Australia fast-tracks commercial ties with Mexico

Australia fast-tracks commercial ties with Mexico

by Christopher Rodwell - Trade Commissioner of Australia - Mexico Central America & the Caribbean 

5 August 2016

This week Australia’s Governor General, the Hon. Sir Peter Cosgrove, made the first ever visit by an Australian Governor General to Mexico. The first stop in a broader official program across Latin America, it commemorated 50 years of diplomatic relations between Australia and Mexico and gave significant focus to the fast growing trade and investment relationship between the two countries.

Discussions with Mexico’s President, Enrique Peña Nieto, as well as the Ministers for Foreign Affairs, Claudia Ruiz Massieu, and the Economy, Ildefonso Guajuardo, revealed both countries are fixed on a much expanded commercial relationship, realising the shared challenge of raising productivity and cementing respective and complementary positions as regional gateways.

Mexico is widely projected to be a top 10 economy within the decade for sound reason. While recent global events have underscored the risk of overly optimistic projections for emerging markets, Mexico’s fundamentals look solid. Its fiscal and macroeconomic management has generally been prudent, allowing it to sustain reasonably strong growth rates for a middle-income economy. With a reasonably young population of 128 million, its demographics are positive.

Mexico has embraced reform with commendable commitment: the OECD rates its reform agenda the most extensive of its membership. It has 13 trade agreements connecting it with 46 countries. Soon, this will include Australia as a result of the recent signing of the Transpacific Partnership (TPP). According to HSBC, Mexico will be the 6th largest trading nation in the world by 2050.

Underpinning all this is a cost structure that, according to BCG, ranks Mexico the third lowest among the Top 25 exporting nations of the world.

As companies seek to nearshore operations to the world’s largest economy, Mexico is the short odds favourite for FDI attraction. Its relationship with the US turns over at US$1 million a minute. It is responsible for two-thirds of Latin America’s advanced manufactured exports and is a world-class producer of minerals, petroleum and agricultural products. It graduates more than 100,000 engineers every year. Its health sector is a US$90 billion market, the second largest in the region. It has projected $500 billion in infrastructure spend from 2014-18.

Astute Australian firms have increasingly paid attention to this transformation in Mexico’s role as a hub for global and regional value chains and the trade & investment opportunities this affords. The prospect and subsequent signing of the TPP has certainly been a substantial trigger but not the only one. Australian boardrooms have found some comfort from the successful market entry of many top tier ASX-listed businesses, such as Macquarie Group, Orica, SEEK and Flight Centre. This activity has served to soothe fears about the complexity of the market. It also reveals the scale of opportunity on offer.

Consequently, the pipeline of Australian companies wishing to enter the market of Mexico and the immediate region has never been so awash. It is unprecedented and across a diverse range of sectors. Indeed it has been a watershed moment for the relationship, increasing total Australian investment in Mexico to more than A$5 billion.

Nonetheless, too few in Australia recognise the rising economic power of Mexico. Complacency could see us miss the opportunity to build a much deeper, more extensive trading relationship with a market that will have a seat at the top table of global economies for decades to come.

Two years have now passed since Australia sharpened its strategy on Mexico, widening sectoral coverage to better reflect the opportunities available. The change is paying dividends.

In food & agribusiness, the Australian research community and major players from the dairy, meat & livestock and wine industries have begun to investigate and build opportunities in the market. This May, the first live shipment of breeder cattle in more than eight years, numbering almost 7,000 head, arrived in Mexico.

In mining, participation in the sector has increased from less than a handful of companies to more than 30 industry leading suppliers, thanks to several targeted trade missions.

Elsewhere, following historic reform of Mexico’s energy sector, major Australian operators and engineering services providers, as well as a couple of major Australian universities with oil & gas capability, have begun to participate in the market. Macquarie Group, meanwhile, recently commissioned a hydro-electric plant and finalised commitments for Mexico’s third largest solar plant.

In fact Macquarie now manages an asset portfolio in Mexico exceeding US$3 billion, suggesting Australia’s financial services sector could well be the spearhead in transforming the commercial relationship. While only a handful of major Australian investment funds have a presence in the market, there is scope for much greater involvement if one considers both the growth and yield on offer.

In advanced manufacturing, Australia has a substantial presence, extending across the automotive, chemicals, electrical, aerospace and footwear & apparel industries. The standard bearer for Australia’s automotive supplier industry, Futuris, entered the market through acquisition in mid-2015, catalysing the interest of other significant suppliers in developing a presence. Two recent Australian Exporters of the Year are also building a stronger presence in the market.

In education, international student enrolments from Mexico to Australia increased by almost 19% a year and commencements by 23% in the past year, sustaining a multi-year uplift in student numbers. The market has also been elevated in the ‘Australia International Education 2025’ plan, thanks to the rich ‘borderless’ opportunities it provides across a range of sectors including agriculture, renewable energies, advanced manufacturing, tourism, IT and health.

Now is the time to accelerate the level of commercial activity. Mexico is no one-trick pony. It is a diverse and increasingly contemporary economy. With existing investments from major Australian pharmaceutical players as well as Australian startups and FMCG companies (whose interests traverse activewear retail, network software management, financial security and blockchain software and beyond), there is a very real opportunity for Australia to realise Mexico for what it is: a rising economy that will thrive not only because of an expanding industrial base, but because of its newfound commitment to entrepreneurialism.

Australia’s commitment to innovation has plenty of currency in Mexico. It has a thriving environment for entrepreneurship, including more than 85 venture capital firms. Australian consumer brands in particular should take note. Mexico is a millennial market powerhouse, with 40% of its population (more than 50 million people) aged between 18-35 years.

The immediate future demands that Australia reimagines its relationship with Mexico. It’s difficult, near on impossible, to find a data point that doesn’t suggest Mexico is surging towards considerably more economic power globally. It will continue to add weight as one of the world’s economic ‘gordos’ (heavyweights). As George Friedman recently commented: “Of course, most of us cannot imagine Mexico as a great power. Nor could most people have foreseen the emergence of China or the resurrection of Japan - or even the United States itself - as a great power. This is a failure of imagination masquerading as common sense.” Australia would benefit greatly if it were to take that leap of imagination.