INDUSTRY SECTOR ANALYSIS

Title: Mexico – Food Processing Machinery and Equipment

Report type: Industry Sector Analysis (ISA)

ITA Industry code: FPP

Contacts: Gerardo Victorica, Senior Commercial Specialist,

gerardo.victorica@mail.doc.gov

Approving Officer: Isabella Cascarano, Principal Commercial Officer

Isabella.cacarano@mail.doc.gov

SUMMARY

The Mexican food processing industry is changing, fueled by robust local

demand for processed foods and beverages and a growing export market,
particularly the United States. Strong foreign competition in processed foods
and new customer behavior are also accelerating this change. To remain
competitive Mexican food processors are exploring new technologies and, in
some cases, investing to modernize or maximize production facilities.

Due to a weak Mexican technology base in this sector, there are plenty of
opportunities for foreign companies to gain entry in the Mexican food
processing market. Main competitors for U.S. manufacturers in this sector
are the Europeans. Opportunities exist for U.S. companies with competitive
technology and prices. Service and top of the line quality are not necessarily
considered value-added if product price is too high. Used and refurbished
equipment are excellent business areas to consider as well.

1. MARKET OVERVIEW

The Mexican processed food market is evolving. Increasingly, Mexicans are

shopping for groceries at large retail stores instead of smaller venues.
Supermarkets had an increase in total sales of 9.6% in 2004 compared to
2003, while “mom and pop” stores saw a sales decrease of 3.1% in the same
period. This is significant because the larger establishments stock a greater
quantity of processed foods, and require better food presentation, product
differentiation, and extended shelf life.

This change in the retail sector has important implications for the Mexican
agro-business and food processing sectors, since supermarkets are
increasingly establishing market entry terms and conditions. Supermarkets
in Mexico now sell $12 billion USD of food a year and thus offer producers an
important internal market. More than 60% of supermarket food sales are
processed foods and 40% are fresh products.

In 2003, the total sales of the Mexican food processing industry reached a
level of U.S.$31 billion, 9.2% higher than in 2002.

2. MARKET TRENDS.

The food processing sector in Mexico has twelve major segments as shown
below.

General description USD$ %

Beverages and softdrinks 6,706,201 21.54%
Liquid milk processing and packaging 2,636,537 8.47%
Sugar and sub-products made out of sugar cane 2,280,785 7.32%
Baking 2,196,244 7.05%
Snacks and other corn products 2,009,780 6.45%
Edible oils 1,980,226 6.36%
Dairy products manufacturing (include cream, butter
and cheese) 1,617,175 5.19%
Processing and packaging of fruits and vegetables 1,537,340 4.94%
Manufacturing of syrups, concentrates and colorants
for food 1,309,378 4.21%
Meat and poultry abattoir 1,196,575 3.84%
Milk processing to convert liquid milk to condensed
or dehydrated milk 1,106,772 3.55%
Meat processing to convert it in cold cuts 975,896 3.13%
Source: INEGI. Aggregated production in 2003.

From 2002 to 2003, the Mexican processed food industry increased

production by 9.9%, one of the most significant increases in Mexico’s overall
industrial production. In 2003 the Mexican food processing industry (in total
30 different segments including the 12 above) comprised approximately 20%
of the total industrial output of Mexico.

Demand for capital equipment in this industry varies according to segments.

In some areas there is a 40% under-utilization of machinery and equipment.
This has kept overall investment figures in food processing machinery at
lower growth levels compared to processed food production and sales.
Nevertheless, there are plenty of companies in certain segments that are
investing in machinery and equipment. A recent study in Jalisco, Mexico’s
third largest food processing industrial base, showed that 25.8% companies
from the sample consulted invested an average of U.S.$ 1.2 million each in
2003. This investment was broken down in the following areas: machinery
and equipment 70%, infrastructure (included construction and installations)
24%, working capital 4%, training 1% and research and development 1%.
Mexican consumers are also driving technology investments by becoming
more demanding in terms of food quality, food presentation and hygienic
considerations. They are seeking fresher flavors and better packaging.
Additionally, retailers are demanding longer shelf life for products.

The Mexican food industry is competing against finished products coming

from virtually all over the world. Mexico is one of the most open economies
with more than 30 free trade agreements, which include the European Union,
Israel, South and Central America and North American Free Trade Agreement
with the United States and Canada. With increased foreign competition,
Mexican industry has had to become more sophisticated in the processing of
their locally manufactured food products, and have invested more resources
in research and development and marketing.

3. IMPORT MARKET

The Mexican local supplier base for equipment and machinery for processed
food is small. Other than refrigeration equipment or some specialized
technology for particular food sectors, such as tortillas, etc, national
production of equipment and machinery is limited. Although there are
manufacturers associated with the Chamber of Transformation, local Mexican
companies in this sector, with few exceptions, are micro or small companies
with limited research and development budgets to cover the growing needs
of the industry.

Foreign food processing technology, machinery and equipment is therefore

the main source of capital goods for Mexican food processors. In fact, many
U.S. and European machinery and equipment manufacturers have
established manufacturing operations in Mexico in the last years in order to
serve this market.

The main source of equipment and machinery for the Mexican food
processing industry continues to be Europe, though the U.S. is not far
behind. The U.S. market share of total imports is 45.2%. See following data:

Mexican Import Market for Food Processing Machinery and Equipment

Millions of U.S. Dollars

2000 2001 2002 2003

Total Imports 1,490 1,412 1,116 1,440

Imports from U.S. 818 808 577 600

Source: Mexican Government statistic.Secretaria de Economia and Banco de
Mexico.
Following is a general breakdown of U.S. food processing machinery and
equipment exports to Mexico:

Product HS Code U.S. Exports

U.S. $
Millions

Refrigerators, freezers, and related 8418 223

equipment

Cooking, heating, and drying equipment 8419 160

Machinery for filling, closing, and labeling 8422 73

Filters for liquids, centrifuges 842111/19/22/21 57

Other equipment for food processing 8438 38

Weighing and weight operated counting 8423 17

machines

Flour mill equipment 8437 4

Milking and dairy machinery 8434 4

Machines to manufacture wine and juice 8435 1

Source: Banco de Mexico, 2003.

4. COMPETITION

The Mexican food processing equipment market is very competitive. Mexican

firms are historically very close to European food processing manufacturers
because the original business owners hailed from Europe and founded the
first bread, dairy and beverage companies in Mexico in the 18th and 19th
century. Italy, Spain, Germany, and Switzerland continue to be important
suppliers to this day. In some sectors the U.S. has less than 30% of import
market share. However, there should be opportunities for companies with
new technologies or low cost equipment.

U.S. firms are competitive in sub-sectors where high productivity and mass
production is required, like beverages, snacks, candies and edible oils. Also
U.S. firms have opportunities with Mexican companies that are exporting to
foreign markets since the import requirements of many countries require
strict sanitary conditions, specialized packaging and extended shelf life.
Main Mexican players in food processing machinery and equipment are
primarily in the cold chain sector. Mexican refrigeration manufacturers have
developed home grown technology and are competitive against international
players. Another area that is well developed in Mexico is the manufacture of
stainless steel implements and equipment, including tanks, mixers and
workstations.

A growing trend in Mexico is to have an in-house engineer tailor technology

to meet the specific needs of the food processor. This could be an advantage
to U.S. companies that sell system components, but obviously not to those
that sell fully automated machinery or turnkey projects.

5. END USERS

A unique characteristic to Mexico is that food processing technology end

users are mainly small and mid size companies. According to official statistics
more than 90% of Mexican companies have less than 50 employees. This is
true also for companies in this sector.

End users are concentrated mainly in 5 geographic areas in Mexico, and are
responsible for more than 60% of total processed food production:

Mexico City 16%

State of Mexico 16%
Jalisco 12%
Veracruz 7%
Nuevo Leon 7%

Mexican companies are accustomed to buy from distributors in this industry.

Medium and small companies rarely import directly from foreign suppliers as
the process to obtain import permits is difficult and time consuming. End
users often rely on distributors for initial training, spare parts and service.

6. SALES PROSPECTS

The fastest growing segment in this industry is the beverage sector, which
has grown by two-digits every year for the past five years. This sector
represents an important opportunity for U.S. firms because companies in the
beverage industry, mainly foreign companies, are open to new technologies
and are investing in research and development. Beer is included in this
segment.

There is also a growing demand for used and refurbished machinery and
equipment. Buyers of used machinery frequently are small companies that
are starting industrial operations. U.S. manufacturers often offer used and
refurbished machinery in Mexico that has been traded in by U.S. customers
who have bought new equipment. Used machinery can be considered U.S.
originating when a certificate of origin is issued and there is predominant
U.S. content in the machinery or equipment, or in the work applied to
refurbish the machinery. For more information on certification of origin call
1-800-USATRADE.

7. MARKET ACCESS

NAFTA eliminated trade barriers U.S. for manufactured products entering

Mexico. Food processing machinery and equipment is import duty exempt
when it is manufactured in the U.S. and accompanied by a certificate of
origin. To qualify for NAFTA origin the exporter should use one of the
methods to confer origin to a product: total cost method, change in tariff
classification, or manufacturing using NAFTA materials in a facility in the U.S.
The certificate of origin should be completed and signed by the exporter and
could cover a period of time up to a year.

Taxes that will apply to food processing machinery and equipment imported
into Mexico include the Value Added Tax (VAT) of 15% and the Mexican
Customs processing fee of 0.08% on the value of the merchandise.

No other requirements, such as import permits, are required by Mexican

authorities as of the date of this report (November 2004), but we
recommend that you check with your nearest U.S. Export Assistance Center
on a case by case basis, as import requirements in Mexico are subject to
change.

8. UPCOMING TRADE SHOWS

Alimentec – A new trade show focused on food processing machinery and

equipment. This small show is organized by a private company
and supported by the Jalisco Chamber of Food Processors.
Venue: Expo Guadalajara, Gudadalajara, Mexico
Dates: First week of October
Web page: www.alimentec.com.mx

Pack Expo – Focused on general industrial packaging material, this show is

visited by buyers and decision makers in the food processing
industry. It is a good option for companies in the food
processing industry as the show organizer states that 7% of
total exhibitors belongs to this sector.
Venue: Expo Santa Fe, Mexico City, Mexico
Dates: Third week of June
Web page: www.expopack.com.mx

For more information on export opportunites in this sector, please contact

your nearest U.S. Export Assistance Center (www.export.gov) or:

Gerardo Victorica
Senior Commercial Specialist
US Commercial Service – US Consulate Guadalajara
Ph. 52-33-3615-0980
Fx. 52-33-3615-7665
Email: gerardo.victorica@mail.doc.gov