The Sweet Spot of the Mexican Telecom Reform (Part 1/3)

The Sweet Spot of the Mexican Telecom Reform (Part 1/3)

Photo credit: EPROM CLCC-44 Devices by yellowcloud

This is part 1 of 3-part post on the recently published Mexican Telecom Reform. Follow me to explore the great opportunities to come.

What ever happened to the Telecom Market.

Mexican Telecom Reform is now on effects. It is the end of the industry, as we all knew it. Frankly, I feel fine and exited about the new regulation.

We need to double-check landmark case law on interconnection, spectrum assignment and antitrust to connect the dots backwards. All those years in court made telecom law history, though.

This Reform offers a fresh start for entrants and opens a wide range of opportunities, as now investors have less barriers for mobile, data and TV.

Telecom regulation is moving in gigaflops. Just now, COFETEL (telecom body) has concentrated all operators annual report formats into one single document. Also, has reduced the local service areas from 397 to 172. Satellite services, fixed-mobile cost models, standards for DTV decoders (NOM-192) and mobile antennas installation are under review. Other issues like passive infrastructure interconnection and white spaces are between the lines on the debate.

Now, foreign companies and individuals can invest in telecom companies up to 100%, and 49% in TV/radio companies (the latter subject to country reciprocity to Mexicans in those sectors). Previously, some investors invested only in no-voting shares with the obvious consequences.

From recent data of COFETEL, telecom services increased an aggregate of 12.5% during first quarter of 2013, comprising broadband connections up to 12 million, CATV up to 13 million, DTH up to 7 million, mobile users up to 101 million and fixed lines up to 20 million. Satellite and trunking decreased.

After the transition, the new IFETEL (succeeding to COFETEL) will review and simplify telecom licenses in one single type, and hopefully will reduce red tape to obtain it.

While the reforms encourage and support free competition on these telecom services, it is also true that incumbents have been preparing for this face-off for years. Yes, it is great for telecom lawyers, but paradise for antitrust telecom lawyers.

However, the less explored side of the Reforms is niches, trends and side markets that could generate businesses while the telecom industry grows in the years to come. Also, the Public Private Associations Law grants rights to private companies or individuals to pitch projects on all levels of Government, so the sky is the limit.

A sweet spot is in cameo here. The Reform is a game changer and abilities of the entrants and possibilities created could generate business, and hopefully profit will come along. Where to start digging?

Project Finance, Convertible Debentures, Secured Loans and other Financial Operations.

Telecom is a money consuming business with small incremental profits. It requires big amounts to acquire infrastructure and clients, as well as to run and expand the business. Now that foreign investment caps have disappeared for telecom and have risen for TV/radio, loans secured with shares can be fully executed in an event of default, as transfer of property is no longer restricted to Mexicans-only. Also, foreign VCs can acquire voting shares without restrictions on caps (except TV/radio).

TelecomMexico will become a market incubator.

Telecommuncaciones de México (TelecomMexico), is a state-owned company operates satellite services, money wires and telegraphy in Mexico. Along with the Telecom Reform, TelecomMexico is in the process of getting a telecom license for SMS, voice and data, fixed and mobile through cellular technology and satellite backbone. TelecomMexico will target low-income communities to reduce the digital divide. This strategy is expected to be in the digital agenda, which could include universal broadband. As TelecomMexico is paying for sunk costs of bringing on telecom services to low-income users, operators could ask for interconnection whether for transporting throughout that area or providing low-income niches services.

Second installment is coming in a couple of days …

An Overview of the Mexican Legal Market for Foreign Firms

An Overview of the Mexican Legal Market for Foreign Firms

Photo credit: Law School by Tulane Public Relations

Investor attention is turning somewhat away from the BRIC (Brazil, Russia, India, China) in recent months because their economies haven’t been growing as swiftly as they had been in years past.  The four countries that are attracting the attention of international investors are Mexico, Indonesia, South Korea, and Turkey, or MIST for short.

Mexico in particular is attracting a lot of attention from investors; it’s currently the second largest economy in Latin America and is poised to become the world’s seventh largest economy in the coming decades.   In fact, Mexico’s economy is predicted to become larger than that of the United Kingdom.    Part of the country’s economic growth is due to the country’s conglomerates looking at international capital markets, and part of the growth is due to public/private partnerships in the infrastructure sector.    Liberalization of Mexico’s oil sector could also fuel tremendous growth; reforms are currently being discussed inside the country’s government.

The country has one of the world’s most open economies.  With a dozen free trade agreements that cover 44 nations, investors from all over the globe are scrambling to set up shop in the Spanish-speaking country.  With a highly skilled and motivated workforce, the country has become the darling of international investment community.

The legal sector in Mexico is also very open to foreign firms.  Interestingly, foreign law firms don’t need to register with any of the country’s local bar associations, and are allowed to use their home name to open offices.    However, only Mexican-licensed lawyers are permitted to appear in court and advise on local law.  It must be stated here that foreign law firms are allowed to employ Mexican lawyers to advise on Mexican law, international law, and home country law.

Mexican lawyers are not required to members of Mexico’s six bar associations.

While the legal market is open and bar association membership is not necessary, this does not mean that Mexico’s legal sector is unsophisticated or underserved.  In fact, Mexico’s lawyers are among the most highly trained and educated in the world with skills that span the entire legal sector spectrum.  The legal market is very competitive and very sophisticated, with a massive number of Mexican lawyers holding law degrees from Ivy League Schools and memberships in United States bar associations.  International firms should not think of themselves as “swooping in” to fill a void in the legal market.

The opportunities for foreign law firms appear to exist in partnerships with local firms or with small- to medium-sized firms.  Large legal firms in Mexico are few and far between, with “large” in Mexico being a firm with around 70 lawyers.  Brazil, on the other hand, has a good number of firms that employ over 200 lawyers.  Mexican lawyers are strongly independent, something they do not want to sacrifice by joining large firms.

But it’s quite possible for there to be many opportunities for legal firms who want to establish “spin-off” or boutique legal practices.  Because of the sense of independence that Mexican lawyers have, this is one area where the legal market has been growing and the trend does not appear to be slowing down.  One of the reasons given for this boutique legal firm growth is that lawyers want to avoid the long wait with larger firms to become partners.

U.S. and Mexico Deeply Linked By Trade

U.S. and Mexico Deeply Linked By Trade

Photo credit: WTC Ciudad De Mexico by Armando Argandar

When North Americans and people from other parts of the world think of Mexico, one of the first things that they may think of, sadly, is the security situation in the country caused by drug traffickers and associated gangs.  However, smart investors and businessmen know that Mexico is quickly becoming an economic powerhouse due to the Spanish-speaking country’s free trade agreements with 44 countries, economic policy reform, and highly skilled, talented workforce.  The ties that bind Mexico and the United States go beyond those of friendship; the two countries are deeply linked by successful trade.

In only twenty years, Mexico’s economy was inward looking and heavily dependent on oil.  Since the North American Free Trade Agreement (NAFTA) was signed two decades ago, the economy in Mexico has turned out to be one of the most open and competitive on the globe.  In fact, Mexico has become so competitive that when it comes to the measure of trade to GDP, Mexico is now surpassing China.

Many experts in the field of international economics say that this success story is mostly in part due to increased trade with the United States since NAFTA came into effect.  Regional supply chains between the United States and Mexico for different products have been flourishing since 1994; interestingly, the economic relationship between the US can be seen as a symbiotic one.  This is because for every article imported from Mexico, about 40 percent of it was actually made in the United States.

In many companies, there is a type of integration that crosses the border in a way that is basically seamless.  Research and development labs might be on one side of the border, while manufacturing will occur on the other, and both facilities may be only minutes away from each other.  In some cases, manufacturing, production and research may actually occur in both countries, meaning that industries in both the United States and Mexico are now permanently tied; the two economies are deeply linked in long-term relationships.

Both countries benefit by Mexico’s positive future.  What is particularly of interest to investors is the fact that even as the U.S. economy may have suffered in the past few years, the overall amount of trade occurring at the U.S. – Mexico border saw growth rates of around 7%.  By some estimates, if cross-border trade included services as well products, the monetary value of total trade would be well over half a trillion dollars per year.  The amount of trade could also increase exponentially if either partner were to increase free trade agreements with other trading blocs.  Negotiations are currently underway for a U.S. – European Union free trade agreement, and the Trans-Pacific Partnership could open up Asian markets to the Mexico-U.S. products manufactured in the border regions.

Mexico still has to get its security situation under control, but the economy is still growing in spite of it.  The United States and Mexico share deep ties when it comes to their economies; the United States is Mexico’s largest export market, and Mexico is the largest or second largest market for 22 individual states.  Mexico’s success also spells success for their neighbour and partner north of the border.

Mexico: A Digital Manufacturing Powerhouse

Mexico: A Digital Manufacturing Powerhouse

Photo credit: Work in Progress by daveynin

Mexico is a country that’s suffered from a rather bad reputation lately; all the media seems to be focused on is the nation’s problems with drug trafficking gangs and politics.  Mexico does have its issues; however, what might come as a surprise to many investors that aren’t familiar with the electronics industry is that this Spanish-speaking North American country is a well-known digital manufacturing powerhouse.  Most major electronics companies have already set up shop in Baja California in the country’s north, and many businesses that relocated to China in the 1990’s and 2000’s are returning to the shores of the Americas thanks to all that Mexico has to offer.

What companies are in Mexico?

To get an idea of the extent of Mexico’s mammoth role in electronics manufacture, one only has to see the names of some of the companies in operation there.  In Baja California alone, Sanyo, Samsung, Sony, Hitachi, Bose Corporation, Daewoo Orion, Kyocera, LG Electronics, Panasonic, Philips Lighting, and Pioneer along with 188 other companies employ over 92,000 people.  Being located in Mexico has proven to be so beneficial that the companies that supply the above mentioned corporations have also relocated to Baja California.

Why Mexico over China?

Until fairly recently, relocating to China made good economic sense for electronics manufacturers because wages in China were so low that the additional cost of transportation over long distances could be justified.  However, in the past few years, wages have been increasing to such an extent that they are now equal to the wages a similar worker would earn in Mexico.  The higher wage in China combined with the now near astronomical cost of transportation makes a move to Mexico the smarter option.

However, there are other reasons why businesses are choosing Mexico over China and other Asian countries; it’s not just about workers’ wages and transportation costs.   First of all, Mexico has intellectual property laws that work – a company’s proprietary design isn’t going to get stolen and copied.  Second, Mexico produces an astonishing amount of highly skilled workers thanks to its numerous universities, technical institutes, and training facilities.  Engineering graduates, production accountants, and all other workers that have very specific skills abound in Mexico – the myth that the country only produces unskilled labor is totally destroyed.  Mexico’s workforce is highly educated, specialized, and famously hard-working.

Other reasons why Mexico’s the powerhouse of digital manufacturing

Along with reduced transportation costs, a highly educated, experienced workforce and relatively low wages, there are other reasons why Mexico is the darling of the electronics-manufacturing world.  One of these reasons is the fact that Mexico is a signatory to NAFTA, the North America Free Trade Agreement.  This means that businesses that would otherwise be subject to heavy duties and taxes simply will not have to pay them if they manufacture in Mexico, dramatically improving a business’s bottom line.   Mexico also has dozens of free trade agreements with other countries and regions; Mexico’s free trade agreements far outnumber those that rival China has.

Another reason is that Mexico is the gateway for all the Americas; the U.S. is right next-door, and access to Central and South America is easy and convenient.  Again, the savings on transportation will be significant.

Finally, another reason why Mexico is a huge player in the digital manufacturing industry is that it can offer “just in time” manufacturing.   Massive orders do not need to be placed months in advance, and companies don’t need to wait for weeks for parts or products to be manufactured and shipped. Storage facilities are practically eliminated as products are made quickly and shipped in a very short period of time.  From Baja California, the American ports of Los Angeles and Long Beach are a hop, skip, and a jump away, while the Mexican port of Ensenada can also offer international shipping services.

Mexico´s Key Role on the US-China Re-shoring War

Mexico´s Key Role on the US-China Re-shoring War

Photo credit: Seagate drives being tested by Robert Scoble

Flavius Vegetius Renatus (Circa 375 AD), writer of Epitoma Rei Militaris (The Military Institutions of the Romans) is often quoted for: “If you want peace, prepare for war”. Business was way more simpler back then, and this kind of advice applied easily to every day trades. Today, globalized and technology-based world has created a more complex and competitive business world with multinationals with no nationalities or boundaries.

As we speak, one trend is challenging business in Mexico … There is a re-shoring war upon us. So, if Vegetius allows me, I would re-quote him for the present time: “Mexico-based operation: If you want profits, prepare for re-shoring war”.

There are several advantages of Mexico that US or China may use for making profit on the current re-shoring trend into America, and eventually will allow Mexico to keep some of that re-shoring inside the country.

1. Location, location, location. As in real estate, in manufacturing, location offers the big advantage of working on-time, reducing delivery times and costs. Plus, Mexico has good infrastructure. Mexico has broad cross borders with the US, as well as 102 Ports and 15 hinterland ports to handle charge and export all over the world. It has 78 airports, 264,000 miles of road and 16,000 miles of railroad. Government has been discussing increase of its railroad infrastructure to meet demand by automakers in the center of the country.

2. Free Trade Agreements and Double Taxation Treaties. Mexico has signed 12 FTAs with 44 countries, 28 Reciprocal Investment Promotion and Protection Agreements (RIPPAs) and 9 trade agreements (Economic Complementation and Partial Scope Agreements) within the framework of the Latin American Integration Association (ALADI). In addition, Mexico is an active participant in multilateral and regional organisms and forums such as the World Trade Organization (WTO), the Asia-Pacific Economic Cooperation (APEC) mechanism, the Organization for Economic Cooperation and Development (OECD) and the Latin American Association for the Integration (ALADI). Since 2010, Mexico is negotiating its incorporation to the Trans-Pacific Partnership (TPP) with Australia, Brunei, Chile, Canada, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. After this Agreement, Mexico will be a world-class connector with reduced or non-existing trade barriers with almost all countries.

3. Export incentives (IMMEX). Through the years, Mexican Government has implemented several export and manufacturing incentive programs for investors.  Currently, IMMEX is the program that supports manufacturing companies for exporting. The main benefit is that raw materials are imported under 0% VAT rate (instead of 16%) or certain import duties, and could be transfer among IMMEX companies with same 0% rate. Machinery/tools could be temporary without paying VAT or import duties, too. Finally, at the end of supply chain, if this product/part is exported, VAT is not paid and machinery/tools could be re-exported without paying taxes. One of the main unexploited features of the IMMEX is that the same provisions apply to services. Then, outsourcing services of any kind (i.e. call centers, digital media rendering for video production, etc.) could apply for the same IMMEX benefits.

4. Engineers. Mexico is producing more engineers than ever, having a base of 400,000 software engineers and 65,000 graduating every year, Mexico is an “Engineering Powerhouse“. This number is powered by the fact that Mexico has qualified and skilled employees that have helped to success of diverse industries like consumer electronics, automotive/aerospace, textile and home appliances. In fact, Mexico has become a good ecosystem for clusters of auto/aero and consumer electronics to flourish.

5. Reliable legal framework. As labor law was amended to provide a more flexible labor system, and wages are reasonable, Mexico is competing with labor conditions in Asia. Government and politics are pushing amendments to free telecom and energy markets, and promised to set a more fair tax system. This could happen as soon as this year. El Pacto Por Mexico, a political alliance between the three major political parties, has outlined some of these amendments, and has guaranteed a majority in the Congress to pass the bill.

6. Domestic market. Mexico has a big domestic market of over 110 million people, with an average age of 26 years, Mexico has a great potential for growing inner market with products manufactured in the country.

Globalization is about producing in a place where business conditions, quality and price meet. Many companies will re-shore from China to US and/or Mexico forming a kind of North America manufacturing hub. Mexico has potential for landing any type of manufacturing operation, partially or totally, as can harbor either Chinese or US foreign investment.

As this re-shoring war is showing their first signs of hostility with companies moving away from China, it is time to apply some advice from Sun Tzu´s “The Art of War”: “Whoever is first in the field and awaits the coming of the enemy, will be fresh for the fight; whoever is second in the field and has to hasten to battle will arrive exhausted.”

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