Although it is said Mexico has caught the attention of the International Community for its multiple opportunities, you have mentioned Mexico depends too much on the American market, that the peso is overvalued, that monopolies keep high prices and that inequality is excessive. How can we mingle these two pictures of Mexico? Do you agree with the International Community that Mexico is experiencing a turning point in its history?
What I have been trying to transmit is that Mexico’s economic indicators have not been good in the last 30 years. And there’s evidence about that fact. There has been a 2.2% growth in the last 30 years, 300,000 people have been given a job but we need that figure to be one million, the poverty index is growing, salary inequality keeps growing. The inequality between Mexico and EEUU keeps growing.
I agree we are going through a turning point, but to take advantage of it we have to implement the right measures. These measures should not come by default. The stars are aligning for Mexico so things can work better. I do not claim victory without results. We still have to see that. Stars are aligning as I said because there are several situations that benefit Mexico. First of all, the administration has already recognized that the productivity has decreased in the last 30 years by 1.7% whereas Korea’s productivity has grown an average 2.5% annually. There are still low wages, poverty, inequality and lack of opportunities for our people. That first step is great. So first we need to recognize our internal issues, and then turn to the macroeconomic situation. The macroeconomic situation of Mexico is very healthy. There is low indebtedness and high reserves. The financial balance of Mexico is very good. It has everything it needs to grow. Another reason, its closeness to the US. The US is debating about the price of energetics. I believe there is a strong industrial resurgence and that will impact on Mexico by default. Mexico is well located in the logistic chains with the US due to the free trade agreement between them, to its proximity, to the logistic situation, the near shore. Another item is that labor cost in China is becoming more expensive, also by default. The proximity between Mexico and the US, freights, the logistic part, and Mexico plays a significant role to own that logistic chain with the US. There are other important actions done by this administration. One of them is the Pact for Mexico. You are aware of the reforms they have passed and which reforms are about to be passed. The last two reforms, the fiscal and the energetic one, are the most important ones. The others are also important but they are not as necessary.
Another positive thing is that the administration has a proactive attitude and it is receptive to opinions and ideas to see how things can be done better. For example, they created the National Productivity Council and before that the National Development Plan. The National Development Plan was developed with the input of all the different areas in Mexico. It is a very clear and specific document as in regards of what should be done, problems and solutions. That was unthinkable before.
The 2013-2018 development plan took into account suggestions or recommendations, such as China’s disloyal practices.
They’ve done many things. They created a Productivity Council mainly made up by state secretaries and the presidents of business institutions aimed at increasing productivity. Furthermore, the President announced a couple of weeks ago the creation of an Advisory Council for Economic Growth where the president was appointed as honorary president, the secretary of the Treasury was appointed, as well as the secretary of Economy, the secretary of Tourism and the SEMARNAT (Secretary fot the Environment and Natural Resources).
They are five. It is a formal council for economic growth and there are five businessmen, they have not been appointed yet, nobody knows who they are going to be but they have already established how often they will meet, etc. I believe that is very good.
Mexico is passing the necessary reforms, they still have to be applied, but they are taking the steps, they are listening to the citizens and civil institutions and macro indicators have improved. That should also include the energy reform. The energy availability in the country is low as in Texas. So we need to pass the energy reform to take advantage of that. Now we are at a privileged position with a promising potential for the future.
I thought you were going to articulate a more pessimistic speech. I mean, what you’re saying is Mexico needs to admit what is wrong and look beyond to what seems to be all right by default.
I want to draw a distinction, results have been bad. And what we have so far are not results but promises.
They have taken the first, second and third steps out of 100. There are things we get by default, things we have to work for and I have already mentioned the reforms. But even if we do everything it will not result in the 6% growth we need. Mexico needs to grow 6% annually to make a million people enter the labor market. If we want to recover part of what we’ve lost in the last 30 years we need to grow by 7 or 8%. It is said we are pursuing a 3.5-4.5% growth. I am more aggressive in that sense. With that growth, we may be better here but it is not enough, there will be more poor people if we do not create a million jobs and we do not want more poverty.
Taking into account what you mentioned about the re-industrialization of Mexico, in his report Jeremy Rifkin proposes five necessary pillars to encourage a third industrial revolution and I wanted to ask you what are Mexico’s strengths and weaknesses beyond the alignment of stars you just mentioned.
What I mean is that apart from those things that are being done; we need to drive Mexico through industrial development. History shows all the countries that progressed from a medium or low level to higher levels did so by means of industrialization and innovation.
Industrial development in Mexico is necessary not only with an export approach but focused on the domestic market. So far we have been import-oriented and exporting our imports does not work. We import to assembly, we seem to be a low income country, with low wages. That is perfect, there is demand now. But we have to look into the future to figure out how by means of industrial development we can generate technological innovation and drive the country to higher wage levels. That is what I believe.
You seem to mention all the flanks in which Monterrey is already immersed. I would like you to talk about the added value of Nuevo Leon. Why all these industries have established here? What makes Nuevo Leon different from other states?
Well, Monterrey has always been a booming and quite industrial city. Our roots are industrial. When Cuauhtémoc Brewery and Fundidora Monterrey came here almost at the same time in 1898 or 1900 there were 50,000 inhabitants in Monterrey. The city grew because of those industries. I mean, that is our origin, just add the fact that Monterrey is a liaison point between the rest of Mexico and the US. It is a very important logistic point. During WWII provisions needed by the US were concentrated in Monterrey. The US was sending so many supplies to the war that it needed more. So Monterrey has been an important logistic point for the American market. The industrial roots together with the logistic points are the reason why we have so many industries.
We are following an editorial line focused on the transition from manufacture to “mind”-facture, as well as on new industries that may contribute to Monterrey branding such as nanotechnology, biotechnology, etc. Do you believe Nuevo Leon will keep strengthening and empowering those industries?
Of course. We already have an industry cluster. We already have industries producing airspace parts. It is not large but it is important. The University of Nuevo Leon has an aeronautic course. Steps are being taken to develop plane maintenance services, etc. to train technicians in those specialties. We have Jaime Parada’s PIIT, several labs, research centers, foreign and national universities participating in the development of nanotechnology. Monterrey is a cluster.
And what are the short-term challenges for this city-cluster? Where do you identify bottlenecks and challenges ahead for Monterrey?
Insecurity, well, that is doing alright, it is improving and we have the example of the civil force. What businessmen have done together with the government to create that police has been an example for many. I believe the challenge is investment. We need more investment, but not only foreign but national investment as well.Foreign investment has been coming somehow, but one the fact is the total investment in Mexico, regardless of all the FDI, has not increased. Investment as GDP percentage has decreased. 30 years ago it was 24% and it has never been higher than that. Thus, we need more financing and the financial reform is also bringing this subject up.
We keep reading news about DEACERO, etc. and we see DEACERO will do a deep incursion in the car branch. It is one of its targets. We have read it will supply all the steel parts for a car. The car industry seems to be one of the most competitive sectors and one of the most productive.
Let me go back to what you asked me about Monterrey. Apart from attracting more national investment, one of the challenges is to work together with foreign companies here to substitute imports competitively.
The market is here, the factory next door is already consuming imported products, but you cannot supply it because you lack incentives, growth. That is something I have mentioned. China can bring it with disloyal competition because the currency is undervalued, why should I produce it, it is easier to import it and sell it.
Or the manufacturer may say I will import it from China because they will not be competitive here. We have to be more competitive together with the government’s public policies to substitute imports competitively. That is another challenge and it is not only Monterrey’s but everybody’s. The car market. In the last 30 years it has been said that the best industrial policy is the one that does not exist. It is one of the reasons why we should have an industrial policy to increase our industrial development emulating what Korea, China, Japan did, what the US and England did. Within that scheme of having no industrial policy the only industrial policy that existed was as regards the car industry. The industrial policy of Mexico was based on promoting the car industry. This industry has been growing fast and has the potential to keep growing quite fast in the next 5 years, together with the logistic chain with the US which has an amazing potential. The challenge is how to increase the national content of those producers here. In the case of the car sector the national content stands for less than 30%. That is related to what I mentioned about promoting or boosting a competitive substitution of imports. The car industry has been a success, I think it will continue being a success and it can result in a bigger branch within the internal market if we take advantage of the competitive substitution of imports and we increase growth in the country. In DEACERO we have been developing wire and steel products. The steel we manufacture is destined to products for construction, agriculture and industry. Construction products stand for 40 or 45%, agriculture products for 30 or 35% and industrial products for 20%. Inside the industrial branch there are many sectors, but we have grown especially in the car sector because we produce many specialties for it. For example, we produce airbags. They are made of wire, the bag has a powder device and the material, the plastic has wire around threaded around to keep it oppressed. It is all threaded so when it explodes the wire is destroyed and the bad comes out. We produce spark plugs, wire for spark plugs, seat parts, steering wheel reinforcements which have wire inside so it does not break. We have developed many products and we will develop more.
I mean, it is a niche that still gives benefits. You mentioned the building branch, infrastructure. I did not know you were involved in building highways. They have less concrete and fewer workforces are needed because of the engineering mesh.
We manufacture many products for infrastructure and especially for highways. One of them are the guard rails made of wire, there are also some made of a galvanized sheet, but we introduced the cable ones here in Mexico because we did not have the technology. We developed the technology, took it to other countries. It has many advantages because it takes you back to your lane instead of going to the other side or jumping. It is like an elastic band. This is very interesting and we are selling more of them. We also have the antiglare mesh for the center of the road made of wire with PVC plastic and slope meshes. When roads are opened mountains have to be cut, so we have meshes to hold back the material. We have the technology to make roads more efficient with an engineering welded mesh designed according to loads and types of roads, etc. they are made of high resistance steel and specific engineering depending on the type of land, etc. Money is saved with cheaper highways which are more resistant and last longer. Thus, we also contribute to sustainability.
You mention the economic relationship Mexico has with the US needs to be changed. In that sense, The Free Trade Agreement, that has been perceived as the true jewel of Mexican exchange, should be exchanged for what kind of agreement?
It is connected with the competitive substitution of imports. Mexico should not pretend to be an assembly country with low wages. We need to integrate it productively or having more production in Mexico.
I am very interested because you mentioned one of the competitive advantages of Mexico against China is that wages are lower in Mexico. On the other hand, we have the dichotomy that the fact that wages are low has to be changed and the domestic demand is affected by low wages. I mean, what distinguishes Mexico from China, how can it make that qualitative jump? I Think that what he means is that Mexico should not base its economy on that competitive advantage. The fact that China has higher wages now, is given by default. Mexico should become competitive because of its industrial procedures, or because its energetic advantages, not because of its cheap labor.
Exactly. It’s like she said. China increased wages because it is sophisticating its industrial production. So China is producing fireworks and cars, tractors, buses, a series of national products that are helping to increase productivity and pay better wages. Having better wages involves an increase in productivity and innovation, sophisticating your products. It should not be a competitive advantage. Thus, we will innovate and try to increase our own production. We will try to produce more sophisticated goods, not just assembling them, why don’t we create our own brand of trucks, cars, even planes, biotechnology and those branches. We should improve productivity and increase national product sophistication to have better wages. We could still be competitive like the US. The US will always be competitive even if they pay higher wages than us.