Economic impact of Japan tragedies in Mexico

Published in Plaza de Armas (www.plazadearmas.com.mx), March 21^st 2011.

A lot has been said and written about the different misfortunes that Japan has been living in the last week. There is still a lot of uncertainty and nervousness about the economic implications of these tragedies, particularly regarding the nuclear crisis they are facing (at the closing of this column, authorities continued their efforts to control Fukushima nuclear plant).

In such an interconnected planet, and considering we are talking about the 3^rd economy in the world, it is impossible to think these events won’t have an impact in other countries, although it is still difficult to have a clear assessment of its magnitude. However, let’s analyze certain data that will let us identify the kind of consequences on different time horizons.

The immediate days after the earthquake, the investors in several countries showed distrust and fears, and this caused falls in different stock markets; however, by Thursday (a week later), Japan, United States, South Korea and China had their first day of profits. We can’t say that we already have a world stock-market stability, but investors in some countries begin to have an initial confidence in the containment efforts of the nuclear leak, in the actions of the Japanese Central Bank with the great money injection they made to the financial system, and they begin to identify certain “bargains” in some stocks due to the recent falls, and they have reactivated stock markets. In short, we can still expect several volatility days in the short term.

In a larger horizon, there are some events that will have repercussions in the following weeks and months. In the world, Japan is a key actor for the automotive, high-technology and precision-machinery industries; therefore, the temporary stops or production decreases that several plants have made (Sanyo, Toshiba, Toyota, Honda, Canon, Panasonic, etc.) due to energy shortages or other circumstances have already had effects in the international prices for some raw materials and components. Also, in a few weeks, there may be shortages in plants around the world, affecting the productive chains in these industries. For now, Mexico already began to have shortages in some components and some plants have announced a two-day closing. The biggest effects will begin to appear mainly in the following weeks, as these companies’ current inventories begin to run out.

On the longest horizon, for the following years, implications of this incident will be in the world strategies for energy generation.  The World Nuclear Association estimates that 14% of world energy is produced by nuclear reactors, and several countries see the nuclear path as a way to reduce carbon emissions. However, the discussion started in different countries about the continuity of these programs, as in Germany, Switzerland and Israel just to mention a few. Although there will be debate in many countries, the current declarations of the two main producers of electricity by nuclear reactors, United States and France, are in the sense of continuity. For Japan, the third producer, it is a theme with profound strategic implications. According to the intelligence firm Stratfor, Japan imports practically 100% of its oil, and that’s why nuclear energy gives them a source they can control internally for energy generation; if Japan decides to reduce or stop its nuclear energy program as a consequence of the different political and technical evaluations, this could limit the growth pace of the world’s third largest economic engine.

In general terms, the direct impact for Mexico would be relatively low due to the small participation Japan has in different economic fronts (Japan was the 0.9% of foreign direct investment in 2010, the 0.6% of exports and approximately the 0.3% of international tourism); evidently these parameters have a multiplying effect, but it is hard to estimate the its size. Japan has more influence on Mexico’s imports (5%). Surely the biggest impact will be in those economic sectors that have productive chains from and toward United States in the automotive and high-technology sectors, due to the intense commercial activity between Japan and United States and our strong industrial activity with the latest. Can there be any benefits? In the supply of all the materials and products needed for the reconstruction tasks the region will have.

It is important to monitor the development of these sectors; you should identify the way your organization participates within those productive chains, directly or indirectly, to prepare contingency plans. The next couple of months will be key ones to have a better estimate of the size of the impact of these events.

Competitiveness in Queretaro

Published in Plaza de Armas (www.plazadearmas.com.mx), March 14^th 2011.

During CANACINTRA’s National Convention, developed in Querétaro last week, there were different references about the competitiveness of the State, including a statement of the  organization’s national president during the closing ceremony.

What does being competitive mean? World Economic Forum defines it as the set of institutions, policies and factors that define a country’s productivity level. The Mexican Institute of Competitiveness (IMCO) defines it as the ability to attract and retain investments and talent. These elements create conditions to have a faster growth in a region in the long term, and therefore, it improves income levels and the well-being of a society.

According to World Economic Forum’s Report, that evaluates more than 130 countries, Mexico has kept the same grade since 2006. This stagnation in the grade has caused the loss of 14 places in the ranking, since Mexico has gone from place 52 to 66. It is true that each year, the Report considers more countries, but the reason of the fall is that other countries are having important improvements and increases on their grades, leaving Mexico behind.

The area where Mexico has had its main improvement is in macroeconomic stability (due mainly to a healthy government budget balance, problem that has affected recently different economies), and the area where the country has lost more places is in the financial market development (since it is not easy to raise money by issuing shares on the national stock market and we have a rather ineffective regulation and supervision of securities exchanges).

Now, within the country, two studies were published the last year: one from IMCO and the other from Instituto Tecnológico de Monterrey (ITESM), one of the most important private education systems in Mexico. Both evaluate over 100 variables in different areas: economic, legal, political, infrastructure, environment, education, health, international relations, labor market, etc. In both studies, Querétaro ranks on 3^rd place, behind Distrito Federal and Nuevo León. These are the strengths and weaknesses of this state according to both studies (there are other identified features, but I will only list those that appear on both evaluations):

Strengths	Weaknesses
·         GDP growth, particularly in services ·         Reliability and citizen’s participation in public elections ·         Good debt grade ·         Safety ·         Increase in fixed and mobile telephone lines	·         Unemployment ·         Income inequality ·         Roads ·         Bad use of water ·         Foreign direct investment

The studies were made mainly with information from 2008, but we see that some of the weaknesses persist, like unemployment, since the State is above the national average. The challenge is important, since 2010 Population Census showed that Querétaro is the sixth State with the biggest immigration in the country. Although it may have a positive effect in the potential of economic growth, it also implies the development of infrastructure and the creation of jobs. We will see how this balance is developed in the future, but so far, the State’s good competitiveness condition allows us to foresee positive perspectives.

Evolution of competitiveness for Queretaro:

	2001	2002	2003	2004	2005	2006	2007	2008
IMCO	5	4	4	6	4	3	3	3

Source: 2010 Competitiveness Index, IMCO

	1995	1997	1999	2001	2003	2007	2010
ITESM	8	4	8	8	10	12	3

Source: 2010 Mexican States competitiveness, EGAP, ITESM

Tourism and insecurity, where are we standing?

Published in Plaza de Armas, newspaper from Queretaro, March 7^th 2011

During the recent weeks, a lot has been said about the numbers announced by the Ministry of Tourism referring to the increase on international tourism in the country during 2010. There is a lot of incredulity because there are many cities where the arrival of tourists has dramatically decreased due to insecurity problems.

Are the numbers unreal? Let’s analyze the situation of this important sector that represents 9% of the country’s GDP and more than 2 million direct jobs.

First, a clarification of terms. International travelers are foreign people that get into the country, no matter if they stay for a few hours or if they stay the night. Mexican Central Bank (BANXICO) records all those visits, meanwhile Tourism focuses only on the people that stay the night in the country, since they receive the definition of tourists.

This difference is important, especially on the borders where there is a very important flow of travelers that don’t stay the night, and therefore, they are not tourists.

BANXICO reports a fall in the total number of travelers in 2010, precisely because the border travelers that don’t stay the night had a significant decrease (7.8 million less than in 2009).

The groups considered as tourists (border travelers that stay the night and those that get beyond the borders) increased from 21.5 to 22.4 million. This confirms the increasing trend announced by Tourism, with a little different numbers (Tourism announced that they were 22.6 million). A 4.4% increase will always be good news, but we are just reaching 2008 levels.

Then, how is insecurity affecting tourism? Let’s see some data that can give us more clarity.

First result: world tourism increased 6.7% in 2010. Mexico is growing slower, therefore we had a relative decrease that makes us stay with a smaller piece of the world pie.

Second result: the country stopped receiving $230 million dollars on the border zone this year due to the fall of travelers. Besides, many hotels on different cities on the north zone reported occupancy levels of 40% during 2010, against 70% in 2009.

Third result: 3 cruises lines recently announced a reduction or elimination of their travels to Mexico. This sector, classified also as travelers and not as tourists, had an increase in 2010 and represents 8% of international travelers and 5% of foreign currency inflows.

Fourth result: United States, that represents 40% of foreign tourism in Mexico, has traveling alerts for half of the country’s states. This is a big red alert (fortunately, Queretaro is not on that list).

Are there good news? Yes. For instance, foreign currency inflows increased 5% in 2010 (every traveler and tourist spent more money on average). Also, the big national centers for international tourism (Cancun, Mayan Riviera, Cabos) are still outside the alert zones for the United States.

Although the perspectives were positive at the end of 2010, we can’t overlook current risks. We still may have an increase in the number of tourist in 2011 as a consequence of the world dynamic in this sector, but if we don’t have positive changes in the short term, the growing rate will be lower again, and tourists will concentrate more in a few destinations, that are already the ones more visited, at expense of the rest of the country.

	2007	2008	2009	2010	2011 (estimated on Dec. 2010)
International tourists (million)	21.4	22.6	21.5	22.4	22.6 Tourist National Confederation
					26.0 Ministry of Tourism

2007 to 2010 are data from BANXICO

A follow-up on Mexican consumer behavior

Extract of the article published on Plaza de Armas (http://www.plazadearmas.com.mx/), February 28^th 2011.

 This is a follow-up of my post published on November 16^th 2010.

At December 2010, retail sales had a 2.9% annual increase. The good news are that all the areas evaluated had an improvement during the year; the bad news are the existing gaps in different areas compared with 2008.

Dec. 2010 vs. June 2008 (Made with data from the Commercial establishments monthly survey, INEGI)
Retail establishments with growth		Retail establishments with decrease
Establishments	Change	Establishments	Change
Food, beverages and tobacco	13.8%	Home appliances, computers and articles for interiors decoration	-18.1%
Textile products, dressing accessories and footwear	6.9%	Motor vehicles, spare parts, fuel and lubricants	-11.6%
Supermarkets and department stores	4.6%	Stationery, recreation products and other personal-use products	-4.4%
Hardware and glass	1.7%	Health-care products	-4.1%

Although data shows improvement, consumers are still very sensitive to prices on their purchases. According to a study published by American Express, 68% of Mexicans make our purchases based on the cost (more than quality, and a lot more than the ecological impact of the products). This behavior is clearly identified by the big supermarket chains, as Walmart or Soriana, that are growing based on their low-investment and low-cost establishments (Bodega Aurrera Express, and Soriana Express).

The factor that Is having a clear influence on this behavior is employment. The national unemployment rate has been at levels of 4.9% to 5.7% on the last 6 months, way above the 2008 levels.

What is the outlook for 2011? There are three indicators that show a positive trend:

1. There are positive estimates of private consumption (where the families’ expense is included) according to International Monetary Fund (+4.7%) and Banco Santander (4.1%); that means it will be one of the motors for the estimated national economy growth.
2. Credit to consumers has had recently its biggest monthly increases in the last 3 years according to Central Bank (BANXICO) and the Banks and Securities National Commission (CNBV).
3. Consumer confidence is positive for 2011. TNS Research International identified in a recent study that optimism levels and intention to consume have increased for 2011. The confidence index calculated by INEGI had in January 2011 its second biggest level in the last 32 months, with good levels for those components that consider the economic perspectives for the next 12 months.

What are the risks? In the first instance, there are current inflationary pressures due to the increase on several commodities; the second risk is the slow rate in employment recovery we are having. Both issues can affect negatively the consumer’s behavior.

In brief, consumers begin to have more confidence and marginally more capacity to consume, what gives moderate growth perspectives with some uncertainties. Meanwhile, cost will be still an important factor in the purchasing decisions, so you will have to develop initiatives to reduce the cost of your product or service without compromising the basic quality elements that keep you competitive.

Understanding the businesses’ profile in Queretaro

Published on Plaza de Armas, newspaper from Queretaro, February 21st 2011. (www.plazadearmas.com.mx)

During the last year and the beginning of this, we’ve heard a lot about the arrival of new investments to Queretaro from big companies, mainly focused in the aerospace industry: Bombardier with a factory for planes, Safran with 2 factories for plane’s components, DHL with its new hub at Intercontinental Airport, General Electric’s Engineering Center inaugurated last week, and plans for installing the first biotechnology cluster as well as talks with Sikorsky United Technologies to install a plant for helicopters, just to mention a few.

Definitely, these are good news, and the results are that Queretaro practically recovered from the 2009 fall, according to preliminary figures.

But let’s make a detailed analysis of the different characteristics of the businesses present in the State, and what opportunities they create. The most recent figures are from 2009 Economic Census, and it establishes the presence of more than 56,300 economic units from the private sector and government’s partially-owned companies, that bought 232 billion pesos in goods and services during 2008 (an economic unit is an organization dedicated mainly to one kind of activity on permanent facilities).

Half of that purchases concentrates on almost 250 organizations that belong to 2 big sectors: the manufacturing sector (mainly those companies with more than 100 people in the  transportation equipment building industry, food industry and chemistry industry), and in the wholesale commerce sector, with a big concentration in the raw materials industry for agricultural, forestry and industry. In other words, only 0.4% of the economic units represent 50% of the consumption of goods and services in the State!

This high level of concentration makes these organizations very attractive due to the high volumes of goods and services they buy; but these are also organizations with strong negotiation leverage, and lots of suppliers at their doors, that generates a very competitive dynamic for which you must have a clear differentiation strategy.

But, let’s not forget about the rest of businesses that still have the need of 100 billion pesos in goods and services that someone must deliver. It is definitely a complicated segment due to its pulverization and, very probably, low institutionalization levels (86% of the economic units in the State have 5 people or less), but you can establish niche strategies to facilitate the delivery and you can have a better negotiation position.

You must work to have a clear understanding and evaluation of your potential markets, with the purpose to identify the opportunities and how to seize them. This will allow you to be effective in your commercial efforts and to develop the right strategies.

The economic performance of each State in Mexico

I published this article on Plaza de Armas, newspaper from Queretaro, February 14th, 2011 (http://www.plazadearmas.com.mx/)

To complete this analysis about the ups and downs of Mexico’s economic fall and recovery, let’s analyze from the perspective of each State performance.

I will make this analysis with data for 2009, since GDP’s data for 2010 by State is still unavailable. However, this figures let us understand the impact of the recent financial crisis.

The economic crisis was of different magnitude for each State, depending on the composition of their economic sectors.

We can see that the northern border States, that depend heavily on commerce and manufacturing, had falls from 9% to 12%. On the other hand, most of the States on the Pacific coast had milder falls (between 2% and 5%), mainly because they have a strong primary sector (agriculture, cattle, fishing, forestry) that kept its level or improved it during 2009.

Only 4 States had a growth during 2009, and all of them driven by different reasons: Baja California Sur was pushed by an impressive growth in the construction sector, Tabasco by oil activities, Zacatecas by commerce and the primary sector, and Morelos, that kept almost the same economic level than 2008.

In the Central region, the States had falls of different magnitude. Meanwhile Puebla had a fall of almost 9% (caused mainly by the machinery and equipment sector, and commerce), Guanajuato’s fall was of 4% (driven by the machinery and equipment sector, and the foods, beverages and tobacco sector).

Referring to Querétaro, during the period 2003-2008 it was the State with the second biggest growth in the country (35.8%), driven by the growth in three main sectors: commerce sector, transportation, couriers and storage services, and construction. However, these same sectors fell from 8% to 15% during 2009, resulting in the tenth biggest fall of the States, and its GDP went back to 2007 levels.

Practically, every economic sector had growth during 2010; therefore, all the States that had a fall below 5% in 2009 may have already recovered during 2010, and if the trends remain, the rest of the States will do it during 2011 and 2012.

This detailed understanding of the country’s economic outlook is useful to have a better evaluation of business opportunities. If you make evaluations based only in perceptions, or with general data, you can outlook opportunities or have unrealistic expectations.

Mexico’s productive sectors economic reality

I published this article on Plaza de Armas, newspaper from Queretaro, January 31^st 2011 (http://www.plazadearmas.com.mx/)

Last week I mentioned that according to the latest economic growth data, Mexico has reached the same GDP levels than before the crisis (first quarter 2008). At a high level, these are definitely good news to keep the growing trend, but there are also elements that show that the negative effects of the economic crisis have not been completely overcome yet.

Let’s analyze the country’s economic sectors to identify which have grown, and which have still gaps to be closed. I’ll take as reference points 2010 1^stQ and 2008 3^rdQ.

The three sectors with the biggest setbacks are:

1. Construction: its GDP is 9.2% below 2008 level. The good news are that this sector stopped its contraction on 2009 4^thQ, and it had a 1.9% growth during 2010 first 3 quarters. Perspectives are favorable for 2011, but not enough to close the gap.
2. Lodging, food and beverage services: this sector is 6.7% below 2008 level. After a strong fall that had its lowest level on 2009 2^ndQ (caused by the economic crisis and the swine influenza alarm), it has had a 12.5% growth since then. Official figures about currency flow shows that 2010 was a better year than 2009 for foreign tourism, but still below 2008 peak. Perspectives are also favorable since insecurity is affecting on the destinations chosen more than on the total volume of tourists; local tourism is still an unresolved matter sin the domestic market is still weak.
3. Professional, scientific and technical services: a sector still 4.9% below 2008 level. Its fall was less dramatic, but its recovery is also slower; it started by the end of 2010.

On the other hand, there are sectors that have had a growth since 2008, and that practically didn’t have a setback on these three years.

1. Government and international organisms activities: it refers to the services offered by Mexican government (education, health, recreational, cultural, etc.), and diplomatic relationships, economic support, technological, commercial programs, etc. from international organisms. This sector has grown 10.1% and reflects the government role (as in all the world) to ease the economic crisis.
2. Media information: considers printed and electronic media. This sector is 8.3% bigger than in 2008.
3. Agriculture, cattle, forestry, fishing and hunting: this sector covers all the primary activities. The sector has grown 7.4%. Although it had been relatively stable during most of the period analyzed, it had an important growth on the last semester due to a positive performance from agricultural products and cattle.

This analysis allows having a better understanding of the different economic recovery nuances, and therefore helps to identify business opportunities and potential risks. Next week I’ll analyze economic performance by states to complete the understanding of the current economic situation.

GDP comparison for the rest of economic sectors, 2010 3rdQ vs. 2008 1stQ (2003 pesos, seasonally adjusted). Elaborated with data from INEGI.
Sectors with regression		Sectors with growth
Sector	Change	Sector	Change
Commerce	-3.6%	Educational services	6.2%
Business support and waste handling services	-3.5%	Corporate	4.7%
Recreational, cultural and sports services	-2.8%	Electricity, water and gas supply to final consumer	2.6%
Manufacturing industries	-2.3%	Real state, and rent of tangible and intangible assets	2.3%
Transportation, post and courier services, and warehousing	-1.4%	Other services except government activities	1.3%
Financial and insurance services	-1.2%	Health services	0.7%
Mining	-0.3%