China and Mexico: The Two Amigos? Part IV

In my first post, I discussed China’s efforts to build stronger economic ties with Mexico – and why Mexico should be clear-eyed about China’s motives. In my second post, I examined the current economic relationship between Mexico and China. In my third post, I explained why the economic relationship between China and Mexico has made so little progress. In this, my fourth and final post, I will look to the future and discuss how to improve the China-Mexico business relationship.

My first piece of advice is for Mexican companies to be realistic about what China wants and what China is truly prepared to do. Just because China offers itself as an alternative to Trump’s America doesn’t mean it is the right alternative, or even a good alternative. Every country has its own agenda and it would be foolish to think otherwise.

Beyond that, every Mexican company should ask itself if it is truly ready to do business with China, and every Chinese company should ask itself if it is truly ready to business with Mexico. It makes no sense to talk about strategic partnership without companies the right companies that are willing and able to profit from a reinvigorated relationship between the two countries. And in my company’s experience, there is a lot of work to be done on both sides, including the following:

• Companies must adopt corporate governance principles and incorporate due diligence into their everyday processes to ensure compliance with the other country’s laws and regulations.

• Mexican companies must make IP protection their top priority and register their copyrights, trademarks, and patents in China as soon as practicable. This advice applies whether they are directly operating in China or are merely operating in the US, Europe, or any other jurisdiction that would put them on the radar of a Chinese squatter.

• Executives must understand not just the relevant laws in the other country, but also the cultural mores and unwritten business rules – and the implications for their company. Mexican executives need to realize that they are both in charge of the Chinese operation and accountable for it. Similarly, Mexican companies should balance the obvious need to hire Chinese nationals with the need to retain personnel (probably expats) who “get” China but also understand Mexico’s business culture and are truly on the side of the Mexican company. This sort of cultural fluency is in many ways more important than language fluency.

• Mexican companies must move beyond the idea that they are direct competitors with their Chinese counterparts. Instead they should either engage in further specialization, or move up the value chain. Patents and trademarks and geographic indicators/appellations of origin can play a key role in differentiation. But being different only goes so far – if you don’t have a product Chinese consumers want, being different is irrelevant.

• Companies on both sides need the support of their respective government, as well as the counsel of qualified international lawyers. Many of the deals I see today have neither, but as the monetary value of the deals goes up, the rest will/must follow.

Almost all of the above address what private companies can do. But the Mexican government has a role, too. It needs to implement an effective economic agenda, and maintain progress toward North American integration.

An effective economic agenda involves more investment in trade intelligence and entering into trade and investment policy negotiations with China that are derived, as much as possible, from the political and ideological considerations that have characterized China’s relationship with many commodity-producing countries in our region. At the same time, Mexico needs to rise up the global value chain, and that requires investing in infrastructure, facilitating trade, and improving the quality of accreditation.

It may seem odd to talk about further North American integration against the backdrop of Trump’s rhetoric against NAFTA and against globalization. But China has long been the de facto 4th member of NAFTA and it’s silly to pretend otherwise. And given the enormously important economic ties among the NAFTA countries, a purely bilateral agreement (i.e., solely between China and Mexico or China and the US) seems increasingly unrealistic.

My company’s bottom line is that we cannot wait to see what Trump does or doesn’t do. Or for that matter, what China does or doesn’t do. China is not going to replace the US as Mexico’s largest and most important trading partner. Each Mexican company’s China strategy should be stand on its own terms. Mexican companies should expand into China because it makes sense to do so and because they think they can succeed there – not because they think China is going to replace the US as Mexico’s most important trading partner.

 

The above post is by Adrián Cisneros Aguilar. Adrian is the founder/CEO of Chevaya (驰亚), an Asia-Pacific internationalisation services company. Adrián has a Doctor of Laws from Shanghai Jiao Tong University and an LL.M. in International and Chinese Law from Wuhan University.

China Law Blog

China and Mexico: The Two Amigos? Part IV

China and Mexico: The Two Amigos? Part III

In my first post, I discussed China’s efforts to build stronger economic ties with Mexico – and why Mexico should be clear-eyed about China’s motives. In my second post, I examined the current economic relationship between Mexico and China. In this post, I will discuss why the economic relationship between China and Mexico has made so little progress.

At first blush, it is difficult to understand the disjunction between what has been said and what has actually been done. The two countries have signed an Integral Strategic Partnership, and China has explicitly offered its assistance should the Trump administration turn its back on Mexico. The Chinese ambassador to Mexico has claimed the two countries’ relationship is “better than ever,” but trade and investment levels are pitifully low, and for a variety of reasons those numbers are unlikely to change.

One huge reason Mexico’s relationship with China is unlikely to change is the existence – and proximity – of the United States. The United States has a huge (and growing) Hispanic population eager to consume a vast array of Mexican exports, whereas Chinese consumers are only interested in a few select Mexican products. Just look at the numbers. Mexico’s annual exports are worth $ 400 billion, and $ 291 billion of that goes to the United States. Only $ 8 billion goes to China. The American government has not exactly welcomed China’s attempts to establish closer ties with Mexico, and there are strong rumors Washington played a big role behind the scenes in the cancellation of the Mexico City-Queretaro rail and the Dragon Mart Cancun projects. Even if the Mexican and U.S. governments are not currently best of friends, our two countries will always be neighbors.

It is also true that Mexico and China have little economic synergy. China is Mexico’s direct competitor in the United States and for many of the same products. According to a study produced by UNAM, the University of California, Berkeley and the University of Miami, from 2000-2011 both the U.S. and Mexico suffered substantial losses in their respective export markets in the NAFTA region. The study identified 52 sectors in Mexico in which the U.S. was losing market share and China was gaining, creating the inference that Mexico was making efficiency gains and had become more competitive in U.S. markets. However, the study found that Mexico was also losing market share in the U.S. in those same 52 sectors. In other words, China was outcompeting both countries — in part because of its advantage in manpower and its government subsidies.

The disconnects are on both sides. Mexico has failed to attract meaningful investment from China and instead focuses on Chinese tourism. Chinese companies have made little effort to do anything in Mexico beyond selling products to Mexican consumers. Mexico has failed to take advantage of China as an export market and has fallen back on sending China non-value added items such as tequila, pork, and fruit. The Chinese government does not make it easy for Mexican companies to enter the Chinese market. And China’s economic model depends on being able to run huge trade surpluses. Combine with this the devaluation of the peso and the rise in gas prices, and the result has been inflation that makes Mexican exports less attractive overseas. According to the Inter-American Development Bank, Mexico’s exports fell 4% in 2016.

Part of the problem has nothing to do with China and everything to do with Mexico. 99.8% of all businesses in Mexico are small and medium-sized enterprises (SMEs) and the vast majority of them are unsophisticated companies, with little interest in or knowledge of how to operate on an international scale. When these companies do seek to engage with China, some (or all) of the following problems arise:

• lack of due diligence about the Chinese market and possible business partners
• poorly implemented corporate governance structures
• failure to appreciate the paramount importance of IP protection, evidenced most often by discovering too late that a third party in China has registered “their” trademark
• lack of cultural and language proficiency on the part of Mexican staff, leading to an inability to deal with Chinese authorities
• inappropriate delegation of all responsibility for Chinese operations to poorly supervised Chinese staff
• lack of transactional oversight due to (relatively) low dollar values

And though more and more Mexican nationals are going to China for education and training, few Mexican companies know what to do with them upon their return to Mexico.

Perhaps the biggest problem Mexican companies face in China – and frankly, the same problem bedevils Chinese companies going abroad – is that they think they can operate overseas the same way they do at home. I still remember the first matter I handled with my company: a Mexican enterprise was operating in China, but had no idea about their legal status in China or whether they were operating legally. Everything from company formation to payroll had been delegated to their Chinese accountant, and as a result they had hired staff without any written contracts, they were not contributing to social insurance or housing funds, and they were paying everyone in cash. It was just a matter of time before they were found out and had the book thrown at them.

Finally, a nontrivial number of Mexicans (and some Chinese) consultants want Sino-Mexican relations to remain in this relatively primitive state, because this will allow these consultants to continue as “indispensable” founts of wisdom and knowledge in an uncertain world.

The one bright spot is the .02% of Mexican enterprises which are not SMEs. These enterprises are the huge multinational corporations known as multilatinas, and they are already operating in China as part of their global strategy. Some of them are already selling more goods in China than in the U.S., and to a one they plan to focus even more on the Middle Kingdom in the years to come. They would not be doing this if they weren’t already doing well in China. As global companies they consider themselves able to compete on the global stage, and you know what? They’re right.

In my concluding post, I’ll look to the future and specifically on how to improve the China-Mexico business relationship.

The above post is by Adrián Cisneros Aguilar. Adrian is the founder/CEO of Chevaya (驰亚), an Asia-Pacific internationalisation services company. Adrián has a Doctor of Laws from Shanghai Jiao Tong University and an LL.M. in International and Chinese Law from Wuhan University.

China and Mexico: The Two Amigos? Part III