Mexican Executives Believe They Need a Plan B for Potential Trump Chaos

Last week Frontier Strategy Group hosted a group of 22 Mexico executives at our semiannual Mexico City executive breakfast on February 15th. The discussion centered on Mexico’s place in regional and global portfolios in the aftermath of the election of President Trump and what impact the Trump administration could have on performance. The discussion also included the major scenarios for Mexico’s economy and its politics through the 2018 Mexican presidential elections, and what multinationals can do to continue to thrive (and survive) in 2017 and beyond. These are the key takeaways from the session:

  • Mexican executives are less confident in Mexico’s prospects than before: 63% of executives surveyed during the event expressed somewhat less or significantly less confidence in Mexico’s economy than a year ago, driven predominantly by the election of President Trump and growing uncertainty over the state of domestic consumption and private investment appetite within Mexico
  • Mandate for growth persists, but confidence in continued support is weakening: While 56% of Mexican executives have not had to change their top-line targets, key questions remain over the viability of previous growth and profitability targets given continued potential for Trump-related instability and continued Federal Reserve rate hikes driving higher interest rates and persistent currency devaluation. Only 33% of Mexico executives are certain that corporate will continue to be supportive of the current growth strategy and reinvest in their Mexican operations at the same degree as before
  • FX impact is weighing heavily on MNC performance: While the Mexican peso has recovered somewhat since the start of 2017, there remains little hope that the Mexican peso’s weakening is over, and this will continue to drive a competitive disadvantage for multinationals and increasing margin pressure, given the resistance to price increases that most multinationals have confronted in Mexico
  • Multinationals are yet to see the effects of weaker peso and lower demand on their sales: While only 26% of executives believe that the market has suffered a significant slowdown over the last few months, most continue to center their concerns on how they would need to react to further currency weakness, while end customer demand remains a major concern as the previous stability of the Mexican market is no longer necessarily a viable assumption
  • Most executives expect the center-right PAN to return to power, but fear the victory of leftist AMLO in 2018’s presidential election: Over half of clients surveyed expect that the PAN’s candidate, most likely Margarita Zavala, will win next year’s presidential election, there is growing fear that Andres Manuel Lopez Obrador may be victorious next year. 86% of executives believe that AMLO’s victory would be highly negative for Mexico’s economy and their businesses, while 14% believe he will have no impact. Most executives believe the PRI will not retain the presidency

Multinationals need a Plan B (and a Plan C)…

Mexican country managers confront an uncertain future over the next few months, but increasingly these executives are prioritizing building out contingency plans and scenarios, incorporating both disruptive events that will require course corrections midway through the planning cycle and particularly disruptive scenarios that would require a full strategic reset (such as a trade war between the US and Mexico over the coming years). In the meantime, multinationals will need to focus their attention on the following:

  • Revisiting fundamental market assumptions: Reexamining customer segment prioritization, including going beyond market segmentation and toward behavioral segmentation and profitability segmentation in order to mitigate the impact of customer price sensitivity over the coming year. Furthermore, consider adjusting value propositions over the coming year, particularly enhancing your focus on value-added services
  • Build underdeveloped capabilities: Mexico executives are increasingly paying attention to building up their channel capabilities as they can no longer take for granted the market’s continued growth. The current uncertainty is also driving an increasingly clear need for improved market monitoring and ensuring that it is effectively incorporated into quarterly business reviews
  • Reset local operations for profitable growth: Before cost-cutting demands start coming from corporate centers, executives should begin demonstrating a focus on productivity and developing a cost-effective culture going forward, to demonstrate a continued focus on ensuring profitability despite continued currency pressures and uncertain growth prospects.

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