Mexico’s Telephones Mean U.S. Dollars

The headlines about free markets and economic change may come these days from Berlin and Moscow, but the real business opportunities are opening up in Guadalajara.

That’s right, Guadalajara, and elsewhere in Mexico where contracts were awarded last week for cellular telephone service. BellSouth, the Atlanta-based regional phone company, won the right to serve Guadalajara, in western Mexico, and other U.S. companies--Motorola and McCaw Cellular, among them--will provide service for other areas.

Their entry into the Mexican market is a small part of a plan to build up telephone service in the country that has the world’s 14th-largest economy--as measured by its $180-billion annual output of goods and services--but a telephone system that ranks 60th in the world.

To correct that situation, the Mexican government will soon announce the sale to private investors of all or part of its 56% ownership of Telefonos de Mexico, the national phone company. After the privatization sale, TelMex will embark on a massive program to double the number of phone lines in Mexico in the next five years, and then double them again by the year 2,000.

That’s important to Americans in a couple of ways. First, U.S. investors own about 11% of TelMex’s 4 billion shares outstanding, which trade over the counter in American Depositary Receipts, meaning that they can be purchased in dollars. Those shareholders were excited last week as Merrill Lynch sent its clients a buy recommendation on the stock, saying the privatization would take place in the next 12 months and lead to higher earnings for TelMex because the government was allowing it to retain tax money to finance expansion. TelMex stock rose about 3 cents a share to roughly $1.18. Two years ago, after the worldwide stock market crash, it sold for 8 cents.

But U.S. interests go far beyond stock action. U.S. business benefits on every level if Mexico builds up its telephone system. To begin with, as phone traffic grows, so do revenues of U.S. long distance companies because more than half of TelMex’s phone calls are between the United States and Mexico.

The expansion may involve expenditures of $14 billion during the 1990s, with substantial business for U.S. suppliers such as American Telephone & Telegraph--although the inside track on equipment sales belongs to Sweden’s L. M. Ericsson and France’s CIT Alcatel, which have manufactured in Mexico for decades.

More original are proposals that U.S. regional phone companies, such as BellSouth and US West, participate directly in TelMex’s buildup by making an equity investment and sharing their knowledge of how to create and expand a modern phone network. The United States, with the world’s highest-density networks--70 phone lines per 100 people--has a lot to teach, and Mexico, with five lines per 100, has a lot to learn. If the plan is successful, Mexico will have 20 lines per 100 people by the year 2,000--comparable to European countries today--and will be able to enter the 21st Century an industrially developed country.

Of course, development is easier said than done and, for many people, easier said than understood.

Why, for example, is Mexico--like numerous other countries East and West--privatizing its phone system? Because the Mexican government has better things to do with its money. If it holds 56% ownership and TelMex needs capital, the government must divert scarce tax revenue or see the phone service wither--as it has.

It’s much wiser to let private investors finance the expansion. So President Carlos Salinas de Gortari, 41, a Harvard Ph.D. in political economics, plans to sell TelMex stock, just as his government is selling two steel mills to private investors. The TelMex sale could bring Salinas’ government $3 billion, which it then could spend on water purification, roads and schools to further aid development.

Other benefits would follow. The rapid growth of TelMex’s modern phone system could propel Mexico’s economy all by itself. A report by Douglas A. Campbell Co., a Los Angeles brokerage that has followed TelMex for many years, projects company revenues growing from $2 billion to $4 billion by 1991. Such growth would have a ripple effect in jobs for Mexico’s 85 million people, in business for U.S. companies and in gains for U.S. investors. So there’s a lot riding on TelMex’s success.

What could threaten such a grand plan? A failure of the privatized economy to create jobs fast enough for the people inevitably laid off by modernizing state companies like TelMex. That could lead to a reaction against Salinas and his government, which is led by U.S.-educated economists like himself, and their defeat in legislative elections coming up in 1991. And such a defeat could turn back the clock again in a country that has seen too many grim yesterdays and too few bright tomorrows.

Americans are anxious that economic change continue in Eastern Europe and the Soviet Union. They should not overlook an even more important country closer to home.