Episode #129 - Exploring Mexico's Packaging Machinery Market Growth Pt. 2: Politics, Packaging Investments & AI Impact

Transcription: 

Sean Riley:

I want to pivot a little bit. Nobody really likes to talk about politics, but 2024 is an election year, and Mexico will be selecting a new president. And historically, there's been a drop in packaging machinery investments during election years.

Do you know what the reason is for that? And I guess, do you think the history will repeat itself and they'll go down again because of the election?

Luis Domenech:

That is completely correct. In Mexico, we have presidential elections every six years. If you see a packaging machinery demand and packaging machinery, we have seen the strongest drops in imports occurred prior to the elections. Either the year before the elections or the elections year, we have seen drops in packaging machinery demand.

That has obeyed to the uncertainty that the election processes bring. For the past 24 years, we stopped being a single party country. We now have a democracy. We have different political parties and different ideologies that come presidency, and that has created some uncertainty, especially among business groups and among international investors. Current president comes from a new political party that he established five years before election. He had run for president for three times with the left-wing party in Mexico for three occasions. He didn't win any. The last time he lost, he decided to block reform the main avenue in Mexico City for a couple of months in complaint that the presidency was stolen. So, in the political scenario, we now have a democracy. We have competition, which is very positive.

But there were fears of the business community, this president with his own political party, how he would run the country. He was saying left wing, and we will consider first the poor. He refers to business groups as an economic wealth, as improper things for a country like Mexico where there's poverty. So, his speech was not pro-business and that created a lot of fear among the business community. And many companies said, "Let's stop investing, in case this party wins and we become communists, we don't lose that money."

Sean Riley:

Right, right. Yeah.

Luis Domenech:

Now, that wasn't the case. Yes, the political party in power is left wing, but they have not issued the things that significantly damage the business economy. Of course, they have implemented measures like increasing minimum wages, like banning outsourcing, changing the way taxes are calculated. So, most companies now pay more taxes.

But I think it has been measured, and it has been positive for Mexico. There are some pending things that everybody in Mexico would like seeing, more security and seeing more combat to the narcos. And we still have strong social gaps. But the government similar to the one that we've had in the past, and Mexico has progressed. So, there was a lot of fear when this government was going to take office. After a couple of years for them in government and seeing that everything was still running smoothly, companies decided to begin investing again, but then the pandemic hit, and companies stopped investing due to the pandemic. And that's why there was so much pent-up demand.

Now, with the new elections, most likely we will see the party in power repeating. The approval of the president is very high. The candidates from his political party are saying that they will follow the same lines, and continue with the social programs, and continue giving away money to the most vulnerable communities. And that's bringing them votes. So, unless the opposition does something spectacular, we will have the same government, and most likely the same economic model.

I don't believe there will be a drop, or a significant drop, in packaging machinery demand this next year. I think there's still some pent-up demand. And the economy is growing faster than the years before. We have recovered from Covid, the economy is rolling, and demand will continue to be up.

Sean Riley:

This trend will probably stop with this election, because if the president wins again, they've obviously done a decent job in keeping the economy good. So, people would be more willing to invest.

Luis Domenech:

That is correct.

Sean Riley:

Right.

Since we're talking the future here, this would be probably a good time for me to pivot and ask some questions about going forward, what we're going to see beyond just the presidency and politics. And a big topic that we're all hearing globally in a lot of different ways is the use of AI. And I'm curious how you see AI impacting the packaging machinery market. And is Mexico following the AI trends that are happening in the US market? Is it the same? Is it different? I was wondering if you could talk about that a little bit.

Luis Domenech:

Yeah.

In Mexico, similar to the US market, there are a lot of talks in the AI space. Now, Mexico has been, I would say, a technology follower. When new technologies come to the market, and we have seen this in robotics, and we saw this when we began with the smartphones and 5G, and all the different technologies that have appeared in the last decade, we're not early adopters of technology. We're a technologically advanced country, but we typically adopted technologies anywhere from 5 to 10 years after they have been implemented in countries like the US, in Europe, or in China.

In Mexico, AI has begun impacting only the large companies. We interview companies for the study that we produce every year, and we try to interview companies that are representative sample of the industry. We have seen many large companies adapting AI technologies, especially for predictive maintenance or for tracking their production. We have seen AI technologies used in the pharmaceutical industry to keep records of pharmaceutical. It was produced with raw materials that came from where, that arrived when, and who was the supplier. All the traceability information has improved dramatically in the pharmaceutical industry thanks to systems. But I think AI has been addressed mostly for predictive maintenance rather than any other reason.

I would say, if you put the relevance of different technologies for Mexican packaging machinery demand, I think we're still in automation. Automation is the thing that is driving most packaging machinery demand. Sustainability is also very strong. In Mexico, we have strict sustainability policies and regulations that are driving packaging machinery demand. And I would say remote monitoring, predictive maintenance, would be the other factors. Not as strong as automation and sustainability, but also impacting packaging machinery demand.

Sean Riley:

Okay.

And you expect those things to continue to drive packaging machinery into '23-'24? Do you believe the market will remain strong?

Luis Domenech:

Yes.

But as mentioned, mostly to things like automation. The bulk of companies in Mexico are medium-sized and small. We've seen consolidation in many industries, especially in beverages, in pharmaceutical. But there's still a large number of small- and medium-sized companies, that they're investing in automation. They're investing in how to stop depending on people for my end of line packaging. They are increasing the speeds of their lines, and that's demanding more technology and more systems in place. They need to track better their production, so that's also use of systems and integrating systems to the machinery. In terms of predictive maintenance and AI, I think it's something that only the very large companies are addressing.

Sean Riley:

Okay. That makes sense.

I guess, to wrap this up, I'm wondering if you have a couple tips you could give to packaging machinery manufacturers who are looking to succeed in Mexico.

Luis Domenech:

Yeah.

I think there are two keys for succeeding in the Mexican packaging machinery market. One is to identify the main market trends, what's right in packaging machinery demand, not only in the country, but in their specific segment. There are several trends driving packaging machinery demand, like sustainability, companies investing in sustainable packages, in new materials. For many companies, there's a challenge to invest in sustainable package that is protective of the product. And at the same time that it can be, not only sitting in shelves, but due to e-commerce penetration, also transported, and sometimes transported in a motorcycle from the retail point to the end user. So, packages now need to be sustainable, they need to be resistant, and they need to be portable. And that's the challenge.

Also, understand the trends like the minimization of plastic materials and the seek for either reusable or resealable pouches. Resealable flexible packages are in very high demand. They understand which products that were not packed are now being packed. In Mexico, we're used to purchase our fruits, vegetables, our proteins, in bulk. You go to the retail store, and there's one person in the meat counter, and you tell him, "Hey, I want three rib eyes as thick as my finger. And he cuts the three rib eyes, there in front of him, and he shows you the cut. That's happening every time less. Now, you see the rib eyes pre-packed with the brand of the protein producer. In proteins, in fruits and vegetables, there's very strong demand for packaging. Also, these protein manufacturers are now making every time more value-added proteins that they compress season, they come sometimes precooked. Those are trends driving packaging machinery demand. So, one secret to success is understand the trends, and which sectors are driving the strongest demand.

And point number two is to have local presence. These times of selling a machinery all the way from the United States or Germany or Italy, sending the machinery to the customer, helping them with the installation. And then, when they require any service, or they have any problem, they either connect remotely and if they need a spare part, they need to wait a couple of weeks for the part to come from Germany or the US or Italy. I think that's in the past. Now, companies, they want to be served by companies who have local presence, who have local maintenance capabilities, who can send a technician, and he's either the same or next day at the facility reviewing the machine. And when they need spare parts, one week has become the desired waiting time. Three days or fewer is the ideal. But very few companies are still willing to wait 15 days or one month to receive a part.

Sean Riley:

That makes complete sense, with the growth and the way that everything has been going down there that would narrow those gaps.

Well, we can't thank you enough for taking all the time that you took with us, Louis, to come on here and break down where the Mexican market has been and what we can look forward to in the future. So, we just wanted to thank you again for coming on here and doing this with us.

Luis Domenech:

No, thank you very much.

And to finalize, I want to mention that BMMI invests in helping members to understand the dynamics of the different markets. BMMI has been doing a yearly story on Mexico, where we not only interview end users, we also interview the Chambers of the leading packaging machinery demand sectors. We interview experts in packaging in Mexico, retailers. And we put together a report with a lot more information than what is covered in podcasts or in the presentation that we deliver at Tabasco, Mexico. So, I really encourage the BMMI users to look for that report. It's on the BMMI page. And take a look at the report that I'm sure will be helpful for companies to understand, not only the generalities, but we also list, for example, there, who are the companies that announced big investments for the coming year. We cover main trends of each industry. We cover who are the companies that invested most every year by specific company names. So, it's very valuable information. I recommend BMMI members to look at the full document.

Sean Riley:

Yes, they should. They should go to bmmi.org, and take a look at the Mexican report, to go a little bit deeper than even we went during this podcast. So, thank you again, Louis, for that little tip.

Luis Domenech:

No, thank you very much for your time. Thanks for the opportunity