We are going to startwith the Mexican context. Which are the advantages and entry barriers that Mexico as a whole offers to foreign investment?
I think it is important to explain this. I always like contextualizing the difference between Mexico then focusing on Nuevo Leon. The truth is Mexico has an advantage, a competitive advantage not many have. We have the advantage to be the closest to the largest economy in the world: the US. Mexico’s strategic position, with connections to both oceans to the south and to the north, gives it a strategic position to develop an international logistic platform, right? What has happened with Mexico? Mexico has gone through a stable transformational process within its public policies. Mexico was managed and structured through political factions, mainly one political faction for a long time. And from 2000 to date Mexico has achieved an alternation process. Processes, mechanisms, and public policies start being developed setting the conditions so that Mexico becomes competitive again. If you look at what Mexico started doing from 1988 to 1995, before that Mexico was not present in the global setting. When Mexico joins the GATT, the free trade agreement, with the launching and incorporation to NAFTA treaty, I mean, the free trade agreement, Mexico positions itself at an international level as a global actor. That is when Mexico starts being present. And that process goes together with the development of the US, with economic expansions worldwide, creating the conditions for Mexico’s positioning. With the changes in 2000, changes in the political arena, Mexico goes through a democratization process guaranteeing the rule of law. Structural reforms are established, a watershed moment; reforms tackling reforms that were not made before 2000. This encourages and creates economic factors that become a breeding ground for Mexico to begin exporting, to begin growing. If you compare the bilateral trade relation between Mexico and the US, the reality before the free trade agreement in the 90s and the present is completely different. Mexico is repositioning itself with a change of government, an alternation where the democratic conditions of the country have aligned. There is not only one political party but for the first time in our history there is communication between parties with a guiding principle establishing the political strategies and the areas of agreement among the three parties to develop a common agenda for Mexico. The famous Pact for Mexico as you said. That creates favourable conditions to pass the structural reforms Mexico requires to be competitive. You know this better than I do, Mexico is in vogue right now, Joseph Steve says so, and Thomas Friedman says so, right? He says so in his article “How Mexico Got Back in the Game”. It is very interesting; he was here in Nuevo Leon, in the PIIT, the Innovation Park.
Right, he wrote that article after that visit.
He wrote the article after that visit. Actually, it is what economic forecasts say, it is the first time Mexico has more international reserves than Canada and the UK, right? It is the first time Mexico is able to pass structural reforms to reach a potential double-digit growth. Mexico has had an average growth of 3 and 3.4%, this year it will be among the OECD members with the highest growth, the Organization for Economic Co-operation and Development. And these structural reforms, especially the energetic one, which is an area of opportunity for Mexico, lead to growth and development opportunities similar to those of the Asian block.
You have mentioned the reforms as a nuclear part of that transition or confidence signs. Concisely, can we enlarge on these reforms, what benefits will they bring to the investment and competitive scenario? If you want to can make reference to the energetic one, and then the structural, fiscals, education, etc.
The truth is that an energetic reform does not involve structural issues that are real and inherent to the population as privatization is. An integral energetic reform involves being more efficient in energy production, right? Mexico focuses on oil refining, and now it has an opportunity. We have the world’s fourth biggest Shale gas reservoir, fields, but our organism does not have the capacity to export Shale as it exports oil. And oil is more profitable than Shale per metric unit so efforts are focused on recapitalizing refining processes in specific sectors. However, we have fields, the world’s fourth largest field, ready to be extracted, developed. That opens investment avenues for foreign capital to flow in, right?
To optimize co-investment or co-participation mechanisms to produce energy. Energy still is one of the main factors for industrialization processes. An average city consumes 20MDA. So the requirements of an industrial plant, or an iron and steel plant, for example, we are talking about more than 60MDA of capacity. So those requirements, how low is its energy cost, it is still higher than that of the US, we do not have a competitive advantage in electricity energy costs, but we do have it with gas, the famous Shale gas. Nuevo Leon capitalizes those advantages because it is close to the US. But if we had our own mechanisms to extract, process and generate energy, well, we would be on the cutting edge of competitiveness.
The Tax Reform, the Tax Reform is key and critical due to the structural scheme towards fiscal federalism. Fiscal federalism is key, how to begin delegating fiscal responsibilities to regional, state and municipal entities, right? Mexico has had a centralist federal system, right?Concentrating all the structure and under a law, the fiscal coordination law, participative tax collection, and the national tax coordination system, the redistribution to states is assigned. The last modification was made in 1988. So at that time, when assignations to entities were made, some were for redistribution, others arbitrary, but just a few were compensatory, so measures were taken to narrow the gaps. We are going to help those have more to narrow the gap. However, 20 years passed without modifying that formula, and some mechanisms appear, giving developed entities less budget. So that mechanism no longer rewards efficiency. That is the case of Nuevo Leon. It is a victim of its own success.Nuevo Leon, with 4% of the population, produces 8% of national GDP. We contribute with 8% of the budget and every year we receive 3.8 of the budget back. And each GDP point we grow reduces the federal participation we receive. And there are only five state taxes we can use. So the mechanism does not reward efficiency. The mechanism does not guarantee that local governments, our local governments last three years, design projects to develop poor housing or to reduce poverty. Because if you lower the poverty index and increase the housing level during the first year, the second year you receive less money. So it does not give municipal presidents or mayors enough incentive to make long-term development projects.
Then you can say more about how Nuevo Leon lobbied to have a more equal distribution of that fiscal burden, let’s talk more about Nuevo Leon. We mentioned before a change of paradigms, based on knowledge economy, what are the reasons behind this state’s proven competitiveness?
Look, there are four pillars of economic development. Let me say first, as Malcolm Gladwell says in “Outliners”, Nuevo Leon is a beach. It is extraordinarily different from the rest of Mexico, it is very important to begin with that.
Because on that basis we do not compete traditionally against other Mexican states. We compete against the US, China, India. When projects are outlined here we compete against Slovakia, against other economies, why? I mentioned the GDP based on production. But Nuevo Leon produces 11% of the country’s manufactured goods. With a 90 billion dollar economy we export 35 billion of them. We export more than all Central America put together. And here we have the key component, why have gone through a transformational process from traditional manufacture to mind-facture or mind-work that is reflected in the GDP per capita. When the average GDP per capita in Mexico is near 10,000 dollars, Nuevo Leon doubles it; we have a GDP of 20,000 dollars per capita. And Nuevo Leon doubles Mexico’s growth rate, it is one of the countries with the greatest growth in the OECD with a 3.5 or 4% forecast. So that is the context of Nuevo Leon compared to Mexico. Proceeding on that basis, Nuevo Leon has developed four main strategies. First, the clustering policy. A clustering policy that is different from physical clusters. It is the productive association among the state’s strategic sectors. It is a virtuous cooperation between the triple helix, the famous academy, to align the interests of private entities, has led to and moved everything through a coordinating engine, which is the State in this case. We did not invent that, we worked with Christian Ketels, or with Michael Porter from TCI, a consultant to the state. In fact Nuevo Leon has just won the World Congress 2014 of the World Forum of Clusters. It is going to take place here in Nuevo Leon next year, with the TCI, infact Christian Ketels from Harvard is the president. And those clustering models are aligned to the identification of strategic sectors in Nuevo Leon. So we based on that we develop a very simple model. Nuevo Leon no longer hands in business cards or goes to international fairs; you may say Nuevo Leon has not been publicized. We have changed the strategy. Nuevo Leon is very distrustful. We will not go there and say “Invest in Nuevo Leon” everywhere. We are not interested in any kind of investment. We leave that to China. We identify the needs of strategic sectors in the state. We try to develop SMEs to integrate them to the supply chains of big companies and if we do not find that company we align foreign investment interests to hit specific targets and integrate those production chains. The perfect example is the automotive sector. We are the national automotive capital producing 27% of all the auto parts in the country. I can mention Guanajuato and El Bajio, the region where the AWMs are. But Nuevo Leon graphically represents the logistic capital of the country. 80% of the economic activity between Mexico and the US goes through Nuevo Leon. So we do not have large assembly plants due to the cost of the land, buying 600 or 700 hectares here is much more expensive. But most of the supplier bases of the country are installed in Nuevo Leon. The North Corridor has 67% of the automotive supplies in the country. The automotive sector still has many supplies coming from abroad. So we want to develop local or regional SMEs by means of certifications, the development of suppliers and the integration of chains. If we cannot do it we will then bring foreign companies. It is the key of clustering. The second one is education and the capital per hour. We have 102 universities and higher academic institutions. We graduate more than 6,000 engineers per year, the highest number by far in the country. 60% of the platform is bilingual due to the proximity with the US. And there is a component not mention much that is the capacity to graduate technical operators, the famous “high school plus three”. Engineers are very import but the rotation of the manufacturing process, the money in certified technicians is very important too, right? We have the highest graduation rate with 11,000 technical operators annually.
You go to high school plus three more years. It is a technical course. Nuevo Leon has the highest percentage of people over 18 years with professional education and producing the highest number of education patents in the country. It has the lowest poverty index. I mean, those are conditions aligned with the education structure. I think this is one of the key strategies. 48% of the budget of Nuevo Leon is destined to education. Budget directly from Nuevo Leon, it is not what the federal government sends you. 48% of our budget is education. The third component is having the best supplier basis in the country. I have already mentioned that, but it is one of the main competitive advantages. And the fourth strategy is being a logistic platform at a national level. The connectivity there is between Mexico and the US, passing by Nuevo Leon, with the railway connectivity. Nuevo Leon is the first entry point. There are only two in Mexico, the trains Kansas City Southern and Ferromex. They cross each other, and they cross two intermodals, at least two kilometres, and there is a 1,300-hectare state territorial reserve, together with the public-private association a logistic platform was developed.
Do you mean Interpuerto?
Exactly. Interpuerto Monterrey is a logistic platform in which the state government and the federal government invested all the money to develop the infrastructure. In exchange for that the state government received 138 hectares to encourage key trailblazing companies to develop the logistic platform. It has strategic fiscal areas and it is next to the Inter Global of Kansas City, the only line with direct access to the 35 law in the US. It is located in the 16km of Nuevo Leon ring road. I mean, it is a platform we have been developing for three years. Nowadays we have already received the first investment of 90 million dollars from a company named Tubacero. That is what is coming for this project. If you put these projects together they are axis or pillars, they are the competitive advantages we see.
This is all is very flashy and speaks highly of what is dealt here in Monterrey, but what are the challenges you are about to face?
As any growing population, Nuevo Leon has had a structured growth, but a concentrated, focused one may be a competitive advantage and a great opportunity area. 85% of the current economic activity of Nuevo Leon is located in the metropolitan area of Monterrey. But we have a big challenge ahead, which is how to carry out development poles in different regions. That brings opportunity areas. So we have to develop infrastructure and human capital strategies to develop poles oriented to strategic locations. For example, the citrus area in Nuevo Leon, Linares and Montemorelos has become a development pole of the agro-food industry producing tomatoes, oranges, and thanks to the production of large companies like Sigma, Qualtia and Kellogg’s, chocolate companies that have found an interesting development niche here. We still have to develop other areas like Pesqueria Nuevo Leon, Salinas Victoria, El Carmen Nuevo Leon. We have to decentralize growth, a federalism of development. That is one of our challenges. Another challenge is keep on developing mechanisms and innovating to be on the cutting edge regarding investment. It is a key issue and we are constantly making reforms. We have reformed the job investment law. We need to be close to global changing conditions to refine our strategies. Like Turkey. Turkey is a good example of a country that was able to focus its strategies on foreign investment. The “Invest in Turkey” platform I think it is a great platform. But Nuevo Leon is developing its own strategies to pursue projects internationally.
We have read a lot about public-private partnerships, etc. Is there any instrument that you have in mind, for such a collaboration scheme but focused on the international ones?
I will give you an example with the PPP law. We have the federal PPP law, the PPP we have, now we are not looking for projects of energy production, but energy co-investment projects. For example, outside the Istmo of Coatepec in Oaxaca, Nuevo Leon has the second most developed location of wind power capacity, with a wind density between 6 and 8. And we have a PV capacity between 5 and 6. That gives us the opportunity to develop sun power and wind power mechanisms. We are working on a project with French companies. It is a NDA, to carry out co-investment projects, as the State I put the land, you put the technology in the CAPEX, we do a shared equity project and we develop a production project to provide subsidized sustainable energy to strategic investments. Not only do I give you subsidized energy but also clean subsidized energy with a social responsibility component too.
Nuevo Leon will be perceived differently from the rest of the country. Nuevo Leon does not usually give land away. Because land is not a commodity in Nuevo Leon. If you ask me why we do not have assembly plants in Nuevo Leon it is because when those plants came 50 years ago Nuevo Leon was already industrialized. Political, economic and social entry barriers were different from those in the center of the country when they almost colonized it, right? And they gave 800 ha away. Nuevo Leon’s challenge, as it does not have land to give away, is to develop integral proposals or business cases with integral competitive advantages. To work together with universities, with big companies, but we do not want to be seen as the capital of cheap human capital. If we bring an investment we like it to involve research centers and that knowledge transfer process to permeate the state. We are focusing on that.
Due to the unfair projection especially of the American media about Monterrey and Nuevo Leon, it is a constant target with certain news. Which is the image you personally want to transmit from Monterrey to the world?
The truth is Nuevo Leon has two realities. I sometimes say Nuevo Leon is a victim of its own success. As Nuevo Leon is the industrial capital it always is in the eye of the storm. We have the greatest social media penetration per capita in the country. We also have the greatest penetration of digital media, TV and radio per capita in the country. Being so close to the US we also get access to international media. So everything that happens in Nuevo Leon goes around the world. When we came here we faced the important challenge of examine if lack of security affected investment. I will share with you a presentation so you can see that the investment trend has been constantly growing even during that insecurity episode. I think the important thing is that the insecurity effect in Nuevo Leon is not endemic. It is not an epidemic crisis. It was a situational movement where a series of factors within a previous administration strategy that took the public security issue to a national security field. It changed the debate from the public order to a national security order. So the debate becomes international and the focus 100% of the attention. That is something that has to be reverted. That is why I say Nuevo Leon is a victim of its own success. It takes time to build an image and very easy to destroy it. That is one of our greatest challenges.
Keep selling us your State Rolando, what have we missed that you consider relevant for us to know to then transmit to the readers of Foreign Policy.
Nuevo Leon has been recognized this 2012 by the OEDC as the most productive state in the country. For KPMG it is the most competitive state in the country. We were the most competitive entity, with the highest business growth and company openings. To the Mexican Competitiveness Institute Monterrey metropolitan area was the most competitive in Mexico. The Financial Times, you can check the April edition, we were number six in the ranking Top Ten Latin American Cities of the Future; we are the number one in Mexico and number six in Latin America.The first one is San Pablo. We are going to overthrow it. I have not had the chance to talk to the Financial Times about the ranking. I am going to share this, there is key data. I like comparing 2012 and 2009, how it was during the crisis and how we are now. How growth is compared regarding economic data. The automotive sector is a jewel. I think it is a bastion that should be included. How Mexico compares to Nuevo Leon, how we have grown and how much the automotive sector has grown, a constant growth. We had a record foreign investment this year. Nuevo Leon has already distributed 2 billion dollars. The goal was exceeded by far. We got almost 3 million dollars, 2.75. 3 billion is our goal. We have had a 98% growth between 2009 and 2012. Our pillars, all the universities are here and all the specific programs we develop for technical courses, for post-graduate courses, all we develop. We are the state with the highest number of PhDs in the country and the highest number of PhD students.
Let’s not forget about the industrial development potential Nuevo León still has.
We have the largest number of industrial parks in the country, there are 127 industrial parks. The connections this network has, accesses to the US, railway connections, Interpuerto… At Interpuerto, with the intermodal of Kansas City Southern and the intermodal of Ferromex, we have the crossing and here they unite.
Tenigal is a huge project. It is the biggest foundry in Latin America, with a 4 billion dollar investment. It is a joint venture between Nippon Steel and Ternium. Nippon Steel and Ternium galvanized steel. It is a beast in Nuevo Leon, it is a monster, and it is the largest OEM galvanized steel supplier in Mexico. Nissan, Chrysler, GM, all of them. I will finish with something concrete, the Secretary has chosen us for a national project, we are going to use it and then we will give it to them, we will extrapolate to a national project. It is the 100% identification of a car. If we said well the automotive chain, if a car has 25,000 components, 26,000 components, we identified that 232 components are strategic and have to be produced in Mexico to be competitive. And we identify in that chain which of the suppliers in Nuevo Leon are able to produce those components, breaking down a car by specific component and piece. So we have a platform and system. I am working on that. So we divide those components and this is the summary. For example, of the body work 20 to 29 strategic components for the car are produced in Nuevo Leon by 27 suppliers. And if you click here it opens suppliers, components, certifications and it says who is it and how much the piece costs. And we are doing this in every sector but we started with the automotive sector. The breaking system, the steering system, the components, the suspension system, air conditioning and the electrical system.
When are we going to have a car made entirely in Mexico?
Making a car in Mexico requires a supplier development. The problem is not that we do not have the capacity to produce all the parts. There are three things. Maybe the suppliers we currently have do not have the necessary quality certificates to be suppliers, or maybe their size and scale do not allow them to get closer and grow. They do not have financing systems to have the capital and work to send an order to GM for example. Sometimes the big OEMs already have their supplier contracts assigned from abroad. So there are two factors. One, we need to develop suppliers, give them credits and specialize them. And two, we need to start establishing bonds. We have everything to make a car in Mexico. We have everything.
It is more or less what you are showing us. People we interviewed have told us that a great percentage of cars is produced in Mexico but assembled in the US. It says made in the US, when the identity of that car is Mexican.
It is what we are looking for. I no longer seek foreign investment with my managers; they no longer go out there to see what is coming. I say, let’s see, I need someone to produce the gear shift, I want to know what company in the world makes the gear shift that cannot make it here, and I go and tell them come to Nuevo Leon, you are going to have many clients. That is how we bring them here. That is how we work, step by step, but it is working.