Five Things Investors Should Know Before Investing in Mexico
Entrepreneurs are attracted to big problems that can be solved through technology and innovative business models. And in Mexico, we have big problems poised for disruption. Luis Cervantes, Managing Director at General Atlantic and head of the firm’s Mexico office, points to five things investors should know about the country’s economy and market dynamics.
01
Mexico is experiencing a wave of entrepreneurship
Starting in 2015, our thesis for Mexico was to invest in established family-owned businesses. We were the first institutional capital behind Sanfer, a pharmaceutical company established over 80 years ago. Fast forward to today, and more than half of our Mexico portfolio consists of companies that hadn’t been founded when we started investing 10 years ago.
Entrepreneurs are attracted to big problems that can be solved through technology and disruptive business models. And in Mexico, unfortunately, we have big problems including the lack of financial inclusion, lack of access to quality healthcare and education, and high levels of fraud. These problems create huge opportunities for entrepreneurs.
02
Nearshoring is creating long-term opportunities despite near-term volatility
Labor costs in Mexico are already more than 15% cheaper than in China.1 In 2023, Mexico became the largest exporter to the US, surpassing US imports from China by 11%. It will take some time for the trend to fully materialize, but some cities in the North, such as Monterey and Tijuana, and some sectors, such as industrial real estate, are already seeing significant benefits from nearshoring.
That is not to say that this will be a smooth ride. I think we will see a period of volatility in the short term as new policies are discussed and some potentially enacted.
There are three main issues in the relationship between the US and Mexico: illegal immigration, drug trafficking, and trade. All will need to be addressed at the same time. Solving those issues rapidly would be a net positive for the US and for Mexico.
03
Mexico is experiencing a rapid digital transition
Until a few years ago, Mexico’s telecom sector was a monopoly. That monopoly was broken by regulation, attracting new entrants from around the world. Competition resulted in data costs that are now competitive.
Mexico’s digital economy remains behind its regional peers, but we are now starting to see the results of lower costs. E-commerce penetration in Mexico is at 9%. The US, by comparison, is over 20%.2 We’re at an inflection point because the infrastructure for digital companies has now been created. Data costs have decreased by over 40%.3 Internet penetration is close to 80%. Last-mile delivery networks and payment systems have been built.
04
Fintech will remain a big driver of change
Mexico has a very concentrated, underpenetrated, and highly profitable banking sector. Regulators are now more open to competition, and technology has reduced the cost to serve previously unbanked customers. Companies are now able to create credit models that allow them to tap into a part of the population that did not have access to credit before – resulting in new disruptors. For example, we have invested in Clip, which is now the leading payments company in Mexico, and Klar, which is the largest digital bank to come out Mexico.
05
The Mexican economy is evolving – and so are its companies
One of the main challenges in Mexico is economic concentration. Established businesses are very powerful and conservative in the way they invest and innovate. It’s the entrepreneurs, the disruptors, that are creating growth in many industries. Allowing and encouraging more competition will, over time, drive innovation and growth in many sectors, much as it did in the telecom sector.
By 2030, we expect Mexico to be a top 10 global economy with significant adoption of digital platforms and financial services. The most valuable public companies in Mexico by then will be tech-first businesses and newer businesses that were created over the last 10 to 20 years.
1NovaLink. “Is It Cheaper to Manufacture in Mexico Than in China?” NovaLink, https://novalinkmx.com/mexico-manufacturing-advantage/manufacturing-in-mexico-vs-china/is-it-cheaper-to-manufacture-in-mexico-than-in-china/.
2World Bank Open Data (December 2022)
3World Bank Open Data (December 2022)
Contributors
Luis Cervantes
Managing Director
Head of Mexico Office
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