introduction

According to Porter’s definition the whole automotive industry of Mexico and the associated

institutions form a cluster. In this part we are trying to reveal the importance of it and the

importance of the particular smaller clusters that are found in Mexico in relation to the three broad

ways that affect competition as Porter describes. Analysing these we can find the potential benefits

that AHE could gain and which exact cluster would be the most beneficial.

5.2b.Productivity

As we mentioned in our theoretical framework there is a number of reasons that can enhance

productivity within a cluster. The productivity growth of the automotive industry in Mexico is

really impressive. A more than 10% annual growth in total units manufactured and a 6.1% annual

growth of the whole sector are numbers that show clearly that there is a continuously increasing

productivity rate. General Motors operates in Saltillo a $500 million car factory which is the most

productive in the world according to the states economic secretary. Another success story comes

from the alliance between Nissan and Renault. Due to the fact they were both located within the

cluster of Aguascalientes they managed to expand their production. Nissan especially is nearly

achieving full capacity utilisation. .Here we will try to reveal the reasons that exist behind this

success.

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• Access to employees: In Aguascalientes every year there is a number of 13,000 people that

join the workforce. This people are well educated as there is a big number of Technological

Institutes and Universities mostly oriented towards engineering. This is a big advantage for

the companies located there as this large concentration of well educated and young

workforce results to lower search and recruitment costs. In Saltillo we see a really low rate

of turnover and that is a big cost saving situation while in Silao there was a lack of skilled

workforce but after GM’s arrival things go better. This happened as around GM located

other Auto Industry companies and all these employees have got experience. A problem for

a new company would be that it should probably have to look for specialized employees

out of the cluster but on the other hand the population in Silao is young and willing to be

trained. Generally the workforce in Mexico is productive, well educated and sufficient in

number. This can give a competitive edge in terms of increased productivity to the

companies that are located there and AHE can benefit from it.

• Access to inputs: In Aguascalientes there are 40 suppliers around the two giants and that

means that there is a wide variety of inputs that can be accessed easily. Industrial

engineering services, casting of raw materials, logistics services provider are all there to

provide their services and that is very important for AHE as all these can serve their

operations. At the same time the wider area of Coahuila has been named as a “mecca” for

industrial manufacturing due to its large supplier base. New products are more and more

available as the cluster develops and that can low down transaction costs and keep prices

competitive. Some examples of benefits in terms of inputs include a very good

infrastructure, a large base of local foundries and a low price of land. All these are very

beneficial for each company that is located there.

• Access to institutions: As previously discussed a company that operates within a cluster

can benefit in terms of costs in inputs that otherwise would be expensive. For example

recruitment of employees trained in local programs cut the costs of internal training. In

addition to that from the research going on in the local universities a company may get

expert advice In Aguascalientes the government is currently offering 883 courses and 9,300

training scholarships to 20,000 unemployed workers and a lot of job training programs

including automotive technician, automotive mechanic and automotive electronics among

others. The “School of Technological Education of Aguascalientes" is offering a program

which is tailored to the needs of the automotive-related local industry preparing

technicians.

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In Coauhilla there is such a big concentration of educational institutes that the city is called

“Athens of Mexico”. The existence of the Monterey Institute of Technology ensures that many of

its graduates will be specifically qualified to the needs of the local industries. The state organizes a

program that lasts 30-60 days and trains inexperienced workers for the needs of the local industry

which in return gives employment to 70% of those who successfully complete it. Expenses are all

again covered by the state. In contrast in Silao the existence of educational institutions is not that

significant but the formation of training schemes for technician as well as managers is one of the

objectives of the local authorities. All these programs are educating future employees with all the

benefits coming to the clusters participants while the expenses are not covered by them. This is a

big benefit for any company located there as it helps keeping low costs in terms of internal

training.

5.2c.Innovation

As Porter explains it is easier in a cluster to source all that is needed to implement innovations.

Operating costs are more or less equal and that leads competitors to try to distinguish through

innovation. Further more because of the fact that there is proximity between suppliers and

customers, needs are identified fast and innovative solutions try to be the answer. The presence of

giants of the Automotive Industry in Mexico, the highly skilled labour graduating from local

institutions and the advanced research centres located within it’s clusters have made it possible for

continuous innovations even if we don’t have enough evidence that these innovations have been

achieved due to location.

5.2d.New Business Formation

A cluster by itself is giving a signal for opportunities. The presence of a cluster attracts many other

companies that try to benefit and make good business because a cluster among others previously

discussed benefits can be also seen as a potential market. When companies see other new entrants

successfully enter the cluster feel like taking the risk. This is clear in the cases of all clusters we

have presented. In Aguascalientes we found around 40 automotive industry -related companies and

the cluster is still expanding as the example of the opening of subsidiary of Aisin Group “AMA”

indicates. The company decided to make this $5.8 million investment and produce doorframes for

the local auto-makers.

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It worth’s mentioning that located in the cluster of Aguascalientes are Calsonic Mexicana, a

company which produce Automotive heating, cooling and exhaust systems and Unipres Mexicana

which manufactures Radiators, Shock absorbers and engine mounts. These two companies are

potential customers for AHE.

In Coahuila an $18 million investment will be made from the Canadian company Inter Automotive

Closures de Mexico for a plant that would manufacture auto parts and would give 650 jobs while

new suppliers are continuously being attracted to Saltillo, encouraged by a series of expansion

announcements from the already existing companies. The proximity of Toyota’s $800 million

assembly plant in nearby San Antonio, Texas is also a great reason why companies choose the

cluster of Saltillo as their new location.

In Silao there is a small number of companies that but there is a significant growth as one of the

objectives of the local authorities is to attract more companies. Continental AG that already

operates in the cluster decided to create a new production plant that will serve the American

Market but will also help the company stay competitive in the global market.

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Chapter 6: Conclusions and Recommendations

6.1 Summary

This study is to find out the potential benefits that AHE would gain if they set up a manufacturing

unit in Mexico. We examined Mexico’s Business environment and Automotive Industry with a

focus to its clusters. In order to do that we have used relevant theoretical models and conducted a

research that has helped us to analyse why so many international companies choose Mexico to set

up production plants. The following chapters include our conclusions, some recommendations to

AHE and some recommendations for further research.

6.2Conclusions

Here we will present our conclusions after this study. The conclusions are answering the purpose

of this study and present which would be the benefits for AHE if they decide to set up a

manufacturing unit in Mexico.

• AHE will save a lot in taxes from the preferential tax payment policy of Mexico as it will

export more than 40% of its production out of Mexico. They will also avoid the double tax

system and they do not need to make any investment in order to meet with the environment

regulation of Mexico.

• One of the benefits is that AHE will not be paying any tariffs when they will be exporting

to USA and Canada and this will save them a lot of money as these two countries

comprises 24% of their total sales.

• With an average shipping time of eight hour from Mexico to USA, AHE will save a lot of

time and money as compared to what it spends now at this moment when they ship their

products from Europe to US, Canada and South America.

• The Mexican Auto Industry is facing a big production growth and that means there is a

continuous demand for 3rd

tier supplies. AHE can only benefit from such a demand.

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• Due to a continuous new business formation in the industry access to a variety of

specialized inputs is easy and in low cost. AHE will be able to build beneficial relationships

with local suppliers.

• Another major advantage comes from the labour force which is very cheap compared to the

labour cost here in Sweden and Holland. They are productive, well educated, speak English

and have an experience of in the automobile industry because of the boom in the auto

industry which was experienced by Mexico post NAFTA. This workforce can give AHE a

competitive edge and lower the production and recruiting costs.

• The Mexican State organizes and pays for special training programs for unemployed

workers. These programs are tailored in the needs of the Industry. AHE can save in Internal

Training related costs.

• The presence of Auto Industry giants in the country has been crucial in terms of continuous

innovation. Operating in such dynamic environment will benefit AHE which will be in

proximity and relationships with companies which focus in innovation either these

companies are suppliers of AHE or customers.

6.3Recommendations

Here in this paragraph we give some recommendation that we think will be beneficial for AHE.

• In our opinion, AHE should consider to set up a manufacturing unit in Mexico. As they

already have a big market share in their segment and a competitive edge among their rivals,

they should follow a strategy that would help them sustain this superiority. Location of

Mexico would reduce many of their costs and would bring them close to the giants of

automotive industry and their North American market in a very dynamic and innovative

environment.

• Setting up a manufacturing unit in Mexico may bring a new volume of production.

Therefore AHE should examine the possibility of building offerings suitable for other

industries than the automotive. For example electrical appliances manufacturers that use

copper strips in their products can be their future customers.

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• We believe that the most beneficial location for AHE should either be the automotive

cluster of Coahuila (Saltillo) or the one of Aguascalientes. Both these clusters are quite

large with number of companies and keep expanding. Some of these companies could be

suppliers or customers for AHE. They are also big in population and have a lot of

educational institutes and training programs specially catered to the automotive industry.

• Finally we believe that AHE should conduct some further research in order to identify

additional locations other than Mexico. There are other locations which are emerging as

favourable and advantageous manufacturing destinations. AHE should compare those

location based benefits with the ones that we have presented for Mexico. This would

possibly help AHE to implement its already successful global strategy in the best possible

way.

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Chapter 7: Checklist In this Chapter we will try to state some of the points that we think are quite important for AHE These points show some potential threats which they should consider while planning their preparations for setting up a manufacturing unit in Mexico.

1. Political history in Mexico shows that Democracy is quite new. That means that there are

some risks involved in making an investment there as nobody can be sure for the

continuation of Democracy in a country that was ruled for 71 years by the same political

party.

2. Mexico has been facing environmental problems and the government is required to take

actions to solve them. Some of these actions indicate the relocation of polluting

manufacturing units. AHE is a company that is environmentally authorised and would not

have any problems but they should take in consideration when they decide their location

that some potential suppliers or customers may have to move to other locations.

3. Transportation of goods within Mexico has high costs as the infrastructure needs

improvements. The cost of Inland transportation is higher compared to developed

countries but is lower compared to China. AHE should take that in consideration when

they will choose the location where they will set up the manufacturing unit.

4. Corruption level is high in Mexico and that means that AHE must take the right actions

and co-operate with the right people.

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Appendix

Political Map of Mexico, 2005

Questionnaire for Peter Morsing

1) What is the company structure of AHE? 2) When was AHE set up and where do they have their production plants?

3) How many employees are working there?

4) Who are the customers and in which countries they are based?

5) How do they organise their sales force?

6) What kind of competition do they face in the market?

7) What are their future strategies to compete in the market?

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