Investing In Mexico

Market Entry Strategy

• In Mexico, business is done on the basis of relationships. U.S. exporters will need to travel to Mexico frequently to develop and strengthen relationships in order to do business successfully in Mexico.
• Mexican companies tend to be extremely price conscious and appreciate outstanding service. Time is essential to cultivate trust to enhance a professional partnership.
• Several market entry strategies have proven to be effective in Mexico. In general, Mexicans appreciate close working relationships, so working with a locally-based agent, representative or distributor is usually essential. However, market entry strategies can vary by sector and region in Mexico. U.S. Commercial Service staff is available to provide individualized counseling to determine the best market entry strategy for a given U.S. company/product.

Using an Agent or Distributor

Many U.S. firms use a distributor and/or retailer to distribute their products in Mexico. This channel can be used to distribute products in various regions or to distribute to several lines of business. For example, a distributor can be used to sell to the automobile industry, and another distributor to sell to the financial sector. This channel is also efficient when the distributor is required to have a stock of the product. Some U.S. firms sell their products through a sales agent. Usually, a sales agent is a freelancer. However, some Mexican firms are interested in serving as sales agents for U.S. firms. This channel can be efficient for reaching the smaller cities or more remote locations of the country.

Selection of the appropriate agent or distributor requires time and effort. Though there may be many qualified candidates, U.S. firms should use high standards in selecting the agent/distributor. Since most Mexican firms are selling in a limited area, U.S. companies should consider appointing representatives in multiple cities to broaden distribution, and rarely, if ever, grant an exclusive, national agreement. It is important to develop a close working relationship with the appointed agent/distributor. Providing appropriate training, marketing support, samples, product support, and timely supply of spare parts is critical for success. There are no indemnity laws to prevent a company from canceling an agent or distributor agreement, but the cancellation clause should include specifics and be free of vague language. Sales performance clauses in agent/distributor agreements are permitted, and failure to meet established standards can be a reasonable cause for contract cancellation.

Before signing the agent/distributor agreement, all parties should fully understand the terms and conditions and the relationship to be developed. Many relationships are strained because insufficient time is invested in developing a full understanding of what is expected.

The Commercial Service and other organizations, such as the U.S. Chamber of Commerce and U.S. State government offices, maintain lists of Mexican agents/distributors, manufacturers, Mexican government offices, and private sector trade organizations. After identifying a suitable agent/distributor, the U.S. exporter is encouraged to conduct a commercial background check on the Mexican firm. The U.S. Commercial Service offers the service of providing an International Company Profile (ICP) report to provide background information on a potential business partner. If the product is new to the market, or if the market is extremely competitive, advertising and other promotional support should be negotiated in detail with your representative. Product and industry knowledge, track record, enthusiasm and commitment should be weighed heavily. Service and price are extremely important to Mexican buyers. The U.S. exporter should also schedule annual visits of Mexican personnel to the U.S. companies for training. Another factor to consider is financing, as the commercial and industrial sectors’ resources are limited due to high interest rates. Joint venture arrangements should also be investigated to strengthen market penetration. Direct marketing and telemarketing are still evolving marketing strategies, but they are gaining in popularity and scope.

Establishing an Office

For U.S. companies interested in establishing a presence in Mexico, the General Law of Mercantile Organizations (or the Civil Code) regulates the many different forms of business entities. The type of business incorporation that a U.S. company or individual chooses is extremely important because it determines the operations they are allowed to perform in Mexico and, among other liabilities, the amount of taxes they pay. Some of the most commonly-used types of business forms are the Sociedad Anonima (Corporation) identified with "S.A." at the end of the company name, and the Sociedad Anonima de Capital Variable (Corporation with Variable Capital) identified with "S.A. de C.V." One of the advantages of the latter is that the minimum fixed capital can be changed subsequent to the initial formation.

The Limited Liability Partnership (Sociedad de Responsabilidad Limitada) identified with "S. de R.L." is similar to a closed corporation in the United States and it also has the option of having a variable capital (“S. de R.L. de C.V.”). As this is an organization formed by individuals, it can have similar characteristics to a partnership with the exception of the unlimited liability.

Civil Partnership (Sociedad Civil) is the most common organization for professional service providers. It has no minimum capital requirements and no limit in the number of partners, but it is taxable in the same way as a corporation. It is identified with "S.C." Civil Association (Asociación Civil) is the form that charitable or nonprofit organizations adopt to operate and is identified with "A.C."

A foreign company may open a branch (“sucursal”) in Mexico as an alternative to incorporating. A branch can provide rights and responsibilities similar to a corporation, including tax liability and access to local courts, but requires the approval of the National Foreign Investment Commission.

Franchising

The franchise industry in Mexico has grown between 15 – 20 percent every year over the last decade. In 2006 franchises generated sales over USD 8.5 Billion, proving that the franchise sector is an important source of job creation, self-employment and wealth creation. Mexico is the 8th leading nation in franchise development according to the World Franchise Council. Conservative estimates indicate that this sector will grow at least 15 percent in 2007.

Franchises in Mexico are regulated by Article 142 of the Industrial Property Law and Article 65 of its Regulations. Franchise agreements must be registered before the Mexican Institute of Industrial Property in order to be effective against third parties. On January 26, 2006, an amendment to the Mexican Franchise Regulations (Article 142) was published in the Mexican Official Gazette, stating a new definition of franchise, mandating requirements for franchise agreements, and providing new standards for pre-sale franchise disclosure.

Direct Marketing

In the last ten years the marketing industry in Mexico has evolved into a more sophisticated, segmented, and dynamic sector. Today, the choices firms have for marketing their products range from promoting their products through one-to-one contact at point-of-sale displays or inserts distributed in monthly bills to mass exposure through advertising on billboards or other media outlets.

Simultaneously, an increase in the general adoption of more competitive and aggressive marketing strategies among local and international firms has fostered specific industry specialization. This is particularly true in the case of promotional services such as instore promotions, free sample campaigns and other types of services, which require a one-on-one approach. Today, as well as traditional marketing firms, there are companies dedicated solely to each marketing discipline. Following is a list of the marketing services that are readily available in Mexico:

1. Publicity
2. Media Centers
3. Public Relations
4. Market Research
5. Internet
6. POS (Point of Sale)
7. Promotions
8. Direct Marketing

Generally, medium and small-sized U.S. companies that enter the Mexican market leave all of the promotional efforts to their local distributor or representative, relying entirely on their ability to sell to major players in the market. However, industry experts believe that in order to establish a long-term presence in Mexico, U.S. firms must directly invest in marketing and promotion to increase their sales. According to industry experts, companies are utilizing more targeted strategies, as opposed to mass media channels. Since selecting the most appropriate means is very subjective, the best approach is to rely on the industry experts to make solid recommendations on the best available vehicle.

CS Mexico highly recommends U.S. companies check with local associations to verify member companies’ standings before conducting any marketing campaign in Mexico. Additionally, local associations are often a great source for information and general orientation as to the most recommended strategy. The leading association in Mexico is CICOM.

CICOM
Confederacion de la Industria de la Comunicacion Mercadotecnica
Confederation of the Industry for Marketing Communication
Cerrada de Palomas 36-A
Col. Reforma Social
11650 Mexico, D.F.
Tel: (011-52-55) 2623-0561, through 64
Fax: (011-52-55) 2623-0564 (request tone)
e-mail: cte@amap.mx
www.cicom.org.mx

Joint Ventures & Licensing

Given the flexibility of engaging in joint venture agreements, this is a common approach for U.S. firms interested in establishing a presence in Mexico. Although some Mexicans rely on verbal agreements when doing business, it is highly recommended to have a written joint venture agreement with your Mexican business partner. According to Mexican law, joint ventures are considered separate entities from their parent companies and must register separately to pay taxes. To safeguard a license or patent against third parties, all licenses and patents in Mexico must be registered with the Mexican Institute of Intellectual Property (IMPI). Registering a license or patent entails a government review that can take up to twenty weeks. For more information on IMPI, please see the “Intellectual Property” section below.

Selling to the Government

The Mexican government purchases large volumes of raw material, repair parts, finished goods and hired services, for the execution of important infrastructure and construction works. In 2005, government procurement amounted to $26.75 billion, of which 31% was used to purchase goods, 44% to services and 25% to construction services. Traditionally, the entities and enterprises with the largest purchasing budgets have been:

Public entities:

• Secretariat of Communications and Transport (SCT)
• Secretariat of Public Education (SEP)
• Treasury Department (SHCP)
• Secretariat of Health (SS)

Public enterprises:

• Mexican Petroleum (PEMEX)
• Federal Electricity Commission (CFE)
• Mexican Social Security Mexican (IMSS)
• Government Workers Security and Social Services Institute (ISSSTE)

For more information on Mexico’s government procurement laws and procedures, please see the following market research report “Update on Mexican Government Procurement Laws,” http://www.buyusainfo.net/docs/x_2561665.pdf. U.S. firms, their Mexican agents, distributors, and representatives interested in government procurement should become familiar with these laws and any potential revisions to the laws. U.S. firms may take advantage of electronic means to participate in the bidding process. U.S. firms that want to learn more about tenders and bids can check the following electronic web page address, which includes all information on current tenders, statistics, and complaints: http://www.compranet.gob.net. While maintaining a representative or office in Mexico is not a prerequisite to obtaining government contracts, it can simplify obtaining the information needed to prepare bid documents and support after-sales service and parts supply.

U.S. firms are encouraged to carefully analyze with their representative the tender specifications. They may differ from entity to entity, depending on the value of operation, type of goods or services, budget limitations, etc. A bid will be disqualified if not received within the specified period of time. Bids can also be disqualified for not meeting minute technical details. Likewise, each tender includes a specific period of time for participants to ask questions. By paying attention to all details, the unnecessary disqualification of a firm may be avoided. In some tenders, only written questions are permitted. Replies are given to all purchasers of the tender documents. If a tender specifies a certain brand or gives preference to a supplier, a complaint can be filed with the General Directorate of Complaints, before the contract is awarded. Each bid should only consider the exact specifications listed in the tender. "Solutions" and or specifications not listed will disqualify the bid.

Finally, U.S. firms should communicate regularly with their Mexican representative and fine-tune all details related to the required documents. There have been numerous cases of disqualification based upon seemingly insignificant failures on the part of bidders to comply with tender regulations and procedures to the letter of the law.

Distribution & Sales Channels

Mexico has an adequate transportation network that is being modernized. The main land-border crossings with the U.S. are Nuevo Laredo, Ciudad Juarez, Piedras Negras, Mexicali and Tijuana, which has the highest passenger traffic in the world. Laredo/Nuevo Laredo is by far the most popular land-border crossing for goods, with approximately 40% of all U.S.-Mexican trade clearing customs at this point. Most Mexican companies, regardless of their geographic proximity to Laredo/Nuevo Laredo, prefer having their goods shipped through this point because the customs agents and customs brokers are the most experienced. The main maritime ports are Altamira, Tampico, Veracruz and Progreso in the Gulf of Mexico, and Ensenada, Lazaro Cardenas, Manzanillo and Puerto Madero on the Pacific Coast. All these ports have infrastructure and equipment to facilitate intermodal, doorto- door merchandise transportation.

Mexico is developing a modern highway system, primarily comprised of expensive toll roads connecting the main industrial areas located in the triangle Mexico City-Guadalajara-Monterrey. Outside this area, road transportation is fair-to-poor. Transportation-logistic services are expensive in Mexico: it is estimated that over 8 percent of product cost in Mexico is related to logistics, vis-à-vis 5 percent in more developed countries. According to the Mexican Institute for Competitiveness, in 2006, 75 percent of Mexican products were shipped by road, 17.5 percent by railroad and 7.5 percent by maritime transportation. North-South NAFTA trade has tripled over the past decade, straining the limit of Mexico’s old transportation infrastructure. The Mexican government is investing heavily in roads, ports and intermodal expansion to make industry and exports more competitive.

Selling Factors & Techniques

In addition to developing strong working relationships with Mexican partners, U.S. firms should use Spanish-language materials and speak Spanish whenever possible while doing business in Mexico. Hiring local staff can help facilitate these relationships and provide U.S. companies with insights on selling to the Mexican market. Mexicans tend to be extremely price conscious. Often business deals are made during meals, most often lunch. Business lunches tend to be late in the afternoon and last several hours.

Electronic Commerce

E-commerce between organizations and companies, either business to business (B2B) or government to business (G2B), has been developing much faster than e-commerce with consumers (B2C). This is mainly due to three main factors: 1) PC and Internet penetration among households is very low, 2) individuals are more reluctant and hesitant to interact with machines, and 3) many individuals still don’t have either a bank account or credit card with which to pay for online transactions. Companies and the Mexican Government are investing heavily in their IT infrastructure to promote e-commerce between clients, suppliers, government and individuals. Given that this market will grow in the future, there are great opportunities for suppliers of specialized and segmented solutions based on economic activity. The biggest market is enterprise solutions to help companies integrate and automate their communications For more detailed information on e-commerce in Mexico, please visit our Market Research Library at http://www.export.gov/mrktresearch and search for “Electronic Commerce in Mexico”.

Trade Promotion & Advertising

CS Mexico provides on-line advertising for U.S. and Mexican companies under the Business Service Provider (BSP) and Featured U.S. Exporter (FUSE) programs. For more information, please see:

CS Mexico BSP Directory: https://www.buyusa.gov/mexico/en/business_service_providers.html
CS Mexico FUSE Directory: https://www.buyusa.gov/mexico/es/oportunidades_negocios.html

According to data provided by the National Chamber of the Publishing Industry, more than 420 newspapers and 1600 magazines are published in Mexico. Many magazines are industry-specific. CS Mexico has extensive media lists available for U.S. companies. Given the size of the country and the diverse nature of the media in the various regions in Mexico, the list of media is too lengthy to mention here. Advertising in Mexican print media is usually more expensive than in the United States. Advertising rates are generally commensurate to those of large international cities.

Advertising on billboards is also common in Mexico. There are more than 100 billboard companies in Mexico offering various kinds of billboards, ranging from plain paper billboards to electronically controlled billboards. According to data provided by Medios Publicitarios Mexicanos, there are over 130 advertising agencies, 40 market research companies, 8 direct mailing companies, 20 sales promotion agencies and 8 direct marketing agencies.

Pricing

U.S. exporters should look carefully at import duties for agricultural products (taking into account the NAFTA progressive tariff reductions), brokers’ fees, transportation costs, and taxes to determine if the product/service can be priced competitively. U.S. companies shipping goods not made in the United States will be subject to the appropriate duties and tariffs. The import duty, if applicable, is calculated on the U.S. plant value (f.o.b. price) of the product, plus the inland U.S. freight charges to the border and any other costs listed separately on the invoice and paid by the importer. These can include charges such as export packaging, inland freight cost, and insurance.

Mexican Customs collects a value-added tax or IVA from the importer, on foreign transactions, upon entry of the merchandise into Mexico. This IVA is assessed on the cumulative value consisting of the U.S. plant value (f.o.b. price) of the product(s), plus the inland U.S. freight charges, any other costs listed separately on the invoice such as export packing, insurance, plus the duty, if applicable. The IVA is 10 percent for products exported to the “border zone,” defined as 20 km from the U.S.-Mexico border. For final shipping points, other than the border zone, a 15 percent IVA is charged. The importer will pay other IVA fees for such services as inland

Mexico freight, warehousing, and custom brokerage fees, if applicable. The IVA typically is recovered at the point of sale when the product is sold. Sales of real property (real estate) within the border zone are taxed at the 15 percent IVA rate.

To avoid dumping practices, the Mexican authorities have set minimum prices for a wide range of imported products, including textiles, clothing, leather products, shoes, some metals, stationary products, tools, some glass products, bicycles, children’s accessories, and others. These minimum prices will be taken as the base for calculating any duty or taxes, if applicable, for all products imported under certain Harmonized System Codes.

Sales Service/Customer Support

Service and price are extremely important to Mexican buyers. In many industries, the decision to select a supplier depends on the demonstrated commitment to service after the sale has been made. This has been the most effective tool that third country manufacturers, mostly Japanese, have used to penetrate the market. They offer to have their maintenance personnel at the clients' plant in no more than 48 hours after a service call is made.

Mexican customers are demanding uniform quality control, compliance with international standards, productivity, lower production costs, just-in-time deliveries and above all, reliable local service and maintenance programs. This last factor has become, in many instances, even more important than pricing or financing. Many Mexican firms employ English-speaking staff, but it is a good idea for the U.S. company to employ Spanishspeaking sales representatives. Providing appropriate training, product support, and timely supply of spare parts is critical for success. The U.S. exporter should also schedule annual visits of Mexican personnel to the U.S. companies for training. All Mexicans traveling to the United States for training or other business purposes need a visa.  Another factor to consider is financing, as the commercial and industrial sectors’ resources are limited due to high interest rates.

Protecting Your Intellectual Property

Two different laws provide the core legal basis for protection of intellectual property rights (IPR) in Mexico -- the Industrial Property Law (Ley de Propiedad Industrial) andthe Federal Copyright Law (Ley Federal del Derecho de Autor). Multiple federal  agencies are responsible for various aspects of IPR protection in Mexico. The Office of the Attorney General (Procuraduría General de la Republica, or PGR) has a specialized unit that pursues criminal IPR investigations. The Mexican Institute of Industrial Property (Instituto Mexicano de la Propiedad Industrial, or IMPI) administers Mexico’s trademark and patent registries and is responsible for handling administrative cases of IPR infringement. The National Institute of Author Rights (Instituto Nacional del Derecho de Autor) administers Mexico’s copyright register and also provides legal advice and mediation services to copyright owners who believe their rights have been infringed. Mexico Customs Service (Aduana México) plays a key role in ensuring that illegal goods do not cross Mexico’s borders.

Despite strengthened enforcement efforts by Mexico's federal authorities over the past several years, weak penalties and other obstacles to effective IPR protection have failed to deter the rampant piracy and counterfeiting found throughout the country. The U.S. Government continues to work with its Mexican counterparts to improve the business climate for owners of intellectual property. Please refer to the Embassy’s IPR Toolkit for more information: http://mexico.usembassy.gov/mexico/IPR.html.

Mexico is a signatory of at least fifteen international treaties, including the Paris Convention for the Protection of Industrial Property, the NAFTA, and the WTO Agreement on Trade-related Aspects of Intellectual Property Rights. Though Mexico signed the Patent Cooperation Treaty in Geneva, Switzerland in 1994, which allows for simplified patent registration procedure when applying for patents in more than one country at the same time, it is necessary to register any patent or trademark in Mexico in order to claim an exclusive right to any given product. A prior registration in the United States does not guarantee its exclusivity and proper use in Mexico, but serves merely as support for the authenticity of any claim you might make, should you take legal action in Mexico.

An English-language overview of Mexico's IPR regime can be found on the WIPO website at: http://www.wipo.int/about-ip/en/ipworldwide/pdf/mx.pdf. Although a firm or individual may apply directly, most foreign firms hire local law firms specializing in intellectual property. The U.S. Embassy’s Commercial Section maintains a list of such law firms in Mexico at: http://www.buyusa.gov/mexico/en/business_service_providers.html.

Due Diligence

U.S. firms must keep in mind that it is recommended to do due diligence on a Mexican firm or individual before entering in any type of agreement. In Mexico’s larger cities, it is possible to find a local consulting or law firm that can find information on a firm or individual. Also, local chambers and associations can assist U.S. firms in locating economic reports on a particular firm.

There are only a few private firms that do due diligence all over the country. U.S. firms should know that the U.S. Commercial Service has a service called International Company Profile (ICP) that can be ordered from our offices in Tijuana, Monterrey, Guadalajara, and Mexico City. The ICP is a report in English that includes financial and commercial information on a Mexican firm or an individual. The service can also be ordered and paid for in any of the more than 100 U.S. Commercial Service Export Assistance Centers located in major cities of the United States.