Mexico’s industrial recovery in 2004 has resulted in booms in several sectors. While some portions of the country’s economy are struggling, sectors such as homebuilding, automotive, cellular telephones, medical devices and electrical power are expected to remain major growth areas for the coming year.

Homebuilding

        “Mexico’s housing sector, and specifically the low-cost segment of the market, represents one of the premier investment opportunities in the world today,” said John Ganschow, founder and CEO of Mexico Home Capital. “The basic supply-demand fundamentals underpinning this market are extraordinary, and this translates into exceptional risk-adjusted yields for our institutional capital partners, which they cannot find today in the U.S. or overseas.”

        Mexico, the world’s 9th largest economy and an investment grade credit, suffers from a severe housing shortage estimated by the Mexican government and independent analysts to be in excess of 5 million units, representing a revenue backlog of more than $100 billion, Ganschow said.  The current annual demand of 750,000 units per year now outstrips supply coming onto the market by more than 250,000 units, resulting in a continual build-up of the country’s housing deficit every year.

        “This voracious appetite for housing will continue into the foreseeable future,” he said, “and with nearly three-quarters of Mexico’s 100 million strong population under the age of 35, this intense level of demand is almost certain to be sustained over the next two decades and beyond.”

        In an effort to address these acute housing needs, Mexico President Vicente Fox has made expansion of affordable housing production one of the main pillars of his economic and social policy platforms, a philosophy that is shared by all political factions.

        “Of the various housing-friendly initiatives Fox has advanced during his term in office, perhaps the most important is his strong support for the development of Mexico’s emerging mortgage-backed securities (MBS) market,” said Ganschow.  “If this secondary market develops as we and others think it will, it could impact Mexico in much the same way as the MBS market did in the U.S. starting in the early 1980s when it triggered a prolonged housing boom that is still underway today.”

        Mexico Home Capital, Ltd., a real estate investment banking firm based in Chicago, has formed a joint venture with a new Mexico-based investment entity to develop and manage a groundbreaking institutional investment program targeting the booming Mexican housing industry.  This is the first large-scale effort to develop a proprietary pipeline of deal flow for institutional investors that encompasses opportunities across the entire sector.

        Grupo Financiero GBM, S. A. de C. V., a respected financial group based in Mexico City, is the advisor of the new privately controlled entity that will partner with Mexico Home Capital.  GBM, through its specialized investment banking business, has been a key player in Mexico’s housing industry and has participated in diverse transactions within the sector involving both the private and public capital markets.

        The new joint venture will commence activities initially by assembling funds targeting project-specific opportunities throughout Mexico.  “The country’s affordable housing sector is experiencing explosive demand, but the domestic financial system, particularly on the equity side, is not adequate to provide homebuilders with the funds they require to meet this demand,” said Carlos Valenzuela, president of Mexico Home Capital and a prominent figure in the Mexican housing sector since the early 1990’s.

        “Our joint venture, which combines Mexican investment sources with U.S. and global sources, will provide a much-needed infusion of capital into the industry and will offer significant benefits for Mexico’s homebuilders, just as it does for our institutional investment partners.  This will be an opportunity for Mexican homebuilders to access a sustainable source of equity development capital that simply is not available otherwise,” he explained.

Automotive

        Passenger vehicle sales in Mexico have doubled since 1990 and annual volumes are expected to surpass Canadian sales before the end of the decade, according to a Canadian Auto Report released by Scotia Economics.

        “Continued solid gains in Mexico reflect a large pool of potential buyers - in sharp contrast to plateauing volumes in the more mature markets of the United States and Canada,” says Carlos Gomes, Scotiabank’s auto industry specialist. “More than half of Mexico’s population is less than 25 years old compared with only 30 percent in both Canada and the United States. This represents roughly 54 million potential new vehicle buyers.”

        Despite a large pool of potential buyers, the Mexican vehicle fleet is estimated at only 19 million or 0.18 cars and trucks per capita. This compares with roughly 0.58 vehicles per capita in Canada and the European Union, and nearly one car or light truck for every driving-age American. In addition to low vehicle ownership in Mexico, the average age of the fleet is nearly 12 years - among the oldest in developed and developing nations.

        “In contrast to most of North America, the Mexican auto market is driven by small economy cars, like the Volkswagen Pointer - the best-selling model in Mexico so far this year, accounting for nearly 30 percent of the company’s volume,” said Gomes. “Even North American automakers such as General Motors - currently the market leader in Mexico, with a 21 percent market share - rely on compact cars such as the Chevrolet Joy/Swing and Corsa for the bulk of their sales in Mexico.”

        Meanwhile, Mexico’s Minister of the Economy, Fernando Canales, said Mexico believes it will double automobile production in 10 years. He predicted an additional $10 billion would flow into Mexico’s auto industry during the next decade.

        More than $2.7 billion in investments in Mexico was announced during 2004 by DaimlerChrysler, Ford Motor Co., Volkswagen AG, Toyota, and Nissan.

Cellular phones

        Consumer demand for wireless data services is accelerating rapidly throughout the world as advanced multimedia phones find their way into more users’ hands, according to a Mobilnet study of 4,500 mobile phone users in 13 countries conducted regularly by global management consulting firm A.T. Kearney and the Judge Institute of Management of Cambridge University.

        The Mobinet study reports 41 percent of global wireless phone users expect to be regular or heavy users of data services by 2005. The index looks at current and planned usage of wireless data services such as mobile e-mail, games, music downloads, photo messaging or news updates. The reported surge in user demand represents a four-fold increase in the past year and shows that these new services have reached a tipping point in terms of mass-market levels of customer interest and acceptance.

        Driving the increase are two factors. First, the number of global wireless users with multimedia phones increased to 49 percent. Second, adoption of key data services has moved past experimentation to achieve penetration rates above 25 percent among target customer segments.   

        “We are seeing huge growth and customer acceptance of wireless data services, particularly among users under age 25,” said Mark Page, A.T. Kearney vice president and leader of the study. “People have experimented with these services find they like and value them, and are planning to use them more in the future. The industry has succeeded in enthusing the market, but clear challenges remain with respect to peoples’ comfort level with using the technology more and paying higher bills.”

        Among the wireless data services experiencing the fastest growth worldwide are:

        •Photo messaging. More than one-in-five users globally have a camera phone and 53 percent of those say they use it at least once a month to send or receive photo messages. Overall, consumer use of photo messaging has tripled over the last year.

        •Entertainment. The number of multimedia phone users downloading and playing music on their mobile phones has nearly tripled in the last year to 21 percent. Some popular entertainment services such as game and music downloads are already being used by one-third of users under age 25.

        •Information services. The number of wireless phone owners using their phones to gather information such as news, weather, sports and stock quotes has jumped nearly four-fold from 6 percent in 2003 to 25 percent in 2004.

        Mobile data usage has moved beyond teens and young adults and into age categories with more disposable income: 48 percent of 35-44 year old camera phone users reported they use photo messaging and 66 percent use text messaging.

        The Mobinet data show a clear correlation between heavy text messaging use today and demand for heavy photo messaging use in the future. Operators who can get camera phones into the hands of their most active text messaging customers will realize the payoff from this higher revenue service.

Electric power

        Canadian government research shows the Mexican electric power sector offers considerable opportunities for foreign equipment suppliers and investors. The Secretaría de Energía, SENER (Mexico’s Energy Secretariat) projects that Mexico’s overall growth in demand for electricity through 2011 will range between 4.7 percent and 5.6 percent annually, which is higher than projected economic growth. This is generally comparable to the worldwide power demand growth rate of 6 percent.

        From 2002-2011, Mexico will require $50.7 billion in investment, making it an extremely important market of opportunity. Of this total, $20.78 billion (41 percent) corresponds to power generation; $11.74 billion (23.2 percent) to transmission; $9.64 billion (19 percent) to distribution; and $7.74 billion (15.3 percent) for maintenance.

        According to the Mexican constitution, CFE and its much smaller Central Mexico counterpart, Luz y Fuerza del Centro, LFC (Central Power & Light) are exclusively responsible for generating, transmitting and distributing electricity as a public service. This means that, in general, private companies are prohibited from generating power for sale to the public (whether residential, commercial, industrial or public sector) or owning or operating transmission or distribution infrastructure connected to the national grid. Instead, under Mexican law, private companies may only produce power for sale to CFE, for their own purposes (self-supply and cogeneration), or for export; or, on the T&D side, construct and maintain transmission lines and substations.

        Since the advent of Mexico’s PIDEREGAS (long-term productive infrastructure financing) program in 1997, the development strategy of CFE has been to award virtually all power generation and transmission and distribution (T&D) infrastructure projects to large private sector developers and contractors capable of financing the cost of construction (and operation for IPPs) over the medium to long term.

        Despite this clear shift to PIDIREGAS financed projects, CFE still purchases a considerable amount of equipment, materials, spare parts and related services necessary to maintain its existing generation and infrastructure. CFE pays for this investment using its annual budgetary resources rather than PIDIREGAS—its only significant non-PIDIREGAS investment item today. In 2002, these direct purchases amounted to approximately $1.2 billion.

Medical devices

        U.S. firms are the world’s largest suppliers of medical equipment and parts, with increasing domestic production. Domestic production increased 20 percent from 1997 to 2002, to $78.6 billion. Surgical and medical instrument production and supplies have grown a remarkable 22 percent and 27 percent, respectively, and make up 59 percent of the industry’s production.

        The U.S. medical equipment industry leads the world in medical device innovation due to its commitment to research and development and its close association with medical research and the microelectronics industry.

        NAFTA has improved the stability of the regulatory environment in Mexico and has encouraged U.S. investment in Mexican assembly plants and production sharing. NAFTA allowed U.S. companies to own Mexican assembly plants. Increased investment has led to cost-cutting production techniques and facilitated the introduction of new technologies in U.S. industry, and the introduction of new U.S. products in Mexico.

        NAFTA increased transparency in government procurement, which has benefited U.S. exporters of medical equipment to the growing public hospital sector in Mexico.

        NAFTA’s elimination of virtually all tariffs on medical equipment in Mexico and Canada has helped to increase U.S. exports to these countries. Today, U.S. medical equipment firms experience no significant tariff barriers in Canada or Mexico. Before NAFTA, Mexican importers of U.S. medical equipment paid nearly $100 million annually in tariff costs, including tariffs as high as 20 percent on some products. Today, U.S. firms enjoy nearly duty-free access to these markets and an average 16 percent tariff preference over competing exporters in Mexico, and as high as 23 percent on some products. For example, U.S. exports of dental and medical chairs and parts to Mexico enter duty free, while those from Japan are subject to a 22 percent duty.

        Similarly, U.S. exports of ultrasonic scanning equipment enter Mexico duty free, while Japanese and South Korean exporters are subject to a 17 percent tariff. NAFTA also eliminated several non-tariff barriers in Canada and Mexico. Today U.S. exporters benefit from uniform customs procedures, greater transparency in standards and government procurement, and stronger protection for trade secrets that have commercial value such as product processes, formulas, and customer lists.

       Medical equipment manufacturers employ 350,000 U.S. workers nationwide, up from 290,000 U.S. workers in 1992. The sector has experienced productivity increases over the past decade due to the introduction of new technologies, cost-cutting production techniques, and production-sharing with assembly plants on the U.S.-Mexico border. Wages remain relatively high in this sector and are up 35 percent since 1992.