THE REPORT Mexico 2019 Hidalgo

OVERVIEW EDUCATION R&D TRANSPORT INDUSTRY ECONOMY LOGISTICS ENERGY INTERVIEWS

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CONTENTS HIDALGO 2019 5

INTERVIEW Editor-in-Chief: Oliver Cornock 23 Camilo Serrano, General Manager for Mexico, Regional Editor, The Americas: Harry Atlas Renewable Energy van Schaick Editorial Manager: Alejandro Fernández

INDUSTRY Regional Director, The Americas: 24 Investment destination Maria Merono Private funds promote competitive industry Country Director: Stéphanie Brua Project Coordinator: Yuridia Durán

Group Managing Editor: Laura Nelson TRANSPORT & LOGISTICS Chief Sub-Editor: Tim Owens 27 At the crossroads Deputy Chief Sub-Editors: Elise Reid, Improved connectivity attracts logistics parks Robert Terpstra Senior Sub-Editors: Jennifer Ma, and terminals Dominic Mealy Senior Sub-Editor, Digital: John Gray Writer and Editor, Digital: Alex AGRO-INDUSTRY Pichaloff Bottom up 29 Cultivating opportunity Sub-Editors: Sheri Cavazos, Teresa Meoni, Kayla Moser, Morgan Soares- Page 12 Agro-industry primed for growth as market Astbury, Lizzie Waymouth expansion and large investments come into The state government has worked to facil- Analyst: Olly West effect itate private companies and investment, Head of Research: Susan Manoğlu launching a package of reforms designed Editorial Researchers: Jade Currie, INTERVIEW Kasia Kugay, Beatriz Trigueros to ensure that being next door to Mexico City 31 Cassiano De Stefano, CEO, Grupo Modelo is an asset for the state and its people. State Creative Director: Yonca Ergin Senior Art Editor: Sara Proserpio authorities have worked to enhance Hidal- INTERVIEW Art Editors: Catherine Celeste, Zahra go’s position through its interdependence Rashid 32 Elvira Noriega, President, National Chamber of Junior Graphic Associate: Babylynne with the capital by tapping into its logistics Industry Pachuca B Cruz capabilities and development in key sectors. Illustrations: Shiji Liang Logistics & Administration Manager: PHARMACEUTICALS Burçin Ilgaz 33 Big on investment Logistics Executive: Marly F Gimeno OVERVIEW The state has proved attractive to Logistics Associate : Will H Mamatra 6 State of transformation pharmaceutical and chemical companies Efforts to improve the business environment making both large and small investments have attracted attention in both traditional and new sectors ICT 34 First things first INTERVIEW Telecommunications infrastructure is 11 Omar Fayad Meneses, Governor of Hidalgo prioritised to support economic development

ECONOMY TOURISM 12 Bottom up 35 A short drive away Emphasis on investment aimed at encouraging Tourist attractions benefit from the state’s inclusive growth proximity to Mexico City

BUSINESS CLIMATE R&D 16 Regulatory revamp 36 Research refined The authorities are ramping up efforts to Innovation requires an approach that joins improve the business climate and attract academia, industry and government investment SMEs INTERVIEW 37 A helping hand 17 José Luis Romo Cruz, Executive Secretary of Support for local small and medium-sized Public Policy, State of Hidalgo enterprises through funding and certification

INTERVIEW INTERVIEW 18 Sergio Vargas Téllez, Secretary of Economic 38 Edgar Espínola, President, Business Development, State of Hidalgo Coordinating Council of Hidalgo

ENERGY & UTILITIES EDUCATION 19 Virtuous circle 39 Talent retention Federal government supports private Promising educational offerings and investment to boost output and leverage programmes help to keep talented graduates position as an energy exporter in the state

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The state’s capital, Pachuca, is located 90 km away from Mexico City

State of transformation Efforts to improve the business environment have attracted attention in both traditional and new sectors

In recent years Hidalgo Hidalgo – officially known as the Free and Inde- MXN10bn ($517.1m) Juandhó combined-cycle power has seen several major pendent State of Hidalgo – is named after Miguel plant, which began construction in December 2018. investments from both Hidalgo y Costilla, one of the leaders of the Mexican Contrary to the trend elsewhere in Mexico, US Mexican and international firms, including $723.9m independence movement. With an economy tradi- investment in Hidalgo has fallen to less than 50% of to build a brewing and tionally based on mining, Hidalgo had lagged behind total FDI. However, the state received funding from

bottling plant, and $517.1m some of Mexico’s more prosperous and dynamic a variety of other sources, with countries in Asia, to construct a combined- regions. However, the state government has actively Europe and South America making” up the remainder. cycle power plant. sought to foster growth in new sectors, develop infrastructure and create a more business-friendly In the first three years of the new regulatory framework. As a result of these efforts, administration the state received $2.8bn it has recently recorded growth and foreign direct in private investment, a considerable investment (FDI) figures that exceed the national increase on the $1.1bn recorded over average. Hidalgo also has the advantage of being the first 29 months of the previous close to Mexico City, the fifth-largest metropolis administration in the world and the most-populous city in North America, making it a strategic location for interna- ” tional businesses to establish themselves. GEOGRAPHY & CLIMATE: Hidalgo is the 26th larg- INCREASED INVESTMENT: Under the new admin- est of Mexico’s 32 federal states, accounting for 1.1% istration led by Omar Fayad Meneses, the state of the country’s total landmass. The state’s capital, governor, Hidalgo has seen record-breaking levels Pachuca, is located 90 km away from Mexico City. of investment. In the first three years of Fayad’s Hidalgo has a varied topography; although it is home term – between September 2016 and September to one of the highest villages in the country, Real 2019 – the state received MXN53.5bn ($2.8bn) in del Monte, which sits 2718 metres above sea level, private investment. This is a considerable increase its lowest region, San Felipe Orizatlán, is around compared to the MXN21.2bn ($1.1bn) recorded over 175 metres above sea level. Hidalgo borders six the first 29 months of the previous administration. other states: San Luis Potosí to the north, coastal This figure includes a number of major invest- state Veracruz to the north-east, Puebla to the ments from both Mexican and international compa- south-east, Tlaxcala and Mexico to the south and nies. In November 2017 Grupo Modelo, the Mexican Querétaro to the west. The climate is generally mild, arm of the world’s largest beer manufacturer, AB with an average temperature of 16°C and average InBev, announced that it would invest MXN14bn annual rainfall of 800 mm. However, there are sig- ($723.9m) to build a brewing and bottling plant in nificant weather variations across Hidalgo due to There are significant Apan, in the south of the state. The plant opened differences in altitude. As a result, a wide range of weather variations in March 2019 and has the potential to produce agricultural produce can be grown in the state, from across Hidalgo due to the 2.4bn litres of beer at full capacity, making it the maize to the agave plant. differences in altitude. As second-largest brewery in the world. PRE-COLONIAL BACKGROUND: Hidalgo has been a result, a wide range of agricultural produce can This remains the largest private investment to inhabited by humans for millennia, most likely due be grown in the state, from ever be made in Hidalgo and was followed by several to its year-round mild climate. The oldest artefact maize to the agave plant. other significant announcements, including the found in the area is an axe dating back to 11,000

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BCE. The archaeological site near Tula, believed to be the prehistoric capital of the Toltec tribe, was the most prominent city in the region after the fall of Teotihuacán in the 6th century. The settlement benefitted from the presence of the mineral obsid- ian in local rocks, which was a precursor to Hidalgo’s strong link with mining activities. MINING: Hidalgo’s mines opened shortly after the first Europeans arrived in the area, with Spanish colonisers wishing to send treasures back to their own country. The first silver deposits were discovered in April 1552 near Pachuca and Real del Monte. Hidalgo soon became a key centre for mining, particularly after Pachuca-based Spanish merchant Bartolomé de Medina discovered the patio process for extracting silver from ore using mercury amalga- mation in 1554. This was a significant advancement for the industry, and the technique went on to be used across the world for the next 300 years. However, the industry also experienced some difficulties. In the 1720s the mines in Pachuca and Mining has been an important part of Hidalgo’s economy since the first silver deposits were found in 1552 Real del Monte were flooded and remained largely out of use. Two decades later they were drained and that have a distinctive English style, including the reconditioned, which brought about another mining capital city’s Monumental Clock, which has machin- boom. According to historical records, around 7m ery identical to that of London’s Big Ben. The miners pesos of pure silver were produced by the state also brought football to Mexico; Pachuca FC was the in this time. In 1851 the discovery of the Rosario first football club in the country, founded in 1892. mine in Pachuca brought the region’s largest min- However, the English ownership of the mines was ing boom. As a result, the population of the city relatively short-lived. The Gentlemen Adventurers’ increased from 4000 in 1850 to 15,000 in 1869. Company sold up in 1849, having failed to make CORNISH INFLUENCE: One of the most significant enough money to justify their investment. Never- structural impacts of the 1810-21 Mexican War of theless, many Cornish miners continued to work in Independence was the partial destruction of the the area in the subsequent years. mines in Pachuca and Real del Monte. By the end of CREATION OF THE STATE: Hidalgo originally formed the war around 50% of the mines were abandoned part of the state of Mexico when the country’s and the remaining were only working at 10% capac- constitution was written in 1824. Due to riots and ity. Given the importance of mining as a key source violence in the early years of the republic, in 1861 of jobs and tax revenue, the Mexican government the authorities decided to divide the state up in the intervened to regenerate the industry by seeking hope of making it easier to manage. However, this the assistance of foreign investors. was delayed due to the French invasion in 1862, The tercer conde (third count), who owned most which meant that the new state of Hidalgo was not of the mines in Pachuca and Real del Monte, made created until January 1869. Pachuca was designated an agreement with two English investors – Thomas as its state capital, as it was already a key centre of Kinder and John Taylor – who founded the Compañía economic growth for the region. Británica de Real del Monte (British Company of APAN: The soil and climatic conditions make Hidalgo Real del Monte) in 1823. In 1824 they formed the an ideal location for the cultivation of the agave Compañía de Caballeros Aventureros (Gentlemen plant, which is used to make alcoholic beverages Adventurers’ Company) and began recruiting miners such as tequila, mezcal and pulque. The state quickly from Cornwall, the most south-western county of became the centre of production for the latter, the UK. The area was known in the 18th and 19th particularly in the Apan region. centuries for having the most skilled miners in the Around 150 years after pulque production began, world. In 1825 more than 130 Cornish miners and Grupo Modelo opened their MXN14bn ($723.9m) engineers arrived in Veracruz by boat. They brought brewery in Apan. The region is the main wheat-grow- with them new technologies such as the steam ing area in Hidalgo, making it an ideal location for the engine, which was used to drain the flooded mines. alcohol industry. Both pulque and beer producers The arrival of the Cornish miners resulted in a also benefit from Apan’s close proximity to the large historical and cultural connection between the two consumer market of Mexico City. The southern region of regions that is still visible to this day. A popular food ECONOMY: The variety of industries that have been Apan is a key location for the production of wheat in the state is pastes, inspired in look and taste by established in Hidalgo in the last few centuries have and agave, making it an the famous Cornish Pasty. In addition, in Pachuca given the state competitive advantages, which are ideal location for pulque and Real del Monte there are a number of buildings proving beneficial as the state government pushes and beer producers.

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HIDALGO OVERVIEW 9

for economic transformation. The economy is changing as traditional sectors such as mining, metallurgy and textiles begin to give way to new industries including renewable energy, sustainable transport, agro-industry, pharmaceuticals and chemicals. For the current administration, improving the commercial environment will be essential to increasing investment and economic activity, in order to benefit both businesses and the population as a whole. POLITICS: Like the country’s president, state gover- nors are elected on six-year, non-renewable terms. Fayad is a member of the Institutional Revolution- ary Party (Partido Revolucionario Institucional, PRI), which governed Mexico for most of the 20th century. Hidalgo is currently led by a coalition government made up of the PRI, the Ecologist Green Party of Mexico and the New Alliance Party. Prior to taking office, Fayad represented Hidalgo in the Senate between 2012 and 2016, and was the mayor of Pachuca between 2006 and 2009. At his inauguration, Fayad vowed to take a tough Approximately 10% of the state’s population – or 277,375 people – live in Pachuca, Hidalgo’s capital city stance against corruption and to make attracting domestic and foreign investment a key priority for many of which echoed the comments made by S&P. Traditional sectors such Hidalgo. He appointed Harvard-educated economist These included an improvement in the state’s liquid- as mining, metallurgy and and civil servant José Luis Romo Cruz, who previously ity position, low levels of debt and an absence of textiles are beginning to give way to new industries, held senior roles at the Mexican Social Security contingent liabilities, as well as “positive but volatile including renewable energy, Institute and New Mexico City International Airport, cash financing balances”. sustainable transport, agro- as the state’s secretary of economic development. Additionally, in a report published in March 2019 industry, pharmaceuticals Despite being from different parties – with the Moody’s highlighted the importance of Grupo Mode- and chemicals. government represented by the Party of the Dem- lo’s major investment in the new brewery in Apan to ocratic Revolution – the state and federal govern- the local economy. The report mentions the positive ments have shown they are able to work effectively effect it will have on employment in the state, the together on a number of issues. This includes the predicted improvement in tax collection as well as construction of the new Mexico City airport, located the indirect impact of the increase in federal gov- near the south-western border with Hidalgo, which ernment resources allocated to Hidalgo. is expected to open in 2021. In addition, the regional CONNECTIVITY: Due to its location in the centre and national governments have collaborated to of the country, Hidalgo is well connected to other combat fuel theft, and roll out new surveillance parts of Mexico, particularly Mexico City and the technologies to monitor the state’s security. neighbouring state of Veracruz. In 1866 the first rail- PUBLIC FINANCES: While Mexico’s sovereign debt way line was opened, between the capital city and has increased under President Andrés Manuel López Veracruz, which passed through Hidalgo. By 1899 Obrador, international credit ratings agencies there were 374 km of railway lines in the state, oper- remain positive about Hidalgo’s prospects. In May ated by five companies. To this day, transport links 2017 Standard and Poor’s (S&P) raised the state’s remain an important factor in attracting investment. credit rating from “mxA-” to “mxA” with a stable out- Now, two cargo rail operators pass through look, a rating it retained in May 2018 and 2019. The Hidalgo: Kansas City Southern de México and agency listed Hidalgo’s low debt level, stable liquidity Ferromex. The state is home to the only terminal position and prudent fiscal policies as reasons for where both networks intersect, located around 65 this decision. Additionally, S&P recognised the state km north from Mexico City. The terminal is a joint government’s efforts to streamline the regulatory venture between local conglomerate Grupo UNNE framework for businesses, expecting economic and Hong Kong holding company Hutchison Ports. conditions to improve further in the coming years The railway network operates alongside a com- as a result of these developments, as well as the prehensive road network. The Arco Norte (North- “consolidation of high-value industries”. ern Arc) motorway, which began operations in two Other ratings agencies have also recognised the phases in 2009 and 2011, respectively, has been The completion of the state’s efforts to improve the commercial environ- a crucial part of boosting Hidalgo’s connectivity Arco Norte motorway in ment. Moody’s affirmed Hidalgo’s “Ba2/A2.mx” to the rest of the country. The toll road is a 223- 2011 has been a crucial credit rating and stable outlook in January 2018 and km circuit around the Mexico City metropolitan part of boosting Hidalgo’s connectivity, linking the in June 2019. In its full statement announcing the area, passing through the south of Hidalgo to the state to Mexico City as well completion of the periodic review in June 2019, the industrial Bajío region in the country’s centre, north as the country’s industrial agency reflected on a number of key considerations, of the capital. This strategically places the state and coastal centres.

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Geografía, INEGI), as of the fourth quarter of 2017 the population of Hidalgo was around 2.96m. Of this total, 47.8% were men and 52.2% were women. Local government data estimates that the population will reach 3m by 2023. Figures from the National Council for the Evaluation of Social Development Policy show that the average real monthly income in the first quarter of 2019 was MXN1409.8 ($72.90). This rose by 7.1% compared to the same period of 2018. The most recent INEGI data from March 2015 shows that the population is fairly well distributed across the state, with around 10% – or 277,375 people – living in Pachuca. The second-largest city, Tulancingo de Bravo, had 161,069 inhabitants. In terms of socio-economic conditions, there is a visible urban-rural divide in Hidalgo. According to the OECD, 36% of the state’s population live in its three largest urban centres, but 48% of economic activity and 42% of total employment is based in these areas. There are a significant number of indigenous Mexicans living in Hidalgo. INEGI data from The population is fairly well distributed, with around 36% living in the state’s three largest urban centres 2015 found that around 15% of the state’s popula- on the route between the eastern Gulf ports, the tion spoke an indigenous language, of whom 10% country’s industrial heartland and the Pacific Ocean. were not able to speak Spanish. Carretera Federal 57 passes through the west of EDUCATION: Hidalgo’s young population is one of Hidalgo, eventually continuing north to connect its economic advantages, and a key driver of job Mexico to the US border in Texas. creation and investment in education. Over 22,000 In terms of public transport, Pachuca is home students graduated from the 106 higher education to the state’s only large-scale transportation net- institutions in the state in 2017. In addition, the pro- work, the rapid transit bus system known as Tuzobús. portion of 19- to 25-year-olds in higher education The network covers 18 km with 33 stations and 19 has risen significantly in the past 20 years, from 5% feeder bus routes. According to the “OECD Territo- in 1995 to 33% in 2015. The next step for the state rial Review of Hidalgo” published in 2019, Tuzobús is to ensure the increased activity in the tertiary carries 110,000 passengers per day. However, the education sector is matched with the creation of report notes that only around 10% of daily commutes new skilled jobs (see Education analysis). are made using Tuzobús, with many people opting OUTLOOK: Following a series of record-breaking to use informal methods of transport or their own investments, and a focus from both the public and vehicle. As of the end of 2018 there were 382 vehi- private sector on building the infrastructure needed cles per 1000 people in Hidalgo, considerably higher to boost the state’s socio-economic conditions, than the national average of 341 per 1000. The OECD Hidalgo has gained both national and global atten- predicts that, as urbanisation and economic growth tion as an attractive business location. As the state continues, this figure will rise further. government continues to create high-value jobs and PEACEFUL STATE: According to the 2019 Mexico improve the regulatory framework it is hoped that Peace Index published in April 2019 by the Institute Hidalgo will be able to rival some of Mexico’s most for Economics and Peace, a global think tank, Hidalgo advanced regions in terms of prosperity and safety. ranks as the fifth-most-peaceful state within the In order to ensure that the administration contin- country, after Yucatán, Campeche, Tlaxcala and ues to work towards its policy objectives, it is likely Chiapas. This was an improvement on its 2018 score that future collaboration between state and federal of sixth place. The index is measured using a com- governments will play an important role, given the bination of criteria including the rate of murder, political capital that President López Obrador cur- violent crime, firearm crime, organised crime and the rently holds on a national level. number of unconvicted prisoners. Hidalgo had low However, the state’s main aim of attracting fur- scores for all five categories, showing it to be safer ther domestic and international investment will also than the national average. In addition, the state has rely on other factors. For example, the success of one of the lowest rates of recidivism in the country the regulatory reforms and improvements is vital to according to the index. Citing FBI data, the murder convince the business community of the benefits in The proportion of 19- to rate in Hidalgo – at 5.1 per 100,000 residents – was working with Hidalgo. Nevertheless, the state has 25-year-olds in higher lower than the US average in 2017 of 5.3. several advantages, including close proximity to education in Hidalgo has risen significantly in the DEMOGRAPHICS: According to the most recent Mexico City and major road networks, a range of past 20 years, from 5% in estimates from the National Institute of Statistics both new and well-established industries operating 1995 to 33% in 2015. and Geography (Instituto Nacional de Estadística y in the area, and a young and educated workforce.

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Omar Fayad Meneses

Policy for prosperity Omar Fayad Meneses, Governor of Hidalgo, on an efficient and robust business environment driven by regulatory reform

What competitive advantages have consolidat- To what extent have regulatory reforms been ed Hidalgo as one of Mexico’s fastest-growing recognised by external and independent parties? investment destinations? FAYAD: Different organisations have outlined how FAYAD: First of all, the government has conducted relevant our regulatory improvements have become a series of regulatory reforms that have fully trans- to the state’s attractiveness to investors and its formed the state’s business environment. We have socio-economic development. Specifically, the Law put into place a one-stop-shop system that allows for the Promotion of Economic Development and companies direct access to information, reduces the Law of Productive Alliances for Investment have bureaucracy and speeds up paperwork. Our security enabled us to facilitate the establishment of new framework was reinforced with over 5000 video businesses, strengthening economic activity and surveillance cameras that will be connected through improving employment rates in Hidalgo. a fibre-optic network to one of Latin America’s most All this has been recognised by the OECD, which sophisticated command centres. In fact, Hidalgo is emphasises the role of the government in devising a currently among the top-five safest states in Mexico. modern framework through which investments are The state’s economy is diverse, with a strong focus encouraged, supported and expedited. These efforts on certain priority areas, such as energy, agro-indus- have also been identified and valued by different try and pharmaceuticals. Due to Hidalgo’s strategic international credit rating agencies, such as Stand- position, there are many opportunities for compa- ard & Poor’s and Fitch Ratings. From 2016 to 2019 nies and investors focused on the oil and energy Standard & Poor’s upgraded Hidalgo’s ratings outlook industries. We have a refinery, and many of Mexico’s from negative to stable, sending a clear message most important oil pipelines cross through our state. to investors and observers that the government’s In addition to this, the state is taking the neces- economic strategy is yielding positive results. sary steps to become a national leader in renewable energy; in June 2019 Atlas Renewable Energy How does the government plan to further boost inaugurated its $120m Guajiro solar power plant, business efficiency and productivity? which features 370,000 panels and a generation FAYAD: The administration has prioritised transition- capacity that could provide clean energy to more ing to an e-government. Making use of the 300-km than 120,000 households annually. fibre-optic infrastructure we are deploying through- In the agro-industry, we have also created the out the state, our goal is to digitalise government right conditions for large-scale projects to develop services and procedures in order to boost business and add value to their companies. Grupo Modelo’s efficiency and productivity. This comprehensive biggest brewery, located in Apan and estimated at technology roadmap we are building will enable around $750m, took less than a year from the con- us to provide administrative services remotely and ception of the project to start operations. This not remove unnecessary bureaucracy. This technology only represents the effectiveness of the one-stop- platform will also allow us to provide high-speed shop system but it also demonstrated the viability internet to all communities around the state and of massive-scale projects in Hidalgo, proving that set the infrastructure foundations to connect local the state has the capacity, the resources and the educational institutions, research and development diligence to realise big international investments. facilities, data centres and corporations to the world.

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Commerce grew by 7.2% in 2018, the second-highest rate in Mexico

Bottom up Emphasis on investment aimed at encouraging inclusive growth

In 2018 the state’s In 2006 local conglomerate Grupo UNNE and Hong infrastructure, strategic location and human resources manufacturing exports Kong-headquartered Hutchison Ports signed a strate- in order to boost competitiveness. grew by 25% to gic alliance to build the Intermodal Logistics Terminal SHIFTING FOCUS: In recent years the state govern- of Hidalgo (Terminal Intermodal Logística de Hidalgo, ment has worked to facilitate private companies and $2.2m TILH) in Tula, in the west of the state. Francisco Orozco, investment, launching a package of reforms designed commercial director for Mexico at Hutchinson Ports, to ensure that being next door to one of the world’s told OBG that the agreement envisioned “the terminal largest consumer markets is an asset for the state of the future”. It became the only intermodal logistics and its people. For decades Hidalgo has struggled to terminal where both cargo rail networks – Kansas City develop in the shadow of Mexico City, but its proximity Southern de México and Ferromex – connect with road to the metropolis has also proven to be a blessing. links that criss-cross the country. At the time there State authorities have worked to enhance Hidalgo’s was limited industrial activity in the surrounding area, position through its interdependence with the capital but industrial parks have since begun sprouting up. by tapping its logistical capabilities and development GROWTH: Hidalgo is keeping pace with Mexico’s in key government-identified sectors. economic development. The state’s economy grew Recent years have also seen a shift away from the by 2.3% in 2018, above the national average of 2%. local economy’s traditional focus on mining. The gov- Hidalgo registered notable expansion in commerce, ernment has targeted several strategic sectors that with a growth rate of 7.2% – the second-highest rate in have significant potential, including energy, sustain- Mexico – and the services sector, which grew by 3.9%, able transport, pharmaceuticals, agri-business and placing it seventh in Mexico. Hidalgo also experienced telecommunications. Efforts to diversify have been strong manufacturing export gains, increasing by 25% strengthened by the fact that the region is relatively in 2018 to $2.2m, easily outpacing the national average unscathed from the drug-trafficking violence that of 10.2%. The international investment community is afflicts other parts of the country. taking note of this progress. In May 2019 Standard Hidalgo ranked as the fifth-most-peaceful state in & Poor’s reaffirmed its “mxA” rating for the state of Mexico after Yucatán, Tlaxcala, Campeche, Coahuila Hidalgo with a stable outlook. The agency cited the and Chiapas, according to the 2019 Mexico Peace Index state government’s “ambitious plan” that could “drive by the Institute for Economics and Peace, a global think Hidalgo’s economic growth above the national aver- tank. The index takes into account factors such as age over the next three years”. The agency did note, the murder rate, violent crime, firearm crime, organ- however, that Hidalgo started from a comparative ised crime and the number of unconvicted prisoners. disadvantage, with a GDP per capita of $6500 in 2018, Hidalgo fared better than the national average in each below the national average of $9800. of the five categories of the survey. The state government has sought collaboration CLOSING THE GAP: In the years since the 2008 finan- The Intermodal Logistics with international experts to formulate regulatory cial crisis Hidalgo has begun to close the output and Terminal of Hidalgo, located improvements that are able to attract investors. In productivity gap with the rest of the country, according in Tula, is the only terminal June 2017 the OECD and Omar Fayad Meneses, the to a May 2019 report released by the OECD. “Hidalgo’s of its kind in Mexico where both cargo rail networks state governor, signed an agreement to consolidate current administration has recently managed to con- connect with road links that economic advancements by jointly developing policies solidate important investment projects in strategic criss-cross the country. and best practices, as well as leveraging the state’s sectors such as the electric automobile industry and

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food industry,” the OECD report stated. These recent changes have also been accompanied by the intro- duction of a new approach to stimulate the state’s economic development. The state has drawn upon its vital location, with its capital of Pachuca located just 90 km north of Mexico City; safe environment, with the third-lowest homicide rate in the country; and compar- atively low costs of production and logistics. The rapid growth of Mexico’s capital has also drawn attention to Hidalgo, as the state is the only flat territory towards which Mexico City and its suburbs can expand. Between 2009 and 2016 the state averaged GDP growth of 3.7%, exceeding the national average of 2.1%. Hidalgo’s productivity rose by 3% from 2010 to 2015, the 12th highest rate in Mexico’s 31 states and federal district, and 40% of the median of OECD countries. Its rapid urbanisation and shift towards industrialisation is reflected in its higher share of gross value added in manufacturing, at 20.6%, compared to the national average of 16.1%, according to the OECD. Even so, in 2016 Hidalgo contributed 1.6% of Mexico’s GDP, despite Between 2009 and 2016 the state’s GDP grew by an average of 3.7%, exceeding the national average of 2.1% being home to 2.4% of the population. The state stands to benefit from its demographics, the Secretariat of Economic Development (Secretaría Since 2016 just under 50% with youth accounting for 28% of the population com- de Desarrollo Económico, SEDECO) of Hidalgo. These of foreign investment in the pared to an OECD average of 17.9%. The government figures have reflected a general upwards trend, as the state came from the US, while companies from Asia acknowledges the need to improve the skills of this state received $294.3m in 2005 and 2006, the first and Europe have launched young workforce to make it competitive. Although two years of the 2005-10 term. operations in Hidalgo. this gap between job market demands and potential Just under 50% of foreign investment in Hidalgo in employees is continually being reduced, students in recent years has come from the US, with companies the state’s universities often pursue degrees in social from China, Japan, Sweden, Germany, France, Brazil, sciences at a higher rate than computer science, Austria and the UK all having entered the state since despite the latter being in higher demand. September 2016. Hidalgo received a major boost in The OECD also outlined the headwinds facing devel- investment in November 2017 when Grupo Modelo – opment, underlining the importance of mitigating the Mexican arm of the world’s largest beer maker, AB the high labour informality rate, the elevated share InBev – announced it would invest MXN14bn ($723.9m) of low-skilled workers, underperforming cities, low in a new brewing and bottling plant in Apan, located tax collection rates, and socio-economic disparities in the south of the state. Modelo’s commitment was between the north and the south of the state. The the largest private sector investment made in the organisation also encouraged Hidalgo to link foreign region. The Modelo facility, along with several other direct investment (FDI) projects to the needs of the domestic and international arrivals, showcases the local economy and develop specific plans to improve rapid rate at which investment is entering the state, the business environment and encourage innovation. a trend that shows no sign of slowing. In December “The State of Hidalgo has long experienced eco- 2018 construction began on the MXN10bn ($517.1m) nomic stagnation, yet since the aftermath of the global combined-cycle Juandhó hydroelectric power plant. financial crisis, its economy has performed better than José Luis Romo Cruz, then-state secretary of SEDECO, the average of Mexican states,” the OECD said in its told local press that month that the facility is expected report. “Between 2003 and 2015, Hidalgo’s GDP per to produce 650 MW of electricity a day, a figure that capita grew by an annual average of 2.4%, above the approximates the energy consumed daily in Hidalgo. national average of 1.1%.” Hidalgo is working under STRATEGIC THINKING: State authorities have been the OECD findings and recommendations in order working to attract investment and talent into four stra- to overcome the barriers and bottlenecks found by tegic sectors that offer above-average salaries to work- the organisation, in order to set a path of sustained ers and therefore have more of an economic impact, economic development and shared prosperity. namely agri-business, energy, sustainable transport INVESTMENT SURGE: Efforts to attract private and pharmaceuticals. The average salary per month 71% investment from both within Mexico and abroad in Mexico for those in agri-business is MXN16,000 of investment has gone have been paying off. The state secured around ($827), MXN13,560 ($709) in sustainable transport, into agri-business, MXN53.5bn ($2.8bn) in private investment from MXN13,000 ($672) in energy, and MXN12,128 ($627) energy, sustainable when Fayad took office to September 2019. This is a in pharmaceuticals, all well above the national average transport and considerable increase compared to the MXN21.2bn salary of MXN9000 ($465). Efforts to funnel funding pharmaceuticals ($1.1bn) recorded during the first 29 months of the into these sectors have been successful, with 71% of since 2016 previous administration, according to figures from the investment into Hidalgo going to these categories.

Bloomberg Terminal Research Homepage: OBGR‹GO› THE REPORT Mexico 2019 14 HIDALGO ECONOMY

also in August 2017. SEDECO announced one year later that 46% of students in the programme had been hired by the companies that they interned for. WORKFORCE: SEDECO estimates that the MXN53.5bn ($2.8bn) in private investment generated some 15,900 direct jobs and close to 39,000 indirect jobs. These openings account for almost 17% of the 233,761 workers registered with the Mexican Institute of Social Security (Instituto Mexicano de Seguridad Social, IMSS) in Hidalgo in the first quarter of 2019. IMSS numbers are used as an indication of the levels of formal employment, and these figures make the state the 21st largest contributor to Mexico’s formal workforce. Job growth is also expanding at a higher rate in Hidalgo than the country at large, with the state adding 6832 jobs in the first three months of 2019 alone. This represented a growth rate of 3%, above the national average of 1.3% and put the state behind only Nayarit, Sonora and Querétaro in terms of workforce expansion. Jobs in the state have also shifted towards permanent positions. Between 2005 and 2010, 52.8% of new jobs created The south-eastern plains of the state have been the focus of efforts to build a local manufacturing base were permanent, but between 2017 and 2019 this Job growth is expanding According to SEDECO, since 2016 the state has received figure had risen to 91.4%. Fayad expects continued job at a faster pace in Hidalgo MXN16.1bn ($832.5m) of investment into agri-busi- creation, with the number of employment opportu- than in the country at large. ness, MXN11.8bn ($610.2m) in energy, MXN5.4bn nities forecast to expand by 3.1% between December In the first three months of 2019 alone 6832 new jobs ($279.2m) in sustainable transport and MXN452m 2018 and the third quarter of 2019, compared to the were created in the state. ($23.4m) in pharmaceuticals. expected national average of 2.1%. The prioritised sectors are spread across the state. “The growing number of permanent jobs is a par- For example, while the north-eastern region of Huas- ticularly encouraging statistic because Hidalgo has teca focuses on commerce, agriculture and cattle traditionally seen its labour force migrate as there were raising, in the south-eastern plains – where Modelo not enough companies investing and creating perma- is based – the emphasis is on industry and agriculture. nent jobs,” Edgar Espínola, president of the Business The state’s logistics centre is in the south-western Coordinating Council of Hidalgo, told OBG. “Now, we Tula-Tepeji region, where the TILH is located. These are seeing people from other states come to work in tailored targets aim to encourage inclusive growth Hidalgo, as happened with the Modelo plant.” and overcome north-south economic disparity. Wages are also growing, albeit at a pace below In addition to the four targeted sectors, the state is the national average. The average salary in Hidalgo looking to reinforce telecommunications in order to was MXN9634 ($498) per month in the first quarter strengthen not only physical but communicative con- of 2019, below the national average of MXN11,165 nectivity as well. In September 2018 Hidalgo became ($577). Salaries expanded by 2.6% year-on-year (y-o-y) the first state in Latin America to lay out a legal frame- in Hidalgo, slightly below the national average of 2.7%. work aimed at facilitating the development of tele- Out of Mexico’s 31 states and federal district, Hidalgo communications infrastructure in its municipalities. ranked 12th in terms of wage expansion. The agreement simplified procedures for authorising Despite progress in wages, informality remains stub- the deployment of telecommunications infrastructure bornly high. As of the first quarter of 2019 some 74% and sped up processes related to the installation of of those working in Hidalgo were doing so informally, antennas and fibre-optic cables. putting the state behind only Oaxaca, Guerrero and BUILD THE BASE: The local authorities are looking Chiapas, according to the National Institute of Sta- to attract further investment in order to take advan- tistics and Geography. The national average for the tage of the trickle-down effects throughout the wider percentage of informal workers was 56.9%. economy, and as such are developing programmes to SHOWING RESILIENCE: The surge in private invest- enhance Hidalgo’s competitiveness. SEDECO estab- ment has been a boon for Hidalgo, which has tradi- lished two initiatives aimed at funnelling benefits from tionally been dependent on public investment and external investments throughout the economy. The spending. A change in government at the federal level In September 2018 first, Pon Tu Negocio, Yo Te Apoyo (Set Up Your Busi- in December 2018 resulted in delays in releasing the Hidalgo became the first ness, I Will Support You) has provided financing for budget, with implications for state and local govern- state in Latin America to some 7960 entrepreneurs since its launch in August ments, as well as businesses. “The local business com- lay out a legal framework 2017. Mi Primer Empleo, Mi Primer Salario (My First munity and the construction sector in particular have aimed at facilitating the development of Job, My First Salary) offers recent graduates paid, six- been suffering since the shift in government,” Espínola telecommunications month internships in the private sector and has linked told OBG. “We have received barely any funding for infrastructure. 1964 young people to 696 companies since its launch, state investments. Thankfully, in Hidalgo we have a

www.oxfordbusinessgroup.com/country/mexico HIDALGO ECONOMY 15

fast-growing private sector.” He noted, however, that the transition to an economy driven by the private sector is not an overnight process and local firms remain dependent on public projects. According to SEDECO, activity in the construction sector fell by 23.4% y-o-y in the first quarter of 2019, with production in public works projects falling by 51.9% over the same period. Private construction rose by 42.3% y-o-y in the first quarter of 2019, but it was not enough to offset the drop in public investment. Countrywide, activity in the sector fell by 2.4%, with public construction production falling by 11.7% and private output rising by 4.2%. SAFE HAVEN: Whether Hidalgo can continue this speed of economic development depends to a large extent on how the wider economy fares in the short to medium term. The state has little control over several factors that directly affect its economy, such as the exchange rate, inflation, interest rates, federal budget and policy, and risk premium investors place on Mexico. What is more, certain federal policies and decisions – including the cancellation of Mexico City’s State authorities are looking to utilise all the tools at their disposal to improve the business environment proposed new airport, the stagnation of some aspects of energy reform, and the expanded role of the heavily confidence and investment prospects.” However, Hidal- In the first quarter indebted state-owned Petróleos Mexicanos (Pemex) go’s progress will also depend on its competitiveness of 2019 private – have caused uncertainty in global markets. In June within Mexico and whether it can transform into some- construction rose by 2019 Fitch downgraded Mexico’s sovereign rating thing of a safe haven for investors despite uncertainty from “BBB+” to “BBB”. In addition to Pemex concerns, at the national level. The state has identified areas the agency said there is “ongoing weakness in the where it can distinguish itself. “People underestimate 42.3% macroeconomic outlook... exacerbated by external the level of responsibility state governments have,” year-on-year threats from trade tensions, some domestic policy SEDECO’s Romo told OBG. “Many of the factors that unreliability and ongoing fiscal constraints.” The same companies weigh in investment decisions – regulation, month Moody’s lowered its outlook on its “A3” rating legal certainty, security – depend more on the state to negative. “Moody’s anticipates a challenging year than the federal government. Our priority is to optimise for Mexico’s economy and expects growth to slow to the things we can control. We have a vision for action.” 1.5% in 2019 from 2% in 2018 with risks tilted to the SEDECO identified early on that one area the state downside given a persistent weakness in private invest- could control was the business environment, Romo ment,” the agency said. “Moreover, Moody’s believes explained. Earlier moves included the creation of a that the government’s mixed messages and unclear single window to allow both citizens and businesses to policy signals will continue to negatively affect business carry out transactions easily, and the implementation of an improved regulatory system that has reduced waiting times for permit approvals. “While economic stability at a federal level is essential for the country to prosper, Hidalgo has done a lot to stand out,” Noé Paredes, director-general of Grupo UNNE, told OBG. “The drive and dynamism that the state has brought to the table has been very important.” FUTURE EXPANSION: Some 13 years after the agreement to build the TILH was signed, the logistics port is reporting strong growth and has diversified operations. “After so many years of effort, we are seeing our labour pay off,” Orozco told OBG. “Volumes are up, clients are satisfied, and more and more potential clients are coming to this area.” For both the TILH and Hidalgo, the outlook depends to an extent on fortunes at the federal level. In any case, Hidalgo is working to turn become a region defined by development. To do so, the authorities are attracting investment, creating Recently implemented jobs and building supply chains. With a slew of invest- policies, such as a single window and expedited ments through to 2022, the government is aiming to approval processes, have ensure that the benefits of expansion are felt across alleviated red tape and Hidalgo’s economy is transitioning to one driven by the private sector the broader economy while still remaining localised. permit waiting times.

Bloomberg Terminal Research Homepage: OBGR‹GO› THE REPORT Mexico 2019 16 HIDALGO BUSINESS CLIMATE

Hidalgo is targeting investment that will boost the local economy

Regulatory revamp Efforts to improve the business climate attract investment

Municipalities in Hidalgo With an eye on diversification and increased val- legislation that jump-started reform. “We believe have agreed to grant ue-added production and services, the state of the next frontier in improving regulations in Mexico construction licences Hidalgo has been working in recent years to revi- is at the state and local levels, where businesses within seven days and new business licences talise its business climate to entice both domestic sometimes find opacity, corruption or difficulty within three days. and international investment in a way that trickles getting permits,” César Emiliano Hernández Ochoa, down throughout the local economy, boosting sal- national commissioner of the National Commission aries and improving livelihoods. To that end, the for Regulatory Improvement, told OBG. “It is encour- government has implemented what in May 2019 aging to see states take the lead. And it’s not just ratings agency Standard & Poor’s called an “ambi- politicians: in March 2018 Hidalgo’s judicial authority tious plan” to make entering and operating in the created a commission for regulatory improvement.” state as smooth a process as possible, which could These initiatives have led to greater security put economic growth above the national average. for investors, as well as faster times for opening DOING BUSINESS: The World Bank ranked Pachuca, businesses and receiving permits. In September Hidalgo’s capital, 19th out of Mexico’s 32 capitals in 2018 the State Council for Regulatory Improvement 2016. That same year, the current governor, Omar approved the government’s proposal to simplify Fayad Meneses, took office, and his administra- 730 procedures, with officials estimating this could tion has taken a proactive approach to attracting save MXN700m ($36.2m). Additionally, municipal- investment. His administration implemented a single ities in Hidalgo have agreed to grant construction window and an improved regulatory system that licences within seven days maximum and allow the reduced the wait times for permits and approvals. opening of new businesses within three days. Other These efforts have already seen results, with the legislative reforms have also improved the business National Observatory of Regulatory Improvement environment, including two energy laws (see Energy ranking Hidalgo as the fifth-best state in terms of chapter), a law facilitating telecommunications regulatory improvement. infrastructure (see ICT chapter) and a public-pri- Much of this has been under the umbrella of the vate partnership law passed in March 2018 that will Secretariat of Economic Development (Secretaría speed up the tendering of infrastructure projects de Desarrollo Económico, SEDECO) of Hidalgo, which and introduce new financing models. has been at the forefront of efforts to improve the SECURE INVESTMENT: Hidalgo has also worked business climate. “Our relationship with SEDECO has to enhance its reputation as an oasis of security, been highly collaborative during the development offering both citizens and investors a high level of the Guajiro Solar Plant,” Camilo Serrano, general of stability. According to the 2019 Mexico Peace manager for Mexico at Atlas Renewable Energy, told Index published by the Institute for Economics and OBG, referring to the first solar energy park in the Peace, Hidalgo was the fifth-most-peaceful state In 2018 the State state. “Their direction was fundamental in enabling in Mexico. To improve safety further, in May 2019 Council for Regulatory us to complete construction on time.” Hidalgo opened a command centre that links 10,000 Improvement approved the LEGAL FRAMEWORK: The overhaul of regula- cameras and 20 drones to security and emergency government’s proposal to simplify 730 procedures, tions has been central in the bid to build a busi- services. These actions should improve the busi- with officials estimating ness-friendly community. In early 2017 the state’s ness environment, enhance investor confidence in this could save $36.2m. Congress approved regulatory improvement the short to medium term and solidify momentum.

www.oxfordbusinessgroup.com/country/mexico HIDALGO INTERVIEW 17

José Luis Romo Cruz

Unlocked potential José Luis Romo Cruz, Executive Secretary of Public Policy, State of Hidalgo, on the state’s economic development strategy

How has economic growth in Hidalgo led to great- In what ways will the new security centre, the C5i, er development and less poverty? strengthen the state’s security system? ROMO: Private investment has injected significant ROMO: The launch of the C5i in 2019 represented dynamism into Hidalgo’s business environment. It an important step towards consolidating the state’s has boosted small and medium-sized enterprise security. This centre monitors and controls 6500 expansion, which subsequently contributed to an security cameras, 38 road points, 20 drones and increase in socio-economic levels for the local pop- a plane, and connects all of the security services, ulation as well as a reduction of the state’s poverty including the military and the police forces. The busi- rate. Since the current administration took office in ness community is now able to link their security 2016, 18,000 new jobs have been created, thus gen- cameras to the centre, so their systems are better erating a sustainable impact on the state’s average monitored. In addition, companies are able to send household income; according to the National Insti- real-time alerts from any electronic device, for tute of Statistics and Geography, Hidalgo’s average instance mobile phones, speeding up response times. household income increased by 6.5% between 2016 and 2018, while the national average decreased by Which industries have been identified as having 4.7% over the same period. Over the two years the significant potential to drive the state’s economic income gap between Hidalgo and the country’s aver- development in the medium term? age decreased by 31% , while 167,000 people from ROMO: Hidalgo’s economic development strategy is Hidalgo have been lifted out of poverty – the sec- driven with the aim of capitalising on local resources ond-highest poverty reduction nationally. to boost the state’s singularity and competitive advantages rather than competing with other regions To what degree has the state of Hidalgo been able in attracting investment within the same sectors. to improve its financial situation? For instance, smart mobility is an industry that has ROMO: For a number of years Hidalgo’s local govern- not been explored by any other state in the country, ments grappled with financial difficulties, creating which has opened the door for Hidalgo to tap this uncertainty and affecting development. Many of the outstanding and promising opportunity. It is a critical former official financial mechanisms that caused this industry for the future development of the state, and have been eradicated, and fiscal responsibility has it holds great growth potential not only in Mexico but become a central part of the public state adminis- also in international markets. tration. The government has reduced existing public Since 2016 the government has attracted substan- debt, with a total of $14.4m paid to creditors. tial investment in the electric and hybrid cars industry, These initiatives have been recognised by different accounting for a total of $250m. The projects – one rating agencies, which, for the first time in the state’s run by China’s JAC Motors, and another by Mexico’s history, have granted Hidalgo the “AAA” credit rating. Ensambladora Latinoamericana de Motores and Chi- Aside from the accountability and transparency cri- na’s FAW – will serve as anchor investments to further teria that the government has to take into account, develop a smart mobility cluster in the state. JAC it has also become increasingly more important that Motors is also working on manufacturing electric car these funds be allocated to more productive sectors, prototypes, which will make Hidalgo home of the first – for instance infrastructure, education and health. line of electric vehicles produced in Latin America.

Bloomberg Terminal Research Homepage: OBGR‹GO› THE REPORT Mexico 2019 18 HIDALGO INTERVIEW

Sergio Vargas Téllez Doing business Sergio Vargas Téllez, Secretary of Economic Development, State of Hidalgo, on economic competitiveness, investments and strengthening the regulatory framework

In what ways is the government seeking to authorities and private developers is represented by strengthen Hidalgo’s economic competitiveness? significant investments. To give you an idea, 27 out VARGAS: The strategy of the government is in line of the 50 investments attracted and signed during with the World Bank’s ease-of-doing-business met- the mandate of the current administration have rics: facilitating the right conditions for companies been allocated to the development or operation to become globally competitive, and focusing on of industrial parks in Hidalgo. providing access to quality, value-added services In addition to this, the state of Hidalgo has been such as energy and telecoms networks, financial implementing different initiatives to foster industrial and human capital, as well as regulatory improve- activity, such as developing infrastructure, providing ment. Furthermore, Hidalgo continues to attract more reliable access to affordable electricity, and investments in five of the most globally competitive improving security and transport. As a consequence, economic sectors: sustainable transport; chemi- in Tepeji two industrial parks have been recently cal-pharmaceutical; agro-industry; energy; and ser- approved. Tepeji Park is already operating, and the vices. The worldwide market value of these sectors other one, Puerta Tepeji, will enter its construction amounts to $30trn and holds substantial growth phase in late 2019. Considering that the municipality potential for the future. of Tepeji is just 70 km away from Mexico City, the Energy and telecoms are key to the country’s location is very strategic for companies that seek development. Currently, the value of Hidalgo’s connectivity and access to effective infrastructure. energy project portfolio amounts to $1bn, which guarantees energy provision for the private sector How is the government strengthening the regu- at competitive costs. Two projects represent this latory framework in order to improve legal cer- great leap forward: Atlas’ solar farm and Juandhó’s tainty for infrastructure development projects? combined-cycle plant. Put together, these invest- VARGAS: In order to strengthen Hidalgo’s legal cer- ments represent 65% of the total investment in tainty, the government issued the Law of Productive energy projects in the state, at around $654m, with Alliances for Investment, which contains over 10 a capacity to generate enough power to provide all different public-private partnership models. This of Hidalgo’s households with electricity. regulation not only reinforces the role of concili- ation to solve issues between stakeholders, but it What steps have been taken to allow the public also allows developing an investment portfolio for and private sectors to develop industrial parks? projects lasting up to 40 years, opening the door VARGAS: Hidalgo has 12 industrial parks covering to bigger infrastructure projects. 1900 ha, which are responsible for 23,000 direct Aside from this, a federal regulatory improvement jobs in strategic sectors such as logistics, metallur- framework – the System for Quick Business Start-up gical, automotive, food and beverages, textiles and – was put in place to simplify over-administrative pharmaceuticals. These projects have been boosted procedures so that states could become an easier by the government through the establishment of a place to do business in. As a consequence of this, series of strong relationships with the main inter- and according to the National Observatory for Reg- national and local actors in the real estate, industry ulatory Improvement, the state of Hidalgo ranked and logistics sectors. This partnership between local as the best in this domain in Latin America in 2017.

www.oxfordbusinessgroup.com/country/mexico HIDALGO ENERGY & UTILITIES 19

Hidalgo is the fifth-largest energy-producing state in the country

Virtuous circle Federal government supports private investment to boost output and leverage position as an energy exporter

Hidalgo has long served an important role in the There has also been an increase in investment in Energy infrastructure in the production and distribution of energy, being a net the renewables segment, with the opening of the state of Hidalgo currently exporter to other regions of Mexico. The state is Guajiro solar project in the municipality of Nopala includes a thermoelectric facility, a hydroelectric well served with energy infrastructure and pos- de Villagran in June 2019. The facility, which is con- plant, a new combined- sesses strong transport connectivity to the rest of tracted under a long-term power purchase agree- cycle power station, a the country. Furthermore, the local administration ment with Mexico’s Federal Electricity Commission network of oil and gas has established energy as one of its main strategic (Comisión Federal de Electricidad, CFE), was devel- pipelines, and a refinery. sectors for development, and has been proactive in oped by the Chile-headquartered solar generation attracting both domestic and international invest- platform Atlas Renewable Energy – which is backed ment, notably in the renewables segment. While by the emerging markets private equity firm Actis – changes in national policy have brought uncertainty who purchased the contract from the US green-en- to the sector, the state finds itself well placed to take ergy firm SunPower. Atlas Renewable Energy invested advantage of the opportunities available. over $118m in the project, with an additional $88.5m ENERGY PROVIDER: Playing host to a range of signif- in financing coming from the state export-import icant energy infrastructure facilities and intersected investment bank Bancomext. The state’s new solar by oil and gas pipelines, Hidalgo is the fifth-largest park is expected to generate 300 GWh per annum, energy-producing state in Mexico. The country’s providing clean energy to more than 120,000 families largest oil refinery is located in Tula, a city in the each year, while saving more than 215,000 tonnes west of the state, along with a major thermoelectric of annual CO2 emissions. In addition to these new plant. Furthermore, a hydroelectric plant is located developments, as of early 2019 the state had signed in Zimapán, damming the Moctezuma River. These contracts for a pipeline of new energy projects with facilities ensure the state operates with an energy a total value of MXN34bn ($1.8bn). surplus, becoming a net exporter, a role supported by NEW OPPORTUNITIES: In January 2019 Mexico faced Hidalgo’s close proximity to Mexico City and well-de- temporary fuel shortages following attempts by the veloped offering of transmission lines. administration of President Andrés Manuel López While increasing private investment in the state Obrador, better known by his acronym AMLO, to and an expected uptick in regional economic activity tackle theft from pipelines. While the state-owned appear likely to boost demand within Hidalgo, these hydrocarbons company Petróleos Mexicanos strug- investments also appear set to expand supply. One gled to maintain supply in the face of these disrup- of the most important new facilities is the Juandhó tions, the US-based multinational ExxonMobil chose combined-cycle power station in the municipality of to bypass the national pipeline network and deliver Tetepango, work on which broke ground in December fuel via rail through a deal with Kansas City Southern 2018. Upon completion, the facility – which is being de México and the US logistics firm Bulkmatic. The state’s new solar park is developed by domestic company Akraan, with the These events highlight the important, expanded expected to generate 300 support of the German industrial conglomerate Sie- role the private sector can play in both the storage GWh per annum, providing mens – will have a daily capacity of 650 MW, enough and distribution of oil and gas, a role traditionally clean energy to more than 120,000 families each year, to satisfy all of Hidalgo’s current energy needs. The reserved in Mexico for state-owned firms. “Simply while saving more than plant is expected to generate around 1100 jobs and put, if more private investment in storage and trans- 215,000 tonnes of annual attract MXN10bn ($517.1m) in private investment. port of fuel had taken place, January’s crisis would CO2 emissions.

Bloomberg Terminal Research Homepage: OBGR‹GO› THE REPORT Mexico 2019 20 HIDALGO ENERGY & UTILITIES

Development, provides a legal framework to govern the state’s business environment in the sector. This includes the establishment of rules governing communication between the state and municipalities in order to better streamline procedures and facilitate development in the sector. COMPETITIVE ADVANTAGE: These legislative changes leave Hidalgo well placed to take advantage of the opportunities that have emerged following the liberalisation of the national energy system. Mexico’s energy reforms began with changes to the country’s constitution in 2013, which enabled private and foreign investment across the whole energy value chain. Not only did these reforms open the door for entities other than state-owned companies to generate and transport energy, it also removed subsidies from the CFE and left energy prices to market forces. Following price liberalisation electricity costs rose swiftly across the country, inhibiting growth for many domestic firms. Nevertheless, these changes provided Hidalgo with opportunities, as energy price In 2018 Hidalgo’s power generation capacity stood at 2651.2 MW, of which 13% came from clean energy flexibility gives the state a chance to develop its In March 2018 the state not have happened,” José Luis Romo Cruz, secretary competitive advantages. Indeed, the state’s rising reformed its energy of public policy of Hidalgo, told OBG. infrastructure capacity and energy surplus should laws, reorganising and Recognising this potential, the administration keep prices low, while the proximity of Hidalgo to empowering the sector authority and improving of Omar Fayad Meneses, the current governor of areas of high consumption such as Mexico City and the legal framework for Hidalgo, has been proactive in attracting investment the Bajío industrial region provide it with a growing business operations. in the energy sector, in terms of both power stations export market. Furthermore, while public sector and fuel. In June 2018 Bulkmatic announced that Tula providers still produce the majority of the state’s would be the site of its newest fuel storage facility, energy output, its position as an energy exporter where the company already operates two terminals. should benefit from the openness of Hidalgo to pri- “Tula is in a great strategic location to store energy vate sector energy providers. for the Mexico City metropolitan area, Hidalgo and RENEWABLE GAINS: In 2018 Hidalgo’s energy other neighbouring states,” Francisco Melo Valdés, generation capacity stood at 2651.2 MW, of which commercial director for chemicals and hydrocarbons 13% came from clean energy sources. However, the at Bulkmatic, told OBG. “The region offers great contribution of renewables to the state’s energy connectivity in terms of trains and roads, as well as mix is growing, with the new Guajiro solar power proximity to oil and gas pipelines and refineries.” plant coming on-line in June 2019. Furthermore, the RECENT REFORMS: In order to facilitate invest- state benefits from significant renewable energy ment in the sector and improve the local business resources, notably solar and wind. The state is ideal environment, the local authorities undertook two for solar energy generation, combining year-long major reforms of the state’s energy laws in March sunshine of at least 5.7 hours per day, with lower 2018. The first of these entailed reformulating the temperatures than other areas owing to its high Hidalgo State Energy Commission into the State altitude, which makes the photovoltaic panels more Energy Agency (Agencia Estatal de Energía, AEE), efficient, according to Atlas Renewable Energy. This a more decentralised public body. The new agency high altitude also makes the state suitable for wind has expanded powers to assist private companies generation, though this segment remains compara- interested in investing in the energy sector, including tively underdeveloped, with only one 100-MW wind through public-private partnerships (PPPs), along farm in operation in mid-2019, operated by the pri- with powers to propose and manage subsidies and vate firm Mexican Renewable Energy. other incentives for energy investors. “Not many Alongside its resources, the state is also able to states have taken such extensive measures as leverage its location and pre-existing infrastructure Hidalgo,” Andrés Manning, head of the AEE, told to attract further investment in its renewables seg- OBG. “We cooperate with companies looking to ment. “Being so close to Mexico City facilitates the Energy price liberalisation invest in the energy sector, managing their arrival operation of and access to the site,” Camilo Serrano, provided Hidalgo with and facilitating communications with municipalities general manager for Mexico of Atlas Renewable opportunities to export as well the federal government.” Manning added Energy, told OBG. In addition, the Guajiro project is energy, with increasing that, “This is important because energy projects less than 3 km from CFE’s Dañú substation, allowing it supply from its new power stations and rising demand have run into trouble in the past due to lack of prior to efficiently provide electricity to the national grid. in the Bajío industrial agreements with municipalities.” The second reform, “Many power generation projects do not materi- region and Mexico City. called the Law for Promotion of Sustainable Energy alise because of the distances to transmission lines,”

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22 HIDALGO ENERGY & UTILITIES

companies. Nevertheless, while the Guajiro solar power plant has an installed capacity of 129.5 MW, while the company with the highest consumption of energy in the state uses 28 MW. This highlights that electricity producers wishing to develop new facilities will need to establish several, smaller private contracts if they remain unable to sell directly to the national grid. Therefore, on top of its existing agreement with CFE, Atlas Renewable Energy announced in mid-2019 that it would also seek to secure private clients for its new solar power station. While this risks slowing down the construction of new power stations, Hidalgo appears well placed to gain the greatest benefit from the situation. FORKS AHEAD: A further example of a challenge emerging as the result of decisions made on the national level is the issue of transmission lines. In December 2018 the new government announced the end of PPPs for transmitting electricity, despite strong interest from the private sector. As such, transmission remains fully under the administration Hidalgo is strategically located to be able to store and transport fuel for the capital and other major cities of the CFE. While the longer-term impact of this pol- Manning told OBG. “In Hidalgo this is not the case; icy remains to be seen, the policy change has sparked this means that the state has the ability to become fears that the supply of new transmission lines will a supplier to the central part of Mexico.” be unable to keep up with demand. POLICY SHIFT: In February 2019 the AMLO admin- While Hidalgo is currently has well-developed istration cancelled the country’s fourth long-term transmission lines, this will need to increase to keep electricity auction, causing uncertainty among inves- pace with demand. The state may be able to attract tors. This major shift in national policy does not mark energy generation companies and connect them to the end of private energy generation, nor Hidalgo’s a sufficient number of clients. However, for these ambition to attract more domestic and international investments to prove successful, electricity will need investment. These changes do, however, appear to to be able to be transmitted from the power station mean that new power plants will have to seek private to the end consumer. “One thing that concerns us, clients, rather than secure agreements with the CFE now that the government is taking on a more cen- through public energy auctions. tralised role in the energy sector, is whether trans- While this shift in policy presents challenges, it also mission lines have the capacity to match our pipeline presents opportunities for Hidalgo. The state is well of investments,” Manning told OBG. “However, we equipped with transmission lines and strategically are negotiating with the federal government so that positioned in the centre of the country, close to the their planning in the transmission sector is aligned capital and major industrial areas. “Under this new with the investments arriving in Hidalgo.” normal without electricity auctions, the proximity The state may also be set to experience adminis- and connectivity of a project to where the energy trative delays as the result of issues with the Energy is consumed becomes an even more important con- Regulatory Commission (Comisión Reguladora de sideration,” Serrano told OBG. “Therefore, if you Energía, CRE), the government entity responsible need a large industrial customer for your project, it for allocating operating licences to both customers makes much more sense to be geographically close and independent power producers, wanting to par- to them.” Hidalgo is, therefore, an “ideal place” to ticipate in the wholesale market. The CRE has faced sell to private parties, Serrano added. budgetary constraints under the new administration, Furthermore, the state has an administration com- along with the resignation of four of the body’s seven mitted to attracting investment and expanding the commissioners since December 2018. output of the sector, one that has demonstrated its PROSPECTS: While the energy sector faces chal- willingness to operate as a de facto energy broker lenges as a result of decisions made on the national between private firms. Conscious that energy costs level, Hidalgo appears well positioned to take advan- can be a deal-breaker for companies when they are tage of the situation. The state’s role as a net energy Following the cancellation deciding where to invest, Hidalgo is looking to help exporter with developed infrastructure, coupled of the fourth national potential energy providers find consumer partners with its location close to both Mexico City and major energy auction in February and sign power purchase agreements. In so doing, industrial areas, provides it with significant oppor- 2019, Hidalgo is looking the state government hopes to create a virtuous tunities to continue to develop its energy offering. to help potential energy providers find consumer circle, whereby more power plants are established, Furthermore, the state remains open to private partners and sign power thereby lowering the cost of electricity for poten- investment and has committed itself to facilitating purchase agreements. tial investors in the state and thus attracting more deals between energy providers and consumers.

www.oxfordbusinessgroup.com/country/mexico HIDALGO INTERVIEW 23

Camilo Serrano

A bright outlook Camilo Serrano, General Manager for Mexico, Atlas Renewable Energy, on regional solar potential to anchor a national market

In what sense did the reforms enacted earlier in companies to improve to their competitiveness, reduce the decade help to boost the energy sector? costs and build an environmentally friendly brand. SERRANO: Although far from complete, and with In addition to the state’s strategic location, other considerable regulatory issues remaining, the energy strengths that encourage companies to establish reform opened the door to competition and attracted their businesses here include the role of the current the attention of international energy companies that government. The two state energy laws that were see Mexico as a new market with great potential. approved in 2018 created a regulatory framework As part of the reform, the energy auctions can be that will form a solid and sound basis for creating a considered – up to a certain level – a case study and a long-term energy development plan. The government success story in the region. They proved how efficient has played a proactive role in providing support to this mechanism is in increasing competition and ulti- private investment and bringing energy companies mately affecting energy costs, which are among the and communities together, which is fundamental for lowest in the world. They also promoted the country the success of any project of this magnitude. globally and attracted a large number of investments to develop the local power industry. To what extent is Hidalgo’s labour market prepared The cancellation of the auctions did not spell the to meet energy companies’ productivity needs? end of opportunities for the sector. Instead, there is SERRANO: Finding skilled labour in the state has been a growing trend towards the business-to-business an issue for a long time due to a lack of higher-educa- (B2B) market and meeting the demand from private tion graduates, a low capacity for integrating young companies through clean energy projects. people into the labour market and poor economic growth in the past. However, the state has created a What qualities make Hidalgo a good place to com- virtuous cycle through which companies and educa- pete in Mexico’s renewables market? tional institutions can link to each other. SERRANO: Mexico has undeniable advantages in the The challenges are still there, but we have seen the solar industry, with one of the world’s highest levels administration become increasingly involved in bal- of solar irradiance. Hidalgo has its own micro-climate, ancing the needs of the private sector and the skills which makes it a suitable environment for solar at lower required in educational institutions. In fact, over the temperatures than the Sonora Desert, for instance. period when our plant was under construction, we In the B2B market, Hidalgo is particularly attractive employed around 1000 people and never experienced because of two key factors: its strategic location close any setback in its development, nor did we need to to the main points of energy consumption and the recruit skilled labour from outside the region. availability of land for the installation of solar panels. There are different levels of qualified and unqual- Hidalgo can serve as a convenient supplier for Mexico ified human capital available in Hidalgo, and these City, which is the largest consumer market in the coun- workers are able to achieve a wide range of different try, as well as for the State of Mexico and the industrial work purposes and goals. We have faced no shortage Bajío Region, which are home to a large number of big of skilled employees throughout our entire develop- companies and large-scale projects. ment, and there is an increasing certainty that the Hidalgo represents a service platform and, most workforce required to undertake any kind of project importantly, an energy solutions provider that can help is and will continue to be available within the region.

Bloomberg Terminal Research Homepage: OBGR‹GO› THE REPORT Mexico 2019 24 HIDALGO INDUSTRY

Industrial development is set to bring more added value to the economy

Investment destination Private funds promote more competitive industry

Long-term local The potential of Hidalgo as an industrial hub is bulk transport firm Bulkmatic announced it would be government support, hardly a new discovery, stemming back to the 1950s investing $100m in building two fuel storage termi- coupled with a number when the manufacturing city of Fray Bernardino de nals, one of which will be located in the municipality of recent high-profile investments in logistics, Sahagún in the southern municipality of Tepeapulco of Tula de Allende. Original plans put storage capac- transport and metallurgy, was founded as part of a federal government ini- ity at 690,000 barrels, but it was recently decided is transforming Hidalgo tiative to house the Mexican automotive producer that the terminal would be made larger, which could into a manufacturing and National Diesel, also known as DINA, and national be credited to improved economic prospects under industrial centre. rail construction company Constructora Nacional the current government (see Economy analysis). de Carros de Ferrocarril (Concarril). Shortly after, Brazilian metal and steel manufacturers Gerdau the state began attracting other private companies Corsa began operations at its Hidalgo steel factory in the automotive, metal, plastic and textile manu- in 2015. At $600m, the development marked the facturing industries. More recently a new focus has largest single investment in the state at the time. been placed on Hidalgo as global companies and The factory has an installed capacity of 1m tonnes new industrial parks are setting up shop backed by of liquid steel and 700,000 tonnes of finished prod- public support and a raft of private investment. A ucts, including beams, pipes, sheets and angles. At major focus is being put on implementing diversifi- the time of construction, the mill created some cation strategies, making improvements to available 4000 indirect jobs, and currently hires 500 direct infrastructure for new industrial investments and employees and generates about 2000 indirect jobs. bringing more added value to the economy. AUTOMOTIVE: Building on the history begun by CONSOLIDATED SECTORS: Growth in the region DINA, the automotive sector has expanded with has not always followed a smooth trajectory, with a particular focus on buses and light-load trucks. several companies based in Sahagún going bank- In 2006 local automotive makers and distributors rupt in the 1980s and 1990s; however, the region Giant Motors Latinoamérica chose Sahagún as experienced something of a comeback in the fol- the location for its 65,000-sq-metre minivan and lowing three decades to now. Canadian rail company truck factory and distribution centre. Then, in 2017, Bombardier acquired Concarril in 1992 and won Giant Motors announced a MXN4.4bn ($227.5m) contracts to build trains from Monterrey and Gua- investment in conjunction with Chinese firm Anhui dalajara to Sahagún. Bombardier currently manu- Jianghuai Automobile Group (JAC Motors) to build factures light-rail vehicles and metro cars operating two new SUV models, followed by an April 2019 in Mexico City. The company also supplies compo- announcement to launch two more traditional mod- nents for projects in New York, Vancouver and Kuala els: the SEI 4 SUV and the Frinson T8 pick-up truck. Lumpur, further consolidating the importance of “People say that Hidalgo is not industrial but I Sahagún to North American trade. do not believe this to be true,” says Elvia Noriega The logistics sector is boosted by state’s prox- Hernández, president of the Pachuca delegation of imity to Mexico City and its connectivity with the the National Chamber of Industry (Cámara Nacional Bajío manufacturing and industrial region. In 2012 de la Industria de Transformación, CANACINTRA). Hutchison Ports opened the Hidalgo Intermodal “There are several crucial industries in the state, Logistics Ports, which receives around half of the and coupled with the rising investment seen in the country’s container port throughput. In 2018 US dry last couple of years, this activity should increase.”

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SUSTAINABLE TRANSPORT: Amid the numerous high-profile investments, the automobile industry has become the region’s new focus, offering environmentally friendly opportunities for international companies and investors. On top of the agro-industry, renewable energy and chemical-pharmaceutical sectors, the government has placed a strategic focus on promoting sustainable transport. Omar Fayad Meneses, the governor of Hidalgo, said in a March 2019 press release that the state should avoid competing with areas like Puebla, Querétaro and San Luis Potosí that have well-established traditional automotive industries. Instead, local manufacturers are looking to produce vehicles that run on alternative fuel sources. Indeed, the JAC Motors investment in the area was something of a seal of approval for this strategy, with Giant Motors and JAC Motors also planning to build electric SUVs and sedan models in Sahagún. JAC Motor’s involvement is particularly relevant given the company is a partner in the biggest electric vehicle project in the world: The state government is providing opportunities for local and global firms to supplement larger investments a $12bn joint venture with Volkswagen. In March 2019 Mexican firm Ensambladora Latino- fiscal incentives to attract investment. However, americana de Motores (ELAM) opened a new plant CANACINTRA issued the cancellation on the grounds to build five natural gas-powered vehicles by Chinese that previous SEZs had resulted in little benefit for state-owned car manufactures FAW Trucks. These the economy. Still, state lawmakers remain resolute gas vehicles reportedly release 20-30% less green- that building a more sustainable manufacturing house gas into the atmosphere. ELAM’s MXN460m centre in Hidalgo will bring added benefits. “This ($23.7m) investment in the western municipality cancellation will not deter us, and we will keep up our of Zapotlán de Juárez is expected to generate 70 efforts to develop the sustainable transport sector direct jobs and 250 indirect positions, according to in the state,” José Luis Romo Cruz, the secretary of the state’s Secretariat of Economic Development public policy of Hidalgo, told OBG. (Secretaría de Desarrollo Económico, SEDECO). SUPPLY CHAIN: Despite the cancellation of the SEZ, Some firms have begun producing electric vehi- there are signs that Hidalgo is gradually attracting cles for commercial and official use. In collaboration more providers and building supply chains in key sec- with metal-mechanics company Moldex, a subsidiary tors. “The state has been able to attract a sufficient of bread-making giant Grupo Bimbo, and a num- amount of suppliers. This is important because when ber of local academic institutions, Giant Motors is companies are looking for new sites, they consider developing electric utility cargo vehicles that Grupo the strength of the local productive chain,” Claudia Bimbo can use for product distribution. Each vehicle Ávila Connelly, executive director of the Mexican has a loading capacity of 600 kg and a range of more Association of Industrial Parks, told OBG. than 70 km. Moldex and Giant Motors are planning Sahagún’s history means that there are well-es- to commercialise the vehicle to other companies tablished providers in the area, but now stakeholders with similar distribution needs. are looking to develop other sectors and add value, The pair is also working on a 100% locally manu- and the government is providing an opportunity for factured and assembled electric car that is expected companies to supplement larger investments. In this to be used as an alternative taxi vehicle for Mexico vein, a string of Mexican and international firms City, which has historically suffered from high levels have recently arrived to the state, boosting local of pollution. If Giant Motors and Moldex succeed industry. In February 2019 Italian firm Mapei opened in commercialising these vehicles, it would mark an its construction materials factory in Zimapán with a important step in Hidalgo’s ambitions of becoming MXN170m ($8.8m) investment. The company plans the new home of electric and alternative-fuel vehicle to manufacture 185,000 tonnes of adhesive and manufacturing in the country. sealant products per year, and expects to provide ZONE CANCELLATION: A setback to these goals jobs to more than 230 people. has arisen, however, as plans to develop an electric Meanwhile, US company Beaver Manufacturing vehicle-manufacturing cluster – alongside renew- spent MXN130m ($6.7m) in setting up its first plant able energy and chemical-pharmaceutical devel- in Latin America in Tepeji del Río, providing technical In March 2019 a domestic opments – in a proposed special economic zone fibre reinforcements for automotive, industrial, and firm opened a new plant to build natural gas-powered (SEZ) have been cancelled at the federal level. The oil and gas businesses. The manufacturer expects vehicles that reportedly idea was to take advantage of Mexico’s Federal Law to employ 30 people at its Tepeji facility, from release 20-30% less on SEZs, which was passed in 2016, and use the where it plans to expand its business into the rest greenhouse gas.

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A number of global firms have already recognised Hidalgo’s potential. The state has 10 industrial parks – seven private and three publicly owned. In 2014 Mexican fund Artha Capital began developing a new industrial park – Platah, which is located in Villa de Tezontepec – under a public-private partnership with the state of Hidalgo. The 343-ha site is equipped with industrial sites, as well as commercial areas and state facilities for education. Platah has quickly become one of the most popular parks in the state, hosting a number of major companies including Envases Universales, drugstore chain Farmacias Guadalajara and Anton Paar. The MXN20m ($1m) first stage of the Tulancingo Industrial Park is due to open in the municipality of Santiago Tulantepec in the second half of 2019. The total corridor is aimed at micro-, small and medium-sized enterprises, and is expected to boost employment in the nearby municipalities of Singui- lucán, Cuautepec, Acatlán, Santiago and Tulancingo. While the entire park will eventually cover 40 ha, the Hidalgo is the location of 10 industrial parks, of which seven are private and three are publicly owned first phase will see 17 ha come on-line. “We always of Mexico and South America. Austria’s Anton Paar, knew that we had a strategic location,” Noé Paredes, which produces scientific instruments for industry head of Tula-based conglomerate Grupo UNNE, told and research, began construction on its MXN100m OBG. “What we did not have was connectivity or ($5.2m) plant in Villa de Tezontepec in January 2019. investment in top level industrial and logistics parks, A number of notable Mexican companies have but this is changing significantly.” also chosen Hidalgo as an investment destination, QUALITY OF LIFE: As well as industrial infrastruc- such as packaging company Envases Universales, ture, Hidalgo must also offer the quality of life nec- which arrived in the state in early 2019 to become essary to attract international companies. In this a major supplier for brewery Grupo Modelo. Tur- sense, having industrial activity spread around the bomex, which makes recipient parts for various state – from the capital Pachuca de Soto, to Tula, industrial processes, invested MXN30m ($1.5m) Tepeji and Tizayuca in the west, and Sahagún and in its facilities in Villa de Tezontepec. Meanwhile, Tulancingo in the south – has represented a chal- Pesa Uniformes has spent MXN50m ($2.6m) on its lenge. Hidalgo’s proximity to Mexico City has also facilities in Zapotlán to provide uniforms for indus- somewhat hindered the development of services try and other sectors, with this investment alone and entertainment in the state. However, being at generating 200 direct jobs. a relatively early stage of economic development However, it is not always easy for smaller local compared to other states also provides a chance companies to participate in the large new invest- for government to ensure that industrial growth is ments. “Hidalgo’s businesses have the technical implemented in a sustainable fashion. and administrative capacity to carry out work for “Hidalgo has a great window of opportunity to the impressive amount of private investment that define the vocation of its 84 municipalities; not is arriving in the state,” Edgar Espínola, president every one has to be industrial,” Connelly told OBG. of the Business Coordinating Council of Hidalgo, “Some could be more residential, tourism based, or told OBG. “However, because large investors tend agricultural. There is also great scope to develop to pay their suppliers between 120 and 180 days urban infrastructure and services in Hidalgo, par- after the job is completed, smaller local firms are ticularly away from Pachuca,” she added. often expected to operate without income for a OUTLOOK: With a record MXN53.5bn ($2.8bn) in substantial period.” Although local companies are private investment received from September 2016 participating in almost all of the new investments, to September 2019, Hidalgo’s efforts to expand and financial limitations means that firms without suf- modernise its industry are paying off. As better ficient capital are forced to act as subcontractors infrastructure becomes available, efforts to deepen rather than the principal suppliers. the supply chains bear fruit, and local companies NEW PARKS: While Hidalgo still cannot boast learn how to work with the multinationals arriving The first phase of a new the activity of some of Mexico’s more industrially in the state, Hidalgo will continue to build its repu- industrial park in the developed central states, sector stakeholders could tation as a top industrial destination. municipality of Santiago now be in position to effectively capitalise on the While progress moves forward, public and private Tulantepec is due to come on-line in the second half recent influx of private investment. “Hidalgo still has sector stakeholders will have ample opportunity to of 2019. The park will available land at a very competitive price compared take advantage of the state’s logistics and connec- eventually span 40 ha. to other regions, for example,” Connelly told OBG. tivity to diversify the demand side of the equation.

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Hidalgo’s central location has made it a transport and logistics hub

At the crossroads Improved connectivity attracts logistics parks and terminals

With the state capital, Pachuca, just 90 km north Construction of the Arco Norte brought a number of Mexico City, Hidalgo’s location has long been a of investments along its periphery, including the 800 km draw for investment. Economic growth in the coun- 840-acre Platah industrial park, which is located of railway lines run try’s capital has attracted even more attention to at the crossroads of the Arco Norte, and the main through the state the central state as it is the only flat territory that motorway between Mexico City and Pachuca. The Mexico City and its suburbs can expand to. Its stra- project bills its location in the centre of Mexico tegic location has brought transport and logistics as part of its strength in logistics efficiency and infrastructure, as well as investment. In November production response capacity. As well as facilitating 2017 Grupo Modelo – the Mexican branch of the access between Hidalgo and the west of the country world’s largest beer maker, Anheuser-Busch InBev – including the second-largest city, Guadalajara, and – announced it would build a brewing and bottling the Pacific ports – the Arco Norte also increased plant in Apan. What is more, a plastics plant run by connectivity to the Carretera 57. Also known as the Grupo REYMA in Ciudad Sahagún is scheduled to NAFTA Highway, Carretera 57 passes through central commence production in 2019. Mexico to the US via Tepeji del Río in Hidalgo. Both companies made it clear that Hidalgo’s trans- LOGISTICS INFRASTRUCTURE: Taking advantage port networks were an important factor that played of these connectivities, a number of private com- into the decision to undertake these projects. “The panies have built logistics infrastructure in Hidalgo. state’s connectivity and strategic location, as well The state is home to three logistics terminals — Dis- as the desire to work with the people in Hidalgo, tribution and Logistics Services in Tizayuca, Bulk- were the reasons why we decided to invest,” Damián matic in Atitalaquía and the Intermodal Logistics Quintana Romo, director of public relations at Grupo Terminal of Hidalgo (Terminal Intermodal Logística REYMA, told local press in October 2018. de Hidalgo, TILH) in Tula –that provide a broad offer- GEOGRAPHIC ENDOWMENT: Hidalgo’s proxim- ing of multi-modal transport and storage services ity to one of the largest consumer markets in the for a variety of products. They benefit from the world – Mexico City – has been key to the coun- 800 km of railway lines that run through the state, try’s economic growth. However, in recent years its and two of the five sites where Mexico’s two rail connectivity to other cities has allowed Hidalgo to operators – Kansas City Southern de México (KCSM) become something of an alternative to the capital. and Ferromex – connect are in Hidalgo. Indeed, the In 2009 the Arco Norte motorway, a bypass around TILH is the only intermodal logistics terminal where the Mexico City metropolitan area, was opened. both cargo rail networks connect with the road links The motorway extends 223 km, stretching from that criss-cross the country. Querétaro to Pachuca, then through to the Bajío “When companies decide to establish themselves Industrial Park in Puebla, an important hub for the in a location, the first thing they look at is connectiv- automotive industry. The link between Puebla and ity and logistics,” Noé Paredes, director-general of The state is home to Hidalgo – another one of the nation’s manufac- Grupo UNNE, the local conglomerate that runs the three logistics terminals: turing centres – is of strategic importance for the TILH, told OBG. “In this respect, and in many others Distribution and Logistics Services in Tizayuca, manufacturing industry, as well as the transport and as well, Hidalgo is highly competitive.” Bulkmatic in Atitalaquía and logistics sector, given the closely integrated supply ROOM TO GROW: Both Bulkmatic, a US-headquar- the Intermodal Logistics chains that run throughout the Mexican states. tered logistics company, and the TILH are expanding Terminal of Hidalgo in Tula.

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the most pressing priorities for road improvements. “This road development is a vital project because it not only offers us another road to the ports on the coast of the Gulf of Mexico, but it also improves connectivity for the agricultural activity taking place in the 200 km or so between Pachuca and Huejutla,” Edgar Espínola, president of the Business Coordi- nating Council of Hidalgo, told OBG. President Andrés Manuel López Obrador, com- monly known as AMLO, is committed to upgrading the highway and earmarked federal funds for the project. As of April 2019 three of the nine stages of construction were complete, according to officials in the state government. “The project is entering its most challenging stage of construction. We hope the promises surrounding the development are successfully fulfilled,” Espínola told OBG. AIRPORT POTENTIAL: One of AMLO’s first acts as president was to cancel the proposed airport project in Texcoco, to the east of Mexico City, even though it was already one-third complete and had A wide variety of industrial companies have chosen Hidalgo as a base for their distribution centres raised billions of dollars to finance its construc- their facilities in Hidalgo as demand grows. Bulkmatic tion. Instead, the president proposed building a has plans for a fuel storage terminal. Initially, the new airport at the Santa Lucía military air base in terminal was slated to have a capacity of 900,000 the north-east of the city, 10 km from the city of barrels, but the company decided to increase its Tizayuca in Hidalgo. Although at the time of pub- investment to $220m and boost capacity to 2.3m lication it was unclear whether the project will go barrels based on indicative demand. Bulkmatic’s ahead, a new major airport close to Hidalgo would facility will connect with both the road network undoubtedly generate significant economic activity and KCSM railway. In the first half of 2019 Grupo for the state. “While the airport in Texcoco would UNNE opened its transloading multi-modal terminal have benefitted the state, a new airport in Santa at the TILH, offering the possibility for its clients to Lucía would benefit us as well,” José Luis Romo Cruz, transfer products such as fuel and diesel from trains secretary of public policy of Hidalgo, told OBG. The and trucks to other modes of transport. local administration led by Omar Fayad Meneses, A NATURAL ADVANTAGE: Hidalgo’s proximity to the governor of Hidalgo, has expressed support for Mexico City and Veracruz – the country’s busiest AMLO’s plans for Santa Lucía, visiting the site with port on the Gulf of Mexico – makes it an ideal trans- the president in April 2019. According to Romo, the port and logistical crossroads. “Hidalgo is excep- state government is putting together a roadmap for tionally attractive because it is safe and secure, the development of a new aerodrome in Pachuca as well as strategically located,” Francisco Orozco, after the facilities are moved from the existing site commercial director for Mexico at Hutchison Ports, to complement the Santa Lucía project. told OBG. “By going through Hidalgo, you can also A major international airport at Hidalgo’s doorstep avoid the traffic in Mexico City. Overall, there are would increase the state’s logistical appeal, and very few places that couple a location like this with experts expect it will lead to a wave of new industrial connection to both rail networks, allowing transport parks and warehouses. Independent of plans for the to access to both coasts.” While Hidalgo’s facilities airport in Santa Lucía, a new airport could be built face stiff competition from terminals in other parts in Hidalgo, where 900 ha of land has been freed up of the country, such as Ferrovalle’s Pantaco terminal in the Tizayuca Valley for this purpose. in Mexico City, APM Terminals’ facility in Cuautitlán THE PATH AHEAD: Hidalgo’s attractiveness as Izcalli and the two terminals in Querétaro, Orozco a centre for transport and logistics is attracting said that he remains optimistic about the state’s companies that not only produce goods but also economic prospects and attractiveness. companies that have chosen the state as the base ROAD TO IMPROVEMENT: In any case, Hidalgo can- for their distribution centres, such as Mexican drug not rely solely on its location and notable improve- store chain Farmacias Guadalajara and Grupo Lala, a ments to its transport network are still needed. local dairy company. While Hidalgo’s logistics capac- According to a May 2019 report from the OECD, ity has been central in its success in attracting the Hidalgo stands to gain around 62% of the state’s road network is unpaved, recent wave of investments, the state should con- from transport upgrades a figure higher than the national average of 53%. tinue upgrading its transport infrastructure, includ- in and around the capital, including the proposed new The local business community highlights the ing its roads and air connections, to attract more airport in Santa Lucía, 10 motorway between Pachuca and the city of Huejutla companies from across the business spectrum and km from Tizayuca. de Reyes on the north-east tip of the state as among enhance its appeal as a destination for investment.

www.oxfordbusinessgroup.com/country/mexico HIDALGO AGRO-INDUSTRY 29

Approximately 15,000 barley farmers work the land surrounding Apan

Cultivating opportunity Agro-industry primed for growth as market expansion and large investments come into effect

The largest single private investment in the history of take advantage of Hidalgo’s role as a top national Hidalgo, Grupo Modelo’s new brewery in the south- producer of barley, alfalfa, wild agave and corn. ern municipality of Apan opened in March 2019 and EMPLOYMENT: The new brewery in Apan has the 46% is a key anchor investment for the state. capacity to produce up to 12m hectolitres of beer of Hidalgo’s population INVESTMENT: Modelo’s MXN14bn ($723.9bn) fund- annually, equivalent to 9.3m 355-ml beers per day. lives in rural areas ing represented 5.3% of Hidalgo’s 2017 GDP and The company’s master plan shows the potential to reflects the agro-industry’s recent progress. Of the double these numbers in the future. strategic sectors prioritised by the state’s Secretariat Modelo’s project illustrates why the state govern- for Economic Development (Secretaría de Desarrollo ment is seeking investments of this type. According Económico, SEDECO), the agro-industry has been to global ratings agency Moody’s, the investment, making the most notable headway. According to which it describes as positive for Hidalgo’s credit SEDECO, the administration has received a total of profile, will enhance the economy and increase its MXN16.1bn ($832.5bn) of investments to the sector. payroll tax collections with the new jobs it generates. In choosing agro-industry, SEDECO hopes to chan- These collections are the most important source of nel new investments to a key sector for rural areas. state-level tax revenue in Mexico. This should also assist the sector’s modernisation Modelo’s records show that around 4500 workers and formalisation of business practices. Around 97% were employed in the construction of the Apan plant, of Hidalgo’s localities are classified as rural, and 46% however, Moody’s says that when indirect jobs are of the population lives in these areas. Furthermore, taken into account the actual figure is as high as some 55% of the state’s territory is dedicated to agri- 10,500. Thus far, Modelo has hired 600 people to culture and farming, and the sector accounts for 19% operate the brewery and expects this number will of employment. According to the OECD, rural areas rise to at least 1200. Moody’s believes that once tend to have high poverty rates and labour informal- the plant is fully operational, it could generate up ity, with up to 45% of the labour population of the to 6200 direct and indirect jobs. 10 poorest municipalities working in agriculture. The Some 70% of the workers at the plant are from Secretariat for Agricultural Development underlined Hidalgo, which should drive a 5% uptick in payroll this point when the current state administration took revenue in 2019 and increase what Moody’s calls the office, highlighting that only 44% of local residents state’s revenue efficiency, or the ratio of revenue working in agriculture make the minimum wage, while from its own sources to total revenues. This ties into about 22% do not receive any income. one of the OECD’s key recommendations: as the state SEDECO estimates that the average monthly wage has the fourth-lowest level of revenue collection in for agro-industry workers in Mexico is MXN16,000 Mexico, it must increase its income. Moreover, the ($827), some 82% above the average across all eco- revenue increase should have a positive secondary The Secretariat for nomic sectors. It is also higher than the government’s effect, increasing the state’s share in Mexico’s Gen- Economic Development other strategic sectors, like energy, sustainable eral Participations Fund (Fondo General de Partici- estimates that the transport and chemical pharmaceuticals. paciones, FGP) – non-earmarked revenue transfers average monthly wage for agro-industry workers Several agro-industry investments have followed from federal to state governments. Moody’s predicts in Mexico is $827, some Modelo’s initiative. The challenge is to ensure that that the government will receive 7.7% more from 82% above the average these investments bring prosperity to the state and the FGP than it averaged between 2013 and 2018. across all sectors.

Bloomberg Terminal Research Homepage: OBGR‹GO› THE REPORT Mexico 2019 30 HIDALGO AGRO-INDUSTRY

succeed, Modelo’s investment needs to spur interest in other companies. In February 2019 packaging company Envases Universales announced that it would invest MXN2.2bn ($113.8bn) in a new plant at Hidal- go’s Platah industrial park. This project will require some 200 technical workers. Envases Universales had been looking for a site with similar characteristics for some time, and Modelo’s arrival in Apan encouraged the company to set its sights on Hidalgo. It is expected to become one of the brewery’s top providers. “Modelo’s arrival undoubtedly triggered our investment in the state,” Alberto Galván Rodríguez, director at Envases Universales, told local media. Galván also said that Platah, which is situated adja- cent to the Arco Norte highway, provides an ideal location given its proximity to potential clients in Mexico City, Querétaro and Toluca. The sector has also seen recent investments from dairy company Grupo Lala, and flour and wheat producer Munsa Molinos. Furthermore, in 2018 US firm Al Dahra ACX said it would invest MXN413m ($21.4m) Some 55% of the state’s territory is dedicated to agriculture, and the sector accounts for 19% of employment in Atitalaquía. The company purchases approximately Modelo estimates that between June 2017 and 1000 tonnes of alfalfa per month from local produc- the end of 2018, the project at Apan had an indirect ers. These investments provide some certainty to economic impact of MXN900m ($46.5m) through farmers in their ability to generate desirable prices salaries, suppliers and raw materials. “Grupo Mod- for their products in the long term. elo, the state government and the local community FURTHER EXPANSION: If the agro-industry compa- have common interests in the Apan project,” Cas- nies already established in Hidalgo are any indica- siano De Stefano, CEO of Modelo, told OBG. “While tion, the sector’s future looks bright indeed. There we obviously expect to have a financial return on is strong potential for Modelo to double its capac- the investment, it is an enormous opportunity for ity in Apan, as it has built a plant that is capable of development in the area,” he said. incorporating new brands as needed. Meanwhile, RESOURCES: There are approximately 15,000 barley Envases Universales says that its investment exceeds farmers working the land surrounding Apan. In April its current needs, but it was made with an eye on 2019 Modelo announced that it had increased its the market’s projected growth. purchase of barley from local producers to 80%, Another major player that has been in the state with the remaining 20% purchased from the state. since 1995 is also expanding quickly. Cargill, a mul- Since 2017 the company has purchased 100% of its tinational agri-business company and the largest supplies from Mexican producers. private corporation in the US by revenue, expanded Although Hidalgo has provided Modelo with bar- its oils and refinery factory in 2014. In March 2019 it ley for many years, the new plant is accelerating carried out a second expansion, investing MXN320m purchases. In the 2018 spring-summer cycle the ($16.6m) in a new production line – the first of its company purchased just under 46,954 tonnes of the kind in Mexico – to produce and bottle vegetable oil. grain from the state and it expects this will increase This turned the company’s Hidalgo plant into its fifth to over 84,000 tonnes in 2019. largest globally. However, the state must continue The company has initiated programmes to help the to successfully build supply chains for agro-industry farmers, including training to increase productivity; to become truly transformational for its economy. new technologies; and Conecta Modelo, or Modelo The OECD also wants to see a greater number of val- Connects, which sends SMS messages directly to the ue-added products, with a “business approach in the farmers, offering logistical solutions and informing use of technological innovations so as to improve the them of the prices at which the company is purchas- standard of living for the portion of the population ing its goods. These efforts should begin to address dedicated to agricultural production”. what the OECD describes as one of the agricultural Modelo, at least, believes that the rural sector will sector’s most pressing challenges: deficient market- grow hand-in-hand with the company. “We cannot ing channels and excessive intermediation. “It is vital guarantee that right now there is sufficient local A number of major agro- to offer barley farmers access to technologies that capacity to produce the barley needed to double industrial companies they would not otherwise have,” De Stefano told OBG. production in Apan, but we can guarantee that we have made significant “Farmers should have the security of knowing that will work together with the state and its people to investments in Hidalgo in recent years, opening they will have customers for their goods,” he said. make that growth happen,” De Stefano told OBG. new plants and expanding Follow-on investments: In order for the govern- “Our plan is not to increase production in the plant existing facilities. ment’s vision of Hidalgo as an agricultural centre to only to then go out and look for suppliers elsewhere.”

www.oxfordbusinessgroup.com/country/mexico HIDALGO INTERVIEW 31

Cassiano De Stefano

Fostering productivity Cassiano De Stefano, CEO, Grupo Modelo, on the strengths of Hidalgo’s beer industry and broader business environment

Which advantages exist for establishing or ex- and domestic and global demand are on the rise. panding a business in the state of Hidalgo? There are many opportunities in different segments, DE STEFANO: When a company seeks to invest such as premium and craft beer, where development a significant amount of resources in a particular is at an early stage. Therefore, Mexico is a growing location, there are several factors to consider, and and sustainable market for the international beer having a government structure that is both dili- industry, which has significantly increased its com- gent and efficient is a good first step. The govern- petitiveness and serves as an excellent platform for ment can help connect private companies to local local consumers as well as global markets. communities, a relationship that is crucial for the success of large-scale projects, and therefore for How competitive are small and medium-sized the state’s overall socio-economic development. enterprises (SMEs) and local farmers in Hidalgo, Hidalgo is broadening its area of influence, and the and how will they help sustain agro-industry? government and local communities are committed DE STEFANO: Local farmers and SMEs in Hidalgo to easing the business environment and facilitating are well prepared to contribute to the supply chain companies’ operations in the state. Furthermore, in an efficient and productive manner. Although Hidalgo is strategically located and has developed they continue to experience financial impediments the necessary infrastructure, including road and to growth – predominantly in regards to access to rail networks, to move cargo efficiently from one technology – the government and private companies point to another within the country, especially from are engaging in programmes that promote the use of the Bajío industrial region to Mexico City. Hidalgo’s technology in an effort to modernise their facilities logistics enable companies to easily and conven- and foster productivity, while also reducing their iently access two oceans, and the location is perfect environmental impact. In terms of the beer industry, for the development of renewable energy sources. technological innovations have contributed to the increased quality and quantity of barley production, What are the strengths of Mexico’s beer market which will ultimately have a positive impact on the amid increasing global competition? reputation and sales of Mexican beer. DE STEFANO: Beer is an important part of Mex- The private sector is also acting as a guarantee ican culture. Mexico grows its own barley, which alongside banking institutions, providing access is essential for the success of the beer industry to credit for SMEs to grow their business and given the importance of a close relationship with strengthen their supply capabilities under favour- both suppliers and export markets. Not only does able conditions. This virtuous circle creates a this relationship reduce dependency on external number of opportunities for both suppliers and markets and factors, decreasing operational costs, manufacturers, and it has been facilitated by the but it also contributes to the strengthening of the active involvement of the government in engaging local market’s overall productivity. and linking the interests of all of Hidalgo’s eco- The demand for a wider variety of beer flavours nomic, regulatory and social actors. Furthermore, is increasing as consumer palates become more the government has helped to develop a large pool sophisticated, knowledgeable and demanding. As a of highly skilled workers, whose input will support result, market offerings have expanded substantially, long-lasting growth in the state’s agro-industry.

Bloomberg Terminal Research Homepage: OBGR‹GO› THE REPORT Mexico 2019 32 HIDALGO INTERVIEW

Elvira Noriega

Evolving environment Elvira Noriega, President, National Chamber of Industry Pachuca, on ensuring local businesses remain competitive

How can local companies strengthen Hidalgo’s with the changing demands of the public sector and competitiveness and productivity? international investors. The state has an advantage in NORIEGA: We have traditionally attracted businesses terms of logistics and location, as it is situated in close from other states, such as Nuevo León, with companies proximity to Mexico City and has a strong industrial bringing their expertise and qualified labour to Hidalgo, heritage, making it attractive to companies seeking and reaping the economic benefits. However, this situ- the right location to connect to the capital city, as well ation is changing; the focus on education and training, as the Bajío region and northern Mexico. In order to combined with private sector investment, has enabled put these qualities on the map for investors, the state local companies to develop and actively participate in needs to ensure that infrastructure and connectivity the state’s socio-economic growth. are prioritised. For example, the development of indus- As the private sector continues to expand, we can trial parks would help Hidalgo meet the demands of now offer qualified human capital, the ability to adhere such a competitive international market. to international standards and a willingness to meet the needs of the investor. Nevertheless, we still have In what ways are improvements to higher education to improve on certain aspects that are key to our com- and training spurring growth? petitiveness. When a large company establishes itself in NORIEGA: Higher education institutions have consist- Hidalgo, local companies have to be ready to face the ently improved since 2010, contributing to socio-eco- challenges this may bring. This is particularly important nomic development across the state. However, more for small and medium-sized enterprises (SMEs), which needs to be done to inspire young people and develop must be able to remain financial viable even when pay- their entrepreneurial spirit, while also ensuring their ments from large clients are delayed. skills match the needs of the job market. In addition, companies must integrate new technol- We believe that there are more rewarding oppor- ogy into their processes in order to improve efficiency tunities for young people in the private sector and and remain competitive. Local businesses are currently we encourage them to pursue work at the local or investing significant resources in developing this area, international businesses operating in Hidalgo. To this but it continues to be a challenge for some SMEs. end, the current administration has taken steps to raise local wages in the private sector, so that young people What steps have been taken to streamline the busi- are more inclined to choose to stay in Hidalgo rather ness environment, and what more can be done? than move to another state. It is also vital that new NORIEGA: The current administration has improved the technology is integrated into the curricula to ensure regulatory framework, reducing the amount of proce- that graduates are skilled in the most advanced and dures and requirements needed to open a business or up-to-date processes and systems. develop a project. This has already had a positive impact Hidalgo has expanded its area of influence in the cen- on the business environment. tral Mexico region, and its attractiveness as a location We are now looking to adapt Hidalgo’s social, physical for investment has increased exponentially in the last and regulatory infrastructure to meet the needs of few years. However, the only way for the business envi- the modern and globalised world. As we become more ronment and the local market to remain competitive is connected, there are new challenges and opportunities to have a well-trained, modern and technology-focused for Hidalgo, and it is important that we can keep up labour force that can boost companies’ productivity.

www.oxfordbusinessgroup.com/country/mexico HIDALGO PHARMACEUTICALS 33

Several chemical and pharmaceutical firms have arrived in Hidalgo

Big on investment The state has proved attractive to pharmaceutical and chemical companies making both large and small investments

Compared to three other sectors selected as strategic PHARMA GROWTH: On the pharmaceutical side, Quim- The sector saw by Hidalgo’s state government, the chemical-pharma- pharma, the Mexican laboratory, is investing MXN102m ceuticals sector has additional room to grow in terms of ($5.3m) in a new facility to produce pharmaceutical $23.4m the aggregate amount of investment that has arrived products and dietary supplements in Tepeji del Río. invested between during the tenure of this administration. “The pharmaceutical sector can use as a leverage the September 2016 According to figures from Hidalgo’s Secretariat of existing pharmaceutical companies that have estab- and May 2019 Economic Development (Secretaría de Desarrollo lished themselves in the state’s industrial parks,” the Económico, SEDECO), the sector has seen MXN452m OECD said in its May 2019 review of the sector. One ($23.4m) of investment between September 2016 and important milestone in this process came in February May 2019, compared to MXN5.4bn ($279.2m) in sus- 2019 when Mexico’s third-largest pharmacy chain Far- tainable transport, MXN11.82bn ($611.2m) in energy macias Guadalajara, owned by Corporativo Fragua, said and MXN16.14bn ($834.8m) in agro-industry. However, that it would be building one of its largest distribution a string of relatively small investments in chemicals centres in Hidalgo. The facility – which will require an and pharmaceuticals have been numerous enough to investment of MXN1.8bn ($93.1m), and in the process build momentum for the sector. SEDECO’s hope is that provide 1700 jobs – will cover 1600 branches across 14 investment will spawn the arrival of further companies, states. Speaking to the state government, Javier Arroyo creating a pharmaceutical cluster in Hidalgo. Navarro, director-general of Farmacias Guadalajara, Pisa Industrial Pharmaceutics has been manufactur- said that the group needed a distribution centre to ing veterinary products in Atitalaquía since before the cover both the central regions of the country but also incumbent state government was elected in June 2016, to “strengthen growth in the south”. and subsequently, five chemical or pharmaceutical Guadalajara’s reasons for choosing Hidalgo show- companies followed in the first year of governor Omar cases one of the latter’s main attractions for chemical Fayad Meneses’ administration. and pharmaceutical companies, that of advantages CHEMICAL REACTION: Several chemical companies related to logistics. SEDECO categorises the pharma- have arrived. Mexican company Sifatec settled at the cy’s investment within the state in the logistics sector, Tula industrial park in 2010 to produce agro-chemical rather than pharmaceuticals. and chemical products, as well as laboratory equipment. “We carried out an extensive exercise contemplat- In May 2017 the firm announced a MXN80m ($4.1m) ing several variables to find a place that not only the expansion to their facility in the state. French group SNF zone we needed, but also had the road network that Floerger, the largest manufacturer of polyacrylamide allowed us to efficiently make trips to the centre and in the world, has brought the largest chemicals invest- south,” Arroyo Navarro told OBG. The company was ment while developing a MXN200m ($10.3m) project in searching for a location that had the required “quantity Atitalaquía. Criogas, a chemical gas producer, is already and quality” of human capital, he added. The Secretariat of operating its facility at the Platah industrial park after a Although the federal government cancelled the Economic Development’s MXN35m ($1.8m) investment that SEDECO says should special economic zone programme in April 2019, one hope is that investment create 96 indirect jobs in addition to the 39 direct posi- that Hidalgo was expecting to utilise in order to build a will spawn the arrival of further chemicals and tions. Fellow chemical firm Cinética Química, which pharmaceutical cluster, Guadalajara’s investment could pharmaceutical companies, operates in water treatment, paper and cosmetics, has act as a further incentive for providers eyeing an oppor- creating a pharmaceutical invested MXN50m ($2.6m) to establish itself in Platah. tunity to be close to one of their major distributors. cluster in Hidalgo.

Bloomberg Terminal Research Homepage: OBGR‹GO› THE REPORT Mexico 2019 34 HIDALGO ICT

It is estimated that Mexico needs to double its number of base stations

First things first Telecommunications infrastructure is prioritised to support further economic development

Hidalgo is launching Internet access is a constitutional right in Mexico, and To this end, in September 2018 the state brought a digital government while penetration rates are gradually increasing, the lat- together its 84 municipalities to evaluate the recom- platform, which it hopes est survey from the National Institute of Statistics and mendations of the Ministry of Communications and will save $5.2m per year. The new platform will help Geography suggests that Hidalgo has some work to do Transport and the National Commission for Regulatory to combat corruption to improve connectivity. In 2017 the state ranked 22nd Improvement regarding a new framework for tele- and reduce government out of 32 nationally for the share of its population that coms infrastructure. The scheme proposed a series of response times. used the internet (59.3%), while it ranked 24th in terms changes to simplify municipality regulations. Zempoala of its percentage of residents using mobile internet on was the first municipality in Mexico to approve this legal a smartphone (46.8%). As of 2017 around one-third of framework in November 2018, seeing the authorisation Hidalgo’s homes were equipped with internet, while of telecoms infrastructure in seven days. Yahualica, two-thirds of residents had a mobile phone. Xochiatipan, Tula de Allende, San Agustín Tlaxiaca, Hue- The government is working to ensure that the pop- jutla de Reyes and Huasca de Ocampo soon followed. ulation has access to high-quality internet and phone NATIONAL RECOGNITION: In June 2019 ANATEL gave connections, and that the necessary infrastructure is Omar Fayad Meneses, the governor of Hidalgo, special in place to support investors. Indeed, the OECD cites recognition for his “significant contribution to facilitat- internet connectivity and accessibility as “major chal- ing the rollout of telecommunications infrastructure”. lenges to boosting competitiveness in the state”. The According to ANATEL, the state’s efforts to create an Secretariat of Economic Development of Hidalgo has efficient regulatory framework are “unprecedented” accordingly added ICT to its list of strategic sectors. and will greatly benefit its citizens, as well as set an “Mexico has the most work to do in the OECD when it example for the rest of the country. “We decided to comes to telecommunications,” José Luis Romo Cruz, recognise Hidalgo because this small state with rel- secretary of public policy of Hidalgo, told OBG. “We atively limited resources is fast becoming a leader in cannot start talking about Industry 4.0 or become an Mexico,” Székely told OBG. “We are sure that further economy of the future if we do not have strong tele- investments will follow, and that Hidalgo will be able to coms infrastructure and connectivity.” provide concrete examples of success for the rest of the IMPROVED FRAMEWORK: As in many sectors, delays country,” he added. As of June 2019 ANATEL members in rolling out infrastructure represent a major sticking had already agreed to invest MXN179m ($9.3m) in the point for telecoms progress. In particular, differences in state. In the same month Hidalgo signed an agreement how municipal governments treat telecoms companies with American Tower Corporation to facilitate the US across Latin America often mean projects take longer company’s infrastructure investments in Hidalgo. This than expected or are not completed at all. “The expec- is a clear priority: according to Székely, Mexico needs tations of local governments and private companies are to double its number of base stations to meet demand. Zempoala was the first often not aligned. There is little communication, and Furthermore, Hidalgo has made 3773 government municipality in Mexico tariffs and processes often differ across municipali- plots of land available for antennas or boosters since to approve the new legal ties,” Gabriel Székely, managing director of the National 2018, meaning that one out of every three in the coun- framework for telecoms Telecommunications Association (Asociación Nacional try is located in the state. Hidalgo is also launching a infrastructure in November 2018, and a number of de Telecomunicaciones, ANATEL), told OBG. “We have digital government platform, which it hopes will save other municipalities in been taking measures to achieve true dialogue between MXN100m ($5.2m) per year. This will help to combat Hidalgo soon followed. different parties and improve conditions for investors.” corruption and reduce government response times.

www.oxfordbusinessgroup.com/country/mexico HIDALGO TOURISM 35

Tourism accounts for 12% of employment in the state and 1.5% of GDP

A short drive away Tourist attractions benefit from the state’s proximity to Mexico City, making it a popular inland destination

As recent years have seen Hidalgo place a greater 2018, the latest year for which figures are available. emphasis on its tourism sector, private companies are Tourism accounts for approximately 12% of employ- 2.7m also recognising the potential of the small but strategi- ment in Hidalgo and 1.5% of the state’s GDP. people visited Hidalgo cally located state. In November 2018 leading US water INTEGRATION OPPORTUNITY: Tourism has lent sup- in 2018 park and resort provider Great Wolf Lodge announced port to many municipalities in Hidalgo, according to the that it had chosen Hidalgo as the site of its first facility OECD, which says that strengthening the sector can outside of the US and Canada. After analysing several help the state tackle one of its major challenges: the Mexican states, the company decided that Tepeji del large north-south divide. The southern part of the state, Río was the best place to reach the largest market in closer to Mexico City, is at a higher socio-economic level the country: the Mexico City metropolitan area. “We than the mountainous north. The organisation says a are targeting customers who will arrive by car from the stronger tourism sector could help generate formal centre of the country and can reach us in no more than employment in rural areas dominated by agriculture, two and a half hours,” Mauricio Campos, country lead while the north can particularly benefit from developing for Mexico and director of the Hidalgo project at Great and capitalising on “the quality of its natural and envi- Wolf Lodge, told OBG. “If you ask people to travel four ronmental conditions”. Agreeing that there is potential hours, you are competing with the beaches and coastal in the sector, Omar Fayad Meneses, the state governor, areas, which is not what we want to do.” inaugurated the Consultative Council for Sustainable CENTRAL OFFERINGS: Great Wolf’s investment is in Tourism Development in April 2019. The council, which line with Hidalgo’s tourism strategy to position itself as comprises 65 key figures from the private and public one of Mexico’s leading inland destinations, providing sectors, was formed to propose and apply the strategies alternatives to the sea and sand for which the country necessary to strengthen tourism in the state. is known globally. Hidalgo is perhaps most famous for Although the OECD acknowledges that the gov- being home to six of Mexico’s Pueblos Mágicos (Magical ernment’s plan for tourism highlights the primary Towns): Huasca de Ocampo, Huichapan, Mineral del hindrances and opportunities in the sector, the organ- Chico, Real del Monte, Tecozautla and Zimapán. Other isation believes there is room for greater “integration attractions of the state include its unique cuisine – such with other sectors, coordination among municipalities, as barbacoa and pastes – three UNESCO World Heritage professionalisation and quality data”. Regarding the sites, a network of over 100 water parks, mountains first point, there are some signs that integration is on near the capital of Pachuca, and 176 estate properties the way. One of the tasks that Fayad has assigned to that have been the production locations of multiple Hidalgo’s new tourism council is to leverage ICT to pro- films and TV series. These offerings are supported by mote the state’s natural riches and visitor attractions. Hidalgo is perhaps most the state’s proximity to Mexico City and its connectivity Furthermore, a June 2019 agreement with American famous for being home to the country’s busiest highway, Carretera 57, which Tower to build telecommunications infrastructure in the to six of Mexico’s Pueblos supplies a significant flow of tourists. state includes bringing 4G connectivity to the Magical Mágicos (Magical Towns), The number of foreign visitors to Hidalgo increased Towns to improve tourists’ experiences. Indeed, as as well as its unique cuisine, more than three-fold between 2009 and 2014, when it Hidalgo works to become more modern and compet- three UNESCO World Heritage sites, numerous peaked at 2.61m before dropping back in subsequent itive in other sectors, overlapping opportunities with water parks, mountains years. According to the statistics agency within the tourism have been emerging as a way to ensure eco- near the capital of Pachuca Secretary of Tourism, 2.7m people visited the state in nomic development spreads to all corners of the state. and 176 estate properties.

Bloomberg Terminal Research Homepage: OBGR‹GO› THE REPORT Mexico 2019 36 HIDALGO R&D

Some private firms are installing research facilities in their factories

Research refined Ensuring the state becomes a place of innovation requires an approach that joins academia, industry and government

The Hidalgo state In an effort to boost the state’s research and devel- took its toll on Hidalgo’s innovation performance. The government is putting opment (R&D) capabilities, in March 2019 Hidalgo number of patents per 1m inhabitants fell from 0.8 in $25m of seed funding announced that $25m of seed funding would be put 2002 to 0.5 in 2015, while the average across much of towards developing Mexico’s first synchrotron, towards developing Mexico’s first synchrotron, a type the rest of the country increased. supported by $500m from of cyclical particle accelerator. The federal government Since then, some companies that have arrived in the federal government. is expected to provide a further $500m for the project, Hidalgo as part of a wave of private investment have which Alonso Huerta, director of the Council of Science, installed research facilities in the state. Food conglom- Technology and Innovation of Hidalgo, says will bring erate Grupo Lala, for example, opened a MXN1bn great benefits to the state. “This is a flagship project ($51.7m) deli meats factory in Tizayuca in November that can go a long way to positively position Hidalgo,” 2017 that includes a centre for technology and innova- he told OBG. “Places that host synchrotrons are ref- tion. Furthermore, the newest brewery of beer company erence points in the scientific world and can become Grupo Modelo – which is located in Apan and opened in talent hubs. It also represents an important economic March 2019 after an investment of MXN14.6bn ($755m) investment in the state, and a major step in Hidalgo’s – includes a quality control laboratory where chemical path to becoming a modern and innovative place.” tests are conducted. Looking ahead, potential investors FOCUS ON INNOVATION: Omar Fayad Meneses, the in Hidalgo have room to innovate in industries such as governor of Hidalgo, echoes this sentiment and believes electric vehicles and renewable energy, which are still that investment in science and technology can “change in their relative infancy within Mexico. Hidalgo and Mexico’s identity”. Indeed, the state gov- WORKING TOGETHER: Seeing as the number of similar ernment has made it clear that R&D is a priority, and the moves from private firms are less than hoped, industry synchrotron is just one of several initiatives. A 20-min- bodies are supportive of Fayad’s mission to follow OECD ute drive from the centre of Pachuca, the Hidalgo City recommendations and create an alliance between the of Knowledge and Culture – a 175-ha facility where government, industry, academia and society as part of academic institutions, research centres and technol- efforts to achieve scientific and technological inde- ogy companies are installing themselves – is arguably pendence for Mexico. A step in this direction came in the most visible result of the state working to provide February 2019 when the Hidalgo branch of the Mexi- a nurturing place for R&D activity. The city is being can Chamber of Construction opened a research and considered as a site for the synchrotron. innovation centre at the Hidalgo City of Knowledge Nevertheless, Hidalgo is still grappling with the chal- and Culture that can accommodate 500 students and lenge of how to turn itself into an R&D destination researchers and is designed to strengthen the link for private sector companies, and thus ensure that between industry and academia. The Hidalgo City of the research happening in the state contributes to Still, Huerta emphasises that bringing together all Knowledge and Culture, improved productivity and more sustainable economic the stakeholders that are needed to cultivate a strong a 175-ha facility outside growth. The OECD is confident that greater investment innovation environment will not be a quick process. “We of Pachuca, is designed in innovation will help boost productivity, yet the organ- have a strong group of state initiatives to promote R&D, to strengthen the link isation believes that Hidalgo currently lacks a “holistic and there are already some private companies here between industry and academia, and nurture innovation policy”, which is reducing its capacity to link generating added value,” Huerta told OBG. “Progress further research and academia, government and the private sector. In the will be gradual, but we are really working to make the development activity. years leading up to the incumbent administration, this knowledge economy a driver of state development.”

www.oxfordbusinessgroup.com/country/mexico HIDALGO SMEs 37

Small businesses play a key role in the state’s economic development

A helping hand Support for local small and medium-sized enterprises (SMEs) through increased funding and certification

According to an OECD statement delivered in May 2019, can do more to maximise the benefits of these new SMEs will play a key role in the economic development investments. “We are seeking support to become pro- $2.8bn of Hidalgo. The organisation suggested that the state viders for all these investments, but we also acknowl- in private investment should look to create “a more strategic vision to inte- edge that, to do this, local companies need to become has been made in the grate local programmes with funding and leverage the more organised,” Noriega told OBG. state since the current National Entrepreneur Fund”. The fund, however, no The companies landing in Hidalgo are looking for pro- governor of Hidalgo longer exists; it was created in 2013 as an initiative of viders with highly qualified and certified workers, which took office in 2016 the National Institute for Entrepreneurship (Instituto means that local public sector contractors are usually Nacional del Emprendedor, INADEM) under the admin- overlooked. “Certifications are certainly an issue,” José istration of former President Enrique Peña Nieto, but Luis Romo Cruz, the state’s secretary of public policy, INADEM was dismantled shortly after President Andrés told OBG. “This is the first time in the history of the Manuel López Obrador came into office. “The dissolu- state that SMEs have this scale of opportunity with tion of INADEM is undoubtedly making the environment large private companies, but they lack experience, so more difficult for entrepreneurs, and we are looking we have to help them to prepare.” forward to a replacement initiative,” Alonso Huerta, FINANCING & CERTIFICATION: To support SMEs, the director of the Council of Science, Technology and IHCE is providing local businesses with financing and Innovation of Hidalgo, told OBG. certifications such as ISO. For example, the institute, TRANSITION TIME: This complex environment affect- in partnership with the Secretariat of Economic Devel- ing the broader national level is arising just as Hidalgo, opment, awarded five of Giant Motors Latinoamérica’s which has traditionally been highly dependent on the providers in Ciudad Sahagún with ISO 9001:2015 cer- public sector, undergoes a transition towards a more tificates in May 2019. With federal funds slow to arrive, private sector-driven economy. “SMEs in Hidalgo are however, much more remains to be done. mostly having a tough time because there is very lit- Financial support for SMEs is especially important tle public investment from the federal government,” because suppliers and providers are often paid 120 or Julio Bravo, director of the Hidalgo Institute for Busi- 180 days after a job is completed, which can test the ness Competitiveness (Instituto de Competitividad liquidity of local businesses. “Hidalgo’s small businesses Empresarial de Hidalgo, IHCE), told OBG. As such, it simply do not have the funding capacity to work under has become more urgent for SMEs to take advantage these conditions,” Noriega said, adding that the lack of of the MXN53.5bn ($2.8bn) of private investment that financing is also holding back SMEs when it comes to has arrived in the state since Omar Fayad Meneses, the implementing new technologies – another factor that governor of Hidalgo, took office in 2016. large companies consider when choosing suppliers. At the state level the state of Hidalgo is looking to In addition to state government initiatives, SMEs have increase financing for SMEs and entrepreneurs by also received help from federal schemes. For exam- actively linking new investors with local companies. ple, in 2017 the Secretariat of Economic Development In 2017 the Secretariat of However, some foreign companies are bringing in their launched the MXN715m ($37m) Set Up Your Business, Economic Development own providers, which means that local companies often I Will Support You programme. Still, some argue that launched the $37m Set Up Your Business, I Will end up participating as subcontractors. Elvia Noriega these measures are insufficient. “I would really like Support You programme to Hernández, president of the Pachuca delegation of development banks, which have a low cost of funds, help small businesses and National Chamber of Industry, said that local companies to start offering attractive rates for SMEs,” Romo said. entrepreneurs.

Bloomberg Terminal Research Homepage: OBGR‹GO› THE REPORT Mexico 2019 38 HIDALGO INTERVIEW

Edgar Espínola

Seeing the light Edgar Espínola, President, Business Coordinating Council of Hidalgo, on enhanced opportunities for investment

In what ways has Hidalgo improved its business the state ideal for renewables, particularly for solar and investment climate in recent years? energy production and distribution. ESPÍNOLA: For the better part of 20 years Hidalgo Hidalgo does, however, continue to face a handful attracted little investment and new businesses, of challenges, including red tape and bureaucracy. and the state’s labour force largely migrated else- While the state government has worked to address where. In recent years, however, the government these impediments, more work needs to be done has implemented policies that supported the private in the coming years. The private sector should also sector. Today, Hidalgo ranks fourth in terms of job continue operations inside a cooperative framework creation in Mexico and is the fifth-safest state in with the municipalities to further bolster adminis- the country. This has positively impacted investor trative efficiency across the state. confidence and has heightened interest of many domestic and national companies which now want How competitive is Hidalgo in terms of large- to establish operations in the state. scale renewable energy projects? We are facing a pivotal moment in Mexico. Domes- ESPÍNOLA: In addition to a climate ideal for solar tic and international economic uncertainty, as well cells – allowing them to work but not be overheated as trade disputes with some of our most important – Hidalgo has large amounts of territory available partners, must be seen as a wake-up call that pushes for expansive solar plants. Companies have positive us to redouble efforts to strengthen our compet- engagements with the local communities facilitated itive advantage at home and abroad. To that end, by the government. Additionally, the government is the state government has implemented a strat- investing in energy technologies to further boost egy focused on investment promotion and legal potential. Within proximity to Mexico City – home certainty. It has been well-received by companies to 25% of Mexico’s population – opportunities for and shown positive results. If the state wants to energy distribution have accelerated since the gov- position itself as one of Mexico’s top investment ernment started to make renewable energy devel- destinations, however, it not only has to consolidate opment a priority. In fact, the increase in energy these changes but also encourage socio-economic demand and investment will enhance the develop- growth throughout the state, not only in Pachuca. ment of the whole industry supply chain in Hidalgo. The state’s central location and connectivity to What segments have brought in the most invest- the northern and central parts of the country make ment, and what improvements can be made to it attractive as a location for distribution to states further attract local and foreign companies? with high energy demand. Hidalgo has the capacity, ESPÍNOLA: There is significant potential for growth location and potential to develop a solid and capable in the pharmaceutical, agro-industrial and energy distribution, warehousing, transport and logistics sectors, and incoming investment has reflected this. infrastructure that is needed in the energy sector. Pharmaceuticals received a boost in Hidalgo with the However, the government and private sector must establishment of a MXN2.8bn ($144.8m) distribution invest in new technologies, improve existing con- centre for one of the main pharmacy chains in the nections, build new Customs locations in the north country. Hidalgo has also received attention for its of the state and promote current and upcoming business environment and climate that both make developments such as the Tulancingo Industrial Park.

www.oxfordbusinessgroup.com/country/mexico HIDALGO EDUCATION 39

In recent years new technical universities have opened in the state

Talent retention Promising educational offerings and programmes help to keep talented graduates in the state

According to the OECD, Hidalgo’s population is currently Edgar Espínola, president of the Business Coordinat- experiencing “a youth demographic premium”, meaning ing Council of Hidalgo, argues that institutions have young people make up a large part of the population. indeed developed vocations corresponding to their 65% of residents are Furthermore, 65% of its residents are between the regions. In 2014 the Polytechnic University of Energy between the ages ages of 15 and 64. There are also greater educational opened near Tula de Allende, where state-owned of 15 and 64 opportunities than in the past, and the percentage energy company Petróleos Mexicanos (Pemex) has of 19- to 25-year-olds who had completed or were in its refinery and companies like UNNE and US firm Bulk- higher education grew from 5% in 1995 to 33% in 2015. matic are building energy logistics facilities. In 2013 the Investment in public education has raised Hidalgo’s Technological Mining University of Zimapán opened in level of basic education above the national average. In the Zimapán municipality, which is home to important 2018 tests by the National Plan for the Evaluation of mining activity. The OECD notes an over-representa- Learning ranked Hidalgo’s sixth grade students’ apti- tion of social sciences and an under-representation of tude as seventh out of 32 states in mathematics, and computer science, with the latter having 4% of enrolled 11th in terms of language and communication. Further- students, agronomy having 2%, and services with 1% more, Hidalgo boasts 106 higher education institutions, at tertiary education institutions. graduating over 22,000 students in 2017. “Previously, COLLABORATION: One way to ensure that local peo- Hidalguenses had to leave in order to study, which hurt ple can find career paths in their home state is to bring us because many young people did not return after- educational institutions closer to the private sector. wards,” Noé Paredes, head of Hidalgo-based industrial Hidalgo’s government is trying to tackle what it sees and logistics conglomerate Grupo Corporation UNNE, as a misalignment of information, with graduates una- told OBG. “The improved offering of schools and uni- ware of the demand for skills within the state. In 2017 versities has allowed them to stay,” he said. the administration launched the Mi Primer Empleo, FINDING A VOCATION: The challenge for the govern- Mi Primer Sueldo (My First Job, My First Salary) pro- ment is to ensure that educational offerings match the gramme, offering graduates six-month paid internships needs of industry and allow the local population to in the private sector. As of October 2019, 2500 people participate in the state’s investment boom. According had benefitted from the programme. to Paredes, human capital suffered in the past because Hidalgo’s government is also working to ensure that young people frequently left in search of work oppor- investors offer their expertise to the local population tunities elsewhere. “This is starting to change with the in addition to hiring locally. When leading US water investments that are arriving,” he said. park operator Great Wolf Lodge chose Tepeji del Río Indeed, the state government’s strategy of targeting for its first site outside the US and Canada, Hidalgo’s more high-value investments is key to ensuring that government proposed that the company work on a uni- enough jobs are created for those who are trained in versity-level programme to train potential Great Wolf Hidalgo to remain in the state. This will require not only employees in hospitality and family entertainment. As The government’s strategy good schools and universities, but also an appropriate Hidalgo looks to meet the demands of more global of targeting high-value academic and vocational focus. “At the moment, there corporate companies, it will require the combined investment is key to ensuring enough jobs are is a strong mismatch between human capital devel- efforts of the private sector, government entities and created for those who opment in educational institutions and the evolving educational institutions in order to ensure that top are trained in Hidalgo demands of industry,” the OECD said in May 2019. human capital continues to be an asset for the state. to remain in the state.

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