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Managing Risk in Mexico

Some credit professionals have noted that obtaining credit information on businesses in Mexico is difficult. Many times credit reports do not provide much information either, was another sentiment recently expressed. In search of answers, questions about doing business in Mexico have expanded to the FCIB Discussion Board. In particular, the question of how to handle the peso and currency risk.

One respondent acknowledged her company sells in U.S. dollars for the majority of its sales transactions. “Customers who need to pay in [pesos] are typically small businesses and low value transactions,” she said.

For businesses that sell in pesos, foreign exchange risk should be part of their risk tolerance and factored into the cost of doing business, she advised. “As we do not have a massive amount of [peso] transactions, we do not hedge or otherwise protect our exposure.”

Gary Gaudette, CCE, ICCE, of Hypertherm, noted that currency risk is still an issue even though his firm sells in U.S. dollars to customers in Mexico. “In theory, our customers have the currency risk, but when there are significant changes in the exchange rate, it can have negative impacts on our business in Mexico,” Gaudette said. “If the value of the peso declines, it becomes more expensive for our customers to purchase our products. This can easily lead to payment delays, both from a perspective of unplanned increased costs for our customers that they may not have cash flow to afford, and also from the perspective of trying to wait for a better exchange rate before paying. We push back on these ‘excuses,’ especially the second one as the rates could continue to get worse.”

The exchange rate can also hurt competitiveness in the market, he said. “Our customers are resellers, and they will pass on (maybe not immediately, but will have to eventually) the increased cost caused by exchange rate to their customers. This would be especially true if there is a local competitor, selling locally that is not dealing with exchange issues.”

Gaudette added that, overall, his firm has “not had any really bad experiences in doing business with companies in Mexico.” His experience there has led him to believe “many companies sort of live in that paycheck-to-paycheck world. They are undercapitalized, margins are low, and cash flow is often a problem. They avoid bank financing at just about all costs, and look to suppliers to be their source of working capital.” In part, slow payments are cultural, he explained. “However, we have found you can influence most to move toward paying timely, but you do have to keep on top of them. If you don’t, they will take as long as you let them to pay.”

Gaudette shared that he has tried unsuccessfully to obtain promissory notes and letters of credit. “I think the unwillingness to work with [letters of credit] goes back to the above comment of bank finance avoidance, and maybe inability to obtain bank credit, but again, I have not been very successful in obtaining security there.”


What are the Plans for NAFTA?

Chris Kuehl, Ph.D.

During the presidential election campaign, the Trump position on the North American Free Trade Agreement (NAFTA) seemed pretty definite as it was asserted that the U.S. would pull out altogether. In truth, that process would be exceedingly difficult and destructive. Now that the election is out of the way, the assertion is that leaving is no longer on the table. Instead, there will be a series of negotiations to alter the way the pact is interpreted in the future.

The two target areas thus far include the trade deficit between the U.S. and Mexico and the level of outsourcing to Mexico by U.S. companies. The trade deficit with Mexico rose in 2015 by 9.5% and is now at $60.7 billion. The deficit with Canada fell by 57% and is now at just more than $15 billion (primarily because the U.S. bought a lot less oil from the Canadians). The aim of the Trump team is to reduce that deficit, but it will be delicate. Much of what is sold to the U.S. is essentially inter-company trade. If the Mexican option for cheaper production is cut off, U.S. companies will either find themselves at a severe global disadvantage or they will have to find another option for that production.

The majority of new manufacturing that has been arriving in Mexico has been relocated from other nations—not from the U.S. Companies are moving from Asia to set up in Mexico as it allows easier access to the U.S. market. If Mexico is not an option, these plants stay in Asia or they lose market share. The Mexican platform makes more sense to the U.S. as Mexico buys almost 90% of what it buys from the U.S. as opposed to less than 15% from the Asian states.

Beyond this economic argument, there is the fact that success in Mexico means fewer migrants coming to the U.S. in the long run. The biggest issue as far as U.S.-Mexico trade is that much of the money that flows into the country is locked up in the hands of the 25 dominant families in the country and rarely makes it out to the general population.


Successful Change Management

Corporations today are in a continuing cycle of change that comes from many different directions—from mergers to acquisitions to outsourcing. This cycle of change can greatly affect employees and managers who are responsible for credit teams, centrally located or in different locations.

Managing change includes being aware of how it impacts others, learning to communicate the changes and identifying pitfalls to successful change implementation. André Kolkman, of Triangle Credit Management Consultancy B.V., will discuss these topics as well as the following in an upcoming webinar:

  • Changes over the last decades
  • Why continuous change inside corporations is a hot topic
  • Examples of organizational changes
  • How people react to change
  • Whether there is a recipe for successful change management
  • How to motivate employees in a changing environment
  • Code of conduct for (credit) managers during a change management project

This webinar will enable credit professionals to better understand the basics and effects of change on people; how to cope with change and how to manage change successfully within their team or organization.

Kolkman will share his experiences on change management and provide some fundamental guidelines based on his more than 20 years’ experience in credit and collections leadership and interim management roles. During his professional career, he led several organizational and system change projects.

To learn more or to register for the webinar at 11 a.m. ET on Dec. 1, click here.


Global Roundup

Turkey and EU near breaking point in membership talks. The European Parliament appeared likely to vote last Thursday to suspend negotiations that would bring Turkey into the European Union, infuriating Ankara and possibly hastening the end of a long and troubled process. While the vote is advisory rather than binding, the government of President Recep Tayyip Erdogan—smarting from European criticism of its crackdown on opponents and on the news media after a failed coup attempt in July—suggested that it might pull out of the process altogether if there were no progress by the end of the year. (NY Times)

Trump sinks Asia trade pact, opening way for China to lead. An ambitious Asia-Pacific trade pact (the Trans-Pacific Partnership) linking the United States and 11 countries lay in tatters Tuesday after U.S. President-elect Donald Trump said he would kill the deal on his first day in office. Trump's statement appeared to open the way for China to assume the United States' leadership mantle on trade and diplomacy in Asia. China, Japan and South Korea are already in the initial stages of discussing a trilateral trade deal. Meanwhile, Beijing has been pushing its own limited Asian regional trade pact for the past five years that excludes Washington. (Reuters)

Trump and Africa: Reciprocity will be key. President-elect Donald Trump made scant mention of Africa during his campaign. In fact, his engagement with the continent thus far has been limited to a handful of Twitter posts. As such, any efforts to discern his Africa policy at this stage are speculative at best. However, there is a general consensus that because other, more pressing, priorities are likely to get in the way, Trump will be restrained from implementing radical changes to U.S.-Africa policy. A more aggressive stance may be adopted should trade deals hit American jobs—which they currently do not. (Global Trade Review)

British firms brush off Brexit vote. Three in four U.K. businesses have yet to feel any financial impact—positive or negative—from the EU referendum vote, according to new research from R3. The insolvency trade body’s survey of British companies shows that only 16% of all businesses, equivalent to 283,000, said the vote has already had a negative financial impact on them. (Insolvency News)

2017 will see more EU division over Russia sanctions. Russia’s countersanctions are hurting various European economies, while major investment projects in Russia are being blocked by the EU sanctions regime. This situation has led to enhanced tensions within the EU, thus increasing the risk of disunity regarding its policy towards Moscow. (Global Risk Insights)

Strong policies helping Mexico confront external risks. While Mexico’s economy continues to grow—although at a slower pace—the country will need to navigate an uncertain and complex external environment, with elevated risks of protectionism and heightened global financial market volatility, the IMF said in its latest annual assessment of the second-largest economy in Latin America. (IMF)

Ecuadorian VP: EU trade deal ‘is unlike other agreements’. Ecuadorian Vice President Jorge Glas says that the trade agreement signed with the EU on Nov. 11 will generate plenty of opportunities and underpin the changes his country has been working toward in recent years. The agreement, which has been in place between the EU, Colombia and Peru since 2013, eliminates high tariffs and protects the bloc’s lucrative geographical indicators, among other benefits. The EU was Ecuador’s largest trading partner in 2015. (EurActiv)

Global banks are retreating from lending to shipping companies. With international trade slowing, overcapacity plaguing ocean carriers and freight rates hitting bottom, many banks are looking at the ocean shipping industry as a bad risk. A slowing economy and increasing capital demands are cutting into bank profitability, and the banks want to improve their balance sheets by reducing their exposure to a distressed industry. (Global Trade Magazine)

 

Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations