Case Study on Sourcing Opportunities in Mexico

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Dragon Sourcing Your Tailored Approach to Emerging Markets

Study on Sourcing Opportunities in Mexico

Dec, 2017 www.dragonsourcing.com


Table of Contents ▪ ▪

Executive Summary Mexico – An Overview

▪ ▪

Mexico – Country Overview

Trade Statistics

▪ ▪

Export & Import Trade Statistics Top Export Categories & Duty Rates

▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪

Vehicles, other than Railway Electrical Equipment Machinery Mineral Fuel

Optical Products, Watches & Medical instruments Furniture and Furnishings Plastics and Plastic Parts Precious Metals

Vegetables Fruits

Trade Agreements

© 2017 Dragon Sourcing. All rights reserved.

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Executive Summary Annual Mexico’s Category‘s Growth of share of share of Exports Global Total Mexico Value Exports Exports (2012(2016) (2016) 2016)

Category

HS Code

2016 Export Value in USD Billion

Vehicles other than railway

87

88

6%

7%

24%

Electrical Equipment

85

76

1%

3%

20%

Machinery

84

62

4%

3%

16%

Mineral Fuel

27

18

-25%

1%

5%

Optical Products, watches & medical instruments

90

16

9%

3%

4%

Furniture and Furnishings

94

10

9%

4%

3%

Plastics and plastic parts

39

8

2%

2%

2%

Precious metals

71

7

-14%

1%

2%

Vegetables

07

7

7%

7%

2%

Fruits

08

6

16%

5%

1%

© 2017 Dragon Sourcing. All rights reserved.

Top Products

Cars Parts and accessories for tractors, motor vehicle Vehicles for goods transport Telephone sets Monitors and projectors Insulated wires and cables Automatic data-processing machines Refrigerators, freezers Spark-ignition reciprocating or rotary internal combustion piston engine Crude oil Petroleum oil Electrical energy Medical Instruments Regulating or controlling instruments Meters

Top Export Destinations

Import Duty into US

Import Duty into EU

USA, Canada, Germany

Free

Free

USA, Canada, China

Free

Free

USA, Canada, Germany

Free

Free

USA, Spain, India

Free

Free

USA, Netherlands, Ireland

Free

Free

Free

Free

Free

Free

Free

Free

Free

Free

Free

Free

Seats Lamps and lighting fittings USA, Canada, Luxembourg Furniture parts Packaging products Other Plastic Articles USA, Belgium, China Plates, sheets, film, foil and strip Gold Silver USA, UK, Switzerland Jewelry Tomatoes USA, Canada, Guatemala Cucumbers and gherkins Dates, figs, pineapples, avocados, guavas, mangoes and mangosteens Strawberries, raspberries, blackberries, back, white USA, Canada, Japan or red currants, gooseberries Nuts (excluding coconuts, Brazil nuts & cashew nuts)

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MEXICO – AN OVERVIEW

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Mexico – Country Overview

Country Facts (2016) Population GDP

127.5 million USD 1.046 trillion

Annual GDP Growth

2.3 %

Country Indicators

Score/ Value

Global Competitiveness Index Score

4.4

Macroeconomic environment Score

5.2

Labor Market Efficiency Score

3.8

Domestic market size index

5.7

Business Sophistication Score

4.3

Country Indicators

Mexico Ranking (out of 190)

Ease of Doing Business

49

Starting a Business

90

Dealing with Construction Permits

87

Getting Electricity

92

Registering Property

99

Protecting Minority Investors

62

Paying Taxes

115

Trading across Borders

63

Enforcing Contracts

41

Resolving Insolvency

31

Political Outlook: Mexico’s political outlook is faintly unstable due to pressing challenges such as nationwide protests against rising gas prices, the depreciation of the peso, and handling the relationship with the new U.S. administration.

Economic Outlook: GDP growth is expected to decelerate modestly to 2.1% in 2017 and 1.9% in 2018

Investment Outlook: FDI inflow was about 26.73 billion USD in 2016. USA is the major investor contributing about 44% of the total investments into Mexico. About 48% of the total investments is in the Manufacturing sector, followed by Commerce at 7%, Media and Telecom at 5%, Services at 15%, Mining at 6%, and Others 18%.

Note: Score reading: 1-7 (best)

Source: World Economic Forum, data.worldbank.org, promexico.mx © 2017 Dragon Sourcing. All rights reserved.

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TRADE STATISTICS

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Export & Import Trade Statistics

Export and Import Statistics (in USD Trillion) 0.45

0.40

0.40

0.40

0.38

0.40

Top Importing Markets for products exported by Mexico (in USD Billion) 0.37

350

0.39

300

0.35 0.25

200

0.20

150

0.15

100

0.10 0.05

50

0.00

0 2014

2015

Total Exports from Mexico

303

250

0.30

319 309

2016

11 11 10 USA

Total Imports into Mexico

Canada

6

5

5

4

China 2014

2015

4

4

Germany

3

3

4

Japan

2016

About 80% of the total exports from Mexico is to the US. Canada, China, Germany and Japan contributes to about 1% and 5% of Mexico’s exports. There is lot of export potential for Motor Vehicles & Parts from Mexico. About USD 30 billion worth market for Motor Vehicles & Parts is still untapped. Machinery market worth of USD 11 billion is available to explore.

Source: World Economic Forum, data.worldbank.org © 2017 Dragon Sourcing. All rights reserved.

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Top Export Categories & Duty Rates Top 10 export categories contributes to about 80% of the total exports value from Mexico Top Export Categories from Mexico (Values in USD Billion) 6 5

Fruits

Vegetables

6

7 7 7 8 8

Precious metals Plastics and plastic parts

10 10

Furniture and Furnishings

16 15

Optical Products, watches & medical instruments

18

Mineral fuels and mineral oils

23

Machinery

59

62 76

Electrical machinery, equipment and parts

81 88

Vehicles other than railway 0

10

20

30 2016

40

50

60

70

80

90

90

2015

Import Duty into the US from Mexico

Import Duty into the EU from Mexico

Vehicles other than Railway (HS 87 series)

Free

Free

Mineral fuels and mineral oils (HS 27 series)

Free

Free

Electrical machinery, equipment and parts (HS 85 series)

Free

Free

Electronic Equipment (HS 84 series)

Free

Free

Furniture and Furnishings (HS 94 series)

Free

Free

Category (HS code)

100

Source: International Trade Centre, US International Trade Commission, European Commission Š 2017 Dragon Sourcing. All rights reserved.

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Vehicles, other than Railway (1/2) World Export of HS 87 series (Vehicles, other than Railway) in USD billion in 2016

Export of HS 87 series (Vehicles, other than Railway) from Mexico in USD billion 100

244, 18%

86 80

90

88

2015

2016

77

60

142, 10% 686, 51%

40 125, 9% 20 64, 5% Germany

Japan

USA

88, 7%

Mexico

Canada

0

Others

2013

Top Importers of HS 87 series (Vehicles, other than Railway) from Mexico in USD billion 80

70

2014

Top Exported Products in this Category

76 74

70

60 50 40

30

Motor cars and other motor vehicles principally designed for the transport of persons Parts and accessories for tractors, motor vehicles for the transport of ten or more persons, motor cars and other motor vehicles Motor vehicles for the transport of goods

20 10

4

4

5

2

2

2

2

1

1

2

1

1

0 USA

Canada

Germany 2014

2015

© 2017 Dragon Sourcing. All rights reserved.

China

Brazil

2016

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Vehicles, other than Railway (2/2)

Baja California

Sonora Chihuahua Coahuila

▪ Nuevo León San Luis Potosi

Jalisco

Guanajuato Aguascalientes State of Mexico Queretaro Puebla

About 21 of the major vehicle manufacturers in the world have presence in 14 Mexican states. Mexico ranks 7th in the production of vehicles globally producing about 3.6 million vehicles. Gross production value of automobile and light-duty motor vehicle manufacturing in Mexico peaked in March 2017 at a worth of USD 5.35 billion In May 2017, the value amounted to USD 5 billion, up from USD 4.2 billion a month earlier Recently, Ford has announced its plan to manufacture a new electric vehicle in Mexico

Major Vehicles Production Zones in Mexico

Source: statista.com, promexico.mx, usatoday.com © 2017 Dragon Sourcing. All rights reserved.

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Electrical Equipment (1/2) World Export of HS 85 series (Electrical Equipment) in USD billion in 2016

Export of HS 85 series (Electrical Equipment) from Mexico in USD billion 100 80

856, 37%

78

80

81

2013

2014

2015

76

937, 41% 60 40

76, 3% 134, 6% China

USA

20 167, 7%

138, 6%

Germany

South Korea

Mexico

0

Others

Top Importers of HS 85 series (Electrical Equipment) from Mexico in USD billion 80 70

2016

Top Exported Products in this Category

70 72 67

60

▪ ▪

50 40

Telephone sets, incl. telephones for cellular networks or for other wireless networks; other apparatus for the transmission or reception of voice, images or other data Monitors and projectors Insulated wires and cables

30 20 10

2

2

2

0

0

1

1

1

1

1

1

1

0 USA

Canada

China 2014

2015

© 2017 Dragon Sourcing. All rights reserved.

France

Colombia

2016

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Electrical Equipment (2/2)

▪ Baja California

Sonora

Chihuahua

▪ Nuevo León

▪ Jalisco State of Mexico

Gross production value of small household appliances manufacturing in Mexico peaked to USD 20 million in March, 2017 Mexico is the leading exporter of the electronics industry in Latin America The cost of electronics assembly in Mexico is 11.9% lower than in the United States. In addition, Mexico has significantly lower operating costs for the manufacture of electronics equipment and components compared to nine other leading countries in the industry. Mexico’s costs are 13.8% lower than the United States for the manufacture of telecommunications equipment. Mexico also stands out as the country with the lowest operating costs in the manufacture of telecommunications equipment compared to nine other leading countries in the industry.

Major Industrial Zones in Mexico

Source: statista.com, promexico.mx © 2017 Dragon Sourcing. All rights reserved.

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Machinery (1/2) World Export of HS 84 series (Machinery) in USD billion in 2016

Export of HS 84 series (Machinery) from Mexico in USD billion 80

344, 18% 60

2014

2015

62

40

191, 10% 62, 3% Germany

USA

20

124, 7%

Japan

Mexico

0

Others

2013

Top Importers of HS 84 series (Machinery) from Mexico in USD billion 60

59

223, 12%

938, 50%

China

60 54

2016

Top Exported Products in this Category

▪ ▪

53 51

50

40 30

Automatic data-processing machines Refrigerators, freezers and other refrigerating or freezing equipment, electric or other; heat pumps Spark-ignition reciprocating or rotary internal combustion piston engine

20 10 0

1

1

1

0

0

1

0

0

0

0

0

0

0 USA

Canada

Germany 2014

2015

© 2017 Dragon Sourcing. All rights reserved.

China

France

2016

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Machinery (2/2)

Michoacán

Veracruz

Guerrero

Mexico is one of the largest electronics production hubs other than Asia Pacific. Electronics industry in Mexico grew at a CAGR of 4% between 2010 and 2015. Over 2010-2015, production of computers and office machinery in Mexico jumped by 27%, communications equipment – by 17%, followed by a 29% surge in electronic components fabrication. A significant share of product output, ranging from 4% in electronic components to 79% of communication equipment, was exported Growth drivers: Increasing Foreign Investments , Joint Ventures with local manufacturers

Chiapas Major Industrial Zones in Mexico

Source: euromonitor.com, statista.com, lexology.com © 2017 Dragon Sourcing. All rights reserved.

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Mineral Fuel (1/2) World Export of HS 27 series (Mineral Fuel) in USD billion in 2016

Export of HS 27 series (Mineral Fuel) from Mexico in USD billion 60

164, 11%

49 135, 9%

42

40 94, 7% 23

62, 4% 18, 1%

Saudi Arabia

Russia

USA

Canada

Mexico

0

Others

2013

Top Importers of HS 27 series (Mineral Fuel) from Mexico in USD billion 35

18

20

1,015, 68%

2014

2015

2016

Top Exported Products in this Category

▪ ▪ ▪

30

30 25

Crude oil Petroleum oil Electrical energy

20 15

14 9

10

5 5

2

2

2

1

2

0

1

1

0

1

1

0 USA

Spain

India 2014

2015

© 2017 Dragon Sourcing. All rights reserved.

Japan

South Korea

2016

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Mineral Fuel (2/2)

Coahuila

Tamaulipas

▪ Veracruz

Mexico is one of the largest oil producers in the world (2.1 million barrels per day in 2016), and the third-largest in the Americas after the United States and Canada Oil is a crucial component of Mexico's economy and earnings from the oil industry accounted for about 32% of total government revenues in 2016. Mexico is likely to keep its production target at 1.944 million barrels per day in 2017. PEMEX is the national oil company (now termed a "state productive enterprise") with a 75-year long monopoly over the oil and gas industry Mexico is likely to continue as one of the largest crude producers due to more foreign investment and expertise in the oil sector

Major Mineral Fuel Zones in Mexico

Source: export.gov, oilprice.com, forbes.com, mxoil.com © 2017 Dragon Sourcing. All rights reserved.

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Optical Products, Watches & Medical instruments (1/2) World Export of HS 90 series (Optical Products, Watches & Medical Instruments) in USD billion in 2016

Export of HS 90 series (Optical Products, Watches & Medical Instruments) from Mexico in USD billion 20

82, 15%

14

16

15

13 67, 13% 268, 50%

65, 12% 16, 3%36, 7% USA

China

Germany

Japan

Mexico

0

Others

2013

Top Importers of HS 90 series (Optical Products, Watches & Medical Instruments) from Mexico in USD billion 16 14

13

14

2014

2015

2016

Top Exported Products in this Category

15

▪ ▪

12 10

Medical Instruments (medical, surgical, dental or veterinary sciences) Regulating or controlling instruments and apparatus Revolution counters, production counters, taximeters, milometers, pedometers

8 6 4 2

0.1 0.2 0.2

0.2 0.2 0.2

0.2 0.2 0.1

0.1 0.1 0.1

Netherlands

Ireland

Canada

France

0 USA

2014

2015

© 2017 Dragon Sourcing. All rights reserved.

2016

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Optical Products, Watches & Medical instruments (2/2)

Baja California

Chihuahua

Total production of medical device manufacturing in Mexico was about USD 8.6 billion in 2011 and is expected to reach USD 15 billion by 2020, according to Mexico’s National Institute of Statistics and Geography (INEGI) Mexico’s optical sensors market is expected to grow to USD 0.64 billion by 2018 at a CAGR of 7.89% over the period 2016-2021. Optical sensors business is witnessing innovative progression, and market players have come up with exceptionally power-efficient optical sensors.

Major Optical Products, Watches and Medical Device Production Zones in Mexico

Source: tecma.com, offshoregroup.com, todaysmedicaldevelopments.com, mordorintelligence.com © 2017 Dragon Sourcing. All rights reserved.

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Furniture and Furnishings (1/2) World Export of HS 94 series (Furniture and Furnishings) in USD billion in 2016

Export of HS 94 series (Furniture and Furnishings) from Mexico in USD billion 20

88, 38%

94, 40%

10

10, 4% 12, 5% China

Germany

10

2014

2015

2016

8

17, 7%

Italy

Poland

Mexico

0

Others

2013

Top Exported Products in this Category

▪ ▪ ▪

12.0 9.0 9.3

10

13, 6%

Top Importers of HS 94 series (Furniture and Furnishings) from Mexico in USD billion 10.0

10

9.7

Seats, whether or not convertible into beds Lamps and lighting fittings Furniture parts

8.0 6.0

4.0 2.0 0.3 0.3 0.3

0.1 0.1 0.1

Canada

Luxembourg

0.1 0.10.05 0.04 0.03 0.03

0.0 USA

2014

2015

© 2017 Dragon Sourcing. All rights reserved.

Japan

Brazil

2016

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Furniture and Furnishings (2/2)

▪ Zacatecas

▪ Jalisco State of Mexico

Total furniture production is about USD 16.5 billion in countries of Latin America and the Caribbean. Brazil and Mexico alone contributes to about 70% of the production in that region. Mexico is the 2nd largest producer and 2nd largest consumer of furniture in the Latin American and Caribbean area accounting about 18% of the total production in the region Revenue in the "Furniture & Homeware" segment in Mexico is about USD 708 million in 2017. It is expected to reach USD 1,484 million in 2022 and resulting in a CAGR of 16%.

Major Furniture Production Zones in Mexico

Source: statista.com, furnitureandfurnishing.com, worldfurnitureonline.com © 2017 Dragon Sourcing. All rights reserved.

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Plastics and Plastic Parts (1/2) World Export of HS 39 series (Plastics & Plastic Parts) in USD billion in 2016

Export of HS 39 series (Plastics & Plastic Parts) from Mexico in USD billion 10

62, 11%

8

9

8

8

2015

2016

62, 11%

59, 11%

326, 60%

28, 5% 8, 2%

China

Germany

USA

South Korea

Mexico

0

Others

2013

Top Importers of HS 39 series (Plastics & Plastic Parts) from Mexico in USD billion

Top Exported Products in this Category

8 6

6

6

▪ ▪

6

4

2 0.2 0.2 0.2

0.1 0.1 0.2

0.3 0.2 0.2

0.1 0.1 0.1

Belgium

China

Colombia

Guatemala

2014

Articles for the conveyance or packaging of goods, of plastics; stoppers, lids, caps and other closures, of plastics Other plastic articles Plates, sheets, film, foil and strip, of non-cellular plastics, not reinforced, laminated, supported or similarly combined with other materials, without backing, unworked or merely surfaceworked or merely cut into squares or rectangles

0 USA

2014

2015

© 2017 Dragon Sourcing. All rights reserved.

2016

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Plastics and Plastic Parts (2/2)

▪ Nuevo León

San Luis Potosi

Guanajuato Jalisco State of Mexico Queretaro Puebla

Total Local Production of Plastics and Plastic Articles: ▪ 2014: 17.6 billion USD ▪ 2015: 18.3 billion USD ▪ 2016: 19.1 billion USD Plastics industry witnessed a growth of 5.7% in 2016 Guanajuato is the major producer of plastics and plastic products in Mexico Though the current state of the industry is stable, manufacturers are expecting higher growth rates in the near future as Mexico continues to negotiate additional free trade agreements with key economies.

Major Plastics Production Zones in Mexico

Source: plasticnews.com, export.gov © 2017 Dragon Sourcing. All rights reserved.

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Precious Metals (1/2) World Export of HS 71 series (Precious Metals) in USD billion in 2016

Export of HS 71 series (Precious Metals) from Mexico in USD billion 15

99, 15%

10

10

106, 16%

8

341, 52%

7

7

2015

2016

5 57, 9% 7, 1%42, 7% Switzerland

China

USA

India

Mexico

0

Others

2013

Top Importers of HS 71 series (Precious Metals) from Mexico in USD billion

Top Exported Products in this Category

▪ ▪ ▪

8 6 6

5

2014

6

Gold Silver Jewelry

4

2

1.3

0.8 0.9

0.3 0.3

0.3

0.0 0.0 0.1

0 USA

UK

Switzerland 2014

2015

© 2017 Dragon Sourcing. All rights reserved.

India

0.30.04

0.04

Canada

2016

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Precious Metals (2/2)

Sonora

Chihuahua

▪ Durango

▪ Zacatecas

Mexico ranks 8th in global gold production Mexico witnessed five times increase in growth is gold production from 2001 reaching 14.4% In 2015, the gold production was about 4.3 million ounces. 3 states (Sonora, Zacatecas and Chihuahua) contribute to about 70% of the country’s gold production. Mexico contributes to about 20% of the global silver production which is higher than China and Peru.

Major Gold and Silver Production Zones in Mexico

Source: issuu.com/mexicobusinesspublishing © 2017 Dragon Sourcing. All rights reserved.

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Vegetables (1/2) World Export of HS 07 series (Vegetables) in USD billion in 2016

Export of HS 07 series (Vegetables) from Mexico in USD billion 10

11, 15%

7 7, 10% 34, 49%

5

5

2013

2014

6

7, 10%

7, 9% 5, 7% China

Netherlands

Mexico

Spain

Canada

0

Others

Top Importers of HS 07 series (Vegetables) from Mexico in USD billion

▪ 6 5

6

4

▪ ▪

2 0.06 0.04

0.05

2016

Top Exported Products in this Category

8

6

2015

Other vegetables, fresh or chilled (excluding potatoes, tomatoes, alliaceous vegetables, edible brassicas, lettuce "Lactuca sativa" and chicory "Cichorium spp.", carrots, turnips, salad beetroot, salsify, celeriac, radishes and similar edible roots, cucumbers and gherkins, and leguminous vegetables) Tomatoes Cucumbers and gherkins

0.05 0.05 0.05 0.03 0.01 0.03 0.03 0.03 0.02

0 USA

Canada

Guatemala 2014

2015

© 2017 Dragon Sourcing. All rights reserved.

Algeria

Spain

2016

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Vegetables (2/2)

Baja California

Sonora

▪ ▪ Baja California Sur

Sinaloa

▪ ▪

Sales volume of vegetables reached 6 million tons in 2016. Sales of vegetables is estimated to reach a volume CAGR of 1% by 2021. Tomatoes and Maize are the major vegetables produced in 2016 Tomatoes, Maize and Onions constitutes about 24%, 22% and 12% of sales volume among other vegetables produced. Yellow maize is commonly used to feed livestock, white maize is mostly for human consumption.

Major Vegetables Production Zones in Mexico

Source: euromonitor.com, digitalcommons.calpoly.edu © 2017 Dragon Sourcing. All rights reserved.

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Fruits (1/2) World Export of HS 08 series (Fruits) in USD billion in 2016

Export of HS 08 series (Fruits) from Mexico in USD billion 10

14, 13% 9, 8%

6 6, 6% 4 6, 5%

68, 63%

5

3

6, 5%

USA

Spain

Chile

Netherlands

Mexico

0

Others

2013

Top Importers of HS 08 series (Fruits) from Mexico in USD billion

6

▪ 5 3

4

2 0.14 0.180.22

0.14 0.14 0.19 0.03 0.04 0.08 0.02 0.03

0.06

0 USA

Canada

Japan 2014

2015

© 2017 Dragon Sourcing. All rights reserved.

Netherlands

2015

2016

Top Exported Products in this Category

8

4

2014

Vietnam

Dates, figs, pineapples, avocados, guavas, mangoes and mangosteens Fresh strawberries, raspberries, blackberries, back, white or red currants, gooseberries and other edible fruits (excluding nuts, bananas, dates, figs, pineapples, avocados, guavas, mangoes, mangosteens, papaws "papayas", citrus fruit, grapes, melons, apples, pears, quinces, apricots, cherries, peaches, plums and sloes) Other nuts, whether or not shelled or peeled (excluding coconuts, Brazil nuts and cashew nuts)

2016

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Fruits (2/2)

▪ Sonora

▪ Nuevo Leon Tamaulipas

San Luis Potosi

▪ Yucatan

Veracruz Tabasco

Puebla Oaxaca

Mexico is the 5th largest producer of Oranges in the world with an average annual production volume of 4.2 million tons Top categories (Mexican consumers’ favorite fruits) - overall volume sales in 2016: ▪ Oranges, tangerines and mandarins: 21% ▪ Banana: 17% Sales of fruits are estimated to reach about 10.5 million tons by 2021 thus attaining a volume CAGR of 1%. Population growth and increase in awareness about the healthy eating habits are the major drivers for the growth in volume.

Major Fruits Production Zones in Mexico

Source: euromonitor.com, theyucatantimes.com © 2017 Dragon Sourcing. All rights reserved.

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TRADE AGREEMENTS

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Trade Agreements México has signed 32 Reciprocal Promotion and Protection of Investments Agreements with 33 countries, 12 free trade agreements spanning 46 countries, 9 agreements of limited scope and economic complementation agreements within the framework of the LatinAmerican Integration Association (ALADI) and it is a member of the Trans-Pacific Partnership Agreement (TPP) Agreements

Region/ Countries Involved

Asia

Israel – Mexico, Japan – Mexico

Europe

EEFTA – Mexico, EU – Mexico

North America

NAFTA (North American Free Trade Agreement)

Central America

Mexico – Central America, Mexico – Panama

South America

Chile – Mexico, Colombia – Mexico, LAIA (Latin American Integration Association), Mexico – Uruguay, Peru – Mexico, Pacific Alliance, Southern Common Market (MERCOSUR) - Mexico Other Trade Agreements Global System of Trade Preferences among Developing Countries (GSTP)

Other Agreements Protocol on Trade Negotiations (PTN)

Source: World Trade Organization, promexico.mx, gob.mx © 2017 Dragon Sourcing. All rights reserved.

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