Mexico’s Telecommunications Industry Open to U.S. Companies

by Gil Cisneros and P.J. Dinner

Talk about telecommunications these days and you’re talking not just about voice transmission, but about data transmission such as electronic mail and fax; educational outreach programs such as distance learning and corporate training; information sources such as the Internet; infrastructure foundations such as fiber-optic networks through which voice and data flows; wireless capabilities that serve the growing cellular and digital markets; and the software and hardware -- phones, switching equipment, transformers, etc. -- that give us instant access to each other and the resources we need to build our businesses.

All of these come under the heading of telecommunications, an umbrella category of various industry sectors born of the advanced technology that is fueling the globalization of business and commerce.

Mexico, recognizing the importance of telecommunications to the growth of its economy, has for the past 10 years been overhauling its policies relating to the industry. The result: a more dynamic industry and a more competitive and inviting climate for foreign firms wanting to do business there. U.S. companies in particular are aided by the North American Free Trade Agreement, in effect since 1994. NAFTA has increased market access for U.S. firms by eliminating or reducing tariffs and non-tariff barriers affecting equipment sales, establishing parameters for equipment standards and allowing service providers the opportunity to invest in communications services or provide such services cross-border.

This means there is tremendous potential for U.S. companies that can serve the growing telecom needs in Mexico. Even so, challenges exist. Telmex, which was cut loose from government control in 1996, no longer has a monopoly on phone services; however, it still controls 50 percent of local access.

According to Doug Hanson, chief executive officer of Denver-based Rocky Mountain Internet, “Telmex controls the telephone system in Mexico because of its control over local access, just as the regional Bell operating companies have a monopoly in their regions within the United States.”

Without doubt, “elements of the national telecommunications policy have given Telmex an advantage over its competition,” according to a report from the U.S. & Foreign Commercial Service. By reserving half of the cellular bandwidth for a Telmex subsidiary, for example, the government has severely handicapped cellular competitors. But the report is optimistic that “the national government clearly intends to force Telmex and its subsidiaries to compete freely in the long run.”

Additional infrastructure in the cities is needed to overcome Telmex control, which Hanson expects will be accomplished in the next five to 10 years.

“Technologies are available that will allow developing countries to leapfrog some of these infrastructure issues and more forward more rapidly, depending on market demand,” says Vince Bradshaw, a 30-year telecommunications expert who is now employed by Powerworx, a Boulder Internet services development company.

Both Hansen and Bradshaw co-chair the U.S.-Mexico Chamber of Commerce’s Rocky Mountain Chapter Telecommunications Task Force, which is working to set up a network of U.S. and Mexican companies to share resources and contacts and to facilitate the relationships that are key to doing business in Mexico. The Chamber’s binational Board of Directors telecom task force is co-chaired by Tomas Vagoun, of Farifax, Va.-based WorldCom Advanced Networks, and Pablo Ruiz Limon, of Miami-based Lucent Technologies.

Another challenge: Foreign companies can own only 49 percent of a telecommunications venture in Mexico. “So even the AT&Ts and MCI WorldComs of the world have to have Mexican partners to be able to do business there,” says Hansen.

Do multinational companies have a lock on opportunities in Mexico, making it harder for a small company to get a piece of the action? As far as building infrastructure, large companies obviously are out in front. But small companies have a unique competitive edge, says Dennis Ferrigno, a management consultant and employee of the University of Colorado College of Engineering and Applied Science.

“What’s going for small businesses is their creativity and determination. In telecommunications it seems there’s more ability to be able to demonstrate that,” said Ferrigno, who is a member of the Rocky Mountain Chapter’s Telecommunications Task Force. “There’s more opportunity in Mexico for small businesses, more ability to assimilate, whether it be search engine companies or faster communications or software companies or training companies.”

What makes Mexico a land of opportunity for telecommunications companies?

First, the density of telephone coverage is low; as the infrastructure expands, so will the demand for phone equipment. As of 1996, Mexico had 8.8 million lines, which translates into 9.6 phones per 100 people; public telephone density was just two telephone booths per 1,000 people. By 2000, density is projected to increase to 20 telephones per 100 people, and five phone booths per 1,000 people , according to the 1995-2000 Program for the Development of the Communications and Transport Sectors.

All state-of-the-art products are imported, mainly from U.S.companies which have a reputation for innovative and long-lasting products. In 1996, American manufacturers of telephones and pay phones had a 27.8 import market share, as indicated in the U.S. & Foreign Commercial Service report.

Second, there is a steady increase in market demand ­­ Mexicans are using their telephones more and for longer periods of time. Internet use is growing at more than 700 percent annually, says Bradshaw. “It’s a relatively small number, less than 1 million Internet subscribers, but the growth rate is large.”

The Mexican economy, not just technology and infrastructure, ultimately will dictate how fast the telecom industry grows. Right now, the ability of the average Mexican to buy telecom services is less than that of the average person in the U.S.

But Bradshaw points out that Mexico is a highly urban country. “About 75 percent of the people live in cities, and in those cities there are organizations and educational groups that have the ability to purchase telecommunications products and use them for economic development.”

A caveat: U.S. companies, whatever their size, need to recognize that it’s more difficult to do business in Mexico than, say, the United Kingdom, which has just opened up its telecommunications industry completely, no strings attached. Says Hansen, “Limitations in Mexico are not just due to governmental controls and regulations, but a language barrier. You need to understand the language and the culture; the culture is quite different.”

Doing business in Mexico is not easy, Ferrigno agrees. “It takes, at the very least, determination, sweat equity and a lot of hard work.”

Bradshaw believes it’s worth the effort, despite “the cultural, political and even legal reasons that make it a little more difficult.”

Experience gained from that effort can be applied to markets in the United States.

“When you consider the fact that the Hispanic population in our region is quite large and growing very rapidly, it makes sense for any Colorado business to at least give thought to doing business in Mexico and with Mexican-Americans.”

Gil Cisneros is executive director of the Chamber’s Rocky Mountain Chapter and P. J. Dinner is a member of the USMCOC and is the prinicpal of P. J. Dinner Communication.