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Overview of Mexico as Big Emerging Market in globalization process for purpose of exporting banking software from U.S.... More...
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Paper Abstract:
Overview of Mexico as Big Emerging Market in globalization process for purpose of exporting banking software from U.S.
Paper Introduction:
Introduction
Much attention has been given to the globalization of trade, with trade pacts being signed among European nations (the European Community), North American nations (the North American Free Trade Agreement) and the General Agreement on Tariffs and Trade (GATT) which evolved into the World Trade Organization (WTO). There are numerous reasons why American companies are eager to conduct business in other countries: diversification of risk, increased revenues and greater market presence are three. Choosing which countries in which to operate is a critical part of the decision making process when companies decide to go international, and some analysts have identified ten nations as Big Emerging Markets (BEMs). This research considers one BEM, Mexico, and the strategies for exporting banking software to that country.
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Since thehousing market in Mexico has come to depend on infusions of capital fromabroad, including from the United States, this has had a devastating effecton housing, as well.[vii] The eventual result was a sharp devaluation ofthe peso.International efforts to respond to the Mexican crisis were led by the U.S.government and the International Monetary Fund, both of which worked todevise a package of short-term and medium-term loans and loan guaranteeswhich initially reached more than $5 billion. Competition comes not only from recognizedindustrial nations, but also from developing nations and the former SovietUnion.The other major reason that companies consider the international economy isthe availability of markets. Such a strategy can help companiesquickly penetrate both markets, a key advantage when companies are dealingwith new technologies, or when they want to establish a market dominantposition.One such joint venture exists between U.S. New York: McGraw-Hill, Inc, 1994.Stober, Richard. Builders." Tierra Nueva for U.S. This researchconsiders one BEM, Mexico, and the strategies for exporting bankingsoftware to that country. This enablescustomers to perform more complex transactions than traditional banking byphone, and offers greater flexibility to banks as a result. Mexico's economy since theloan package has witnessed severe changes as the government seeks to dealwith the deleterious effects of the devaluation. Can Profit From NAFTA." Management Review 82 (March 1993), 11-13.Rugman, Alan and Richard Hodgetts. RisksThere are considerable risks in any business venture, and the risks becomegreater when the venture undertaken is one in a foreign country. Under Secretary ofCommerce for International Trade Jeffery Garten identified the followingten nations as BEMs: Chinese Economic Area (including China, Hong Kong andTaiwan), South Korea, Indonesia, India, South Africa, Poland, Turkey,Brazil, Argentina and Mexico.[i]The reasoning behind BEMs is that these economies have the infrastructureand the population demographics as well as the economic policies in placeto help ensure their continued expansion. It is important to remember that the company hasa strong presence in the United States, and it is able to subsidize itsentry into the Mexican market for several years through this domesticmarket. Amanufacturer of high technology equipment is unlikely to market to areaswhich have little or no infrastructure to support that equipment, forexample. It is for this reason that thecompany marketing the software must be secure in its ability to survivewith or without the Mexican venture.In fact, the company must be willing and able to ride out some period,possibly years, in which the Mexican venture does not pay off, or whenrevenues from the venture are not to the company's expectations. "Caterpillar Exports to Mexico Rise in First Six Months of 1994." PR Newswire, 14 September 1994, 914NY 58.Terpstra, Vern. One of the firstprojects that the joint venture will pursue is commercial vehicles designedspecifically for Mexico's urban delivery market.The fact that there are numerous American companies already doing businessin Mexico means that the company will benefit from their experience andalso from the financial and economic infrastructure which they have putinto place. The competition facing companiesdomestically is increasingly from foreign firms. The austerity measures are designed to preventan inflationary spiral, deal with the country's current account deficit,and resume economic growth as soon as possible.[viii]Unemployment is expected to increase significantly in 1995; inflation isofficially projected to rise to 42 percent and the economy to contract by 2percent. Since the company willbe dealing with banks, this would not be a difficult transaction toaccomplish. This contributed to a growing current accountdeficit which reached $29 billion by the end of 1994, equivalent to 8percent of Mexico's gross domestic product (GDP). J. IntroductionMuch attention has been given to the globalization of trade, with tradepacts being signed among European nations (the European Community), NorthAmerican nations (the North American Free Trade Agreement) and the GeneralAgreement on Tariffs and Trade (GATT) which evolved into the World TradeOrganization (WTO). Americans, for example,purchase cars and electronics made in Japan, ham and golf carts from Polandand shoes from Brazil. Bremner, Background Notes: Mexico. This is not software that ispurchased at the local computer store; instead, it requires customizationto meet the exact needs of each customer. In addition, these larger banks are likely to have betteroverseas contacts which, in today's poor currency environment, means thatthey are better suited to finance the purchase. "Tierra Nueva for U.S. Marketing the ProductThe product will be marketed as a premium product which is designed to helpbanking institutions reduce their costs (a primary influence given thecurrent state of the Mexican economy) and increase their productivity andcustomer service. There are domestic regulations to consider,regulations in the destination country, the logistics of moving the productto the destination country and successfully building a marketing programthere, and problems with foreign exchange.[iii]Despite these difficulties, an increasing number of companies are marketingon an international basis.[iv] There are two primary reasons why they dothis: competition and markets. Because of this, the short learning curve will beemphasized. Can Profit From NAFTA," ManagementReview 82 (March 1993), 11.[xiii]Rugman and Hodgetts, 398. The year 1994 ended with anunexpectedly strong attack on the peso and the emergence of a financialcrisis in Mexico which fell to the new Zedillo administration and affectedemerging markets throughout the world.[vi]An overvalued currency, combined with a diminishing inflationary gapbetween Mexico and its main trading partner, the United States, madeimports relatively cheap. However, its infrastructure and commitmentto long-term growth remain strong, and it should be a promising economyover the next decade. Over the long-term (ten years),these economies are poised for growth that the more established economiescannot expect because they are more mature and at a later stage ofdevelopment. The mostobvious risk to this venture in the short-term is the risk of the currencybeing devalued even further, or the Mexican government defaulting on itsobligations. During the same period, the public debt washalved, and inflation fell from 15 percent in 1987 to 12 percent in1992.[xii] These moves indicate that the Mexican people and government areeager to improve their international financial standing and attractinvestment to the country. Mode of EntryBecause the company writes its own software and because the software iscustom to each customer, the company would essentially export its goods tothe Mexican economy on a case by case basis. "Home-Building Opportunities in Mexico." Real Estate Finance Journal, Spring 1995, 21-23.-----------------------[i]Jeffery Garten, "Big Emerging Markets," World Traders, December 1994,14.[ii]Ibid., 15.[iii]Vern Terpstra, International Dimensions of Marketing, Boston: PWS-Kent Publishing, 1989.[iv]Alan Rugman and Richard Hodgetts, International Business, New York:McGraw-Hill, Inc., 1994, 37.[v]James Aley, "Tierra Nueva for U.S. Typically, these economies are inthe so-called developing nations. A misstep could easily move one ofthese nations out of BEM status and another nation, such as Russia, in.Because of this, companies are well advised to consider carefully theeconomy they are entering and whether or not the company can survivepotential downturns in the economy, whether for a short or extended periodof time.[ii] The ProductLike many companies in the Bay Area, this company writes banking software;specifically, the company writes software which enables banking by phone,but which also provides voice recognition for authorization. In this way, the companywould protect itself against additional weakening of the peso on the openmarket; since it is unlikely that the peso will significantly gain strengthover the length of the contract, this offers the American company the besthedge against the foreign exchange risk.[xiii] PricingThe price for the banking system would be set just below competitors'pricing. The Mexican EconomyDuring the early 199 s, improving economic conditions in Mexico and theapproval of the North American Free Trade Agreements offered significantpromise to the Mexican housing market. Washington, DC: U.S. Because it has strongrelationships with its American customers, and because banking is largelyan international business with domestic banks having contacts abroad, thecompany has been able to gain strong leads in Mexico. International Dimensions of Marketing. Boston, MA: PWS- Kent Publishing Company, 1989.Tresnak, George. However, the hourly ratewhich the company charges for its time and the support rate can be comparedagainst its competitors, and can be priced competitively in order to gain afoothold into the market. If the company can sell the productand have it installed in the largest banks, it has a much better chance ofusing the bandwagon effect to sell the product to lower-tier bankinginstitutions. "Big Emerging Markets." World Traders, December 1994, 14- 18.Peak, Martha H. Electricar and Group IndustrialCasa (CASA). Two of the more seriouseffects are accelerating inflation and shifts in the balance of payments.In March 1995, the Mexican government instituted a series of austeritymeasures, including sharp cutbacks in government spending, increases in thevalue-added tax, and increases in the price of gasoline and energy, as wellas a tight monetary policy. Arebel uprising in the southern state of Chiapas, two high-level politicalassassinations, and several kidnappings of prominent businessmen for ransomcaused investor confidence to decline. Even in today'shigh technology environment, expanding into the international market comeswith significant difficulty. Atthe same time, Mexico City suffers from extremely poor air quality, andthere are incentives available there for companies that can switch todelivery vehicles that help reduce the air pollution. In addition,because more services can be automated, the bank reduces the number ofemployees that are needed and, because there is less human interaction,there is less chance for human error.This product has been installed with success in the United States, and thecompany is now looking to export it abroad. The focus will be on improving the level ofcompetitiveness which the banks can obtain by using the software.Above all, the ease of use and the rapid training time will be stressed.No productivity tool is worthwhile if it cannot be learned quickly by thosewho are going to use it. Builders," Fortune, 9 August 1993,24.[vi]M. Thisis because of the cost associated with the product as well as the imagethat the company wants to maintain. Even the dire actions taken by Zedillo supportthis in that the president is willing to undertake painful actions in orderto shore up his country's currency.However, this does not mean that the endeavor in Mexico is without risk.To protect itself from severe currency fluctuations, the company couldrequest that it receive payment in dollars rather than pesos, which wouldprotect it against the fluctuations in the market. This strategy results incompanies that have production facilities in both countries as well asdistribution facilities in both. Various economic reform programs culminatedin the reduction of inflation from 132 percent in 1987 to 8 percent in1993.[v]However, any country's housing situation is directly related to itseconomic stability, and Mexico's economy is in a state of disarray. Big Emerging MarketsThe concept behind BEMs is that there are a number of economies which willgrow faster than established economies. This was upfrom $82 million in 1993. J. Market opportunity and growth is certainlypresent in foreign countries, although purchasing power can vary greatly.For many products and services, companies are turning to thediversification that international marketing brings. The company credits NAFTA and the reduction oftariffs that affect Caterpillar products as well as an overall improvementin the Mexican economy for the growth. There are severalSpanish-speaking employees at the company, and a willingness to enter thisdynamic market. ConclusionMexico is the closest of the BEMs, but also one of the more risky becauseof its current economic crisis. Fortune, 9 August 1993, 24.Bremner, M. International Business. Although the crisis and the austerity measures are painful, theyoffer the best hope that the crisis will be short-lived. Market SegmentsThe market segments which the company will target are the largest banks inMexico initially, followed by penetration to the next tier of banks. In the firstquarter of 1995, Mexico had a trade surplus of about $88 million, comparedto a deficit of more than $4 billion for the same period in 1994, a hopefulsign that Mexico was on target to virtually eliminate its current accountdeficit in 1995.[ix] American Companies Doing Business in MexicoThe North American Free Trade Agreement (NAFTA) was intended to greatlyfacilitate increased trade between Canada, the United States and Mexico.Because of NAFTA, but also because of improvements to the economicinfrastructure undertaken by Ernesto Zedillo in the 198 s, a number ofAmerican companies are now doing business in Mexico.One of the major American companies to benefit from NAFTA is Caterpillar,which saw its exports to Mexico increase 77 percent in the first six monthsof 1994 when compared with the same period in 1993.[x] The company sold$145 million worth of machines, engines and parts in the first half of1994, most of which came from American production facilities. It is a costly system, and onewhich requires expert on-site assistance. Because of this, the company can take a loss leader position inorder to gain market share while building a niche for its product inMexico. By subsidizing expansion efforts in Mexico with ongoingAmerican activities, the company should be able to protect itself and itsinvestment in this Big Emerging Market. These systems do not have retail prices that can be compared oneagainst the other because each system is written specifically (or undergoesextensive modification) for each institution. However, the long-term promisein Mexico is exciting and offers an attractive opportunity.Prior to the current financial crisis, Mexico had taken significant stepstoward improving its economic situation. Not onlydoes this offer a greater prestige factor, but it also provides theinstitutions with the security that this is a tried and tested product andnot a new experimental program that has yet to be tested in the field. "How the U.S. The products will bedistributed in the United States as well as Mexico and Central and SouthAmerica.Zero-emission vehicles are of particular interest to Californians(Electricar is based in Santa Rosa, California) because the state hasmandated stringent air quality regulations by the end of the century. The financial institutions in Mexico are among thegovernment's leading creditors, and any downturn in the economy as a wholehas a direct effect on their fortunes. Mexican officials worked withAmerican housing developers as well as domestic developers to improve thehousing supply in the country. In this way, the company will not need to reinvent itsbusiness, but can take advantage of the inroads already made by others.The presence of American companies also means the presence of Americanvisitors who are used to the convenience that banking by phone offers.This can help create a demand for the service which might not otherwiseexist. The benefit to Caterpillartranslates into benefit for its employees: exports to Mexico in 1993 and1994 supported 13 jobs for Caterpillar workers in the United States, andmore than 27 jobs for employees at Caterpillar's suppliers in the UnitedStates.[xi]Some American companies are pursuing joint ventures with Mexican companiesin order to take full advantage of NAFTA. Introducing and marketing products abroadincreases the company's overall market share, and is thus a competitivedecision that many companies are turning to.When a company begins considering the possibility of internationalmarketing, or when it evaluates a current international marketing program,it must take into account the characteristics of the destination country(including demographics, purchasing power and political considerations). Companies who are interested in long-term success shouldconsider business in the BEMs because they may well represent the singlemost important economies in the coming century.However, the very fact that they are growing at a rapid pace and are notyet fully developed makes them risky. In addition, the ability to reduce the workforce and thusinhibit costs will also be key, although with unemployment already a severeproblem in Mexico, this benefit will be kept to the highest decision makerswho will not themselves be threatened by the implementation of the system.Another feature that will be emphasized is the fact that the system hasalready been implemented in a number of large American banks. The companies announced in October 1994 that they woulddevelop, manufacture and market several thousand "zero-emission" electricvehicles and buses over the next several years. As American managers speak with their Mexican counterparts, theyare likely to indicate that such technology is expedient and convenient forcustomers, and thus help create demand in the economy. In 1994, U.S. But the balance ofpayments situation was increasingly untenable, which caused capital toleave the country and foreign exchange reserves to dwindle. Under President Carlos Salinas deGortari, the number of publicly held companies fell from more than 11 in1982 to just over 2 in 1992. Choosing whichcountries in which to operate is a critical part of the decision-makingprocess when companies decide to go international, and some analysts haveidentified ten nations as Big Emerging Markets (BEMs). End Notes BibliographyAley, James. Inthis way, the institution can be assured that it is receiving a productwhich will work to its expectations and that it will not be paying for thecompany to learn its business. Department of State, May 1995.Garten, Jeffery. Washington, DC: U.S.Department of State, May 1995, 8.[vii]George Tresnak, "Home-Building Opportunities in Mexico," Real EstateFinance Journal, Spring 1995, 21.[viii]Bremner, 8.[ix]Ibid., 9.[x]Richard Stober, "Caterpillar Exports to Mexico Rise in First Six Monthsof 1994," PR Newswire, 14 September 1994, 914NY 58.[xi]Ibid.[xii]Martha H. International MarketingInternational trade is possible because companies are willing to take onthe expense and difficulties associated with the process. Builders. There are numerous reasons why American companies areeager to conduct business in other countries: diversification of risk,increased revenues and greater market presence are three. Because of this, building a market presence in thehighly lucrative banking industry is an important opportunity which shouldnot be missed. By marketing to avariety of nations, a company is not so severely affected by a downturn inany one country's economy. Peak, "How the U.S. Politically, however, it could raise significant problems forthe banks, the Mexican government and thus the company since theramifications of a bank not backing its own transactions with the nativecurrency could be significant.Instead, the company might consider taking payment in the form of a forwardcontract in which the bank agrees to pay the terms of the purchase atagreed upon dates for agreed upon exchange rates. This isbecause of the great disarray that the country is currently in, and theeconomic morass in which it finds itself. Background notes: Mexico. This would require that thecompany remain based in the Bay Area, although it might open a sales officewith some technical representatives to provide local technical support oncethe company becomes established in Mexico.
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