Telmex, the Mexican telephone company, has been moving beyond its national borders. Piloted by Carlos Slim, now its honorary president, Telmex has made high-profile acquisitions throughout Latin America during the past year. The company’s expansion moves have been carefully watched by Telefónica, Spain’s largest telecom operator and the leader in that sector in Latin America. The duel between the two giants has set off a succession of moves and counter-moves that threatens to revolutionize the sector. The party has just gotten started.
Late last year, Telmex launched an offer for the Latin American division of AT&T, which wanted to withdraw from the Latin American market. That acquisition, valued at $207 million, opened markets for Telmex in Colombia, Chile, Peru, Brazil, and Argentina. In early March, Telefónica launched a counter-attack by purchasing 100% of BellSouth’s Latin American operations. With that move, Telefónica entered Venezuela, Colombia, Ecuador and Uruguay, thus consolidating its position in South and Central America.
The BellSouth deal was a tremendous blow for America Móviles, the mobile phone subsidiary of Telmex, which had controlled this segment of the Latin American market. The Mexican telecom company was quick to respond, launching an offer for MCI’s shares in Embratel, a Brazilian firm that supplies fixed long-distance and communications services to businesses. It took about $400 million to close that deal. Ever since then, Telmex has been making other moves in the region, including its purchase of a majority ownership in Net, the most important cable television company in Brazil; its acquisition of Chilesat, the third-largest long-distance operator in Chile; and its purchase of Techtel, an Argentine company that supplies data services.
Meanwhile, América Móviles reached agreements to purchase mobile service firms in Brazil, Argentina, Ecuador, Honduras and Nicaragua. According to the latest rumors, América Móviles is now working on a deal to acquire some of the Latin American assets of Telecom Italia. Jaime García Cantero, an analyst at IDC, says those rumors are not very reliable. “Although Telecom Italia has been selling off its shares in foreign markets, it has always considered Latin America as a region of strategic importance.” For all that, García Cantero says that the past three and a half years have been a very difficult period for Telecom Italia and other companies with a presence in Latin America. “If Telecom Italia has endured the worst, why sell now, even if they are perhaps in a better position now to sell than they were a year and a half ago. These sorts of rumors crop up from time to time, and Telmex usually appears as the buyer.” The reason, he says, is that “although Telmex does not have a presence in every country in Latin America, its goal is to become a pan-American company in the future.”
A Controversial Privatization
All of these deals illustrate the clearly expansionist goals of Telmex these days. Carlos Slim Helú, the richest man in Latin America, is responsible for the company’s renewed energy. In 1991, Slim paid $1.7 billion to take control of Telmex, which had been a state-owned telecom monopoly. In Mexico, Slim is considered a sort of King Midas. He has managed to amass a fortune worth $13 billion by acquiring companies that were in trouble, and making them part of his Carso industrial group. Nowadays, the companies in the Slim empire comprise 40% of the total market capitalization of the Mexico Stock Exchange.
Slim’s valuable political contacts explain part of his success. The Telmex privatization was, in fact, filled with controversy. Although Slim won the contest, it has long been suspected that Slim acted as front man for Carlos Salinas de Gortari, who was president of Mexico from 1988 to 1994. Although these suspicions have never been proved, the acquisition process was widely criticized in the telecom sector.
Nevertheless, time has emphasized the wisdom of Slim’s approach. “As chief owner of Telmex, Slim’s strategy has been very successful,” says Enrique de la Garza Toledo, professor at UAM, the Autonomous Metropolitan University of Mexico. Unlike other privatized enterprises, Telmex managed to overcome Mexico’s financial crisis of 1995 without any problems, consolidating its position in the domestic market and extending itself into parts of the U.S. and Latin America.
Telmex transformed itself from a state monopoly that barely made any money into one of the most profitable telecom companies in Latin America. Two changes were responsible. First, revenues became dependent on local telephone services, instead of the long-distance domestic and international services that had dominated when Telmex was state-owned. “That was a very important turnaround, involving a tax that the Mexican government conceded to Telmex, called ‘measured service,’” says De la Garza. With this service, users pay the normal rate of telephone service but their bills increase to the extent that their call volume goes beyond a certain limit. “Consumers of local services have financed a great deal of Telmex’s success,” De la Garza explains. Telmex generates immense liquidity in Mexico — some $1.5 billion a year — and Slim has used those funds to move beyond the local market without generating any debt. In addition, “accelerated technological change has led to a very significant increase in productivity.”
Although Telmex was privatized, it maintained its monopoly for six additional years, thanks to government regulations. As a result, when the sector was ultimately deregulated, Telmex managed to fend off competition, maintaining an 80% market share. Its competitors were barely able to grab markets from Telmex, and they complained that inter-connection fees were too high. They even lodged a complaint with the World Trade Organization, arguing against Telmex’s supposedly monopolistic practices.
The Process of Internationalization
Several reasons explain why Telmex has moved into new markets in the U.S. and Latin America. No enemies are within view; Telmex has secured its position at home; and the company’s growth at home is severely limited by the income levels of Mexican consumers. It has not been easy for Telmex to move north. It has had to deal with important obstacles. “One of those obstacles involves legislation,” said De la Garza. “American regulations are restrictive when it comes to operations of companies from other countries.” Moreover, Telmex “has had to confront strong competition from top-ranked companies.”
Esteban García Canal, professor of business management at the University of Oviedo, agrees that there is a great deal of competition in the U.S. market. Experts say this is the reason why Telefónica and Telmex are making it a higher priority to expand in Central and South America, where they can count on some competitive advantages. Meanwhile, the two companies will be paying attention to the attractive Hispanic market in the U.S., which has greater buying power than the population of Latin America.
In Latin America, Telmex’s main competitor is Telefónica. Another former state monopoly, Telefónica began its expansion process in Latin America in the early 1990s, and it is now the leading telecommunications company in the region. The expansion plans of both companies have been affected by their common history as monopolies. García Canal says that it is quite normal for companies that belong to regulated sectors to internationalize because the long-term future of the telecom sector involves liberalization and deregulation, which creates opportunities and threats. In this sense, the monopolies have followed a dual strategy. “On the one hand, they have taken maximum advantage of the opportunities that came from their positions in their domestic markets. On the other hand, they have taken advantage of all the opportunities for international expansion, as they showed up due to the liberalization processes that have taken place in other countries.”
There have been many such opportunities, especially after the withdrawal of many global companies from Latin America. García Canal says these moves may reflect a change in strategy and focus. “If American companies haven’t done well in Latin America, there may be pressure to get back to areas where they made a profit.” For De la Garza, the departure of companies from Latin America is closely tied to the income level of the region’s population. “There is a distinct, but not very large, segment of the [Latin American] population that demands the same level of services as people in developed countries. Then, there is a broad mass of people who have a low level of income, and only demand services that are more basic and less profitable.” For that reason, some companies have preferred to withdraw “to countries where the income level of the population allows them to do better business.”
At the same time, companies are clearly consolidating after moving in many different directions in the late 1990s, including into the Internet and emerging markets. “The moment may have arrived for looking at which business activities should now be shut down,” warns García Canal.
All these factors explain the moves and counter-moves that are now taking place. According to García Canal, these deals are very normal in such oligopolistic sectors as telecommunications where “competitive counter-moves ordinarily take place. When one or two players make a move, the other tries to react, in order to maintain the statu quo.”
Clearly, Telmex and Telefónica are the two companies fighting hardest to dominate the telecom market in Latin America. Both companies have some very important advantages over companies that are not Latin American. The most important advantage is probably their experience in operating in regulated sectors, including those in Latin America. Another advantage is their knowledge of international political relationships in the region, according to García Canal.
Telefónica still has a clear advantage over Telmex in Latin America. Telefónica controls 24% of the fixed-line telephone market, and 40% of the mobile market. In contrast, Telmex has a 16% share of the market for fixed line service, and 30% in the mobile market. However, De la Garza says that Telmex has an added advantage over Telefónica in the mobile market. “Look at the way Telmex has developed. It is quite similar to other companies you find further south, with respect to its customers, products and promotions. Its experience comes from Mexico, and it is trying to move into countries that have similar characteristics.” García Cantero agrees that the image that Telmex is selling is about providing a more local service than Telefónica or other European operators can provide. “I am from outside, but I don’t come from very far away.” That’s how García Cantero describes Telmex’s positioning. This works in favor of Telmex, especially in Mexico where, in García Cantero’s view, “Telefónica is seen as a foreign aggressor.”
According to De la Garza, another factor may be equally helpful for Telmex — the Latin Americanism of Carlos Slim. In addition to having achieved a great deal of success, Slim has gotten indirectly involved in the world of politics by repeatedly using “Latin Americanist” rhetoric over the past two years. De la Garza sees this as an alternative strategy for doing business in the region; an approach to development that is less dependent on the United States. “It is a tough sort of rhetoric that can be self-absorbed, but which can have results in some countries in Latin America — especially Brazil, Argentina and Venezuela.” In recent years, policy in those countries has turned toward leftist populism under the leadership of Lula, Kirchner, and Chávez, the respective presidents of those countries.
Nevertheless, Telefónica has a presence in more key markets in the region than Telmex has. These markets include Chile, “which sets the standard as the most sophisticated market in Latin America, as well as Argentina and Brazil,” says García Cantero. On the other hand, “Telmex has less experience making high-level alliances than Telefónica has. Negotiating is not [Telmex’s] game. It has not had any experience playing a win-win game with other important players.”
The battle for controlling Latin America has yet to reach the finish line. De la Garza believes that more moves are going to take place in the mobile phone sector, both in the short and medium term. That is because investment costs have dropped far below costs in traditional telephony, leading to a drop in the pricing of services. “In the beginning, mobile phone service was for the high-end segment. Now it is widely popular, even in poor countries,” De la Garza notes. “Costs are going to drop, and it is going to be much easier for ordinary people to have a cell phone.” In his view, Internet access is another service that is going to expand significantly. “At first, people thought that, when it came to poor countries, these services would be restricted to the middle and upper classes. But it isn’t turning out that way. For several reasons, people are gaining access to the Internet on a massive scale.”