U.S. Investors Take Wait-and-See Stance
Businesspeople and investors in the U.S. are enthusiastic yet wary about Mexico as Vicente Fox takes over as president.
Enthusiasm is high because Fox, who started his six-year term Friday, is an international businessman himself. He headed Coca-Cola’s operations in Mexico for many years and has appointed several multinational businesspeople to positions in his government.
Fox sees joint ventures with U.S. and other foreign companies bringing capital and expertise to Mexican industry. He wants to dramatically increase foreign investment in Mexico to help build up the country’s infrastructure and its industries.
“He’s a man of the private sector, who understands what Mexico needs to develop,” says Robert Day, head of TCW Group, the parent of Trust Co. of the West, a Los Angeles-based firm that has major investments in Mexico’s leading companies.
Still, Day and other U.S. managers acknowledge that major institutional investors are not committing funds to Mexico at this time. The investors generally are nervous about world economic conditions and specifically are waiting to see progress on reforms in Mexico.
Big U.S. companies, however, are making moves. Wal-Mart de Mexico, which is 60%-owned by Wal-Mart Stores of the U.S., is expanding its chains of supermarkets, discount centers and restaurants. McDonald’s is opening more outlets in Mexico.
Those consumer-oriented companies see real wages rising and Mexican consumers able to spend a little extra for the first time in years.
Looking ahead, U.S. chemical and oil companies are studying joint ventures with Mexico’s state-owned oil company in anticipation of more friendly rules about foreign investment.
The potential is vast as reforms come to the country of 97 million people with an economy of roughly $450 billion in annual output. That’s 36% of the U.S. population but less than 5% of its economic output.
Mexico’s big problem is that it lacks capital. The small to medium-size companies that form the backbone of Mexico’s economy need equity investments.
“We are very positive that the domestic economy will receive real help, but it is critical that Mexican firms rebuild their finances,” says John Rhoads, a U.S.-born Mexican businessman. Rhoads, a longtime owner of investment firms in Mexico City, is leading an official Council for the Development of Stock Exchanges, trying to raise equity for Mexican companies.
But so far, U.S. pension and mutual funds, with more than $100 billion looking for new ventures, are not investing in Mexico.
The money is waiting to see whether Fox can launch important reforms in Mexico’s tax system and its legal system. Tax collections need reform to give the Mexican government the finances of a modern nation; reform of the legal system is essential for foreign investors to feel secure. Such processes will take years, of course, but big investors want to see Fox’s program achieve initial victories in the Mexican Congress.
Some U.S. investors aren’t waiting, however. James Jones, U.S. ambassador to Mexico from 1993 to ’97 and now head of a Mexico-U.S. business committee in Washington, has helped raise $80 million for one fund of U.S. investments and is just completing a second fund of $200 million.
“So far, we have made investments in some five companies,” Jones reports, including Homex, a home builder in Northern Mexico, Aerobol, a maker of ingredients for household cleaners, and Innopak, which makes plastic packaging for soft drinks.
In addition to capital, the funds supplied professional financial officers and other managers to the Mexican companies.
Jones, who is Washington-based counsel to Manatt, Phelps & Phillips, a Los Angeles law firm, says the family companies weren’t eager to sell part-ownerships, “but with the lack of credit for small business in Mexico, they’re coming to terms with the idea.”
Fundamental reforms of society lie ahead for Mexico. Tax revenue in most countries, for example, equals roughly 20% of the total economy--19% in the U.S. But in Mexico, tax revenue amounts to only 11% of the total economy. This leaves government services permanently underfunded and open to corruption, as when policemen must make a living from payoffs.
It says a lot about the challenge facing the new government that one of the largest U.S. companies in Mexico is Pasadena-based Inter-Con Security Systems, which employs almost 5,000 people in guard work and sophisticated protection services.
Inter-Con uses global positioning satellite technology to track trucks moving with freight or cars moving with executives and diplomats. “If something happens, we can disable a vehicle remotely and hold it until police or our people arrive,” says Enrique Hernandez Jr., Inter-Con’s president.
But it also says a lot about the development of business ties between Mexico and the U.S. that Hernandez’s company originated in the 1968 Mexico City Olympics, when Enrique “Hank” Hernandez, a lieutenant in the Los Angeles Police Department, was dispatched to help Mexico set up security for the world’s athletes.
The experience led the elder Hernandez to found Inter-Con, which his sons have built into a firm with more than 20,000 employees guarding businesses and embassies around the world.
As Mexico develops a modern economy and society, opportunity will increase for business and investment from the U.S., Canada, Europe and Asia. Mexico’s railroads already have improved, thanks to joint ventures with the Kansas City Southern and Union Pacific of the U.S.
Potential investment is available. “There is about $134 billion in private-equity funds looking for opportunities” around the world, says Alex Cappello, chairman of Cappello Group, a Santa Monica investment banking firm. Cappello has placed investments in Unefon, a wireless communications company in Mexico, and in Grupo Elektra, a chain of electric-appliance stores in Mexico and Latin America.
Cappello feels that if the Fox government can demonstrate progress on reforms, Mexico could become a magnet for such funds.
Others take a positive view also. “The Fox government is not a revolution but a continuation of reforms begun by his predecessors,” notes economist Abel Beltran del Rio of Ciemex-WEFA, a research firm based in Philadelphia.
The sense as Fox takes office is that a country of 97 million people, most of them young, is going to make progress. And that’s making Mexico’s neighbors enthusiastic.
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Building Up
Foreign direct investments in Mexico’s industry, from U.S., European and Asian companies building factories, stores, communication lines and railroads, have grown in recent years. Figures show totals in billions for direct investment.
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2000 (estimated): $12.1 billion
Source: Ciemex-WEFA Research
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James Flanigan can be reached at jim.flanigan@latimes.com.
