January 1999

Out Of Gas Or Just Idling?
Mexico's Telecom Infrastructure Race

BY CARLYN TAYLOR

Mexico is in a race. It must improve its telecom infrastructure to remain competitive in the increasingly global and information-oriented marketplace. Mexico knows the only way to achieve this ambitious goal is through liberalization and foreign investment. Thus far, the country has made all the right moves, from privatizing Telmex in 1989 to signing the WTO Agreement in 1998, which eased restrictions on foreign ownership of Mexican telecom systems. In addition, Mexico initiated an FCC-style spectrum auction program in late 1997.

Unfortunately, the recent worldwide economic crisis has threatened to push Mexico out of this race and into a pit stop due to a lack of fuel. Foreign investment, once pouring into Latin America by the billions, has all but dried up since early August. Even the most promising opportunities have been put aside as investors analyze their existing exposure and rethink their future investment plans. Unless the pipeline is quickly re-opened and foreign capital once again begins to flow into the Mexican telecom market, Mexico's efforts to build its telecom infrastructure could be seriously impeded.

Fortunately for Mexico, savvy investors are likely to recognize the numerous strengths of the Mexican telecom market and the unique opportunity created by financial investors' overreaction to the Russian crisis. These strengths and opportunities - discussed briefly in the following sections - are what will lead investors to re-open the pipeline to Mexico and continue fueling the development of Mexico's telecom infrastructure.

Low Teledensity
There are approximately 92 million people in Mexico, with less than 10 phone lines per 100 inhabitants. For the sake of comparison, the majority of residences own televisions and other electronic devices. Telmex's inability to provide vast areas of the country with basic telephone service has resulted in huge pent-up demand.

Customer Behavior
Mexico generates above-average long distance usage due to its close proximity to and high volume of trade with the United States. Evidence of this demand can be seen in the popularity of wireless phones in Mexico, a direct result of the high cost and long wait times to get landline phones installed. Wireless local loop allows companies to provide the local service that customers require more quickly and at a lower cost than traditional wired service.

WTO Agreement
As part of the WTO Agreement, foreign investors can now own up to 100 percent of cellular services and 49 percent of other services.

Political Stability
Mexico has enjoyed a stable political environment in recent years, especially when compared with other Latin American countries. Its proximity and strategic importance to the United States will continue to contribute to a more stable economic and political environment.

NAFTA
Although still part of Latin America, Mexico's economic condition is now more strongly tied to the United States. Numerous multinationals, especially manufacturers, have established facilities in Mexico, and this is contributing to a growing demand for modern telecommunications services.

CONCLUSIONS
With the above political and economic factors in place, Mexico's low teledensity and high demand for service provide a clear opportunity. The country as a whole stands to benefit from the latest telecom technologies as companies install new infrastructure.

The question, therefore, is not if foreign investment will return, but when foreign investment will return. The confluence of an under-served market, favorable regulatory conditions, and technological advances which provide low-cost infrastructure choices make investment in the Mexican telecom market hard to resist. Mexico's telecom infrastructure race is only idling, waiting for financial market psychology to turn and for renewed foreign investment to fuel its completion.

Carlyn R. Taylor, CPA, is a partner in the PricewaterhouseCoopers Telecommunications Financial Advisory Services Practice. Based in Los Angeles, Carlyn specializes in litigation, strategy, and corporate restructuring consulting for the telecom industry. PricewaterhouseCoopers, formed by the merger of Price Waterhouse and Coopers & Lybrand, provides a full range of business advisory services to leading global, national, and local companies and to public institutions. For more information, please visit their Web site at www.pwcglobal.com.