Emerging Mexican technology businesses should take a very close look at the TechBA Program, a business incubator funded by the Secretary of the Economy of Mexico and operated by the United States-Mexico Foundation for Science (Fundacion Mexico Estados Unidos para la Ciencia - FUMEC).  In my own city of Austin, Texas, TechBA is operated in conjunction with the Austin Technology Incubator (ATI), which in turn is part of the IC2 Institute at the University of Texas at Austin, but there are also TechBa Programs in Madrid, Montreal and Silicon Valley.

TechBA is akin to a government-funded venture (not vulture) capital firm that provides money, office space, and consulting services to Mexican businesses seeking to bring their technology-related products and/or services to global markets, all in an effort to boost Mexican exports.  Now that is a great idea.

Sara Van Zee is the director of the TechBA Austin and she and her team do a wonderful job.  I am generally impressed with the entire TechBA concept, but two aspects of the Program strike me as very significant: (1) it requires Mexican businesses to physically move a portion of their operations to Austin so they develop a clear understanding of the U.S. market; and (2) it encourages Mexican businesses (that have the resources) to hire at least one high level person who is a U.S. citizen, who will share U.S. business knowledge with Mexican co-workers (this is the same advice we give to U.S. companies expanding into Mexico in relation to the hiring of Mexican citizens).  These two elements -maintaining a physical presence in the local market and hiring at least one high-level local employee who share local knowledge - seem essential for the success of almost any business seeking to expand into international markets.   

Emerging Mexican technology companies interested in participating in the Austin program should contact Sara Van Zee or Luis Medina for more information and an application.  Sixteen Mexican businesses are in residence at the TechBa Austin facility at one time; each company participates in the program for 12 months, and new companies enter the program as space becomes available. Several companies have successfully graduated from the TechBA Program.   

Home Depot (Mexico) officially opened its 9th store in the State of Mexico on June 24, 2008, as reported in El Financiero today.  Led by President and Managing Director Ricardo Saldívar Escajadillo, the report said that Home Depot Mexico currently has a presence in 44 Mexican markets and plans to open 10 additional Mexican stores in 2008, giving the home improvement retailer 75 stores country-wide.  Last year, according to the report, the company enjoyed in excess of 10% year-on-year revenue growth of its Mexican operations.

Mexico’s tremendous housing deficit - estimated by the Mexican government to be in excess of 5 million housing units - is likely a significant contributing factor to Home Depot’s success in the country.   

The wonderful opportunities for home improvement retailers in Mexico did not become apparent to Lowe’s, which is Home Depot’s principal U.S. competitor, until January 2007, when it finally announced plans to open its first stores in Mexico (3 to 5 stores in the Monterrey area) by 2009.  Lowe’s-Mexico is lead by vice president Francisco Fernández, who joined Lowe’s-Mexico after seven years with Total HOME (Grupo Alfa).  Total HOME, which operated a 4-store chain of home improvement stores, was acquired by Home Depot Mexico in 2001.

The Texas Association of Mexican American Chambers of Commerce (TAMCC) is expected to enter in to an agreement with Texas governmental agencies and univerisites on June 24, 2008 that could provide up to $100 billion of procurement contracts for Texas Hispanic-owned businesses, according to a report today in the Austin Business Journal.  The procurement contracts would encompass a range of businesses, including audio/visual, legal, construction, and video production. 

Depending on the way the proposed agreement defines "Hispanic-owned business", it could be a boon for Mexican investors seeking opportunities in Texas.  MLB will investigate and report more in a later post.

The general counsel of one of our U.S. clients called me yesterday seeking urgent advice after it discovered that certain employees of its newly acquired Mexican subsidiary were looting the subsidiary and had been doing so for at least 5 years prior to the acquisition.  The client had acquired the Mexican company, which is located in a border city, indirectly (by purchase of another U.S. company), and had not performed any due diligence on the employees or labor matters relating to the company.

It turns out the Controller and the Managing Director of the Mexican company had orchestrated the looting by "hiring" a half dozen or so managing-level employees and paying them salaries and other bonuses even though they never appeared for work.  (Lesson #1: if the number of managers of a Mexican company set forth on the company’s payroll records is high relative to the number of employees, the company may have phantom employees.)

The Managing Director, who was seconded to the Mexican subsidiary by the U.S. parent, alleged that the Mexican Mafia had carjacked him and required him to pay the phantom employees.  He said he feared for his life.  The Managing Director may or may not have been telling the truth, but our U.S. client assumed (I think appropriately under the circumstances) that he was.  The Controller apologized in a detailed written confession. 

Since the Managing Director was both an employee of the U.S. parent who was paid by the U.S. parent and a employee of the Mexican subsidiary (because Mexican law deems any person who provides services to another person an employee), we prepared release and termination agreements for him under both U.S. and Mexican law in conjunction with Mexican labor counsel. 

(Our client elected not to require the Managing Director to sign U.S. and Mexican resignations, but rather to cause the U.S. parent to pay the Managing Director a very limited severance under Mexican law in exchange for his signature of the release and termination agreements, principally because of concerns that the Managing Director could have made an argument in a post-termination lawsuit in Mexico that he was forced to resign based on the specific circumstances of the resignation, among other reasons.)

The severance payment also served as consideration for the termination and release agreement under U.S. law.  We then had Mexican labor counsel prepare terminations/resignation agreements under Mexican law for the Controller.  Our client decided (again, I think appropriately) that it would have been imprudent to require the Managing Director to obtain resignations from the phantom employees because of the possible Mexican Mafia involvement.

Lesson #2:  With the help of competent Mexican labor counsel, perform extensive labor and employment due diligence on all Mexican companies prior to any acquisition.  In most cases, problems like phantom employees can be discovered and remedied prior to closing.  Even in the absence of corrupt employees, labor and employment liabilities of Mexican companies are often extensive because of Mexico’s paternalistic labor laws and should be rooted out prior to closing.  Sometimes the extent of the liabilities merits adjustment to the purchase price of the acquisition.

The Mexican Tax Administration (Servicio de Administracion Tributaria - SAT) has determined that the employment outsourcing activities performed by certain Mexican outsourcing companies violate tax laws, according to a SAT press release dated June 16, 2007.  The violations involved the transfer of workers to various partnerships with the purpose of avoiding the required employee profit sharing, federal taxes, and social security contributions under Mexican law.

U.S. companies with Mexican subsidiaries that retain outsourcing companies should always make certain they are contracting with outsourcers that fully comply with Mexican tax laws.  If an outsourcing deal seems to good to be true, it probably is, and the outsourcer probably isn’t complying with such laws. 

In due diligence investigations pending acquisitions of Mexican companies, we have seen business structures where one or more services companies designed to lease workers to the target (and thereby enable the target to avoid employee profit sharing obligations) is organized as a partnership.  Among the problems with these structures for the acquirer is that the SAT and/or the Mexican Social Security Institute could, after the close of the acquisition, retroactively impose liability and penalties on the target and/or such affiliates for unpaid employee profit sharing, social security payments, and other obligations arising from the improper use of the partnership.

Alberto Vilar, chief executive of MetLife Mexico, S.A., forecasts 8%-10% growth in Mexico’s life insurance market in 2008, according to a report by Ken Parks of Dow Jones Newswires released on May 30, 2008. 

MetLife Mexico’s life insurance sales in Mexico totaled MN$23.08 billion (approximately US$2.23 billion) in 2007, giving the company a 30% share of the total market.  Life insurance appears poised for growth in Mexico because of the country’s young population, emerging middle class, and limited use of financial services.   

One of MetLife Mexico’s target markets is lower- to middle- income Mexicans, to which it has been selling life insurance since 2006 through a joint venture with Wal-Mart de Mexico (WALMEX.MX).

Rising oil prices should have boosted profits at state oil monopoly Pemex by $3 billion over government budget estimates, but there are no "windfall profits", reported the New York Times today.  Mexican state governors and Andrés Manuel López Obrador, who lost the 2006 presidential election to Felipe Calderón, have demanded that Pemex account for the "disappearance" of the funds.  The governors are especially interested because Mexican law mandates they be allocated a percentage of Pemex’s surplus cash for state public works projects.  Obrador is interested in anything facts that can be twisted to make President Calderón look bad.   

The true source of the missing profits appears to be Mexico’s flagging oil production and rising imports of refined gasoline (which Mexico lacks capacity to refine itself), as the article appropriately intimates.  It is no secret that Pemex lacks the money and technology to exploit Mexico’s remaining oil resources, which are are significantly depleted.  President Calderón has presented a plan to Congress to allow outside (read international) contractors help Pemex search for oil.  Hopefully the Institutional Revolutionary Party (PRI), which controls the legislature, gives him the support he and Mexico need. 

Lionel Richie said "fiesta forever", and Ford Motor Company agrees.  Ford announced on May 30, 2008 that it would commence production of its Fiesta small car at the company’s Cuautitlán Assembly Plant near Mexico City beginning in early 2010.  The Cuautitlán Assembly Plant, which currently builds large trucks (ranging from the Ford F-150 to the F-550), will be transformed to accommodate small-car production as part of Ford’s manufacturing shift to smaller, fuel efficient vehicles.  In addition to the Cuautitlán Plant, Ford has stamping and assembly plants in Hermosillo, Sonora that manufacture the Ford Fusion, Mercury Milan and Lincoln MKZ sedans, which are sold in North America, Venezuela and Brazil.

Expensive oil may continue to cause multinationals to modify supply chains, perhaps with additional positive externalities for Mexico.

Banks may be tightening commercial lending for transactions in the U.S., but U.S. and foreign banks appear ready, willing, and able to fund transactions in Mexico and many other Latin American countries on reasonable terms, including commercial real estate development transactions and leveraged business acquisitions.