The Mexican market for building products

The Mexican market for building products

Robert Shaw

For several years, the Mexican construction industry has been growing faster than the rest of the Mexican economy. In 1991, demand for building materials, hardware, and fixtures jumped 101 percent. The following year, it grew a solid 39 percent. Industry expectations for the next three years are that the industry will grow at an average annual rate of eight percent.

Industry growth has been driven by federal programs aimed at improving the country’s overall infrastructure. Among the most important is the federal program to promote the construction of affordable housing. Mexico currently faces an estimated 6 million residential unit deficit and an estimated average annual demand of 567,000 units. Also important is the federal program for highway and road construction, seeking this year to channel US $7.6 billion to modernize Mexico’s road and highway system. The impact of these government programs has had a profound impact on all aspects of demand in the construction industry.

Imports are a very important part of the Mexican market for building materials, hardware, and fixtures, averaging about 97 percent of reported domestic consumption figures. It must be noted that these figures do not include what many claim is a very active and completely unreported informal market. Nevertheless, imports did grow 124 percent in 1991 and another 37 percent in 1992. Industry expectations for the next three years are that imports will grow at 9 percent, a little faster than the industry as a whole.

Imports from the United States grew 145 percent in 1991 and 34 percent in 1992. Industry expectations for the next three years are that U.S. imports will grow at the industry rate. The Mexican market is considered highly receptive to U.S. manufactured construction products, reflecting their high quality, versatility in application, and the geographic proximity of U.S. suppliers.

Market Assessment

The Mexican market for building materials, hardware, and fixtures experienced extraordinary growth during the last two years. Between 1990 and 1992, total demand grew from US $304 million to US $851.9 million. Industry expectations for the next three years are that the industry will grow at an average annual rate of eight percent.

The Mexican construction sector as a whole, which includes building materials, hardware, and fixtures, accounts for an estimated 6.2 percent of the GDP and provides employment to approximately one million people. Transportation and irrigation construction, the largest sector component, accounts for 44 percent of the whole. Building construction is second with 35 percent. Industrial construction is third with 14 percent.

During the last three years, the Mexican economy recovered much of what it lost during the hard times of the 1980’s. Gross Domestic Product (GDP) totalled US $241.9 billion in 1990, US $283.6 billion in 1991, and is estimated to reach US $319.0 billion for 1992. These figures represent real GDP growth rates of 4.4 percent for 1990, 3.6 percent for 1991, and an estimated 2.7 percent for 1992. The Consumer Price Index (CPI) rose 29.9 percent in 1990, 18.8 percent in 1991, 11.9 percent in 1992, and the most recent data for the month of January 1993 was 1.3 percent. The Mexican government forecasts that the CPI will grow at 7 percent in 1993, but private economists put the figure closer to 9 percent.

Housing

Business opportunities in the housing sector exist for U.S. manufacturers of building materials. The Center for the Promotion of Construction estimates the annual demand for housing to be 567,000 houses and the current housing deficit to be approximately 6 million houses. The Secretariat of Labor and Social Prevention estimates housing demand as shown in Table 1.

In 1992, the Mexican government launched a housing program designed to encourage the private sector to meet the nation’s burgeoning housing needs. Under the program, approximately 250,000 residential units were to have been built last year and another 320,000 are to be built this year. The National Institute for Workers’ Housing and the National Fund for the Promotion of the Housing play important roles in this regard.

Home to a quarter of the country’s population, Mexico City has its own rather important housing program. The mayor’s office his recently approved a development on a 1,600 acre site in the southwest of the city that will take 10 years to complete. The development will include the construction of major corporate buildings (for Televisa, Bimbo, and Hewlett-Packard, among others) as well as homes and shopping malls. Another significant project is a thirteen block downtown development called the “Alameda Project”.

Table 1

Mexican Market for Building Materials

(US$ Millions)

1990 1991 1992(*) Estimated Annual

Growth – Next 3 Yrs.

Imports 272.5 611.1 839.0 9%

Imp. from U.S. 179.6 441.0 589.6 8%

Production 308.6 330.2 357.6

Exports 276.5 327.7 344.7

Consumption 304.6 613.6 851.9 8%

Exchange Rate 2899 3106 3210

(*) estimated

Future inflation rate assumed: 7%

1991 Shares of Total Building Materials Import Market:

U.S. 70.3%

Italy 8.3

Germany 6.2

Japan 5.7

Sweden 3.1

Spain 3.0

Table 2

Estimated Mexican Housing Demand

Year Houses

1990 595,361

1991 590,380

1992 584,833

1993 581,374

1994 58l,268

1995 583,389

1996 585,148

1997 586,807

1998 588,658

1999 590,476

2000 592,068

Source: Secretariat of Labor and Social Prevention

Table 3

Mexican Population, by State

State Population Percent of Total

Mexico 9,815,901 12.10

Distrito Federal 8,236,960 10.15

Veracruz 6,215,142 7.66

Jalisco 5,278,987 6.51

Puebla 4,118,059 5.07

Guanajuato 3,980,204 4.90

Michoacan 3,534,042 4.36

Chiapas 3,203,915 3.95

Nuevo Loon 3,086,466 3.80

Oaxaca 3,021,513 3.72

Guerrero 2,622,067 3.23

Chihuahua 2,439,954 3.01

Tamaulipas 2,244,208 2.76

Sinaloa 2,210,766 2.72

San Luis Potosi 2,001,966 2.47

Coahuila 1,971,344 2.43

Hidalgo 1,880,632 2.32

Sonora 1,822,247 2.25

Baja California 1,657,927 2.04

Tabasco 1,501,183 1.85

Yucatan 1,363,540 1.68

Durango 1,352,156 1.67

Zacatecas 1,278,279 1.58

Morelos 1,195,381 1.47

Queretaro 1,044,227 1.29

Nayarit 816,112 1.01

Tlaxcala 763,683 0.94

Aguascalientes 719,650 0.89

Campeche 528,824 0.65

Quintana Roo 493,605 0.61

Colima 424,656 0.52

Baja Calif. Sur 317,326 0.39

Total 81,140,922

Source: Preliminary results, XI General Census of People and

Housing, National Institute of Statistics, Geography and

Informatics.

Table 4

Mexican Population, Estimated by Age Group

(Thousands of Persons)

Age 1990 Pct 1995 Pct 2000 Pct

0 – 4 9,575 11.8 10,949 11.5 11,722 11.3

5 – 9 10,711 13.2 10,232 10.8 10,787 10.4

10-14 10,547 13.0 10,109 10.7 10,154 9.8

15-19 10,061 12.4 10,177 10.7 10,004 9.6

20-24 8,601 10.6 10,388 11.0 10,021 9.6

25-29 7,140 8.8 9,022 9.5 10,257 9.8

30-34 5,923 7.3 7,431 7.8 8,921 8.6

35-39 4,787 5.9 6,073 6.4 7,346 7.1

40-49 6,572 8.1 8,768 9.3 10,710 10.3

50-64 6,005 7.4 7,663 8.1 9,254 8.9

65+ 1,217 1.5 3,969 4.2 4,821 4.6

Total 81,141 94,781 103,997

Source: Projections of Mexican Population: 1980-2010, National Population

Council and INEGI.

Also noteworthy is that major commercial banks have begun to orient important financing programs toward the purchase, construction, and remodeling of residential units. Loans may cover up to 80 percent of development cost and are usually for 10 to 15 years.

Preliminary results from the 1990 General Census of Population and Housing reveal that Mexico’s population has now topped 81 million. Mexico’s annual birth rate, of major concern a decade ago, fell dramatically from 3.3 to 2.0 percent since 1980 and is expected to fall another full percentage point by the year 2000. Life expectancy is estimated to be 72.9 years for women and 66.4 years for men. Roughly 70 percent of the population live in urban areas. Approximately 30 percent constitute the country’s economically active population. Table 2 Wives Mexico’s population by state.

Persons between 20 and 49 years old make up the population segment most likely to demand housing. In 1990, this segment accounted for 40.7 percent of the total population. The government estimates that this population segment will grow to 45.5 percent by the year 2000. Table 3 shows Mexico’s population by age groups.

In housing construction, the most common building materials used are: (for floors) cement, paving tile, and earth; (for walls) cement blocks, adobe, and wood; and (for roofs) concrete slabs, asbestos and iron sheet, tile, cardboard sheet, palm, and wood. The private housing segment is increasingly using low energy lighting products as well as aluminum and other lightweight products.

Roads and Highways

President Salinas has placed a high priority on the expansion and improvement of transportation as part of Mexico’s modernization program. As a major part of this, the Secretariat of Communications and Transportation (SCT) is seeking the channel US $7.6 billion to road and highway construction this year. The most important part of SCT’s effort is the National Highway Program, wherein the construction and operation of toll roads is contracted for on a concessionary basis. SCT hopes to attract US $4.8 billion in private investment for the four lane conversion of 1,250 miles of existing two lane highway. SCT’s own budget calls for the maintenance or reconstruction of 1,300 miles of highways and 82 bridges in the National Federal Highway Network. Under Solidarity (a major social development program), 750 miles of rural roads will be built, some 250 miles will be rebuilt, and 225 miles of rural and 1,250 miles of feeder roads will be paved.

In commercial and industrial construction, the most common building materials are: concrete, steel, glass, paving tile, cement blocks, and wood. This segment is increasingly using sophisticated materials such as energy conservation products and pollution resistant materials.

The Mexican Construction Industry

The National Chamber of the Construction Industry classifies construction companies according to their equity rather than by the number of employees as is usually the case. Micro-enterprises are those that have an equity under US $74,000, small companies between US $74,001 and US $653,000, medium companies between US $653,001 and US $2,887,000, and large companies over US $2,887,000. Approximately 18,000 enterprises make up the Mexican construction sector, 90.9 percent of them micro, 7 percent small, 1.3 percent medium, and the remaining 0.8 percent large.

Large construction companies are the most important end-users of imported building materials. They are most likely to purchase the most sophisticated as well as the greatest variety of materials. Large construction companies have the technical and financial capacity for large projects and are well experienced in this area. Among the largest construction companies are: Ingenieros Civiles Asociados, S.A.; Bufete Industrial, S.A. de C.V.; Mextrac, S.A. de C.V.; Gutsa Construcciones, S.A. de C.V.; and Desarrollo Monarca, S.A. de C.V.

Although statistics are not available, it is generally believed that micro-enterprises are the second most important end-users of building materials. Although very small in size, these micro-enterprises number well into the thousands. This group engages in small projects unless they join forces with medium and small components.

Medium and small construction companies are thought to have about equal market share and are usually involved in medium sized projects. They often collaborate with either micro-enterprises or large companies on projects, especially if time is a constraint. Purchases of building materials by the occasional user or do-it-yourself homeowner are not significant.

Market Trends

Among the trends in construction is the use of advanced technologies and special materials, especially in the Mexico City area since it is subject to earthquakes. In building construction, advanced materials such as energy isolation products, intelligent building wiring, and pollution resistant finishing products are being employed with greater frequency. In road construction, hydraulic concrete mixers, asphalt protection products, and foundation stabilizing chemicals are increasingly being employed.

Best Sales Prospects

Best sales prospects are: hydraulic cements, asphalt materials, granite, marble, slate, gypsum products, plywood, steel structures, doors and windows, locks, plumbing products, copper piping, air conditioning equipment, liquid fuel boilers, electric stairways and elevators, wall paper, and prefabricated structures.

Competitive Situation

Last year reported domestic production of building materials equalled only 42 percent of domestic consumption Cement, glass, lime, ceramic tile, gravel, and vinyl paint make up the greatest portion of the Mexican materials production and are competitive with U.S. manufacturers. Largely because financial constraints have blocked modernization and expansion of capacity, domestic manufacturers of other building materials are not currently competitive with U.S. manufacturers.

Domestic manufacturers have been unable to meet demand. imports of building materials were US $272.5 million in 1990, US $611.1 million in 1991 and US $839.0 million in 1992. They are expected to continue growing at average annual rate of nine percent over the next three years. Imports of building materials from the United States were US $179.6 million in 1990, US $441.0 million in 1991, and US $589.6 million in 1992. They are estimated to continue to grow at an average annual rate of eight percent over the next three years.

U.S. manufacturers have been the largest supplier of building materials, hardware, and fixtures to the Mexican market. Last year they accounted for 70 percent of all imports. Suppliers from Italy came the closest to the U.S., but still only accounted for 8.3 percent. Germany with 6.2 percent, Japan with 5.7 percent, Sweden with 3.1 percent, and Spain with 3.0 percent rounded out the field. U.S. manufacturers are expected to retain their dominance in coming years.

Competitive factors favoring U.S. manufacturers include high product quality, the ability to meet or exceed product specifications, and the ease with which they can be contacted. The size and proximity of the U.S. market is also an advantage, enabling U.S. manufacturers to supply large volumes of product promptly and at relatively low transportation cost.

Import Climate

No major obstacles exist to the importation of building materials, hardware, and fixtures. Since Mexico Joined the General Agreement on Trade and Tariffs (GATT), most import barriers have been eliminated. Today only about 306 of 12,000 products classified under the Mexican Harmonized System Schedule are required to have import permits. Mexico is expected to continue to be increasingly receptive to foreign made goods. Mexico currently maintains five import duty levels: 0, 5, 10, 15, and 20 percent. Most building materials, hardware, and fixtures are subject to import duties ranging between 10 and 20 percent.

Note should also be taken that, as of January 1, 1993, the last three digits in Mexican currency have been eliminated. For example, prices of products in Mexico before this date listed as 10,500 pesos and 4,500,300 pesos will now be listed as 10.50 nuevos pesos and 4,500.30 nuevos pesos, respectively. All new price listings will bear the legend “nuevos pesos” (new pesos). Exchange rates will also be listed differently and these will appear now as 3.2000 nuevos pesos per one U.S. dollar as compared with 3,200.00 pesos.

A value added tax of fifteen percent is levied on both domestic and imported goods. The import value on which this tax is calculated is the FOB invoice value, plus the ad valorem duty and a customs processing fee. With a twenty percent duty, for example, an item with an invoice value of $100 would first pay a duty of $20 and a processing fee of $0.80. The value added tax on the resulting $120.80 would be $18.12, giving a total of $138.92. An article of Mexican manufacture with an invoice value of $100 would pay a VAT of $15.

The Mexican government has begun enforcing a law under which certain categories of products must be labelled in Spanish prior to importation into Mexico. As of November 1992, this list includes all textiles and apparel, all leather products and refrigerators. Mexico requires that all other products have a Spanish-language label affixed prior to reaching the consumer. As of October 1992, Mexico permitted importers and distributors to affix these labels after importation into Mexico. However, because this practice may change, exporters may want to explore cost effective ways to label their products in Spanish. Importers and customs agents can usually provide information on current and proposed labelling requirements.

Mexico has also recently begun requiring certificates of quality before certain products can be sold in Mexico. For a list of product categories requiring certificates of quality and complete labelling information, consult the Tariffs, Permits, and Customs Regulation section of the main menu of the Office of Mexico’s Flash Facts system at (202) 482-4464.

There are no official metric requirements applicable to imports into Mexico; however, since the metric system of units is the legal official standard of weights and measures in Mexico, importers will usually require metric labelling for packaged goods, although the English system is also used. Dual labelling is acceptable. Mexico adheres to the International System of Units (SI) in both official and common practice. Electrical standards are the same as in the United States, electric power is 60 cycles with normal voltage being 110, 200, and 400. Three phase and single phase 230 volt current is also available.

Business Practices

Building materials, hardware, and fixtures are largely sold by specialized retailers. For example, painting products and accessories are sold in paint stores. Vinyl flooring tiles are usually sold in carpet, blind, and curtain stores. Lighting products are sold by distributors of electric products. Plumbing products are sold mainly in hardware stores. Ceramic water closet bowls, flush tanks, lavatories, plumbing fixtures, and heaters are sold by specialized retailers. In addition, cement, lime, gypsum, gravel cardboard sheet, and steel rods are also sold by specialized retailers.

It is easy to find retailers of building materials. Some offer a variety of building materials such as paints, insulating products, and plumbing accessories. Large hardware stores offer different lines of building materials, including paints and plumbing accessories.

The conventional way of promotion is through radio, television, and print advertising. Specialized magazines and trade publications are also often employed. Products may also be promoted in trade shows and by visiting clients.

Purchases are usually paid in cash. Payment terms of 50 percent up front with the balance received upon delivery is common. Checks and credit cards may be accepted. Bank financing is used by medium and large customers. Large customers may get credit terms for anywhere between 8 and 45 days.

Mexicans usually pay for their international purchases with an irrevocable letter of credit. Some may have checking accounts with U.S. banks. Several Mexican commercial banks offer money transfer services and the major ones have offices, subsidiaries, and correspondents in the United States. Some U.S. banks have representative offices in Mexico; however, severe restrictions are currently places on their ability to offer a full complement of banking services to Mexican customers.

COPYRIGHT 1993 U.S. Department of Commerce

COPYRIGHT 2004 Gale Group