Industrial growth to continue in San Luis Potosí

San Luis Potosí initially found wealth as a mining town after gold and silver were discovered in the area in 1592. Indeed, its name derives partly from Potosí, the Bolivian town that had the reputation as the richest city in the world thanks to its silver deposits. The state’s mining boom never quite took off like its namesake’s, but the central Mexican state has always had characteristics that make it a natural centre for industry. Just 415 km from Mexico City, 505 km from Monterrey and 370 km from Guadalajara, San Luis Potosí is as central as it can be relative to the economic centres of the country.

For more than a century this strategic location allowed the city to be a rail hub; and although passenger trains are now confined to the railway museum in the capital’s historic centre, the current railway network makes San Luis Potosí a highly connected region in Mexico for cargo. Kansas City Southern’s Mexican subsidiary operates routes directly from the industrial zone to the eastern US, as well as the eastern and Pacific coasts of Mexico. Today, San Luis Potosí is known as a crucial part of the Bajío region alongside Querétaro, Guanajuato and Aguascalientes. The area has become a powerhouse for Mexico’s manufacturing industry, and in particular a centre for automobile manufacturing.

Economy

The emergence of the Bajío industrial corridor has allowed GDP in the states that comprise it to grow well above the national average in recent years. State GDP has been at least one percentage point, in most cases more than two, above national GDP for every year since the 2009 recession with the exception of 2013 and 2014. San Luis Potosí’s GDP increased from MXN211.3bn ($12.74bn) in 2009 to an estimated MXN284.5bn ($17.13bn) in 2016 on a constant price basis, averaging around 4.4% annual growth from 2010-16. Mexico’s national GDP growth, meanwhile, averaged 3.1%. Recently, the gap between national and regional growth has become wider, with the state’s GDP growing at double the rate of Mexico’s. In 2015 the state’s economy expanded by 5.4% compared to 2.6% growth at the national level, putting it in fifth place out of 32 states in terms of GDP growth. Fellow Bajío states Querétaro and Guanajuato were the first and third fastest growing in Mexico that year, respectively. Official state figures for 2016 are still not available, but San Luis Potosí is again expected to more than double the nation’s rate of growth, with 2.3% forecast for Mexico and 4.6% for the state. This has seen San Luis Potosí increase its share of national GDP from 1.77% in 2003 to 1.98% in 2015, according to the most recent official data available from National Institute of Statistics and Geography. The workforce, too, has expanded with the economically active population in San Luis Potosí rising from 1.04m in 2011 to 1.19m in 2016, or 42.7% of the total population, according to estimates from the Secretariat of Economic Development (Secretaría de Desarrollo Económico, SEDECO).

Economic activity remains firmly centred in the Centro region, where the capital city and most industrial areas are located. The Centro region accounts for 84.1% of state GDP despite being home to just over half the population, which has grown from 2.41m in 2005 to 2.72m at the time of the last census in 2015. Migration from other states to the industrial zone is partly responsible for the increase.

Investment

The nature of how foreign direct investment (FDI) is made, and how levels are measured, means that states rarely see linear annual growth; indeed, in 2016 San Luis Potosí received just $838.4m of FDI – around 47.3% of the amount it registered in 2015. But the industrial boom has brought some far larger inflows in recent years. With $1.77bn of FDI inflows, 2013 was a record year for the state, and though the number dropped to $980.1m in 2014, in 2015 San Luis Potosí attracted $1.62bn of investment – putting it sixth in the country despite being the 18th largest economy out of the 32 states in Mexico. Additionally, exports have witnessed consistent growth, having more than tripled in US dollar terms since 2009. Volumes have grown every year since then to hit $10.47bn in 2016, according to estimates from SEDECO released in early 2017. Approximately $11.44bn of that is estimated to have come from the manufacturing sector.

Automotive Boom

Indeed, some 78.8% of Mexico’s GDP is generated within a 500-km radius of the state capital, giving companies based in the area access to 73m potential customers. The arrival of GM, which opened a plant in San Luis Potosí in 2006, led to a significant expansion in automotive manufacturing; the number of companies involved in the industry increased from 93 in 2008 to around 218 in 2016 (see analysis). In 2016 BMW began construction of a $1bn manufacturing plant in the Logistik industrial park in Villa de Reyes, where the company will begin manufacturing its 3 Series in 2019.

Around 35% of the 2500 automotive providers in Mexico are based within 300 km of San Luis Potosí’s capital, according to Gustavo Puente, secretary of economic development in San Luis Potosí. This has helped the automotive sector form around a quarter of the state’s manufacturing industry, compared to just 18% of Mexico’s overall manufacturing segment.

Diversified Industry

Yet the state’s economy is not all about cars. As in the past, mining continues to be a key industry, although in October 2016 the sector accounted for just 1.2% of the jobs in the state affiliated with the social security system — a way of measuring formal employment. San Luis Potosí is home to the largest fluorite reserves in the world with significant deposits of bentonite and cadmium. In total the sector received $102m in FDI in 2016.

More traditional industries include food, where Mexico-headquartered multinational Grupo Bimbo celebrated the 25-year anniversary of its San Luis Potosí plant, which employed more than 1200 people in 2016. Mexican-owned Mabe, which produces home appliances from its plant in San Luis Potosí, will celebrate 30 years in the city in 2017. Bimbo is one of the largest players in an electrical appliances and accessories industry that employs more than 10,000 people in the state – the third most of any manufacturing sector behind food and transport.

Infrastructure Growth

San Luis Potosí has a comprehensive state-funded infrastructure network. With the future of the North American Free Trade Agreement (NAFTA) unclear, San Luis Potosí is still in a position to retain the advantages of being on what is known today as the NAFTA corridor. The Carretera 57 highway, which runs from Piedras Negras on the US border to Mexico City, passes through several of the state’s 20 industrial parks that were placed strategically along the main road.

Anticipating further increases in traffic along industrial roads, the state government has begun work on the road to Querétaro. President Enrique Peña Nieto’s visit to the state in late February underlined the route’s strategic importance to the country, and as he instructed the nation’s minister of communications and transport, Gerardo Ruiz Esparza, to seek ways of reducing congestion.

In November 2016 San Luis Potosí’s airport operator began work on a MXN400m ($24.1m) expansion to double capacity from 450,000 passengers per year to more than 1m. The project is set to be completedby the end of 2018. “Over the last five years Luis Potosí’s airport has experienced an average annual growth rate of 16%. The new added capacity will allow it to increase capacity to 1.2m passengers a year,” Marco Antonio Camarena, regional administrator of San Luis Potosí’s airport, told OBG.

In addition, the state’s industrial parks offer added facilities for companies locating in the area. Most notable are the World Trade Centre industrial park, which acts as its own Customs office; and Mexico’s first free trade zone, from which Kansas City Southern railway operates an intermodal transport hub. This puts San Luis Potosí firmly in the NAFTA corridor both by road and rail (see analysis).

Safe Bet

There are many factors that contribute to stability in the region. The state is relatively isolated from the organised crime that persists in certain areas of the country. Members of the business community and state government are encouraging investors to focus on San Luis Potosí’s stable labour environment, as there has not been a strike in the state for 14 years. There is also consistency in the weather, with a dry to semi-dry climate and an average temperature of 21°C.

Juan Manuel Carreras, governor of San Luis Potosí, has made attracting investment a priority by implementing business-friendly practices since late-2015 and by appointing administrators with experience in the private sector, such as Gustavo Puente, who served as the president of the San Luis Potosí branch of the National Chamber of Industry (Cámara Nacional de la Industria de Transformación, CANACINTRA). According to SEDECO’s “Economic Panorama 2016”, the relationship between state authorities and local, national and international businesses is one that is conducive to prosperity. The World Bank’s “Doing Business 2016” report put San Luis Potosí in eighth position overall out of Mexico’s 32 states.

Education

The stable business environment is complemented by local government efforts to provide the education needed to make the state a continued place for investment. Close collaboration among the government, private sector and educational institutions is actively encouraged. There are more than 92 technical schools and universities, and major investors such as BMW are collaborating with educational institutions to provide apprenticeships under a dual education system (see analysis).

Tourism

The recent sharp increase in business travellers has provided ample room for the hotel industry to expand in the state’s capital city. With government efforts to capitalise on the increase in the number of non-business tourists, investments are being made in the region’s infrastructure and diverse ecosystems. Additionally, due to San Luis Potosí’s relatively unexplored natural areas, adventure and nature tourism are set to expand (see analysis).

Agriculture

Carreras has made decentralising the economic activity of San Luis Potosí away from the capital one of the administration’s priorities, and the huge potential in agriculture is attracting investment both from abroad and elsewhere in Mexico. Thanks to investment in protected agriculture, it is one of the top-three tomato producers in the country, and it is also a top producer of chilli, oranges and sugar cane.

Making the most of a dry climate, plentiful sunshine and energy infrastructure to expand the reach of greenhouses is one way the state may look to boost formal employment in rural areas. The state has invested MXN107m ($6.45m) in the modernisation of irrigation technology in an effort to make agriculture more productive and profitable, and the current administration is aiming to modernise 15,000 ha of land in the short term. These efforts, among others, are aimed at formalising labour and improving the quality of life in the countryside. According to San Luis Potosí’s Secretariat of Agricultural Development and Water Resources, 43.8% of the businesses or people operating in the sector are subsistence farmers, meaning their primary focus is on growing enough food to feed themselves and their families, leaving little or none for surplus trade.

A Changing Market

The auto industry experienced a minor setback in January 2017, with US auto manufacturer Ford cancelling its proposed $1.6bn investment in a new plant in San Luis Potosí. This and the political rhetoric coming from the newly elected US administration have stakeholders in the US and Mexico questioning the future of NAFTA and trade between the two countries. However, BMW, which is building a $1bn plant set to begin operations in 2019, immediately reaffirmed its commitment to investment in the region, as did other industrial companies with operations in the state. “BMW makes its investments based on the long term, and there is no reason for us to change our plans for a project of this size,” Carlos Gutiérrez, head of government relations and external affairs at BMW in Mexico, told OBG. “We are aware that there may be changes in the external environment, but we are building a production plant to serve the whole world,” he added.

Additional key investment projects have been signed since, signalling resilience and stability in the manufacturing industry. In January 2017 US-owned transport group Kansas City Southern teamed up with Watco Companies and World Trade Centre (WTC) Industrial to facilitate and expand the export of liquid fuels from the US to Mexico (see analysis). According to José Luis Contreras, COO of Grupo Valorán, parent company of WTC Industrial, “this joint venture is a sign of confidence and there is an optimism around now that wasn’t here in January 2017”.

Free Publicity

Furthermore, in the wake of Ford’s decision, San Luis Potosí experienced a period of relative world media attention. “In some ways, Ford’s departure can be an opportunity for San Luis Potosí,” Paulina del Valle, director-general of the Mexican Business Council for Trade, Investment and Technology in San Luis Potosí, told OBG. “We are becoming known throughout the world, and other companies can now come and take advantage of the strategic and logistical location of the state,” she added.

Although any changes in Mexico’s trade relationship with the US – and thus the impact on industries in San Luis Potosí – are far from being defined, the notion of having to operate in a new environment is accelerating the process of diversifying to new markets. “For a long time in Mexico we have made the mistake of always looking north,” Raúl Martínez Jiménez, president of San Luis Potosí branch of CANACINTRA, told OBG. “Now we may not be able to export to the US as much as before, but in San Luis Potosí we have everything we need to reach many other countries.” Indeed, industries are building on existing relationships with Europe, Asia and other parts of Latin America. Although state exports, as in the rest of Mexico, go overwhelmingly to the US, San Luis Potosí has something of a head start when in comes to receiving investment from non-US sources. Since the 2000 free trade agreement between Mexico and the EU, around 40% of Mexico’s FDI has come from Europe; in San Luis Potosí that number is around 50%. Furthermore, the number of Japanese companies present in the state has risen from three in 2009 to 46 in the span of eight years.

Outlook

While the uncertainty that has been ushered in with the new US administration may have lowered expectations in the short term, there are several encouraging signs that industrial growth is set to continue apace in the region. Central players in San Luis Potosí’s private sector are, therefore, expecting the region to keep growing for many years.

 

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The Report: Mexico 2017

San Luis Potosí chapter from The Report: Mexico 2017

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