August 22, 2012 7:05 pm

North of the border

Mexico is shedding its image of focusing on cheap exports to the US, writes Adam Thomson
Members of the Maru Montero Dance Company perform at the Sylvan Theater near the Washington Monument during the 18th Annual National Cinco de Mayo Festival in Washington Sunday, May 2, 2010©AP

Best foot forward: dancers in Mexican costume celebrate a festival in Washington. The Hispanic community in the US now numbers 52m

Located at the northern tip of Mitkof Island, where the icy waters of the Frederick Sound meet the Wrangell Narrows, the Alaskan city of Petersburg is about as remote as they come.

However even this wilderness with its wolves, black bear, moose and humpback whales, is within range of an expansion of Mexican-owned business that is reaching the furthest corners of the US. At the supermarket in Petersburg you can pick up a telephone from TracFone, a virtual mobile operator controlled by billionaire Carlos Slim.

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Over the past five years or so, Mexican companies have poured billions of dollars into the US as they ramp up the purchase of assets that range from banks to broadcasting companies and building-material suppliers. The push, which has gone largely unnoticed, has extended the reach of Mexican businesses that once looked exclusively to domestic customers.

Some people have even begun to call it the reconquista or “reconquest”, in reference to the recent clawing back, through demographics and the spread of Mexican-owned businesses, of territory that was once Mexican and became part of the US after the war between the countries in 1846.

The result is startling. Cemex, the Mexican cement and building materials manufacturer, is now the largest producer in its segment in the US – commanding 10.5 per cent of a highly fragmented market.

In 2010, Grupo Bimbo, the Mexican baker, announced the purchase of Sara Lee, the US baker, in a deal initially estimated at US$959m. The acquisition, which received approval from the US Department of Justice late last year on condition of some divestitures, consolidated Bimbo as America’s biggest breadmaker.

Televisa, the Mexican broadcaster, significantly deepened its exposure to the US market in 2010, investing $1.2bn in Univision, the US’s largest Spanish-language network. It took an initial 5 per cent stake and debentures convertible into an additional 30 per cent equity stake in the future.

Probably the most recognised Mexican brand in the US in the past 20 years is Corona Extra, the beer in the clear glass bottle served, in the US at least, with a wedge of lime in the neck. Corona is now the best-selling imported beer in the US – a title it has held every year since 1997.

Even Alfa, the Mexican conglomerate with interests stretching from petrochemicals to food processing, has started to drill for natural gas – not in Mexico, where the country’s constitution restricts private investment, but in Texas in a partnership with Pioneer Natural Resources and Reliance.

Between 2006 and 2011, the US received US$8.4bn in direct investment from Mexico, according to data from the US Department of Commerce’s Bureau of Economic Analysis. The figure is higher than that for any previous six-year period (though 2000 was the highest year on record with US$5bn).

Televisa: Telenovelas for US tastes

There was a time, not too long ago, when melodramatic scenes of heartbreak and passion were the exclusive realm of midday soap operas broadcast to millions of housewives and domestic staff throughout Latin America.

Not any more: last month, Televisa, the Mexican master of the telenovela, announced a big push into the English-language market as part of its expansion into the US market.

Televisa USA, as the company’s new Los Angeles-based studio is called, launched with multiple broadcast network deals, including a joint venture with Lionsgate, the global entertainment company, to develop new content for television audiences all over the US.

“Our content travels well,” Carlos Madrazo, who heads Televisa’s investor-relations department, told the Financial Times. “It transcends language and culture.”

The strategy, he explained, involves complementing new material with content adapted from Televisa’s existing library of Spanish-language soap-opera titles, which is the biggest in the world.

Executives said that the launch of Televisa USA was independent from Televisa’s investment in and collaboration with Univision. For years, Televisa has been providing much of Univision’s primetime content through a commercial agreement.

As part of Televisa’s 2010 investment in Univision, that agreement has been extended by several years. It has also been widened to include mobile and internet rights.

Televisa USA recently completed production of “Devious Maids”, a broadcast network pilot co-produced with ABC Studios and Oasis Media Group, to be transmitted by Lifetime Networks. It is also currently producing an English-language adaptation of Alcanzar Una Estrella, a popular Mexican series, for Nickelodeon.

The series, called Hollywood Heights in its English-language format, is being co-produced by MTV networks and Sony Television, and is bringing the typical Latin American five-nights-a-week format to English-language audiences for the first time.

Televisa executives said that the daily format would provide US advertisers with a unique vehicle to sell their goods. “Advertisers know that they are going to be able to target their audience from Monday to Friday, while TV networks will have a much more efficient product from a cost perspective,” says Fernando Pérez Gavilán, head of Televisa International.

This contradicts the conception that Mexico’s success is entirely built on big foreign investors building up cheap, export-oriented enterprises in border cities such as Tijuana and Ciudad Juárez.

“Many people still assume that the US-Mexico business relationship is a one-way street of American investors travelling across the border to build factories in Mexico,” says Damian Fraser, head of Latin American equities at UBS in Mexico City. “It’s not true: today, direct investment travels in both directions.”

But what is driving this expansion? And why has it picked up speed now?

Economists and analysts say one factor is Mexico’s robust economy, which has given companies a solid and reliable backdrop against which to build their domestic businesses.

Economic growth has returned following the brutal 6 per cent contraction that hit Mexico in 2009. According to the International Monetary Fund, Mexico could grow as much as 3.9 per cent this year – almost double the country’s average annual growth rate of the past decade.

Some analysts are so upbeat about the country’s prospects that they are even suggesting it could become the region’s new star. In a research note, Nomura Equity Research estimates that Mexico will overtake Brazil as Latin America’s biggest economy. “Over the next decade, Mexico will, in our view, become Latin America’s largest economy and one of the emerging markets’ most dynamic,” it concludes.

Such analysis often sees a deep manufacturing strength in Mexico while Brazil has been more dependent on high commodity prices.

All this means Mexican companies find themselves with cash to expand their businesses and go on shopping sprees abroad. In a reflection of the good times, the Mexican Stock Exchange burst through the 40,000-point mark for the first time in June and hit an all-time high last month.

“Today’s prices imply interesting growth potential in future earnings,” says Luis Téllez, the stock market’s president. “They also encourage companies to take on new expansion projects, including outside Mexico.”

. . .

A second reason for Mexican companies’ expansion into the US is geography and demographics. Unsurprisingly, Mexican multinationals or multilatinas have expanded in many directions. The US has usually proved the obvious destination however – not only because the two countries share a 2,000-mile border with plenty of rail and infrastructure links, but also because the US has increasingly offered Mexican companies a chance to market to their own people.

Already, about 12m Mexicans – about 10 per cent of Mexico’s population – live in the US. The Pew Hispanic Center estimates that the 52m Hispanics living there today, who account for roughly 16 per cent of the entire US population, will grow to 125m or 30 per cent of the US population by 2050. Already, one in four people under the age of 20 living in the US is Hispanic.

“That is a big number,” says Jeffrey Passel, senior demographer at Pew. “For the most part, they are people who grew up in Mexico, and they have a familiarity with, and a feeling for, Mexican products.”

For Mexican companies, which, unlike their US competitors, have had decades to hone their marketing strategies to Mexicans back home, the mix of demographic and economic factors north of the border is inviting.

Cue Televisa. For years, the broadcaster, which draws about 70 per cent of the free-to-air television audience back home, has been supplying Mexicans living in the US with their favourite soap operas via a commercial agreement with Univision. But its 2010 investment in Univision, and a new commercial agreement, has opened a new chapter for Televisa’s engagement with the US market.

Thanks in large part to the Mexican broadcaster, which provides much of Univision’s primetime viewing, the network is already one of the top five in the US. In 2010, it aired Soy tu Dueña or A Woman of Steel, a Televisa production, which averaged 5.4m viewers per episode during its seven-month run and pulled in a staggering 10m viewers for the last show on December 27 of that year.

The explanation? “The person who goes to the US still shows a preference for Mexican brands and it is no different for Televisa,” says Carlos Madrazo, head of Televisa’s investor relations. “The Hispanic market is very loyal.”

Not all Mexican multilatinas have taken the same approach to the US market. Grupo Modelo of Corona Extra fame continued to produce at home and use US distributors. By contrast, the likes of Cemex and Bimbo entered by acquiring existing operations worth billions of dollars.

Nor has it always been a smooth ride. Cemex’s purchase of Rinker, the Australian building-materials supplier, for US$15.3bn including debt, massively increased the company’s exposure to the US market. But the deal, which was the largest overseas acquisition by a Mexican company, was funded with short-term debt and took place on the eve of the US housing crash and financial crisis.

Mr Slim, who controls América Móvil and is the world’s richest man, took a radically different path with his US$57.5m purchase of an initial 55 per cent stake in 1999 of TracFone, a Florida-based virtual network operator that offers pre-paid services.

Carlos García Moreno, chief financial officer of América Móvil, TracFone’s Mexican parent, says caution was always paramount in the company’s US expansion, and there was never any talk of buying a fully-fledged network with its own infrastructure.

“We could have been much more aggressive,” he told the FT. “But buying a network would have exposed us to a market and a regulatory framework with which we were unfamiliar. It would also have absorbed too much capital and we didn’t want to take on a lot more debt.”

So Mr Slim bought a small venture then used Mexican knowhow in pre-paid phone cards that he had developed so successfully back home and that enabled him to offer mobile telephony to low-income individuals for the first time. “TracFone went for the bottom of the pile,” says Mr García Moreno. Today, TracFone has 21.3m clients compared with the 134,000 it had back then.

. . .

Whatever the model, a third factor explaining Mexican multilatinas push into the US is common to almost all of them: using powerful positions in home markets to fuel their overseas expansion. With few exceptions, Mexico’s business landscape is dominated by just one or two companies operating in a given sector. Competition between them can be fierce but the resulting duopolies produce high barriers to entry for potential newcomers, which tends to dissuade them from trying.

Eduardo Pérez Motta, president of the country’s Federal Competition Commission, or Cofeco, argues that the effect leads to business owners dominating their respective sectors while generally leaving each other’s fiefdoms alone so as not to disturb the status quo. “Mexico has an enormous entrepreneurial talent but many generations have had a feudal vision of the country,” he says.

The result massively inflates profits compared with other markets. In the second quarter of this year, Bimbo’s operating margin in Mexico was 9 per cent compared with just 2.7 per cent in the US; Cemex’s operating margin on earnings before interest, tax, depreciation and amortisation during the second quarter of this year was 35.7 per cent in Mexico and 0.2 per cent in the US. “Mexican businesses generate huge cash flows,” says Mr Pérez Motta. “That is what helps them to expand abroad.”

And with Hispanic purchasing power in the US expected to reach $1.3tn by next year compared with just US$800m in 2006, according to estimates from the Selig Center for Economic Growth at the University of Georgia, there seems little doubt that the multilatinas are there to stay. As Mr Fraser of UBS says: “The fiesta is just getting started”.

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