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Mexico a regional hub for neighbouring markets

At Business Sweden we see an increased interest in establishing operations in Mexico, not only to cut supply chain costs and better serve the Mexican market, but also to supply the NAFTA free trade markets and other neighbouring markets, like Cuba. Business Sweden in Mexico has supported several Swedish companies in decreasing time-to-market and lowering risks by performing greenfield analyses that propel international growth.

One Swedish company that has taken advantage of the beneficial conditions in Mexico is Suzuki Garphyttan. The company develops and manufactures advanced spring wire from various alloys for applications where the quality and performance requirements are extremely strict. Business Sweden stepped in to assist Suzuki Garphyttan with its expansion strategy in Mexico.

“Due to a strong growth of our customer base in Mexico, Suzuki Garphyttan decided earlier this year to start a greenfield production site in Guanajuato. We based our decision on an extensive assessment of the different states within Mexico (made by Business Sweden) in which many different variables such as labour and logistics costs, safety and availability of educated labour were evaluated,” says Jan Pieters, CEO, Suzuki Garphyttan AB

Cost competitiveness in Mexico outperforms many other markets

Today, the direct average cost of production in Mexico is lower than in China. Indeed, the wages per hour in the Mexican manufacturing sector are 40% lower than in China, according to Bank of America Merrill Lynch. 

Graf Mexico

Impressively, Mexico’s manufacturing cost structure improved the most of any of the 25 economies in Boston Consulting Group’s latest Global Manufacturing Cost-Competitiveness Index. A recent report from KPMG compares international business location costs across more than 10 mature markets and over 100 cities in Asia, Europe and the Americas. Mexico City and Monterrey outperform all included markets and cities, respectively, as the most competitive in terms of business location costs.

Move with the geopolitical forces shaping the world, and participate, or stick your head in the sand and pretend they are not happening.

Martin Sorrell, Founder and CEO of WPP

In addition to favourable conditions in Mexico, new developments have improved the attractiveness of doing business in Cuba. U.S. President Barack Obama’s visit to Cuba in March 2016 is the first presidential visit in 88 years and a milestone in the relations between the two countries.

The removal of Cuba from the “State Sponsors of Terrorism” list in May 2015 and the subsequent easing of economic restrictions imposed by the U.S. are undoubtedly the most critical game-changers for the Cuban economy in the last century. The projections include boosted international trade and improved access to foreign financing. Business Sweden recently published a report about the business climate in Cuba.

Cuba - open for business?

Benefits

Easing of economic restrictions imposed by the U.S.
Although the complete lifting of the embargo requires a vote in the U.S. Congress, it is expected that the easing of restrictions will continue throughout the remainder of Obama’s mandate.

New law for foreign investment
Though some clauses remain highly constraining, and control by the state is to remain prominent, the new law adopted in March 2014 provides a much more favorable and pragmatic framework than the previous 1995 regulations for foreign investment, especially in the Mariel Free Trade Zone.

New investment opportunities
In 2014, the government presented a vast list of projects offered to foreign investors. The ‘Cuba Portfolio of Opportunities for Foreign Investment’ includes 246 projects seeking over 15 BUSD of capital. It covers critical sectors such as energy, food, construction, pharmaceuticals, biotechnology, and others, while placing a particular emphasis on developing the Special Zone of Mariel.

Challenges

Currency and financing risks will increase
The Cuban exchange rate system is complex, featuring two coexisting official currencies (the CUP and the CUC) with different (fixed) exchange rates. The government has already expressed its will for unifying the exchange rate system. However, no concrete steps have been taken, as unification might lead to drastic economic adjustments, with high economic and social costs.

Political and business climate risks to remain high
The desired ‘upgrade to the Cuban economic model’ by President Castro will require strong support from the ruling party. Foreign investments will remain tightly controlled by the State, with most foreign ventures requiring majority Cuban ownership. Despite the positive developments, the Cuban economy will remain rationed and mostly State-driven, as labor, wages and price controls will remain in place.

Credit risk to be watched intensely
In the short-run, non-payment risks by Cuban companies will remain high. Sweden’s export-credit agency EKN rates Cuba’s country risk class as 7/7 (high risk).

Promotion of foreign investment is key for the process of updating the Cuban economic model

Cuba’s foreign investment strategy is focused on export and import substitution industries, and eliminating bottlenecks in production lines, favoring modernization, infrastructure and technological development. It has been estimated that to achieve the targeted growth rates of GDP, Cuba will have to attract foreign investment flows of between 2 BUSD and 2.5 BUSD annually. In line with recognizing the importance of foreign investment for economic development in the country, Cuba has taken actions to enhance the strategy, such as:

  • New Foreign Investment Policy
  • New Law 118, Law on Foreign Investment, and the issuing of its supplementary regulations
  • Creation of the Special Development Zone Mariel
  • Publication of the Portfolio of Opportunities for Foreign Investment

Business Sweden sees business opportunities for Swedish companies in Cuba in a number of sectors, such as Manufacturing, Energy, Tourism, ICT and Healthcare. Cuba is still a very complex market where local knowledge is key. Access to public statistics is restricted and sometimes unreliable; therefore, the sources for most conclusions in our report are based on direct interviews in Cuba with foreign companies and government representatives, as well as external market intelligence reports. 

Business Sweden’s office in Mexico City – covering Mexico, Central America and the Caribbean – has a team of business consultants with extensive market knowledge and experience of promoting Swedish commerce in the region. Over the last several years we have supported business entries and growth in various sectors, such as Healthcare & Life Sciences, Energy and Environmental Technologies, Telecom and IT, Automotive and Transport Systems. 

Get in touch – we are happy to help!

Read the full report about cuba here

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Olof Hällerman

Trade Commissioner México, D.F Trade Commissioner, México, D.F
+52 55 9126 3432
E-mail olof.hallerman@business-sweden.se