Café Mundo: So, you read our article about business costs and compliance in the U.S., and are familiar with doing business in both the U.S. and Mexico. Tell me how different it is here in Mexico.

 

Doug: Well, people complain about the cost of compliance and the regulations and everything. The way I look at it is, “I knew that before going into it. That’s just part of the business. You have to do your calculations before you open up… to see if you can meet all the obligations you have and make money. Can you make enough money that it’s worth the trouble of doing it?

 

I hear people complain all the time, “Oh, there are so many taxes,” and “Oh, they’re ripping me off.” Well, regardless of what happens, it’s part of the system. So, calculate that into it, and if you can make it work, try not to worry about it too much.

 

Every once in a while you look at it and say, “Gosh, it’s an awful lot of money,” or “It’s an awful lot of trouble,” but those are the rules of the game, and if you want to play the game you’ve got to follow the rules.

 

Café Mundo: Well, I guess that’s the right attitude. Otherwise you’re fighting it all the time.

 

Doug: Oh, you’d just go nuts….

 

Café Mundo: What about the transition for yourself and your family?

 

Doug: I had an easy transition in that sense because I had already worked for the University of Northern Mexico, so I had plenty of time to adapt. The first business I started here was a company in Monterrey. So I knew a little bit about how things are culturally before I tried to open a business.

 

You see here in Puerto Vallarta people come down in January, and fall in love. In January the placed is packed. It looks like business is going to go forever, and they start businesses here, but it doesn’t go very well. They don’t know the market. They don’t know the people. It’s not easy. They forget there is September when there’s nobody here, it’s hot and there’s nothing going on. So you come down with all these assumptions about how things work and about how things are, and you try to apply those assumptions here and it doesn’t work. There are different people here, and they see the world differently. You’ve got to understand where the people are coming from here, and you’ve got to accept the system.

 

Café Mundo: How did you go about setting up your business here in Mexico?

 

Doug: You mean how did I go about starting the Coffee Cup?

 

Café Mundo: Yes. If you were in the U.S. reading this, and wanted to know how to go about starting a business in Mexico, what would you want to know?

 

Doug: Starting a business here is probably no more difficult than starting a business in the States, but there are some different problems. (They are) mostly cultural things – the way things work here – that present problems you wouldn’t have in the States.

 

Of the people I’ve seen come down here from the U.S. and start businesses, I’d say 80% to 90% of them get frustrated really fast.

 

Café Mundo: After the business is open?

 

Doug: After the business is open because of the operational troubles – trying to keep everything running smoothly.

 

The things you have to do to set up a business are very similar, just in general. The main differences come once the business is actually up and running. All materials are harder to come by here. They are more expensive. You have a lot more absenteeism here. Suppliers are out of everything all the time. You have problems because they want to charge you for things that never got shipped.

 

(For example) We carried a particular brand of bottled juices in the shop. Well, regularly they would send us a case of out-of-date juices. We would complain and send them back, and we would get the new case and find the out-of-date juices mixed in. On the edges of the case would be the juices that were in-date, and in the center of the case were out-of-date juices. They were trying to pass them off on us.

 

I would have loved to switch the company, but it was a brand of juice that just sold well for us, so we put up with it because customers liked the product. I got pretty frustrating, every time we would get an order, to open up the cases and make sure they didn’t sneak in any outdated juices inside.

 

Or… we will call up our suppliers and try to order supplies that they don’t have. Coffee cups, for example. Disposable coffee cups are very expensive and very hard to get. All the coffee cups go through Mexico City, and are the same Dixie brand cups we use in the States. Part of our problem is that we use 24-ounce cups (because it is in a resort location), and most people don’t drink coffee out of cups that size here.

 

Café Mundo: There seems to be a lack of competition here, especially at the retail level. I think that’s why Wal-Mart, Home Depot and Costco are here and doing well.

 

Doug: I’ve been in Mexico off and on since 1993, and what people do here is that they have their favorite stores here. You develop a list of places. You know where everything is. Outsiders are left asking, “Where do I find this. Where do I find that.” And they chase all over town. After a while you figure out who has what you want; who is reliable; what neighborhood stores you can use.

 

It’s the same with people – plumbers and electricians. It’s trial and error. The best way to find good people is to start asking around…. It takes a while. I think in the States there is more competition in general, so you’re more likely to have luck just by calling somebody out of the phone book. (Here) it’s rare that you would ever call an electrician just out of the phone book. I basically don’t do anything without a recommendation from somebody.

 

You have to set up a support system of people you can hire for different things. 

 

Café Mundo: Now you just sold your business. What’s the new owner’s story? How is he handling those challenges?

 

Doug:  Good, because when we sold the very first (coffee shop) that we opened, they were the same guys who took it over – a couple of guys from LA. So for them it was an easy transition because they had already learned a lot in the previous five years.

 

Café Mundo: I noticed that he speaks Spanish, and he’s here every day.

 

Doug: I do know some people here who run good businesses, and they don’t speak any Spanish. I don’t know how they do it, but they manage to get things done – things happen. My Spanish is quite good. When you’re dealing with employees, you are trying to fit in. It gets you a little more respect, You don’t get a good response it you say, “Well back home they do it like this.” That doesn’t really work.

 

Café Mundo: What’s different here?

 

Doug: People’s attitude toward work. Absenteeism is a big thing here. If it’s somebody’s birthday, they expect the day off. If they miss the next day at work because they partied too hard on their birthday, you can’t really get too upset. If you make a scene about it, that is seen as really uncool. It’s “Oh, well, sorry. I missed work and I didn’t call in” But you let it slide and hope they had a good time, and you don’t make a big deal out of it.

 

Café Mundo: So do you think that Americans, Canadians, and perhaps Europeans who open businesses in Meixco are perhaps always always trying to push the standards a little higher without pushing through that envelope where you break the cultural barrier?

 

Doug: Yeah. I see a lot of people start businesses because they see an opportunity to improve the quality of the product… and in general I think they do a pretty good job of motivating people. I think by making them want to do it, you know, when you have customers who like it and come back every single day and say “We really enjoy coming here. We come back every year.” Ninety nine percent of our customers are really happy, and how many times do you hear about what a good job you are doing? It’s a nice atmosphere to work in. And that’s where we get good service. You can’t force somebody to provide good service.

 

Café Mundo: It occurs to me that it is a good working environment for your employees. The customers are happy because they came in for a cup of coffee and a bagel. You guys produce a good product, so they’re happy, And it’s a nice environment.

 

I’m thinking, “What if I want to start a construction company or a vehicle maintenance company, or a property management company, where you are dealing with more difficult work, harder working conditions, and employees who work with their hands. How do you make that work?”

 

Doug: Well, I think in almost any business you have to hire the right people. If you are looking for a mechanic, you have to find someone who actually likes being a mechanic, and has some enjoyment from the job. A lot of people have worked in places where there has not been a lot of customer satisfaction: the customers are grouchy; the boss is grouchy; so they work more out of necessity than choice. But by working in a situation where you do a good job, that you finish the work when you are supposed to; that you are not gouging the customer; you start to see that the response is better. Customers are happy. Lots of people respond when they see that people are happy with what they are doing.

 

Café Mundo: Let’s talk about setting up the business. The guy who wrote a piece for us on starting a maintenance business in Utah talks about the hassle of employee withholding; the costs of collecting, reporting, and sending money to the federal and state governments. He talks about the cost of FICA and FUTA (state unemployment insurance). He needs to verify citizenship with two forms of ID. When it’s all taken into consideration, he actually pays about 130% of each employee’s salary when you add compliance costs, social security, unemployment, and some form of health care plan.

 

Doug: That’s basically the same here. We calculate 133% of salary just for the basics required by law.

 

Café Mundo: What are the basics required by law?

 

Doug: There is employee withholding (for income taxes); there is a payroll tax for what they call social security here. It’s somewhat different than in the States. You are also required by law to pay, in addition to their salary, a Christmas bonus every year. It’s called the aguinaldo.

 

Many of the withholdings are pretty similar to the States. There is no unemployment insurance requirement. Your big costs are social security, which is called IMMS (Instituto Mexicano del Seguro Social). It covers some health insurance if they are injured on the job and they receive some money during the time they are not working. For pregnancy they are allowed 42 days of leave. Six days of that are paid by the employer.

 

Also out of IMMS some money goes toward a program called Infonavit, which is a federal housing program where employees can take out loans to buy homes.

 

Café Mundo: Isn’t that voluntary?

 

Doug: To use it, an employee has to sign up to use the credit. For the employer it is not a voluntary program. You must pay in. We paid in every two months. It’s roughly the same as you pay for social security. You also pay into the government sponsored health care system, and you pay monthly based on the number of employees you have and their salaries.

 

Café Mundo: How does that compare with health care in the U.S.?

 

Doug: For insurance and for health care, it’s probably less expensive because health care is so much cheaper here. For private medical insurance – for good coverage – it’s pretty similar to what you pay in the States.

 

Café Mundo: The trade-offs are interesting. Health care is really expensive in the U.S., but the employee’s housing is up to him. Health care is inexpensive down here, but you have to pay into a housing program. Yet it all seems to work out to about an extra one-third of wages.

 

Doug: The money is basically the same, although most companies here don’t offer private health care. At least not until you get into the big companies, and then maybe for executives. I don’t know of any small companies that offer private health care.

 

Café Mundo:  I read a letter to the editor of EscapeArtist.com, where a guy living in Mexico with an FM-3 visa said he was able to use the public health care system, and he was using it for pretty serious stuff, like major operations. He said it was basically free.

 

The public health care facilities are not the same as private facilities. The treatment is a little bit more brusque, but overall the level of health care is pretty good. You know, if there’s something wrong with you, they will fix you up.

 

Café Mundo: What about corporate taxes?

 

Doug: I’m not quite sure what it is in the States. The corporate income tax rate here is 29%. I mentioned that to somebody recently, and he said, “Gosh, that’s awfully high.”

 

I also think that for corporations you get a lot more deductions in the States than you do here.

 

Café Mundo: I have the impression that a lot of people in Mexico don’t pay taxes – that tax evasion is kind of a Latin American pastime.

 

Doug: Yep. Most people, as far as I can tell, don’t pay into the system, or they game the system.

 

Café Mundo: How do they game the system?

 

Doug: Oh, they keep two sets of books – one for the tax man and one for operations. They may claim they pay their employees a lower salary (than they actually pay). The payroll tax and social security and everything is all based on salary.

 

Café Mundo: Did you do all your tax reporting and withholding calculations in-house, or did you hire somebody to help you with that.

 

Doug: We hired an outside accountant. We had a bookkeeper inside doing the day-to-day stuff. She would turn in the books twice a month, and they would go through it all and prepare all the reports; do the payroll for us.

 

Café Mundo: And what did that cost you?

 

Doug: Oh, with twice a month payroll… about $300 a month. Down here that’s quite a bit, but worth it because they did a thorough job. 

 

Café Mundo: What about hiring practices? Are they flexible down here?

 

Doug: They are not flexible at all. If you fire somebody you are required to pay them two months’ severance pay. It’s based on their seniority with the company. If you have been here for a certain period of time – over three months – then there is an additional calculation where you tack on one week of pay for every year. It gets quite expensive.

 

It’s difficult… even it it’s an employee who is not performing well; an employee who is late for work; the labor laws are very much in favor of the employee. People are very slow to hire because of that. If the employee doesn’t work out, it’s very costly to let them go. It’s detrimental to business and the economy in general.

 

You hear the government talk about the need for jobs, but it’s a big risk to hire an employee, (because) if it doesn’t work out you have to pay them three months’ salary.

 

Café Mundo: When I was down here with a professor from Metro State, who is Mexican. His comment was that there is a low level of trust in Mexico as a society, and consequently businesses are often constrained by the number of family members they have available to fill positions. That’s not necessarily the result of labor laws. I think it’s partly a cultural problem.

 

Doug: It’s probably more cultural. There are a lot of mom and pop kind of businesses… where bringing people in is a risk. If they don’t work out; if they don’t run the business well; if they look for ways to take advantage of the situation…. You hear stories about it all the time. People have a reluctance to hire.

 

I can’t remember the name of it, but there was a study done on constraints on business: how competitive different countries were in the business arena, and how much the labor laws favor the employee over the employer. Mexico was something like 128^th on the list.

 

Café Mundo: So when you hire for your business, how do you go about hiring employees?

 

Doug: We do lots of interviews. We look for people who have “people skills:” that they are a positive, outgoing kind of person. We are a coffee shop, and you don’t have to have a lot of prior experience to do the job. You check references. You rely on a gut-level feel.

 

Café Mundo: Do you have a lot of turnover?

 

Doug: Actually, for a business like ours, we have very little turnover. We try to make it a good place to work, and I’d say that at least 50% of the employees that have left have later come back. It pays well. It’s a good place to work. The environment is good. We can offer people some flexibility if something happens. A lot of people have kids, and if there is a school event, we can work the schedule around it.

 

Café Mundo:  What other regulatory requirements did you have to meet?

 

Doug: When you open a business, the health inspector comes out along with a department that is the equivalent of the fire department. They check your gas lines, for example. They have you put up emergency exit signs; signs for maximum capacity. You have to have fire extinguishers now. The City inspectors come out and make sure you have permits for your business and permits for your signage.

 

Café Mundo:  Do they keep coming back?

 

Doug:  Every now and then, but it’s pretty rare. The Social Security people will come by, just to check and see how many people are really working there…. Income taxes are one of the things you withhold. It’s taken out of your wages before you get paid. If you are an American working abroad, you still have to file a tax return every year. In Mexico you don’t have to file a tax return until you make over a certain amount of money per year.

 

Café Mundo: You know, I have no wage income here, but I have a bank account and an investment account. At both Banamex and Lloyds they simply take about 1% of the average balance of the account out for taxes every year. I don’t have to file anything. The bank does it for me, but it’s like an assets tax – a tax on the size of your account – but at a pretty low level. As opposed to an income tax, this gives me an incentive to go do something with the money.

 

You know, on the subject of taxes, I look around and see the level of taxation on houses in this area; the income tax that’s collected out of payroll, just as we do it in the U.S.; the social security and infonavit taxes that employers pay for employee retirement and housing. Then I look around at the poverty and the condition of the roads and wonder where the money goes.

 

Doug: I think a lot of money taxed here doesn’t make it to the government. There is also a large informal economy, which does not pay any tax. Something like 40% of businesses are not registered at all. And among the businesses that are registered, many do not comply. They don’t pay. They try to game the system. The level of taxation might be the same (as the U.S.), but the level of compliance is not, that’s for sure.

 

January 2008

 

If you have questions or want more information about Puerto Vallarta, see Doug’s web site at: http://www.vallartablog.com