Doing Business South of the Border, Down Mexico Way
from
September/October 2002
by John R. Engen
During the early-’90s debate over the North American Free Trade Agreement, critics sounded warnings about everything from environmental degradation to the “giant sucking sound” of U.S. jobs heading south of the Rio Grande.
NAFTA hasn’t been a panacea, but judging by the numbers that count most it’s been a success. According to the Census Bureau, U.S. exports to Mexico hit $101.5 billion in 2001, compared with $41.6 billion eight years earlier. Imports climbed even more, to $131.4 billion last year, from just $39.9 billion in 1993, the year before the agreement took effect. That leaves the U.S. with something of a trade gap.
Today companies big and small continue to look south for opportunity. The trouble is, the trade boom hasn’t been able to overcome some decidedly negative trends. While NAFTA has helped make Mexican business and government more accountable and straightforward, information is still tough to come by and living standards haven’t improved as much as many had hoped. The result is a market that continues to resemble a cross between Sicily and the Wild West, where relationships and rumor often matter more than the hard numbers, and kidnappings and vehicle armor are frequent subjects of dinner conversation.
For a quick primer on Mexico’s business and security climate, Corporate Board Member ’s John R. Engen talked with David Robillard, senior director of business intelligence in the Mexico City office of Kroll Inc., a global security and risk-management corporation. The 36-year-old Robillard, a native of Ottawa, went to Mexico City in the early 1990s to learn Spanish. After security stints with a couple of international companies, he was hired by Kroll in 2000.
Today he’s a classic corporate gumshoe, his conversation peppered with talk of “subjects,” intelligence “networks,” and the need to “tropicalize” operations in the country he now calls home. “People either love or hate Mexico,” he says. “I fit in very well here.”
What are the keys to being successful in Mexico?
You need people who understand the country. I see American companies all the time who send people who don’t even speak the language, let alone understand the culture. Some try to transfer procedures from the home office without tropicalizing them and adapting to the local conditions. They underestimate the importance of relationships, both formal and informal, between companies and governments and within companies.
A big problem is impatience. People try to do too much in too little time and get burned, because they don’t understand their options—in terms of suppliers, personnel, or local partners—and don’t give themselves time to check things out. In contrast, some Japanese or European companies will send people down here for a year just to listen and observe before they do any business. That leaves them better positioned to understand the real opportunities.
What’s the biggest gaffe you’ve seen a foreign company make?
Three years ago, a consortium of local and foreign investors bid for a government concession to operate a national car registry. The firm named an Argentine, Ricardo Miguel Cavallo, as CEO without investigating his past. A short time later, Cavallo was identified by former political prisoners in Argentina as having tortured them during the military dictatorship that ran the country from 1976 to 1983. He was arrested on human-rights violations, and the resulting bad press overwhelmed the new company. In the end, the government canceled the concession and millions of dollars were lost.
So how do you tropicalize operations?
Tropicalizing is mostly about adapting your business practices to the reality of the country. It also involves treating people with respect and asking, “Why do you do things this way?” instead of trying to force them to do things your way. I know companies that have acquired firms and made major layoffs without asking where the institutional memory lies. They get rid of some of the older employees, and then they find out that person was responsible for getting something specific done.
One good way to tropicalize is to have Mexicans in positions, such as human resources, where local understanding is important. When you hire an agent here, for instance, you might view them as a subcontractor. But under Mexican labor law, they could be considered a de facto employee. A lot of foreign companies don’t realize that. They also don’t understand the importance of some little things, like understanding the holidays. In Mexico, Mother’s Day is as big as Christmas. If you don’t give mothers in your office at least a half-day off, you’ll have absenteeism on that day, and hurt employee relations.
What advantages do U.S. firms have?
Leadership here is built on personal relationships, impressions, and sometimes fear. American companies often differentiate themselves by using better, more motivational methods. A lot of Mexicans are attracted to work for them because they’re seen as meritocracies; people believe they can get ahead because of what they do, not who they know.
Other U.S. methods are admired and being adopted here, in particular transparency and accountability, and recognition of results. But there needs to be a balance. You can’t lose the human touch.
Who are Kroll’s clients?
About half of our clients for due-diligence services are the investment bankers or attorneys who are advising company boards on an acquisition or partnership, and need due diligence done. The other half are businesses themselves. Most don’t have the resources to deal with fraud or security vulnerabilities. Some are seeking to enter a new market and are concerned about the unknown.
You mentioned due diligence. How do you get good information?
Very little information is available in digital form, or online. So the work is very physical. You have to travel through the country, visit government agencies, and talk with a lot of people. I have a group of business, political, and social leaders, which I call my godfather network, to gather that information.
Your godfather network?
Yeah. Mexico is a highly religious society, where a principal means of reinforcing ties is to ask a business or family associate to be the godfather of your child.
Are you really people’s godfather?
No. But the theory is the same. A lot of times we need to understand the reputation of an acquiree or partner, beyond the numbers. What’s the word on the street? Have they been the subject of investigations by authorities? In Mexico, rumor is often as valid as what is proven. So I talk to people who do business with my subjects. They may be Mexican, they may be foreigners. They’re people I can call on and ask, “Hey, what’s your opinion of this person?” If you ask four or five people the same question, you can usually get a good idea of their reputation.
Some clients can tolerate risk. I told one client that a subject had family connections with a known money-launderer. They said, “Okay, I can handle that.” But they wanted to know beforehand, so they could structure the deal in a way that removes the risk. In another instance, I had a case involving two subjects with the same name. One was a money-launderer, the other was a respected businessman. The word on the street was that our subject was a money-launderer. We went a step further and discovered he was clean.
Relationships are obviously important. How have you developed yours?
A few ways. I teach at a local university where I did my M.B.A., and have had a number of senior managers in my classes. I’m also active with the Canadian Chamber of Commerce. Sometimes my clients become sources. If I’m approached by an attorney, I’ll keep their firm in mind for business another client might need. When people call and ask if I’ve heard something about someone, it keeps me current. To be effective in business intelligence, you need to keep your contacts up. You also need a very good memory, particularly for names.
Mexico has a reputation for government corruption. What does a company need to know about dealing with regulators?
It’s important to develop relationships within regulatory bodies, but not for influence. Ten years ago, you could get contracts through influence-peddling. Many companies still come down here and believe they can get an inside track because someone’s brother-in-law is an undersecretary. That’s not necessarily the case. Once you had big companies, like Pemex or Telmex, regulating themselves and others. Now there are separate regulatory bodies. There’s greater accountability, more oversight and transparency.
But when you’re going for a public tender or a permit, it’s still good to know if there is a family relationship between your competitor and a local government official. The trick is to be careful. In the past year, our firm has worked with a number of clients who hire consultants to lobby governments. But many of these consultants are known as “coyotes.” They taint clients with their own poor reputations and cause a lot of complications.
How do the coyotes work?
An American manager will come down, and one of the first people they meet is an English-speaker who seems worldly. He might even be a former government official, and have connections. But it’s one thing to be known, and quite another to get them to receive your clients. Many of these coyotes not only are ineffective, they have bad reputations. They’ll get you to sign agency agreements, which by Mexican law create an employer-employee relationship. In order to get out, you have to make a severance payment. And worse, your name has been associated with them.
But there must be a role for consultants or lobbyists.
Sure. The best place to get a qualified list of those is at the U.S. commercial service at the embassy.
Does having a local partner help?
In my opinion, you can acquire local talent just as easily. A decade ago, when companies were preparing for NAFTA, most of them partnered. Partnering still works. But there’s a large pool of highly skilled, educated professionals. If you establish a good core team and then look for good local people, you stand a better chance of building the business the way you want.
Let’s talk about personal security. Is Mexico City less safe than when you arrived 10 years ago?
Definitely. I used to feel safe walking the streets at night. But that was before the peso crisis of 1995. Today you can’t go out for dinner without the subject of personal security coming up. People exchange war stories all the time about what’s happened to them or their colleagues.
What kind of war stories?
They usually center around kidnappings. “Did you hear about Juan? He was kidnapped, but they only kept him for a week, and they paid out X million dollars.” Or maybe there was an “express kidnapping” where someone was abducted in a taxi and forced to withdraw their maximum from an ATM machine. One of the problems is that there are a lot of taxis that aren’t really taxis. If you take a taxi from a taxi stand, you’re fine. There’s a registry of the transaction. But in other cases, you’re running a major risk.
Other stories focus on muggings. Last Friday the Cuban ambassador was mugged right outside his home at 5 p.m. He was driving up to his house, and someone walked up and pulled out a gun. It sort of baffles you. It wasn’t the middle of the night, and it was a very good part of town.
Who are the perpetrators?
There’s a lot of one-off petty crime. But there’s also a great degree of organized crime. The kidnappers require a network themselves to identify and keep the targets, and they’re quite sophisticated.
How do people safeguard themselves?
You don’t have to be paranoid, but you need to be aware of your surroundings. It’s all about common sense. People often get into trouble talking on their cell phone as they’re walking on the street. They’re not paying attention. Another common mistake is that a person will have a meeting a block away from their hotel, and they’ll walk carrying their laptop. Thieves look for laptops. They’re easily resold, they’re small. People think, “It’s only a block.” Spend the money. Take a taxi.
How does Kroll prepare executives for these dangers?
We conduct security audits of their homes, their travel routes, and identify points of weakness. It might be the quality of door locks or the screening of the house staff, or making recommendations in terms of the routes. Predictability creates a problem. With transit, the points of risk are the arrival and departure from home and office, not just the route. If someone knows you’re going to go jogging at 6 a.m. every morning, that presents the opportunity.
It’s important to be discreet. If you’re leaving for the weekend, don’t tell everyone at your club that you’re leaving. And we tell the staff in the home, if someone calls for an individual, never say they’re not there. The person might be calling from in front of the house on a cell phone.
We’ll also teach people how to use their vehicles in an offensive or defensive manner.
I’ve heard armored limousines are popular.
Only in Mexico do people know the difference between a level 3 armored vehicle and a level 4 or 5. It has to do with the degree of bullet penetration. That’s dinner conversation here. It’s a growing business, and it’s being marketed downscale. So it’s not just presidents of major corporations who have them. People who own medium-sized companies have bullet-proof vehicles—maybe a level 3 or 4, which protects against handguns, not an AK-47.
Do you have an armored vehicle?
No. Armor is expensive, and I’m not a target. But I have a 3M film on the windows.
So people can’t see in?
No. A common form of assault is for someone to smash your window with a piece of metal while you’re sitting in traffic, and then steal your purse or briefcase. If you have this film, the window will shatter, but it will stay together.
What do companies do about security for their offices and factories?
They’ll work in conjunction with an industrial-park association to create security perimeters, and hire private security guards. The police are very poorly financed, so these people will be supporting local law enforcement.
There’s a well-known banquet hall in the center of the city. To get to it, you have to do U-turns around four blocks. Whenever there’s an event, there’s security along that route, and you’re being stopped along the way and asked where you’re going. That information is radioed along the line ahead of you. This type of activity is very common.
Any final words of advice?
The key to success here is humility, being a good listener. Mexico isn’t homogeneous. Mexico City is more liberal than the north or rural areas. And people in Monterrey have a much more let’s-talk-work attitude than they do here. But all Mexicans are extremely open to giving advice and helping out. You’ve just got to be attentive enough to listen.
