Mexican Industrial Policy, Hand in Hand with Opening the Economy?

Interview with José Luis de la Cruz, director of the Institute for Industrial Development and Economic Growth

By: Susana Sáenz Arelle

Mexican Industrial Policy, Hand in Hand with Opening the Economy?
In an interview with Comercio Exterior, José Luis de la Cruz presents an overview of the Mexican industry, draws attention to its heterogeneity, the scarce incorporation of national content to exports, and the lack of internal production chains. We are at a level of such low growth, he points out, that a well-structured industrial policy and well-targeted support would set up a scenario that would drive growth between 4 and 6 percent each year. For the purposes of the country’s development, that would make a big difference.

What is the general outlook of the country’s industry one year after the lockdown decreed by health authorities?

The Mexican industry is facing a very complex outlook as evidenced by the little over 10% decline seen in 2020. A drop of this magnitude had not been observed in many years and can be attributed to, in essence, the performance of the export sector (especially manufacturing linked to trade in North America) and that of construction (highly affected by lockdown and the cancelling of several important projects).

However, we must highlight that the health and economic crisis found an already weak industry. Average annual growth in the last two decades was only 0.8%, even lower than population growth. Going forward, export-oriented manufacturing already shows signs of reactivation, but the scenario is not encouraging among the companies that serve the domestic market, at least in the first months of 2021.

 

What is the industry experiencing regionally and in sectors as a result of the crisis?

There has been a general downturn regionally and in the sector. In all states of Mexico, apart from Tabasco, industrial activity declined in 2020. Of the four major components of national industry, construction registered the greatest decline with -17%, followed by manufacturing with -10%. Mining, and the production of electricity and water also report downward trends.

In the specific case of construction, civil engineering works suffered because all government levels could no longer support already authorized projects. A decline of over 20% is reported in this particular niche. This trend is also seen in building, especially in the residential segment, as well as in the construction of offices and other real estate for businesses. We must not forget that construction is a thermometer of the environment that prevails in the business conducted in Mexico. Ultimately, its behavior reflects the willingness of the remaining sectors to invest in the construction or rehabilitation of houses, offices, factories, warehouses or roads.

We see encouraging signs in the manufacturing of computer equipment, as well as in the electrical and electronic industries, largely associated with the moderately positive evolution of exports. There is also a rebound in auto industry activity, recently hampered by a global shortage of integrated circuits. The production of food, beverages and tobacco is also recovering. However, the generation of electricity and gas is still an uncertain ground because current investments are insufficient to reactivate the activity.

 

What is the recovery of the country’s industrial activity expected to be like? What production activities will recover more quickly and which ones will take longer?

A good part of the activities aimed at the foreign market is already showing signs of reactivation. This is also seen in the manufacturing of machinery and equipment, in the aeronautical industry and in the manufacturing of electrical appliances, screens and other final export goods. Later, we will see a reactivation of construction and manufacturing oriented to the domestic market. This recovery will be minimal because the basis of comparison will be low, and it will correspond to the most critical months of 2020. Hence, we will see as of April positive data that will undoubtedly extend to—at least—September or October of this year. Reactivation will boost the consumption of electricity, gas, and water, essential for industrial activity. We will then see if the Mexican energy sector has the capacity to adequately meet demand. The part that perhaps shows a little more lag is everything industrial linked to oil extraction. Because of characteristics of its investments, with longer maturity, results will most likely begin to materialize around 2022 or 2023.

 

Is there a risk that the heterogeneity characteristic of the country’s industrial fabric will be accentuated with a recovery under the terms you describe?

You have just hit the nail on the head. Crises test the adaptability of businesses. Digital manufacturing, cloud work, artificial intelligence, and e-commerce are technologies that offer business solutions to face the challenges of the current economic crisis. We see that large companies—and some smaller—around the world are speeding up their transition to the digital world to defend and expand their market share. Just to give you an idea, China’s industrial activity grew 35% at an annual rate, and that of manufacturing grew almost 40%, between January and February of this year. Many of these large transnational companies operate in Mexico and they do so with similar parameters of efficiency, technological innovation, and promotion of human capital, so they will surely recover more quickly. The great challenge of the ongoing economic crisis is to prevent small and medium-sized Mexican companies from lagging behind; we must seek the most appropriate support to accompany their recovery and democratize the digital leap.

 

What specific measures would you recommend to integrate a greater number of Mexican companies into the dynamics of export markets?

First—and at no expense to the government—would be to guarantee a level floor; i.e. imports should meet the same requirements that are asked of Mexican companies. I include here everything from labor rights, pollutant emissions, to ensuring that prices reflect market costs—without subsidies or foreign exchange tricks. These are common supervision and regulation practices that would guarantee fair and beneficial competition for companies in the country, and at no cost to the treasury.

Second, emulating one of the measures implemented in the United States and in other countries to promote the reactivation of their economies, is to set a minimum national content for the materials required for emerging infrastructure construction programs, thus favoring national suppliers. This incentive does not cost the treasury anything either because, at the end of the day, these supplies are already budgeted and they have to be purchased.

Third, to promote the competitive substitution of imported raw materials; and guarantee adequate energy prices, security, the rule of law, and better logistics so that the goods produced in the country compete in price and quality with those that we import today. Financing is also very important, particularly that provided by development banks to boost strategic sectors. With all these three measures, Mexico would take firm steps to build a more robust and dynamic industrial sector. Industrial policy holds a prominent place among the actions taken by governments around the world to reactivate their economies. It has long been successful in China, Korea and Vietnam, and is now openly promoted by the governments of the United States, France, Germany, and other European Union countries. It is a modern industrial policy that, without renouncing international trade or economic openness, seeks to generate better conditions and provide direct support to drive the international competitiveness of companies.

 

Increasing national content in exports is one of Mexico’s biggest challenges. Has this increased or are we still a predominantly maquila country?

Only between 25 and 27 percent of the value of Mexican manufactured exports corresponds to local content. Three-quarters of their value is incorporated outside our borders. As a country, we specialize in phases of the production process with low added value, simple assembly of components, and this reality has not changed substantially in recent decades. But that’s a big area of opportunity. One of the paradigms that are rapidly spreading throughout the world is precisely promoting the construction of production capacities that expand value creation and capture in global chains. That’s the kind of transition that Mexico should aspire to. It takes time, but the 2020 crisis message is obviously that we must work quickly to increase the transforming capacity of Mexican companies, especially small and medium-sized, and transform their reality with more efficient processes, better machinery, and more competent human capital.

 

Does Mexico boast the conditions needed to implement an industrial policy? What are the most important elements of your proposal?

Yes, it does. President López Obrador has said that he agrees to have a more active industrial policy. What is missing at the moment is that it be generated from the State. Secretary of Economy Tatiana Clouthier has expressed—as has Undersecretary of Commerce Héctor Guerrero—the convenience of implementing an industrial policy in the country. So there is a favorable environment and willingness—at least—to leave behind the unfortunate times when it was said that the best industrial policy is no industrial policy. The international environment is also favorable. In many countries of the world a series of measures are put into practice to strengthen their industrial fabric and it is done openly.

We believe that an industrial policy with a social vision should be promoted; its ultimate objective should be balanced economic and social development that closes gaps. It should promote harmonious growth that energizes all sectors, but pays special attention to those activities and regions of the country that show the greatest lag. Second, this industrial policy must focus on people and promote an economic model that promotes inclusion and social well-being. Regarding this we must have three very clear concepts: we must go towards greater national content, towards greater added value, and towards a greater linkage of Mexican companies. To be sustainable, we must strengthen productivity, competitiveness, and the quality of our production processes. This is where elements such as development banking come in to finance strategic sectors and public-private partnerships to promote sectors in which there is overlap. Also important is seeking that public investment and spending promote what has been done in Mexico and, finally, a solid education system that promotes knowledge and generates new technologies.

 

What innovative measures are being taken around the world to strengthen the industrial fabric and how could they be adequately applied in Mexico?

The current United States government, our main economic ally and member of the USMCA, considers industrial policy a relevant element of its economic proposal. President Biden wants manufacturing to play an important role in economic dynamics and contribute to recovery, as it did in other critical moments in the country: after the Second World War, for example. Furthermore, we must remember that one of the objectives of the renegotiation of the North American free trade agreement was precisely to raise the regional content of manufacturing production. If the United States is taking steps to leverage this new situation, Mexico should too.

Another important partner, China, has been applying various strategies for years to boost its industrial sector; its current promotion policy deals, especially, with activities related to the digital economy. Germany and France, which have also made significant production investments in Mexico, apply an industrial policy in which their public banks play a relevant role in the development of strategic sectors. Finally, the entire East Asian region—where we can include Vietnam, Indonesia, Malaysia, Taiwan, Singapore, South Korea, and Japan—is applying, just like China, policies to promote the digital leap, through the development of Industry 4.0, 5G technology, and artificial intelligence.

 

What type of horizontal or vertical incentives should the State use to ensure that Mexico specializes in the goods and services, and the phases of the production process that contribute the most to economic growth? 

In a country of stark contrasts such as Mexico, a broad set of measures is required. In regions such as in the south-southeast—Chiapas, Guerrero, Oaxaca—industry is not mature enough and the horizontal policies aimed at ensuring a level floor are insufficient. In these cases, direct support is required to promote strategic sectors and regions, accompanied by measures that boost the development of an ecosystem of innovation and technological development. It must be a comprehensive policy, where horizontal measures are complemented with vertical ones to adequately meet the specific needs of each region, with the ultimate purpose of closing gaps. Some sectors are only going to demand very timely support, and others will need broader actions. 

On the supply side, we have to support innovation, technological progress, education, and industrial development. Regarding regulations and other elements of demand, we must create the conditions for the market to incorporate more products made in Mexico.

 

The automotive industry worldwide is moving towards a new techno-economic paradigm. Are the appropriate measures being taken to defend and expand the international competitiveness of automotive manufacturing established in Mexico?

The automotive sector has its own dynamics. The most important automotive and auto parts manufacturers in the world are established In Mexico and they operate, for the most part, with state-of-the-art processes and standards. However, a national supply chain will be needed, in which small and medium-sized companies participate, to maintain this trend in the new global environment and, above all, to increase the national content of automotive manufacturing. I believe that the necessary actions are still not being taken to incubate and develop these types of companies. Inertia helps, but conditions have to be created to increase attraction and not lose market presence, which occurred last year.