December 2004/ January 2005

Oh My, the New Client Owns a Plant in Mexico? What Do We Do Now? (Part II) By: Miles Stover

In Part 1, we discussed your concern, known as fear in some circles, over finding out that your new client has a manufacturing operation in Mexico. You, having many years of experience in the turnaround environment, but none in Mexico, might be anxious about what you need to know and do.

We identified what a Maquiladora was and identified some of the Mexican government programs this division might have been formed under. We talked about how many financial liabilities might not be recognized on the financial statements and how large they might be. Finally, we discussed how some U.S. companies might have been operating in Mexico by “renting employees” from a contract or shelter manufacturing organization.

That was interesting, slightly scary in terms of potential financial exposure, but didn’t help you get your hands around the operation and making a decision as to what to do. In Part 2, we will get you into Mexico legally, out of Mexico safely and arm you with several of the questions you need to ask to accomplish/complete your due diligence.

In several of the turnaround cases I have been involved with in Mexico, the plant was part of a bigger purchase and not the focus of the purchase. The U.S. based company that bought the operation in Mexico would ask the Mexican general manager to bring his accounting records and himself to the U.S. for a debriefing.

It was this hands-off approach and not actually visiting the operation that made it a “turnaround case.” Having the general manager come to the U.S. is probably necessary and can be useful, but it does not replace going to the plant yourself or sending someone who knows what you need to know and getting the information in person.

In more than a decade of working in Mexico in some capacity, the only businesses that totally failed financially were ones where the U.S. based management did not take an active physical interest in the operation. They were afraid to go there or had some excuse that prevented them from doing what was correct and necessary. It was a very expensive excuse. So, let’s get you on your way to Mexico.

Entry requirements. The government of Mexico requires that all U.S. citizens present proof of citizenship and photo identification for entry into Mexico. A U.S. passport is recommended, but other U.S. citizenship documents, such as a certified copy of a U.S. birth certificate are acceptable. Don’t expect a driver’s license or a “hospital birth certificate” to get you into the country. They will turn you back no matter how nice you appear to be, no exceptions. Since September 11th, the U.S. Government has been very strict with the Mexican government on this issue and the Mexican government has cooperated.

A visa is not required for a tourist/transit stay of up to 180 days. If you are going into Mexico for other than tourist reasons – and you are – you need to have a visa and must have a U.S. passport.

If your client is law abiding, and they should be, you are not going to be able to get into the Mexican plant without a Form FM-N – this is your visa. You get this at an immigration office after you cross the border or land at an airport. You will need to know the exact address of the plant, a contact’s name and the phone number of the plant. It is best to have all of this information on the plant’s letterhead and signed by an official to use to complete the form. It is also best, if possible, to have someone from the plant meet you and assist you filling out this form which is in Spanish. If someone is going to stay more than 30 days there is a whole new level of application to obtain, a Form FM-2 or 3. This requires the help of a Mexican lawyer in most instances.

Another reason to request someone to meet and drive you to the plant and hotel relates to crime. Crime in Mexico continues at high levels and is increasingly violent. This is especially true in Mexico City, Tijuana and Ciudad Juarez. Travelers should leave valuables and irreplaceable items in a safe place, or not bring them at all (recommended). Avoid wearing obviously expensive jewelry or designer clothing, and only carry the cash or credit cards that will be needed on each outing.

U.S. citizens should be cautious in using Automated Teller Machines in Mexico. If an ATM must be used, it should be accessed only during the business day at large protected facilities (preferably inside commercial establishments, rather than at a glass-enclosed, highly visible ATM on streets where criminals can observe financial transactions.). Recall from Part 1 that the minimum wage is less than $2.00 per hour so to get $100 in five minutes from someone they will never see again is a huge ROI.)

Criminal assaults occur on highways throughout Mexico. Use a company driver if at all possible and use toll (cuota) roads, rather than the less secure “free” (libre) highways, whenever possible. Don’t go anywhere at night alone in Mexico City. Have the concierge in your hotel arrange for travel to and from restaurants. (I have never had a problem in my years working in Mexico in cities like Guadalajara, Monterrey, Tijuana or Ciudad Juarez. But, I know where to go, where not to go, speak the language somewhat but even I don’t go out at night in Mexico City without significant security preparation.)

Because your passport is so important, copy the front page and give it to a friend in the U.S., have a copy of it hidden in your briefcase and have two extra passport pictures taken and keep them in your wallet. (The U.S. Consulate can issue passports, but they don’t take pictures.)

Lastly, VISA, MasterCard and American Express cards are accepted. Traveler’s checks are accepted everywhere. When you go to your hotel they will ask for your credit card, will swipe it and have you sign a voucher. Don’t worry, this is standard procedure.

Now, you are there and need to get the information that will allow you to make an informed decision on what to do next.

An assessment report should be prepared that includes, at a minimum, a review of the following areas: 1) Operations and Production, 2) Legal Compliance with Mexican laws and accounting regulations, 3) Organizational Conditions related to employment and benefit laws in Mexico and 4) Management.

The operations and production section should address the physical plant conditions, the adequacy and availability of the equipment needed to meet production demands. Mexico has historically been a country where manufacturing has been a way of life. You do not have to compromise your requirements of operations, because it is Mexico; any equipment needs can usually be met in Mexico.

A legal review should include a review of the current union contract(s) and the employee contract(s). This will tell you what you can and cannot do in several areas. Also note that a “majority ownership” in a Mexican corporation is significantly different than a majority ownership position in this country. Majority stock ownership from a stock perspective only means the owner of the stock benefits in proportion to the total stock outstanding when a distribution is made. Majority ownership technically provides no say in the affairs of the corporation. It is the Administrator of the Mexican corporation that possesses all of the powers and rights of the company. Many U.S. based companies wrongly believe that a majority ownership position gives them control, the ability to hire and fire, to buy and sell. If that control was not established before the investment through the selection of the Administrator or a board of directors, it can be difficult or impossible to predict or control many situations.

Finally, the legal review should include a review of the Minutes of the corporation, which have to be filed with a Notary Public. Determine whether the company was properly established and the company is meeting all of the legal reporting requirements of the state in which they were established.

An organizational review and a review of compliance with Mexican labor laws will be vital to any complete assessment. In this area, the proper accrual for items, such as severance pay, vacation pay, housing costs will come to light. There can be significant liabilities that are generally not recognized on the financial statements. (Part 1 identified the great majority of liabilities to be reviewed and calculated.) The Human Resource Director is a key person on the management team and can prevent a lot of problems from occurring. Time spent with this person is time well spent.

The Accounting Manager is also an important part of the team and a key contact point for you. They generally are degreed and understand the laws well. Depending on the pressure exerted on him by the general manager, the books can be kept conservatively or “not so conservatively.” Be sensitive to this fact, but probe into the position the general manager takes on reporting to ownership in the U.S. There is GAAP in Mexico and it is close to U.S. GAAP. I always interview or at least meet the CPA firm Partner assigned to the company. Be polite, but not too polite. Ask if he has any suggestions as to how the books might be prepared differently. They understand liability and need to know you have the authority to change things, including CPA firms. If you ask for forecasts, make sure you find out what the peso to dollar exchange rate assumption is.

Lastly, a management review is important. Because of traditions from centuries past, you cannot expect too many comments from staff about the General Manager. He is “the Supreme Being” and accepts and expects the loyalty that goes with the position. He will more likely than not have an employment contract. Read it closely or have it interpreted by your local lawyer. Interview all of the managers and, if possible, do it away from the general manager.

Business encounters in Mexico frequently are held outside of the office, around the meal table. Breakfast is the meal at which the most can be accomplished; it is therefore the most productive meal. Lunches tend to be less formal and can easily go for more than two hours. Business is discussed at the end of the encounter. Dinner is the most social and longest-lasting meal. It is used to honor the guest, to convince someone of something or to ask for a favor. Dinner is also usually formal. If the invitation is for a restaurant, the person who arranged the engagement normally pays the bill.

A foreigner engaged in a conversation during a business meal with a Mexican associate may find there was little talk of business and lots of talk of sports, news, family matters and so on. This may be interpreted as lack of interest in business, which is totally wrong, because it could lead to a future favorable partnership. Personal talk is a sign that the counterpart wants to establish personal trust before getting involved in a business deal. Try to schedule your day such that you do not have to talk about business at all over dinner.

If you can be in Mexico for one entire week, you should be able to gather 95% of the information needed to make your assessment. Anything less than one week and you subject yourself to being shuffled between meetings and never getting to focus on subjects important to you. Mexicans are polite and being polite takes time. Unless you asked for reports to be ready before you arrived, they will get done, but probably not as quickly as you would like.

If you can bring two or three associates with you, especially if they are fluent in the language, to attack several areas at the same time, you stand a better chance of obtaining more information. Having two people in each meeting does improve the probability of not misinterpreting information.

More than a decade of work in Mexico has provided me with a list of 231 things not to do gathered from my first years in Mexico. Time and space prevent those suggestions from being divulged here.

There are a few common themes I will leave you with and ask you to you consider. The professional staff and the direct labor employees in Mexico want the same things as those who work in this country. They want to know what is expected of them and be provided with the support to make those things happen. The people want to be respected and thanked when they do some-thing well. They also prefer to be told, but not in front of their peers, when they do something wrong.

Tell them what is expected and by when. Tell them you need their help. Their culture is different, but that does not make it better or worse than ours. Respect their culture and traditions (e.g., Mother’s Day is a VERY important holiday, and soccer is a very important sport). Tell them you expect them to call, when they have a question. Being fair, firm and consistent has great value not only in our United States, but in the United States of Mexico. As I mentioned previously, most of the failures or problems U.S. based firms have in Mexico is related to their lack of onsite assistance and presence, lack of being available, lack of understanding the culture. If the employees think you or the company will only be there twice a year, they will be less likely to give you the results you want. Even though you are a consultant, let them know that your recommendations will include active, face-to-face involvement with them.

Hopefully, you are now a little more confident that you can get the information you need, when you find out that you have a plant in Mexico. Take advantage of the information about Mexico that is available with a little research within your organization. Take advantage and call those who want you to be successful in Mexico, such as this fellow consultant. You have a job to do now that you have a plant in Mexico; it’s time to go to work! Buena suerte! (Good luck!)