Walmex as Acme Motors Considers

WalMex

As Acme Motors considers expanding our operations to the city of Nuevo Laredo, on the Mexican side of the Rio Grande, many here at Acme wonder what the benefits are of such a move. We feel that this move will be highly successful for Acme and help to drive our company forward. To illustrate the benefits of expanding to Mexico, I will present to you the case of Wal-Mex, the Mexican subsidiary of iconic retailer Wal-Mart.

Wal-Mart entered the Mexican market in 1991 when it merged with existing retailer Cifra. Since then, Wal-Mex has grown to over 1000 stores in the Mexican market, under a variety of brands. Wal-Mart's operations in Mexico are strictly in the retail field. Despite using a wider variety of brand names, Wal-Mart's operations in Mexico closely mirror those of their U.S. operations. They operate large discount retailer locations. These are fed by a regional distribution centers and supported by extensive advertising. Wal-Mart competes in Mexico in the same way it does in the United States, on the basis of being the lowest cost provider, and they have tailored an extensive cost-reduction culture to support that initiative.

Wal-Mart has several comparative advantages that it uses in the Mexican market. The buying power that Wal-Mart has in the U.S. market is brought to the Mexican market. No local firm can match this power. Part of the attractiveness of the Mexican market for Wal-Mart is that market's combination of a large middle class not dissimilar in tastes to the American middle class, but also a large underclass that forms a cheap labor base. This allows Wal-Mex to have an even better cost advantage than they enjoy in the U.S.

That is not to say that Wal-Mart has not faced any issues in Mexico. One example is the controversy in 2005 over their proposal to build a store at Patzcuaro, a native heritage site. This controversy created a rift in the host country because many people felt that Wal-Mart epitomizes values not shared by the Purepecha Indian community at Patzcuaro. This controversy was fueled by Wal-Mex's rapid expansion and by the Mexican people's love-hate relationship with the U.S. There were calls for political action to prevent the store from opening.

Ultimately, though, the situation was resolved by Wal-Mart opening the store. Similar controversies have occurred in the past, such as at the pyramids of Teotihuacan. Wal-Mart opens the store, and while critics decry this as being culturally insensitive, many locals prove to be in favor of the store.

The resolution appears to have little in the way of short-term costs, but there are long-term costs associated with such an approach to conflict resolution. In the short-run, Wal-Mart wins, as they are allowed to open the store. Yet, in the long run, such controversy creates strong negative publicity. We have seen in the United States that this publicity has made it difficult for the company to open stores in certain areas and this is becoming the case in Mexico as well. The legal entanglements that come from hard-fought battles to prevent the opening of Wal-Mart stores adds to the company's cost structure, which in turn compromises its ability to deliver on its primary differentiating feature. These costs are something we at Acme hope to avoid, as we feel that we are contributing to Mexico's economy by providing quality jobs and making possible knowledge transfer.

The case of Wal-Mart in Mexico is valuable for Acme was we prepare to move into Nuevo Laredo. It illustrates both the opportunities and risks that come from entering into foreign markets. The Mexican market is large, rapidly growing, and with a strong middle class. We at Acme Motors have substantial competitive advantages that can be won by entering this market. The combination of affordable Mexican labor and our well-developed techniques and systems will help Acme become more profitable. Furthermore, it will also give us a gateway into the Mexican market. Firms like Wal-Mart have shown conclusively that American business acumen and systems can be applied successfully to the Mexican market. Moreover, we feel that the cost advantages we will gain from setting up in Nuevo Laredo will restore Acme's strength.