Interview with Britain's Ambassador to Mexico, Duncan Taylor CBE

With strong growth prospects, a rapidly expanding middle class and exciting economic reforms, Mexico has become an emerging market investment darling. So far UK plc has been slow to take advantage but LatAm INVESTOR caught up with the new British Ambassador to talk about the challenges and opportunities of investing in Mexico...

Mexico has a large, diverse economy but where are the most exciting opportunities for British investors?

The automotive and aerospace industries are two very important areas for us here. We have many companies that are in the supply chain for the large car and aviation factories in Mexico. That goes from big names such as GKN and Rolls Royce, right the way through to smaller outfits like JJ Churchill. Your readers may not realise it but Mexico has become a major car producer, the 4th biggest exporter in the world in fact. Now it’s looking to build on that success and develop a specialist aerospace sector. In Baja California there is a firm making whole aircraft but generally the strategy seems to be for producers looking to become part of the supply chain of Boeing and Airbus.

Britain's Ambassador to Mexico, Duncan Taylor CBE

In terms of UK exports to Mexico the biggest single area is machine tools. And given the rapid pace of industrial growth here there is potential for more of the same in the future. Another, perhaps less recognised sector is retail. There is a growing middle class, which is very brand conscious. That creates great opportunities for Britain’s luxury retailers.

"All in all it’s a fascinating time to be here in Mexico and I expect to see more British companies and investors coming over here to be part of this story… "

One area that is quite small at the moment but, in my opinion, has real potential is the creative industries. It’s a part of the Mexican economy that is growing very quickly as the government is keen to encourage internet entrepreneurs and is even building a tech hub, Ciudad Creativa Digital (Digital Creative City) in Guadalajara to foster more development. Given that this is also a growing area in the UK, where London’s TechCity has made some great gains, there is potential for collaboration between the two countries.

Finally I’d like to highlight education. It’s an area that we are traditionally strong in and one that drives lots of exports to emerging markets. Here in Mexico there is a real appetite for British education services. One reason is that the Mexican people are Anglophile, and generally like the UK. For example more Mexicans go to study in Britain than anywhere else in Europe. Worldwide we are the second destination after the US, which dominates for obvious reasons. Interestingly among those students who get scholarships from their governments the UK is the number one destination. We are now working to build on that. We are involved in several programmes to improve the quality of English language education here in Mexico and we are also encouraging links between the universities of the two countries.

Do you think that UK plc is aware of the opportunities in Mexico?

There is a considerable misperception about Mexico, which is summed up by the reaction to my appointment here. When it was announced I received emails from friends of mine. Those who didn’t know Mexico commiserated and asked ‘what did you do to end up there’. But all those who know the place, said, ‘wow you lucky so and so, that’s great’. The people who knocked Mexico aren’t idiots, they just don’t know about the country. Their perception comes from the little bits of Mexico that are reported in the UK papers, which is mostly drug crime.

Crime remains a problem in parts of Mexico

If you look at the stats you’ll see that while Mexico has security problems, they are not as bad as the common perception would suggest. For example I heard the governor of Puebla speak the other day and he noted that in his state there are 7 homicides per 100,000, while the wider Mexican average is around 10. Now both of those are a bit high compared to a worldwide average but they are far lower than other, supposedly safe, places. For example the homicide rate in many US cities is far higher. But we don't have the same perception of those cities as being dangerous because they get into the news for lots of other reasons. So there’s a big misunderstanding out there and its something that both governments are determined to overcome.

The fact is Mexico is a huge, incredibly diverse place. There are serious security problems in some areas but they don’t impact your daily life in most parts of Mexico. Moreover, when I speak to British businesses that are out here, they are delighted to be doing business in Mexico.

What about corruption? Many international business people say that it’s a big problem here.

It’s something that I have asked British businesses. They say that it’s not a problem, but of course they are hardly likely to tell me if they are giving bribes! But I have had frank discussions with several business people who tell me that corruption here isn’t as bad as other places in the region.

The feeling that I get is that it is an issue that affects smaller businesses more. I think larger ones perhaps have the clout to brush it off. It also may be more of an issue with local government than with the federal government.

The Mexican government is setting up an anti-corruption commission, which shows their commitment to improve the situation but of course trying to stop corruption is a bit like turning around an oil tanker – it takes time. You have to start at the top. You need a government that is committed and sending credible signals that it is committed to stamping out corruption, and Mexico has that. It will also be interesting to see what effect the UK bribery act has. It is actually a very radical piece of legislation that means any British person anywhere in the world can prosecuted for giving or receiving a bribe. Even more far reaching is that directors can be prosecuted for not doing enough to prevent corruption from taking place. It’s a new piece of legislation and still very early days but it will be interesting to see how it pans out.

2013 was a strange year for the Mexican economy - plenty of important reforms were passed but economic growth slowed. Are you optimistic for more progress this year?

Yes I am. There is no doubt that economic growth was a disappointment [growth in 2013 is likely to come in at 1.3% compared to expectations of 3.5%] but I think that most commentators accept that there were some one-off factors that affected Mexico’s performance last year. With the Sixenio system that they have here it is pretty typical that growth slows down in the months leading up to a new government. There is a very long lame duck period between the old government knowing that it is leaving and the new one taking over. When they know they are leaving it is natural that they take the foot off the peddle in terms of investment, while businesses may wait for the new administration. There is also a lag when the new government comes to power as the new officials need time to sort their budgets, priorities and teams. Meanwhile the effort of passing all those reforms may also have distracted the government and prevented it from other business.

But I am very optimistic for this year. Not least because of the significant achievements towards the end of last year with the energy reform. For me personally energy is very important because UK industry is in a key position to take advantage and it could be a game changer for our interests.  The Mexican part of the Gulf of Mexico is one of the last untapped huge oil and gas provinces left in the world.

Mexico's chunk of the Mexican Gulf has great potential

We already have British success story in Petrofac, which blazed a trail here under the old contract system. British majors, BP and Shell, are also active in the country and will relish the opportunity to work with Pemex. Another factor to remember is that whoever ends up investing and developing the Gulf will need sub-sea services and equipment. The UK industry is a world leader in the sub-sea oil and gas exploration sector with 40% of the global market.

However, it is important to recognise that the lead-in times for these projects are very long. We’re talking about developments that might not happen for 10 or 15 years. In the short-term British investors can look to the reforms in the telecommunications or power generation sector. Indeed Virgin Media has already signalled its interest.

Impressive as these reforms are on paper, a lot of the detail still needs to be worked out. Do you think that Pena Nieto can deliver these reforms in the face of some substantial opposition?

I think he can because fundamentally I believe that these reforms will benefit the Mexican people. There is a feeling here that Mexico must change. In the last few years economic growth has been slow, while productivity growth has been close to 0%. If you look at Mexico and compare it to somewhere like South Korea over the same timeframe it feels like Mexico has been treading water while competitors have marched forward. The poverty level in Mexico today is about 50% which is more or less where it has been for the last 30 years. Now the thinking is that Mexico needs to open up the closed markets that will provide the growth that will allow it to deliver the social improvements needed. If the economists are right these reforms will help turn 2.4% average annual growth of the last 30 years into a growth of 4% or 5% for next 20 years. If that happens then Mexico will not just climb up world economic league table but will reduce poverty and solve social issues.

The key for the government now is to implement these reforms. Another vital task is to get the message across to the public. They look to be doing that by focussing on the short-term reforms - such as using competition to cut phone bills or electricity tariffs – that will have a quick, positive impact on people’s daily life. The government is also advertising the benefits of the reforms, so that people understand what they are about.

Energy is a very sensitive topic here. It was nationalised with great pride in 1938. However, the world has changed and the right legislation and regulations can ensure that energy reform improves the lot of ordinary Mexicans. But it’s not just the government that has a message to deliver. British companies entering these sectors also need to be aware. Anyone coming here needs to be careful of how they present themselves as there are people who will want to see them as rapacious foreigners who want to take as much as they can.

All in all it’s a fascinating time to be here in Mexico and I expect to see more British companies and investors coming over here to be part of this story.