ENDEAVOR REVIEW ENTREPRENEURIAL ECOSYSTEM RESHUFFLE Challenges & Opportunities in the Post-COVID-19 World 2020 An interactive dashboard with the complete survey results can be found at: https://bit.ly/DaaS_Economic_Impact 2 1 INTRODUCTION Since its unexpected and unprecedented outbreak, the COVID-19 pandemic has sent profound shockwaves around the world, causing one of the greatest global economic downturns in history. With a projected decline of 10.5% in real GDP in 2020, Mexico is facing one of the sharpest declines in Latin America, only second to Venezuela. The country also has the 4th-highest death toll in the world with over 70,000 lives lost, which is bound to cause serious economic upheavals.1 Every crisis, however, is also an opportunity. The COVID-19 pandemic has been a game-changer for businesses—a quasi- game-over for some and a level-up for others, depending on their readiness to adapt and evolve. Social distancing protocols have changed consumer behaviors as people realize the possibility of taking their daily activities online, including work, studies, and groceries. New market trends such as the rise of tele-industries (tele-health & tele-education), greater digitization efforts, and automation of processes (including the use of AI and robots) to minimize physical contacts. 1 Mexico’s total COVID-19 death toll stands at 74,348 as of September 23, 2020. COVID-19 Dashboard by the Center for Systems Science and Engineering (CSSE) at Johns Hopkins University. 2 Given these radical changes, special participation of Endeavor Entrepre- this Review seeks to expand neurs, whose first-hand insights and honest upon how the pandemic will perspectives help readers understand compa- transform Mexico’s social and nies’ resilient responses in times of crisis. economic fabric. In particular, what obstacles and oppor- While the development of the pandemic is highly tunities does this crisis hold unpredictable, clearly mapping out industry for entrepreneurs? And what trends and outlook through quantitative and lessons can they take away qualitative analysis will allow entrepreneurs to better position themselves to identify upcoming challenges and opportu- in the post-COVID world? To nities to stay proactive. In these dark times, do so, this Review will first Endeavor hopes to shed light on the best provide an overall context practices that entrepreneurs and other by examining the nature of stakeholders in the ecosystem can adopt to COVID-19, the macroeconom- support each other and move forward. ic landscape in Mexico, and the changes in consumption patterns in the aftermath. Next, we will zoom in on the sectors most affected, both negatively and positively, by this disruptive crisis, including tourism, retail, entertainment, healthcare, and more. Drawing on public sources and Endeavor’s proprietary customer relationship man- agement (CRM) of Mexico’s entrepreneurship ecosystem, we performed an in-depth data analysis on key information such as sales, employment, and capital raised to holisti- cally evaluate the economic impact of COVID-19. Further- more, this Review involves the 3 CONTEXT entered into the pandemic with a faltering economy hindered by endogenous factors, and COVID-19 only further exposed the deficiencies of the country’s quality healthcare and engines for inclusive growth, casting doubt on its potential recovery to Macroeconomic Landscape a “new normal”. in Mexico Before & After COVID-19 As the 2nd largest economy in Latin America and the 10th-most populous country in the world with 128 million inhabitants, Mexico is an economic powerhouse. Its rise and fall have significant repercussions on the region and the world. It’s worth noting that even before the pandemic, the country had already entered a recession with a negative growth of 0.1% in 2019, marking its first contraction in a decade. Mexico Quarterly GDP Growth YoY 10 4.1 3.3 3.2 2.7 2.7 1.7 3.1 3 3 1.8 2.6 2.8 2 1.6 2.2 1.2 0.1 0 0 -0.5 -0.8 -2.2 -10 -20 -18.9 -30 Q1 Q1 Q1 Q1 Q1 Q1 Q3 Q3 Q3 Q3 Q3 Q2 Q2 Q2 Q2 Q2 Q2 Q4 Q4 Q4 Q4 Q4 2015 2016 2017 2018 2019 2020 GDP YoY Primary Activities Secondary Activities Tertiary Activities Source: Endeavor Intelligence, 2020. *The information corresponds to data collected by INEGI. Accessed: July 2020. 4 As the country entered a nationwide Mexico’s real GDP is expected to contract by 10.5% in 2020, lockdown, the severe impact caused by the worst decline in Latin America only second to Venezuela. A this near-total activity freeze is evident— gradual recovery will follow with a projected growth of 3.1% in in Mexico’s GDP for the second trimester 2021.3 According to the National Council for the Evaluation of there was an 18.9% contraction compared Social Development Policy, by the hour, 13,700 Mexicans lose to last year, the steepest decline on their jobs, seven companies shut down permanently, 1,366 record.2 And the contraction is particularly people enter poverty, 256 people get infected with COVID-19, pronounced for secondary (-26%) and 25 Mexicans will die of it.4 and tertiary (-15.6%) activities such as manufacturing, construction, and retail. According to the projections by the IMF, GDP Forecast in Millions of Pesos 18, 465, 007 18, 483, 472 17, 285, 979 GDP 2019 Outlook Early 2020 Median of contraction Maximum of contraction 16, 526, 181 Outlook 2021 2019 2020 2021 Source: Endeavor Intelligence, 2020. *The information corresponds to data collected by IMF, Citibanamex and INEGI. Accessed: 18/06/2020. **The forecast for 2021 is calculated based on the 9.6 % contraction projected for 2020. 3 “World Economic Outlook Update, June 2020”. International Monetary Fund. Accessed July 9th, 2020. 2 “Estimación Oportuna del PIB trimestral”. National Ins- titute of Statistics and Geography (INEGI). Accessed Au- 4 Joan Borbolla. “Cada hora en México se contagian 256 personas de COVID-19 y más de gust 30, 2020. 13 mil pierden su empleo”. Vanguardia. July 31, 2020. 5 The pandemic constitutes a perfect Looking at the Mexican labor market, 7,580 establishments storm for Mexico as it takes specific aim were closed from March to May 2020 alone, resulting in at its economic pillars: trade, remittance, around 1M jobs lost, according to the Mexican Social Security tourism, and oil. In 2019, 80% of the Institute (IMSS). But signs of recovery are showing as 2,823 country’s $461 billion USD in exports establishments opened up again in June. By INEGI’s estimates, went to the United States, mainly in the the economically active population was 45.5 million in May form of automobiles, auto parts, and while the economically inactive population was 19.4 million, of computers. Similarly, Mexico is the top which 9.5 million stopped working as a result of the temporary recipient of U.S. remittances with $38.5 suspension of their employment without receiving salaries.8 billion USD processed in 2019.5 Mexico’s Keep in mind that these figures only account for the formal heavy reliance on the U.S. is beginning employment sector, and over half of the labor force (51.8%, up to have serious consequences as the 4.1% since April) pertains to the informal sector, whose data is U.S. struggles to rein in the pandemic, not readily available. This demographic group is the most vul- registering over 6 million cases so far nerable to the impacts of the crisis due to their lesser capacity and forecasting a massive 8% decline to work from home and the lack of a safety net such as health in 2020’s real GDP. Mexico has already insurance and social security. seen a sharp YoY drop of 11% in exports to the U.S. from January to April of 2020. In addition, as one of the world’s most visited countries, Mexico attributes 8.7% of its GDP to tourism, a sector which is seeing significant losses due to COVID-19. Mexico’s INEGI reports 78.5% fewer international tourists in April 2020 than in the same month last year, which translates to a 93.7% loss of its foreign exchange earnings.6 Lastly, with a third of its fiscal revenues coming from petroleum-related taxes, Mexico is susceptible to the weak demand for fuel consumption globally. The state oil company Pemex reported a $23.6 billion USD loss in the first quarter, one of the worst in history, although the loss was narrowed to $1.9 billion USD in the second quarter as oil prices recovered.7 5 Remittances. Migration Data Portal. June 10, 2020. 6 “International Tourism In Mexico Fell 78.5% In April; Tourism Will Not Recover Until 2023” June 10, 2020.” Puerto Vallarta Daily News. 7 Shannon K. O’Neil. Council on Foreign Relations. “Mexi- co’s Oil and Taxes”. May 28, 2014. David Alire Garcia, Adriana Barrera. Reuters. “Mexico’s Pemex narrows losses in second quarter, but debt rises”. July 28, 2020. 8 “Encuesta Telefónica de Ocupación y Empleo” INEGI. June 2020. 6 Formal Employment Monthly Growth 200, 000 5, 000 4, 452 2, 823 2, 404 123, 139 68, 955 0 0 -83, 311 -130, 593 -200, 000 -3, 295 -5, 000 -6, 689 -344, 526 -400, 000 -10, 000 -555, 247 -600, 000 January February March April May June 2020 Formal Employment Employer Registration Monthly Growth Source: Endeavor Intelligence, 2020. *The information corresponds to data collected by the IMSS. Accessed: July 2020. In response to the unparalleled challenges (13%), Professional, Scientific, and Technical Services (13%), presented by the pandemic, countries Construction (12%), and Manufacturing (11%)9. across the globe have witnessed governments responding with various In contrast, the Mexican government so far has done little in degrees of vigor to reactivate the terms of economic relief plans to offset the adverse impacts of economy.