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The fact that the northern states of the country: Baja California, Sonora, Chihuahua, Saltillo, and Nuevo León share the border with the southern territory of the USA, simplifies the processes and reduces logistic costs. There are enough railroads and highways to transport vehicles and auto-parts to all the production centres of the country.

II. Foreign investment and foreign trade in the automotive industry

2.1. Foreign investment

In Mexico we have the Foreign Investment Law, which defines and regulates the activities foreign investors are allowed to perform, establishing percentages, limits, restrictions or conditions on participation percentages. It specifies the activities that may only be carried out by Mexican individuals, and those that allow a certain percentage of foreign investment.

In some cases there a few exceptions, which are subject to the decision of the corresponding authorities (The Ministry of Economy).

There are some restrictions for the participation of foreign investment, which can not be exceeded directly, or by using trusts, deals, statutory or partnership agreements, pyramid schemes, or any other mechanism granting control or a larger participation; except in case of a neutral investment, meaning it is not considered to determine the percentage of foreign investment in the social capital of Mexican companies or authorized trusts funds.

According to the Foreign Investment Law, trading corporations established in Mexico must stipulate in their bylaws an agreement by which foreign partners are compelled to be considered as Mexicans in regard to their shares, social capital, goods, rights, liabilities, concessions, participation or interests, as well as all the rights and liabilities derived from the contracts they sign as partners. Therefore, they can not request the protection of their governments. Otherwise, they shall include an exclusion clause for foreigners stating the partnership will not admit foreign participation.

Hence, partnerships that include an admission or exclusion clause for foreigners in their bylaws will have the right to own, for example, immoveable properties in Mexico for the development of their businesses.

Until 1999, companies devoted to manufacture and assemble automotive parts, equipment and accessories were allowed to have a maximum foreign investment percentage of 49%. After that year, regulations were modified to allow 100%, without having to request the approval of Mexican authorities.

Nevertheless, and according to the aforementioned law, there are some responsibilities on foreign investment that must be periodically fulfilled to inform authorities about the financial situation of the company, as well as any foreign investment change in order to simply business development opportunities for this industry in Mexico.

2.1.1. Tax Compliance

Natural persons and companies have the following tax responsibilities, among others:

• Submit tax returns specifying the tax results of the FY or its taxable profits.

• Elaborate a financial statement and have a CPA make the corresponding report.

• Auditor’s report on the compliance of its responsibilities before the Mexican Social Security Institute (Instituto Mexicano del Seguro Social), in case the company had an annual average of three hundred or more employees during the last FY.

2.1.2. Tax Incentives

2.1.2.1. Tax incentives for expenses and investments in technologic research and development

Taxpayers who pay income taxes on verifiable investments for the development of products, materials, production and research processes are granted a 30% tax credit.

2.1.2.2. Immediate deduction of new fixed assets

It is possible to apply the immediate deduction of new fixed assets during the same FY the investment is made, in the same FY they are used or during the following FY.

2.2 Foreign Trade

Mexico has many important support programs for production industries, especially the automotive industry, because of the relevance of this sector for the national economy.

Following you will find an introduction on the automotive industry support programs, which are intended to promote high competitive levels in international markets.

2.2.1. Temporary imports program for the production of export goods (PITEX):

This program allows temporary import activities of raw materials from any country, without paying import taxes (according to the provisions of the international agreements signed by Mexico), or VAT or compensation fees (if applicable). The machinery and equipment with the necessary characteristics to manufacture export products may be imported with the support of this program without paying VAT.

It is possible to have access to this program in fifteen business days, but it implies many control responsibilities. Following you will find some of them:

1. Generation of an annual report (summary of foreign trade operations)

2. Return of raw materials in 18 moths, at the latest

3. Automated inventory control system, properly recorded through a computerized system that differentiates national from foreign merchandise, including information on the exported or returned goods, the percentage they represent from the products temporarily imported, the damages and wastes that are not returned, as well as the ones bound for the national market using the first-in-first-out mechanism.

The life of this program is indefinite, as long as companies comply with the provisions and exportation of goods.

2.2.2. Maquila Program:

Similarly to PITEX program, the Maquila program allows temporary import activities of raw materials without paying foreign trade taxes, VAT and compensatory fees (if applicable). The machinery and equipment with the necessary characteristics to manufacture export products, imported with the support of a Maquila program, do not pay VAT on imports.

Additionally, it allows the importation of goods to offer certain services and their corresponding invoicing to residents abroad, such as exportation services (0% VAT), among others:

• Goods supply, storage or distribution services
• Merchandise packing, repacking, boxing, reboxing, bottling, marking and labelling;
• Merchandise classification, inspection, testing or verification;
• Pieces cutting, adjusting, sanding, gluing, polishing, painting or waxing
• Restoring and maintenance of goods;
• Washing or ironing clothes;
• Embroidering or stamping clothes;
• Shielding, modifying or adapting an automotive vehicle;
• Design or engineering of products, including software;
• Recycling or collection of wastes.

It is possible to have access to this program in fifteen business days, but it implies many control responsibilities. Following you will find some of them:

1. Generation of an annual report (summary of foreign trade operations).

2. Submit a monthly statistical report of foreign trade operations.

3. Return of raw materials in 18 moths, at the latest.

4. Automated inventory control system, properly recorded through a computerized system that differentiates national from foreign merchandise, including information on the exported or returned goods, the percentage they represent from the ones temporarily imported, the damages and wastes that are not returned, as well as the ones bound for the national market using the first-in first-out mechanism.

The life of this program is indefinite, as long as companies comply with the provisions and the exportation of goods.

2.2.3. Program for companies with high-export levels (ALTEX):

This program allows companies with high-export volumes to receive the refund of VAT credit balances in five business days, approximately.

It is possible to have access to this program in fifteen business days, but it implies many responsibilities, some of which are: the generation of an annual report (summary of foreign trade operations) and continued efficient export activities.

It is important to highlight that the submittal of the annual report renews the life of the program.

2.2.4. Sectorial Promotion Programs (PPS)

The PPS allow the definite importation of goods intended for production with a preferential tariff rate, regardless of the country of origin, and the exportation of the resulting products with preferential rates (foreign trade taxes from 0% to 5%).

Following you will find the goods that may be imported by industrial sector. The PPS found within the production chain of the automotive industry are:

• Electric industry
• Electronic industry
• Mining and metallurgical industry
• Capital goods industry
• Various industries
• Chemical products
• Rubber and plastic manufacturing industry
• Leather industry
• Automotive and auto-parts industry

To enrol in this kind of programs takes approximately 20 business days. Their life cycle is indefinite, as long as the company complies with the provisions, such as the production of the imported goods and the submittal of an annual report.

2.2.5 Law to promote manufacturing, maquila and export services companies (DIMEX):

The law to promote manufacturing, maquila and export services businesses is expected to be enforced by the end of 2006. This law intends to consolidate the Maquila and PITEX programs, annulling the latter.

It is necessary to have an Advanced Electronic Signature to subscribe to this program.

Benefits:

1. To enrol in this program it is necessary to present an export project (without a maquila formal contract)

2. Simultaneous approval of a Sectorial Promotion Program (PPS)

3. The companies enrolled in a previous PITEX or Maquila program can count on the authorization of a DIMEX program.

4. VAT return in 20 days at the latest, if there is a credit balance.

5. Importation of machinery and equipment complying with the foreign sales requirement of 500,000 USD or 10% of the total sales.

The life of a DIMEX program is indefinite, as long as control responsibilities are fulfilled, some of which are:

1. The generation of a foreign trade operations annual report according to the program.

2. Keep an automated inventory record to control the merchandise imported and exported during the life of the program.

3. Return of the merchandises in 18 months, at the latest.

DIMEX considers the authorization of the Services Maquila programs with a wider range of activities, including, among others, goods repairing, cleaning, quality control testing, packing, painting, and greasing activities.

2.3. Bonded warehouse

The qualification of a bonded warehouse is convenient to get a maximum deferral on the payment of import taxes. This regime states the goods can remain within the bonded warehouse without paying the taxes generated by the import activities for two years, and may be withdrawn at any time to be applied in the national market or in production.

One of the main requirements to qualify a bonded warehouse is the tight control of the goods it contains, as well as the deposit and withdrawal dates, and the probable tax payment at the moment of withdrawal for definite import purposes.

2.4. Drawback

The foreign trade drawback program allows beneficiaries to get back the general import tax generated by:

• Goods, raw materials, parts and components, packages and bottles, fuels, lubricants and other materials incorporated to the exported item
• Merchandises returned in the same conditions
• Merchandises to be repaired or modified

The amount of the drawback is based on the amount paid as general import tax at the moment the export activity is carried out. The drawback of the taxes paid takes approximately 10 business days.

III. Automotive industry financing

The Mexican financial system is basically made of the following institutions:

+ Treasury Ministry (SHCP). It is the ultimate administrative authority of the Mexican Financial System.

+ Banco de México.

+ Mexican Stock Exchange (Bolsa Mexicana de Valores). The purpose of this private institution is to simplify stock transactions and promote the development of the respective markets.

+ Banks. To carry out banking operations; they receive and concentrate, as deposits, the capitals attracted to make them available to those who know how to manage them.

+ Development bank (Nafinsa). Promotes savings and investments, as well as the channelling of financial and technical support for industrial promotion and, in general terms, for the national and regional economic development of the country. The development banking institutions have the purpose of financing priority projects for the country.

+ Investment funds. Provides credit or funding to plan, acquire, develop, build, transfer and manage all kinds of real-estate or personal properties to specific sectors or activities.

+ Non-banking financial institutions (SOFOLES).

3.1 Financing for assemblers:

Traditionally, assemblers based in Mexico finance their operations through resources obtained by their corporations through the International Stock Markets. Likewise, they appeal to local financing sources to obtain and allocate resources for their operation, mainly with short-term credits.

In order to attract permanent investments and generate sustained economic growth, some state governments have programs that provide incentives for companies who want to establish in their territories.

These incentives may be in cash or in kind, depending of the characteristics of the investment and the specific programs of every location. Usually, these incentives are granted to companies that are planning to carry out large-scale investment projects.

Usually, new investors can have access to this kind of programs as long as they are able to generate benefits for a certain period of time. Some of the most common benefits pursued are the generation of a minimum amount of jobs or the contribution or support to state development programs.

Additionally, the authorities who grant this type of incentives set periodic results programs that are subject to audit and inspection procedures, and the government has the authority to review the destination of the funds provided.

3.2 Financing for distributors

This type of financing comes mainly from trade and development banks through complementary or replacement plans to substitute the ones offered by other financial agents. These plans allow distributors to acquire units from the assembly plants without making immediate payments and maintaining in their showrooms enough new assorted units until they are sold. Banks have a specialized department that carries out an analysis of the operative performance and profile of the automotive distributors, based on their projected sales level, inventory rotation and internal controls.

3.3. Financing for suppliers (auto-parts)

Financing for suppliers of the automotive industry comes mainly from assemblers and international banks. Likewise, as in the case of assemblers, they appeal to the Mexican Financial System to cover short-range cash flow needs.

Every year there are many shows and encounters in Mexico, some organized by the Banco Nacional de Comercio Exterior (Foreign Trade National Bank) and Nacional Financiera, in which companies have direct contact with the assemblers operating in the country. These are the main forums for people interested in becoming suppliers of this industry, because they can establish direct contact with any company. Potential suppliers must present a cost-analysis specifying overhead costs, raw materials, labour, indirect expenses and other issues such as supervision, equipment or maintenance. One of the advantages of becoming a direct supplier of the automotive industry is the relatively simple access to credits in dollars from large assemblers or international banks.

3.4 Financing for consumers

Consumers can buy new units through the following mechanisms:

• Cash sales. Assemblers authorize the application of incentives to offer lower prices than other commercialization options. In Mexico 2% of the sales are made through this means.

• Plant financing. Plant financing institutions determine the price of the vehicle, the down payment (35% average), the term (12 to 36 months) and the interest rates (from 0% to 18%).

• Bank financing. Financial institutions are responsible for establishing the credit conditions (down payment, term, rates). In Mexico the sales through financing (banks and plants) represent 30% of the total sales.

• Self-financing. Consists in the integration of consumers groups who periodically give a certain amount of money to acquire new vehicles. All self-financing institutions determine their own adjudication criteria (number of contributions, biddings, raffles, punctuality, etc.). This financing method is for consumers who are not creditworthy and represents 13% of the sales in Mexico.

Banks. These institutions offer plans with many different characteristics, and some of the most common ones are the “secured credit” and the “financial leasing”. For secured credits the invoice of the vehicle is in favour of the creditor until it is totally paid, the credit holder can dispose immediately of the vehicle and the payments are generally fixed, terms go from 6 to 60 months. There is a setup commission of 1.5 to 2.3% of the amount to be financed, advance payments are not penalized and the minimum down payment percentage is 7%. The insurance may be paid cash or financed throughout the life of the credit.

As for the financial leasing, the consumer has the right to use the vehicle and when the contract expires he has three options: the first one is to use his buying option and pay a percentage of the original value, which may be arranged from the start as long as the amount is lower than the market value at the time of the transaction. The second option is to renew the contract with a lower leasing amount, that is to say, extend the life of the contract, reducing the amount of the instalments. And the third option is to sell it to a third party and divide the money with the leasing institution. The leasing may be paid at a fixed or variable rate, the term varies from 12 to 48 months; it is necessary to pay research expenses and a setup commission (from 1.5 to 2%), depending on the amount to be financed or a minimum down payment of 15%.

Sofoles. They offer a wide variety of plans; therefore, there are many different terms, down payments and Interest rates.

These partnerships offer secured credits with conditions similar to the ones offered by banks and leasing plans. Their terms vary from 12 to 48 months, the minimum down payment varies from 10 to 35% of the value of the vehicle depending on the plan; it also offers a special payments option (usually annually) to reduce the amount of the monthly payment. The life and damage insurance can be included in the monthly payment.