Doing Business In Mexico

“ Doing Business in Mexico: Business Opportunities and Cultural Challenges ” Michael J. Pisani, Ph.D. Associate Professor of International Business, Central Michigan University February 2, 2005 Co-Director, “Increasing International Business and Personnel Capacity in the Mid-Michigan Region through Private Sector Outreach and Curriculum Development” Title VI Grant funded by the U.S. Department of Education: Business and International Education Program and Central Michigan University.

“ Doing Business in Mexico: The Bottom Line”*

Proposition #1:

Rock-Bottom Price + Bell-Ringer Product = Sale

Wrong: This is a flawed approach to doing business in Mexico. It presumes that buyers are vendor neutral and will instantly issue a purchase order whenever that supplier offers a lower price or better product.

*Adapted from Becker (2004), Doing Business in the New Latin America , pp. 112-113.

Proposition #2:

Reasonable Price + Satisfactory Product + Customer’s Trust = Sale

Correct: This mirrors the reality found in Mexico (and Latin America). It is essential to reassure customers that they can rely on the assurances you make because they are backed by your own personal integrity. When you motivate customers to buy only from you because you are trustworthy, you expand the envelope of what qualifies as an acceptable price and product. This is why trust is such a precious currency in Mexico (and Latin America) to be earned, conserved, and invested in.

Map of Mexico

Brief Overview of Mexican History

Pre-Columbian Mexico

Pre-Classic 1500 B.C.-200 B.C.

Olmecs (Tabasco and southern Veracruz)

Teotihuacan (Central Mexico)

Monte Albán (Oaxaca)

Classic Period 200 B.C. – 900 A.D.

El Tajín (Veracruz)

Maya (Yucatán)

Post-Classic 900 A.D.-1521 A.D.

Toltecs (Central Mexico)

Zapotecs and Mixtecs (Oaxaca)

Post-Classic Maya (Yucatán)

Aztecs (Central Mexico and beyond)

Brief Overview of Mexican History (Cont.)

Colonial New Spain

Encounter & Conquest (1519-1521)

Colony (1521-1821)

The Mexican Empire, 1821-1824

The Mexican Republic, 1824+

Loss of Texas (1836) and War with the United States (1846-1848)

The French Intervention (1863-1867)

The Porfiriato (1876-1910)

The Mexican Revolution (1910-1920?)

The Revolution Institutionalized (1928?-2000)

The PRI Loses and Multi-party Rule (2000-

Current Socio- Demographics of Mexico

Population 97.5 million (2000)

Greater Mexico City 21.7 million

Mexican States Along U.S. Border 16.6 million

Population: 1950 = 25.8 million

1970 = 48.2 million

1990 = 81.2 million

7.2% Speak an Indigenous Language (6 million)

GDP: $626.1 billion in 2003 (Canada = $891.7 billion; US = $11 trillion)

GDP Growth Rate: 4.4% (2003/2004)

Per Capita Income: $5,910 (2002) (Canada = $22,300, US = $35,060)

Current Socio- Demographics of Mexico (Cont.) Income Distribution .48541 30.5 46.4 22.4 15.6 10.5 5.2 USA .4080 42.8 58.2 19.2 11.8 7.2 3.6 Mexico GINI Coefficient Richest 10% Richest 20% 2 nd Highest 20% Middle 20% 2 nd Lowest 20% Poorest 20% Country

Other Mexico Facts of Interest

Mexico receives about 20 million tourists a year

Mexico has about 20 billion barrels of oil reserves

684,000 new cars were registered in 1999

Current Account Deficit 2003 $1 million (US $ 530 billion)

2004 Inflation Rate: 5.1%

Michigan Exports

1 in 9.5 private sector jobs in Michigan are supported by exports (2001)

1 in 4 manufacturing jobs in Michigan depend on exports for their jobs (2001)

1 in 8 manufacturing jobs in Michigan are provided by foreign controlled companies (2002)

12,127 companies in Michigan exported in 2002

10,573 (87%) were small- and medium-sized firms (SME) employing fewer than 500 workers (2002)

SMEs generated 18.6% of Michigan’s total exports of merchandise (2001)

In 2002, foreign controlled companies in Michigan employed 204,100 Michiganians 47% in the manufacturing arena

Michigan companies export to 185 countries (2003)

Michigan exports to Mexico increased 68% from 1999-2003.

U.S. – Mexico Exchange Rates ($1 U.S. = in Mexican pesos) 11.1660 2004 11.2360 2003 10.3125 2002 9.1423 2001 9.5722 2000 9.5143 1999 9.8650 1998 8.0833 1997 7.8509 1996 7.6425 1995 Exchange Rate Year

U.S. Trade & Michigan Exports (Top Five) * 2004 (January-November). ^2003 Total Exports: $32.9 billion Total Trade: $2,088 billion Total Exports: $746 billion Total Imports: $1,342 billion UK (2.1%) | $706 million Germany (4.7%) China (4.2%) 5) Germany (5.3%) Germany (3.0%) | $973 million Japan (8.1%) UK (4.4%) 4) Japan (8.8%) Japan (3.3%) | $1.1 billion China (10.1%) Japan (6.7%) 3) Mexico (10.7%) Mexico (12.2%) | $4.0 billion Mexico (11.7%) Mexico (13.6%) 2) China (13.3%) Canada (60.1%) | $19.7 billion Canada (19.5%) Canada (23.2%) 1) Canada (17.5%) Michigan Exports^ | $ Value U.S. Total Trade* U.S. Exports* U.S. Imports*

Top 25 Commodities Exported from Michigan 2003, in Ranked Order 1.35 443.9 Trucks With A Diesel Engine 1.36 448.1 Brakes, Servo-Brakes & Parts for Motor Vehicles 1.46 481.1 Natural Gas 1.48 487.4 Drive Axles With Differential for Motor Vehicles 1.54 494.0 Parts of Seats 1.54 507.5 Parts of Spark-Ignition Internal Combustion Piston 3.36 1,105.7 Motor Vehicles for the Transportation of Goods 3.94 1,296.3 Gear Boxes for Motor Vehicles 4.66 1,536.2 Passenger Vehicle With An Engine Between 1500 &3000 cc 5.04 1,660.6 Spark-Ignition Reciprocating Piston Engines 7.60 2,502.2 Passenger Vehicles With An Engine Exceeding 3000 c 7.86 2,589.4 Parts & Accessories of Bodies of Motor Vehicles 9.15 3,014.8 Parts and Accessories of Motor Vehicles Percentage Share Value ($millions) Commodity

Top 25 Commodities Exported from Michigan 2003, in Ranked Order (Cont.) Source: U.S. Census Bureau, Foreign Trade Division 100.0 32,941.1 All Exports 58.06 19,124.9 Top 25 0.49 160.2 Iron or Steel Threaded Screws and Bolts 0.49 160.2 Compression-Ignition Combustion Piston Engines 0.52 169.8 Parts of Air Conditioning Machines 0.53 173.7 Retail Medicaments in Measured Doses 0.56 184.0 Motor Vehicles, Trans Goods, GVW between 5 & 20 Ton 0.58 191.3 Metal Mountings & Fittings for Motor Vehicles 0.58 192.1 Other Machinery & Mechanical Appliances 0.70 230.0 Automatic Regulating Instruments & Apparatus 0.79 261.1 Steering Wheels, Columns & Boxes for Motor Vehicle 0.81 266.2 Rear-View Mirrors for Vehicles 0.86 281.7 Purifying Machine & Apparatus for Gases 0.87 287.4 Insulated Wiring Sets for Vehicles Percentage Share Value ($millions) Commodity

Michigan’s Top 5 Agricultural Exports – 2002 ($ millions)

Soybeans and products – 162

Feed grains and products – 127

Vegetables – 106

Fruits – 79

Live animals and meat – 53

Total Agricultural Exports from Michigan = $735 million (2002)

(Note: Michigan began exporting apples to Mexico for the first time in February 2004)

Mexican Trade (in $ millions) 34.6 62.0 170,545.8 88.9 164,922.2 2003 35.1 63.4 168,678.9 89.1 160,762.7 2002 34.2 67.7 168,396.5 88.7 158,442.9 2001 35.4 73.3 174,457.8 88.9 166,454.8 2000 35.5 74.3 141,974.8 88.4 136,391.1 1999 33.9 74.5 125,373.1 87.9 117,459.6 1998 33.1 74.8 109,807.8 85.6 110,431.4 1997 Maquiladora Imports (%) Imports from US (%) Import Total Exports to US (%) Export Total Year

Top 15 U.S. Exports to Mexico – 2003 ($ billions) 97.457 Total 8.559 Other 1.656 Apparel and accessories 15 2.269 Misc. manufactured commodities 14 2.323 Petroleum and coal products 13 2.701 Paper 12 2.718 Textiles and fabrics 11 2.854 Primary metal manufacturing 10 3.586 Agricultural products 9 4.041 Fabricated metal products 8 4.165 Food manufacturing 7 4.826 Plastics and rubber products 6 6.184 Electrical equipment, appliances, and component 5 8.511 Machinery, except electrical 4 9.175 Chemicals 3 12.356 Transportation equipment 2 21.533 Computer and electronic products 1 Amount Product Rank

Top 10 U.S. Exports to Mexico by State – 2003 ($ billions) 97.457 All US 1.705 New York 10 1.776 Louisiana 9 1.814 Florida 8 2.102 Ohio 7 2.105 Indiana 6 2.153 Illinois 5 3.229 Arizona 4 4.006 (transportation equipment, computer and electronic products, and chemicals) Michigan 3 14.872 (computer and electronic products, machinery, and plastics and rubber products) California 2 41.561 (computer and electronic products, transportation equipment and chemicals) Texas 1 Export Amount State Rank

Foreign Direct Investment (FDI) in Mexico (in $ millions) 5,100.6 (54.1) 1,832.9 (19.4) 4,531.7 (48.1) 9,431.4 2003 8,226.7 (62.1) 4,288.7 (32.4) 5,434.9 (41.0) 13,258.9 2002 20,361.8 (76.6) 14,409.4 (54.2) 5,854.4 (22.0) 26,569.2 2001 11,841.1 (72.0) 4,763.5 (29.0) 9,308.7 (56.6) 16,448.7 2000 7,066.7 (53.7) 759.7 (5.8) 8,984.6 (68.2) 13,165.6 1999 U.S.: $ (%) Financial Services: $ (%) Manufacturing: $ (%) Total FDI ($) Year

Culture - Defined

Culture is “the collective programming of the mind which distinguishes the members of one group or category of people from another” (Hofstede, 1997, p. 5).

Furthermore, “culture could be defined as the integrative aggregate of common characteristics that influence a human group’s response to its environment. Culture determines the identity of human a group in the same way as personality determines the identity of an individual” (Hofstede, 1980, pp. 25-26)

Culture “is a learned, shared, and interrelated set of specialized behavioral patterns, understandings and adaptations of a like group of people” (Pisani, 2000, p. 25).

Cultural Dimensions

Geert Hofstede

Power Distance

Individualism vs. Collectivism

Femininity vs. Masculinity

Uncertainty Avoidance

Long Run vs. Short Run Orientation

Cultural Dimensions

Edward T. Hall & The Language of:

Time: refers to how one spends time

Space: physical distance; size and orderliness of surroundings

Things: material possessions

Friendship: the nature and make-up of friends

Agreements: commitments agreed upon

Silence:* the meaning of silence

*Developed in conjunction with Sang-Jin Kim, CMU MBA student

Mexican Culture Hofstede’s Cultural Dimensions Short Run Short Run Long Run vs. Short Run Orientation Low High Uncertainty Avoidance Masculine Masculine Femininity vs. Masculinity Individualist Collectivist (in-group vs. out-group) Individualism vs. Collectivism Low High Power Distance USA Mexico Cultural Dimension

Mexican Culture Hall’s Cultural Dimensions Uneasiness in conversation, anger, grief Denotes pain, disappointment, control Silence Contracts more important than relationships (low context culture) Relationships more important than contracts (high context culture) Agreements Temporal, casual , few obligations A few long lasting friendships with many obligations Friendships Personal status Personal status Things Private, low-density Public, high-density Space Planned/Scheduled, monochromic Variable, polychromic Time USA Mexico Dimension

Historical Stereotypes: Mexico and the United States of America Submissive, weak Aggressive, at times brutal and abusive Dominant, strong Brave, but overpowered Character Dishonest, indirect, sneaky, not trustworthy Manipulative, tactless, can’t be trusted Honest, direct, principled, literal More important to be nice than objective, save face, maintain respect, ok to bend the truth or retain information if people’s feelings are preserved Honesty & Trustworthiness Primitive Condescending Advanced Traditional Civilization Emotional, volatile, undisciplined Cold, insensitive, emotionless Rational, calm, masculine, deals actively with stress through discipline in life Deal passively with stress, saying “ni modo” when something doesn’t go to plan Self-Control North American View of Mexican Mexican View of North American North American View of Self Mexican View of Self Value

Historical Stereotypes: Mexico and the United States of America (Cont.) Passive Christianity, God’s faithful servant Profess a false religion Active Christianity, God’s appointed steward (mixed religions) Repository of higher moral values (long Roman Catholic tradition) Religion Chaotic, inefficient, unjust Economically superior Orderly, efficient, upwardly mobile Exclusive, but more cultured and civilized at top levels Social Classes Lives too much in the present while dwelling on the past; surrenders own will and ambition to chance. Procrastination. Obsessively future oriented. Doesn’t know how to relax. Unrealistically believes time can be mastered The present is the birthplace of the future; planning, action-oriented Lives in and enjoys the present, respects past, awaits a future to be determined by God’s will: “si Dios quiere” Time Orientation North American View of Mexican Mexican View of North American North American View of Self Mexican View of Self Value

Historical Stereotypes: Mexico and the United States of America Source: Adapted from Harris, Moran and Moran (2004), Managing Cultural Differences , pp. 320-321. Lazy, work is bad Obsessive, materialistic Work is the measure of a man Work not inherently redeeming; something that must be done Work Ethic Lacking vision Interventionist, imperialist, subversive Good natured, missionary, helpful, showing others “the way” Sovereignty, respect, recognition National Intent Fatalism Destructive, futilely trying to control only what God can master Man can and should manage nature Nature merely “is”, can’t influence or control Orientation to Nature North American View of Mexican Mexican View of North American North American View of Self Mexican View of Self Value

Basic Mexican - US Customs begins on time, business may be discussed begins late, no business discussed Social Dining short, business not mixed with pleasure long, deals made at the end of the meal Business Dining important important Eye Contact Necessary, but awkward important first step in conversations Pleasantries “ Good morning” “ Good afternoon” “ Good evening” “ Hi” “ How are you?” “ Nice to meet you” Firm Handshake at beginning and end of a formal encounter; informally, a wave of the hand is acceptable “ Good morning” “ Good afternoon” “ Good evening” “ Hi” “ How are you?” “ Nice to meet you” Handshake Common (go to everyone in the room and shake hands at entry and exit). Abrazo (hug) or kiss for close friends the norm Greetings/Handshake United States Mexico Custom

Basic Mexican - US Customs* *Source: Adapted Robert T. Moran and Jeffrey Abbott (1994), NAFTA: Managing the Cultural Differences , pp.47-49 large personal distance and few hand gestures close personal distance, frequent touching and hand gestures Nonverbal Gestures Assumes everyone speaks English Businessmen will speak English Language Competency Down-played very important and operationalized Class and Status Desirable, not mandatory seen as a courtesy Thank you Notes Friendly, somewhat hospitable warm, friendly and hospitable Hospitality informal moderately formal Level of Formality Don’t discuss politics or religion, personal questions ok keep conversation on a general level, do not pry into personal lives Questions in Social Gatherings rigid flexible Punctuality United States Mexico Custom

Additional Cultural Factors* *Source: Adapted from Eva Kras, (1995), Management in Two Cultures . Direct “yes” or “no” answers given and expected, truth is seen as an absolute value Truth tempered by need for diplomacy, truth is a relative concept Ethics No time for “useless frills” Aesthetic side of life is important, even at work Aesthetics Money is the main status indicator and is a reward for achievement Title and position more important than money in the eyes of society Status As long as appearance is reasonable, performance first Dress and grooming are status symbols Personal appearance Formality often sacrificed for efficiency, “let’s get to the point” “ Old World” formality, etiquette considered a measure of breeding and is an expression of courtesy and consideration Etiquette Very patriotic, proud of the “American Way of Lilfe” Very nationalistic, proud of long history and traditions, reluctant to settle outside of Mexico Nationalism Analytical approach, practical emphasis, narrow and in-depth specialization Memorization, theoretical emphasis, rigid and broad curriculum Pedagogy Family usually second to work, children independent, executive mobility unrestricted Family is the first priority and the base of society, children sheltered, executive mobility limited Family U.S. Mexico Factor

Traditional Mexican Management Style

Leading: paternalistic; autocratic; honest; demands respect and dignity

Staffing: nepotism encouraged; loyalty of staff of paramount concern

Planning: short-term focused; centralized and often capricious decision-making

Organizing: organizing activities are ritualized, codified and formalized; power tied to position

Controlling: business practices typically go unchecked to preserve organizational harmony

Additional Management Contrasts: Mexico and the U.S. Forbidden Part of doing business Bribery Mixed Top-down Decision-making To self To supervisor Loyalty Task-oriented, work comes first, social conventions come second if at all Person-oriented, social conventions come first, work second Individual vs. Task Based on merit Based on loyalty to the supervisor Promotions Tell the bad news as well as the good Only positive feedback provided Feedback More practice oriented More theoretical Theory vs. Practice Managers delegate responsibility and authority; executive seeks responsibility and accepts accountability Traditional managers autocratic; modern managers delegate responsibility, not authority Direction/supervision Lives to work Works to live Work/Leisure U.S. Mexico Management Practices

Additional Management Contrasts: Mexico and the U.S.* *Sources: Adapted from Becker (2004), Moran and Abbot (1994), and Condon (1985). Values tied up in equality, fair play and democratic spirit. Respect earned. Determined by unequal relationships and power. Respect given as a function of position Respect Inductive, action oriented, factual Deductive, analytical, conjectural Records Accomplishments and “doing” Personal relationships and “being” Activity modality Expedient communicator Benevolent dictator Model Boss Employees are self-starters Employees expect close supervision, paternalistic supervisors Responsibility Under promise, over perform Over promise, under perform Promises Are experts who transfer impersonal truths Are gurus who transfer personal wisdom Teachers/trainers Money, opportunity for advancement Money, friendly atmosphere (in-group), loyalty to supervisor and firm Motivation U.S. Mexico Management Practices

Mexican and U.S. Negotiation Styles Medium-term Long-term Time perspective for business relationship Medium-term Short-term Time perspective for deal under negotiation Win-win Win-lose Negotiation perspective Cost-benefit ratio Best bargain Focus of negotiating goal Medium-high. Financial and technical analysis Slight, limited to awareness of company or brand name Extent, type of pre-negotiation preparation Tomorrow Not today Interpretation of mañana Fast paced Slow paced Negotiation agenda Systematic Spontaneous, impulsive Decision-making process Slight. Decisions are based on cost-benefit analysis Great. Preserving personal dignity is paramount Role of face-saving in making decisions Technical expertise, function Title, family or social ties Negotiator selection criteria To be avoided Primary Role of personal involvement Legal contract, then experience Friendship, then legal contract Basis of trust U.S. Mexican Negotiation Variable

Mexican and U.S. Negotiation Styles (Cont.)* *Source: adapted from Becker (2004), Doing Business in the New Latin America, pp. 165-166. Formal legal contract Word of honor supplemented by brief written agreement Form of final agreement Making a final offer Reopening previously closed issues Taking a settlement position Real power, legal enforcement Threat of withdrawal of stronger consequences Power tactics Concrete, rational Vague, emotional Type of arguments to defend position Reasonable Extreme Opening bid Medium-high if justified Low Risk tolerance Informal Formal Protocol Impersonal Passionate Emotional display Not highly valued Highly valued Emotional sensitivity Neutral Friend, social equal View of opposite party Strict Casual Adherence to agenda and deadlines U.S. Mexican Negotiation Variable

References

Becker, Thomas H. (2004), Doing Business in the New Latin America: A Guide to Cultures, Practices, and Opportunities , Westport, CT: Praeger.

Condon, John C. (1985), Good Neighbors; Communicating with the Mexicans , Yarmouth, ME: Intercultural Press, Inc.

Hall, Edward T. (1960), “The Silent Language of Overseas Business,” Harvard Business Review , 38(2), 87-96.

Harris, Philip R., Robert T. Moran and Sarah V. Moran (2004), Managing Cultural Differences: Global Leadership Strategies for the Twenty-First Century , 6 th Edition, Burlington, MA: Elsevier Butterworth-Heinemann.

Hofstede, Geert (1997), Cultures and Organizations: Software of the Mind , New York, NY: McGraw Hill.

Hofstede, Geert (1980), Culture’s Consequences: International Differences in Work-related Values , Beverly Hills, CA: Sage.

Kras, Eva S. (1995), Management in Two Cultures: Bridging the Gap Between U.S. and Mexican Managers , revised edition, Yarmouth, ME: Intercultural Press, Inc.

Moran, Robert T. and Jeffrey Abbott (1994), NAFTA: Managing the Cultural Differences , Houston, TX: Gulf Publishing Co.

Pisani, Michael J. (2000), “An American Management Training Model in a Latin American Context: Some Implications for International Business Consultants,” Journal of Teaching in International Business , 12(1), 23-39.