BAI's Penglan Zhao: In Mexico, Waiting for a World-Class Tailwind

By Ren Qian

On March 29, Waves published A Globalization Guide for Chinese Founders, breaking down the past, present, and future of Chinese companies going global across specific regions — North America, Latin America, the Middle East, Japan, Southeast Asia, Europe, and Africa. If you haven't read it yet, feel free to jump over and check out the sections that interest you.

Over the course of this week, we'll be sharing perspectives from investors on the front lines of globalization about different regions and sectors. Is Mexico magical realism or El Dorado? How should we view the opportunities and challenges for Chinese companies expanding to North America? How should Chinese innovative drugs plan their global path? And what qualities do transnational entrepreneurs with Chinese DNA need? Over the next week, you may find some answers.

Penglan Zhao, partner at BAI Capital, is probably the investor who has flown to Mexico most frequently over the past two years. Each time, the 25- to 30-hour flight has had just one purpose: he and BAI Capital are waiting for a world-class opportunity to take off in Mexico.

When Zhao first turned his attention to Mexico in 2019, he led BAI Capital's investment in Stori, a digital banking company, and followed up with Trubit in 2021. The explosive growth of these two fintech companies gave him confidence. In 2022, when many Chinese VCs were still prioritizing Southeast Asia for their overseas strategies, BAI Capital remained focused on Mexico.

That year, after meeting with nine unicorns and local giants in one week in Mexico, Zhao gained a clearer picture of the landscape: "Looking at the new economy industries, it's similar to China in 2014 and 2015. Most models that emerged in China before 2015 already exist there, but things that only appeared in China after 2015 are still missing."

Opportunity is brewing. Zhao believes Mexico is one of the few countries in the world where manufacturing is rapidly rising, and its export ties with the US are a major highlight. Investment in Mexico, he says, will gradually become consensus this year.

Below are excerpts from Zhao's views:

1. In future global economic growth, Mexico will be a major bright spot. It's hard to predict exactly how big it will become, but its growth rate will be fast, and the process of creating incremental value will generate many new-economy opportunities.

2. In Mexico, or Latin America as a whole, nearly half of economic output comes from the informal economy. If you can penetrate it with new-economy approaches — e-commerce, mobile payments, and so on — linking these fragmented pieces together can upgrade backward productivity and unleash greater economic incremental value. This has already been partially validated. For example, there are prototypes of Dingdong Maicai, Meicai, and Xingsheng Youxuan there, and gross margins are much higher than in China, though absolute volumes are far smaller. New-economy companies in Mexico don't face the same level of "involution" as in Southeast Asia. The same business model might lose 10% in China, break even or lose 5% in Southeast Asia, but earn 10-20% in Mexico.

3. Investing in such projects might ultimately yield only a $2-3 billion company, but the probability of success is far greater than finding a Wang Xing in China's thousand-group-buying war. If Chinese teams can localize well in the local market, combined with their engineering capabilities, technical skills, and product vision, they could easily become one of the most competitive teams there. But because of the natural physical distance, very few founders are willing to relocate permanently. Local native founders are decent too, but they still lack in execution, operations, and product design.

4. Mexico is the world's third-largest financial inclusion market (per capita GDP × unbanked population), after China and the US. Six of Mexico's nine unicorns are fintech companies. The reasons: first, it's relatively easy to execute, with no commercial or logistics flows required; second, traditional Mexican finance has been concentrated in the hands of foreign banks, where the top five account for 80% of business volume but only serve the very top tier of customers.

5. Mexico's entire economy is now in its fastest growth period in 30 years, and I believe this high growth will continue for at least the next five years. In 2022, people didn't feel this as acutely, but by 2023 and 2024 it has become consensus. When I fly from Tokyo to Mexico, two-thirds of the passengers are Chinese. There are also many Koreans and Japanese. Prices and land values are rising, and cities are getting crowded.

6. Mexico's biggest beta is nearshoring, or friendshoring, which has been especially vigorous post-COVID. Mexicans are particularly pragmatic. Though called "America's backyard," they believe that for manufacturing's resurgence, Chinese experience is more worth learning from. American experience is less relevant to them because Mexico's per capita GDP is the same as China's, and Mexico also has a large county-level population with a huge underbanked population. They feel China has found the solution.

7. The rise of manufacturing will bring a wave of new middle class, and the new middle class will spawn demand for new-economy services — these are the mobile internet application opportunities that happened in China. That's what we want to invest in.

8. We still maintain a certain Chinese perspective — from the Chinese founder angle, either founders who are very strong, or those with gaps we can help fill, or business models. We believe Chinese experience has a foundation for export. This is our biggest conviction. If this conviction holds, then our approach of taking Chinese experience overseas to invest holds.

9. Anyone doing cross-border will pay attention to Mexico. Consensus will gradually form this year, but the execution difficulty is far higher than Southeast Asia.

Image source: IC photo