Telecoms In Mexico: a growth market for Chinese investors

Traditionally, the private sector has not played a key role in the development of the telecommunications sector in Latin America. That is now changing. While state-owned enterprises once dominated the telecommunications market, private companies are now stepping in to fuel the further development and growth of this vital sector. Driven in large part by the forces of modern economic development and Chinese investments, Mexico has quickly become an example of the positive impact that privatization can have on a specific industry and a local economy.

The telecommunications market in Mexico is dynamic. Despite the crisis that has recently been experienced by the global economy, the sector has continued to grow and is currently undergoing a major transformation. This is due largely to the introduction of new technologies that enable the provision of integrated voice and data services to a growing number of homes and businesses across the country. Also, a new optic fibre service has just opened which, by size and coverage, is one of the largest in the country.

China’s impact

The telecommunications sector is experiencing rapid and robust growth throughout Latin America. According to Business Monitor International, the total value of spending on information and communications technology products and services in Latin America is expected to grow more than 35% by 2013, from US$48 billion this year to US$65 billion. This growth is the direct result of China’s continuous search for new investment partners in Latin America. China is now the most important investor in Mexico among the countries of the Asia-Pacific zone. Although China initially focused on natural resources, its interests have now grown to include other sectors such as telecommunications.

China’s biggest telecommunications companies are now exporting their products and services to Mexico and other countries in the region. The Chinese are effective competitors. They offer good products and services at low cost. Consider the case of ZTE. This Chinese company focuses on providing technology and solutions for the telecommunications sector. ZTE has set its sights on Mexico. Although other countries may be more technologically advanced, Mexico has come out on top with a focus on expanded services. ZTE is taking advantage, obtaining support through contracts and partnerships with three of the largest providers of fixed line and wireless telephony and data transmission throughout the country – Telmex, America Movil and Telefonica.

Exploring other opportunities

The opportunities in Mexico will increase in the coming years, with new projects expected in the broadband and mobile telephone markets. At present, a sizeable percentage of Mexico’s population lacks access to either of these services. However, this is changing. Mexico’s regulatory authority has published data indicating that the country had nearly 28.4 million internet users at the end of 2009, a figure that is equivalent to 26.4% of the population. It is expected that this number will continue to grow. Indeed, market observers predict that the number of users will surpass 42 million by the end of 2014. Much of this growth will be driven by an increasing number of broadband subscribers in the market. That is the reason why ZTE has become a major ally of the local government in Mexico City.

These new developments will eventually open the door to providers of telecommunications solutions, both in optical and mobile networks. The Mexican government is currently enacting new legislation to allow triple play service (high-speed internet access, television, and telephone over a single broadband connection). New operators will shake up the market, stimulating competition and lowering prices. Mexican regulators are also expected to issue additional 3G regulations, as well as mobile reseller licences, before the end of this year. They also continue to examine the possibility for 4G services, which will further open the mobile market. Furthermore there is already a technology called WiMAX (worldwide interoperability for microwave access) which allows wireless access to broadband Internet. It is noteworthy that WiMAX is a platform unlike WiFi; it reaches for a distance of 50 kilometres, which helps digital city projects to reach metropolitan areas.

Currently, the telecommunications sector is regulated by the Secretariat of Communication and Transportation (Secretaría de Comunicaciones y Transportes) and by the Federal Telecommunications Commission (Comisión Federal de Telecomunicaciones).

The Federal Telecommunication Law of Mexico provides the legal framework for the regulation of telecommunications activities. Although the regulation is federal, local governments can provide infrastructure, tax credits, or simply guide foreign companies in the process of establishing their investments. Mexican law allows up to 49% foreign participation in telecommunications networks and services with the approval of the National Foreign Investment Commission. The activities to which this limit applies are the use of radio/electromagnetic spectrum, the installation and operation of public telecommunications networks, the occupation of positions in space by satellites and the emission and reception of signals from foreign satellites. The restriction on foreign investment does not apply to cellular telephone operations.

Low market penetration

Now is a good time to invest in Mexico. The country enjoys a strategic geographical position, natural wealth, and the advantage of being a youthful country. Furthermore, the continuous growth of the telecommunications sector makes Mexico a land open to international markets. Its economic and financial stability allows it to be arguably one of the best destinations for international investment. The entry of Chinese companies like ZTE into Mexico will only boost business opportunities throughout the country. At present, Mexico’s rural areas offer great growth potential, where there is little if any market penetration for telecommunications services. The country’s telecommunications market offers many investment opportunities in a medium-risk environment. The rapid penetration into this market by Chinese companies only proves that Latin America continues to offer significant opportunities for growth.

Marta Colomar and Ricardo Ortiz are associate attorneys at Diaz Reus & Targ