Ringing in a New Era in Mexico

Andres Vazquez used to be king.

The marketing director for Telmex, Mexico’s giant telephone monopoly, recalls how he’d become an instant hit at parties. Everyone had the same question: “Can you get me a telephone line?”

“Before, having a friend in Telmex was more important than having a friend in the presidency,” he says.

These days, the company--one of Latin America’s most notoriously inefficient utilities--is going through a striking change. Telmex has poured $12 billion into new technology. Waiting periods for new phones are down to weeks, not years.

Most dramatically, starting Aug. 11, Vazquez and his colleagues will no longer reign over Mexico’s telephone market. The country’s biggest publicly traded company, long a symbol of government sloth, will actually be struggling against competitors, including AT&T; and MCI.

“True competition will exist for the first time in this country,” said Gabriel Szekely, author of a book about Telmex.

That may be a slight exaggeration, but the new competitors are serious. Tearing up Mexican roads to lay fiber-optic cable and blitzing viewers with TV commercials, they’re gearing up to steal customers from a behemoth whose reputation has been as bad as Ma Bell’s--and whose service was far worse.

The attraction is a local and long-distance market expected to grow from $6 billion to about $9 billion by the end of the decade, thanks to lower prices and growing U.S.-Mexican trade.

Already, telephone traffic between Mexico and the United States is the second-highest between any two countries in the world, after U.S.-Canada calls, according to the International Telecommunications Union.

Not even Mexico’s disastrous recession of the past year is discouraging competitors.

“The market opportunity is so large, it’s not an issue,” said Dan Crawford, an MCI Communications Corp. executive who is chief operating officer of Avantel, a joint venture with Mexico’s biggest financial institution, Banamex-Accival.

It probably will be early next year before Mexicans see an all-out telephone war like the one AT&T; faced in the United States. In 1997, Telmex is required to connect competitors to its network of phone lines reaching homes and companies. That will allow Mexican consumers to switch their long-distance business to consortiums featuring AT&T;, MCI and others.

But on Sunday, the former state-owned giant will begin feeling the heat. On that day, telephone companies with their own networks will be allowed to offer service.

Avantel recently completed a 3,000-mile fiber-optic “crystal triangle” between major Mexican cities; Alestra, a joint-venture that includes AT&T; Corp., GTE Corp., Spain’s Telefonica Internacional and two Mexican companies, is furiously laying cable. Their short-term goal: to directly hook up big firms that have been the cream of Telmex’s clients.

“Telmex may have a rude awakening,” Szekely said.

Telmex, or Telefonos de Mexico, has long been the company that Mexicans loved to hate. Originally founded by ITT and the Swedish company Ericsson, it was taken over by the government in 1972, at a time when state ownership was viewed as a key to development.

But for years, government investment was minimal. So few new telephones were installed that Mexico had only five lines per 100 inhabitants by 1991, compared with 50 in the United States. Equipment was something out of Jurassic Park.

“Calling between Los Angeles and Mexico six or seven years ago was like talking to the planet Saturn,” Vazquez recalls.

In 1991, in one of Latin America’s biggest privatizations, Telmex was sold to Mexican entrepreneur Carlos Slim of Grupo Carso and two minority partners, St. Louis-based Southwestern Bell and France Telecom.

Since then, Telmex has been transformed.

Millions of new telephone lines have been installed. Copper wires that slowed computer transmissions have been replaced by fiber-optic cable. Symbolically, Telmex’s clunky old switching system--floor-to-ceiling stacks of metal rims with tiny steel arms--was packed off to a museum.

“The old system had a capacity of 10,000 telephone calls. This has the capacity for 100,000,” said Ricardo Rodriguez, director of a Telmex switching center in Mexico City, showing off an AT&T; computer network that resembles a small group of side-by-side refrigerators.

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But despite the changes, Telmex faces stiff competition, analysts say. Among those who could be affected are U.S. investors, who have made Telmex one of the most popular Mexican stocks sold abroad. Long-distance calls represent about half its sales.

Rizwan Ali, a telecommunications analyst at Bear Stearns & Co. in New York, estimates Telmex will lose 35% of the long-distance market. However, even though Telmex’s share of the telephone pie will shrink, the entire pie is growing--so the company may not be badly hit.

“In a nutshell, their revenue will be flat in real terms,” Ali said. “What they have to do to make money is decrease their cost base.”

Telmex’s main problem is people like Hector Aguilera. The Mexico City accountant complains about Telmex’s high prices, charges for calls he never made and telephone lines that fail mid-conversation.

“Telmex’s service isn’t good,” he says. “If another company gives better service, I’ll switch.”

Other people complain of delays in getting their phones fixed or operators with all the charm of Bosnian warlords.

“That’s the problem Telmex faces,” said Ray Liguori, Latin American telecommunications analyst for Merrill Lynch & Co. “They’ve done a terrific job in improving their quality. But the market doesn’t perceive it.”

Telmex, whose stock accounts for about 22% of the variation in the Mexican stock exchange, is listening. In addition to investing $12 billion in the last five years, the company is doing extensive training to emphasize customer service.

Even phone repair workers are getting lessons in how to offer tips and extra services to homeowners.

“Before, they barely said hello to the client,” Vasquez said. “Now we want to have a relationship.”

The company also has sought to preempt its competitors’ price cuts, flooding the airwaves with ads offering 20% or more off for fax users or customers who frequently call long-distance. Corporate discounts are even bigger.

One of Telmex’s biggest advantages may be the ignorance of consumers. Many have wondered whether they’ll have to pay to switch long-distance providers (they won’t), or whether their streets will have to be ripped up if they change companies (they won’t).

“You have to 1), know about the competition and 2), make the move to switch it,” said Sari Mayer, the Latin American telecommunications analyst at Salomon Bros.

“The process might prove to be an impediment.”