Jaime Chico Pardo: Telmex's CEO talks straight about foreign ownership, the WTO and competition.

Telefonos de Mexico (Telmex), Latin America's largest telecom operator, is simultaneously loved and hated. Forbes magazine called Telmex the No. 1 telecom in the world in 2001, and the company's stock is a constant favorite among Latin American market analysts. Meanwhile, competitors, the U.S. government, and Mexico's own Federal Competition Commission (CFC) describe Telmex as a behemoth monopoly that takes advantage of weak government regulations to maintain its control of the nation's telecom industry.

While the big name, and big owner, behind Telmex is Chairman Carlos Slim Helu, the man controlling the company's day-to-day operations and successes is CEO Jaime Chico Pardo. The successful spin off of America Movil, now Latin America's No. 1 mobile telecommunications concern, and a 100% increase in earnings over three years, are among his accomplishments.

Chico answered a call from BUSINESS MEXICO to discuss where Telmex is, and where it's headed.

What is Telmex doing to develop Mexico's relatively low 14% fixed-line telephone penetration?

I think you have to look at that figure in different ways. If you look at fixed-line penetration, it's 15% today. If you look at fixed plus data-line equivalents, then you're probably at 18%. If you look at fixed-data equivalents and wireless, you would probably be talking of a significantly higher figure, probably 35% to 40%.

At the end of the day, the challenge we have is that the number of customers that can pay for telecommunications services in Mexico is limited. There are 10 million people registered with social security and 2 million more for people who don't have a permanent job. Twelve million registered people gives you an idea of how many people have regular salaries and how many people can pay for services like telecom. So the market, even though it is big in terms of numbers, is very small in terms of the ability of people to pay for services today. As we have economic recovery and sustained economic growth, we are looking at a market that has great economic potential, but that has to happen first. So what we have done is to say, how can we adapt our services so that more people take advantage of them? The first thing we did many years ago was to introduce pre-paid wireless services, by virtue of which we were able to bring into the cellular network customers that do not necessarily have to make a phone call to have a cellular phone. Through calling-party-pays and pre-paid service, they get the usage of a handset for a very minimal amount of money per month. We are doing exactly the same now in the fixed-line business. We have just introduced the pre-paid fixed-line service, by virtue of which a customer without having to pay a fixed rent can have the use of a fixed-line phone in their house. So they will only pay as they use the services with the cards that they buy.

Given the lack of investment in telecommunications infrastructure in rural Mexico, do you believe foreign ownership limits should be lifted for fixed-line telecommunications companies? Will it ever happen?

I think it will eventually happen. Today, from my perspective in Telmex, I don't think the ownership of capital in companies in the telecom business is relevant, because it's a fact that most of our competitors are foreigners. So we are confronted with that. The telecom world is a globalized world. We don't see any problem or disadvantage in competing with foreign companies. But we have asked that this be made transparent, that rules be established so everyone can appraise them. And the other thing that I think will be relevant going long-term, is that there is reciprocity in these companies' countries of origin, so that we as Mexicans have the ability to participate in other markets, just as these companies come into our own market.

Carlos Slim in a recent meeting said that he's against the proposal being discussed in Congress to force operators that have more than a 30% stake in the market to rent their infrastructure to competitors at cost. Will this go through, and if it does, how much will it affect Telmex? Today what we have is a proposal that is being discussed and reviewed in Congress. So I'm still hopeful that this discussion and the intent to have a consensual proposal will make it better over time. I think our point of view is very precise. What we want is a modern telecommunications bill that proposes more investment, more competition and a modem approach to regulation. Why? Because Mexico needs more investment in infrastructure. Mexico needs more competition. We live in a global world, but why should we have a law based on experiences that have not worked in other countries? Why should the failures of other countries become bills in this country? Rather, we need to look forward, we need to have a vision of our own country and we need to have a modem law.

Do you think this proposal would tie Telmex's hands?

In its current draft, yes. The fact that the current draft states that a 30% market share is considered dominant is totally absurd. The fact that you need to have a measure at all in this world in which you have global companies is absurd. I think regulators' concern should not be the size of the company, but the effect of any one company on the customers. Secondly, as a Mexican, one would hope to have big companies competing globally, and not miniature companies attempting to compete.

What innovations is Telmex currently offering the business community?

What we are trying to do is to make sure we better understand the technology evolution that is taking place in the telecom world, and by virtue of this, to apply it in a different form in our country than it is applied in other countries. So our challenge is how to communicate with our customers so they have the best applications of the technology that we use, and secondly, to make sure that we do not confuse them with technology. Rather, that we take care of the technology in order to provide the services and products that they need. That applies to all types of markets. Not only to corporate markets, but also to the residential markets in which the challenge is how to use technology to better serve their telecommunication needs.

You have pledged that Telmex will not raise its prices in 2002, and have said that this loss, accounting for inflation, will be offset by improvements in worker efficiency. How is this progressing, and will Telmex's pricing freeze be extended? Very well. The potential to improve efficiency is always there. We are finding that we can improve efficiency in our workforce by introducing new technology, better working practices and better training. So we continue moving in that direction, and it's a constant dialogue with all our workers. This company has invested a lot in hardware, but we have also invested a lot in human capital. So the fact that we have a very well-trained workforce permits us to expect increased efficiencies over time. If we have a stable economy--low levels of inflation and sustained economic growth--we don't see price increases as a policy that would be relevant in the ongoing future. Assuming that scenario, what's important is increased efficiencies and increased volumes, so that we can mai ntain current operating margins.

How is Telmex participating in the e-Mexico project?

We have our own project that started about 18 months ago, which is very ambitious. The first stage is due to be completed in December of this year, which is to provide broadband connectivity in 2,450 municipalities. We are on target, and we are doing this with different technologies, like DSL (Digital Subscriber Line) and satellite. We are going ahead very fast on this. After December, we will start a new stage. But our intent today is to evolve our network so it provides voice as well as broadband connectivity. We believe in a world in which the network has to be able to provide multimedia. Even in small towns and rural areas the need to have broadband connectivity for Internet access is a must in the future. So we are committed to it. We will be there by the end of the year. We have a very modern network. We have invested in this company for the last 12 years, and the result is that we can sometimes provide broadband access much more efficiently than bigger U.S. companies. Our loops are shorter, our network is more modern and we are introducing new technology faster.

High-speed Internet connection services have yet to take off in Mexico. Why?

What is essential is to have broadband connectivity nationwide. We need to make sure that customers have access to this. Today we have close to 200 cities in which you have DSL connectivity, and we're moving fast in providing this. As we have infrastructure, the need to have applications and services becomes essential. That's where we're inviting application service providers to be the integrators of this content, so that our customers can use it. Broadband is not just for fast Internet access, or for being able to check your email faster. We need to develop a content strategy that will make users much more at ease with broadband connectivity. We're working on that.

So content is the answer?

Absolutely. The main thing is, let's provide what they want. If you provide content that is of very little use, or you make it very complicated for customers to use, you are not meeting their needs. So we are doing a study right now to try to answer that in our market. What is it that Mexicans want to have access to on the Internet? Is it radio? Is it games? Is it a combination of various things? Once we have that answer, we're going to start piloting, probably in the fourth quarter of this year. The date is established for a pilot test in certain areas of Mexico, where different content will be provided over broadband Internet access.

Where do you see U.S. telecom stocks going over the next Few months?

That's very difficult to answer. We have done better than the average in part because even though we make mistakes, the mistakes we make are smaller than the ones some of our competitors have made. Our bets have been smaller than theirs. Since we came into this company, the forefront of our policy has been to manage the company conservatively. Our balance sheet is very strong, and this is no coincidence. We told the investors when we arrived, we are not going to pay big dividends, we are not going to leverage extremely, and we are going to be wise in the use of cash flow. And we have done that.

And we make investments, bets and business judgements that we believe are manageable by Telmex even if they fail. I think that has helped us tremendously. In Europe we have seen people paying enormous amounts of money for frequencies. You see other companies attempting to acquire huge companies for exorbitant prices. We have not done those things, and we hope we will not make those mistakes. In managing this company as a business where shareholders are the most important, you must remember that this company is quite unique in the sense that the principal shareholder is the chairman of the company. He makes sure that shareholder interests are well taken care of because he is one of the principal shareholders.

As the telecom world develops, things will not be as obscure as they are now. Opportunities will be there. The Internet phenomenon is not a passing one, but is a major transformation of the world in which we live. The applications that were made in the past were perhaps not the correct commercial applications. But I believe that this is a major change and that the telecom business is right at the heart of it.

There are many investment opportunities. You can see it today in the United States and other parts of the world. What are the ones that should be of interest to a company like Telmex? That's what we keep on looking at and analyzing. Which would increase the market value of this company? Those are the critical questions.

What developments can we expect from Telmex over the next 18 months?

We are trying to convey to our customers, particularly our corporate customers, that we are the best example of technology use. We try to use our technology in-house before we submit it to our customers. That's the best way to approach the changes that are happening.

Changes in technology that have occurred are going to impact the businesses and lives of many people in the years to come. Business will become much more efficient by virtue of digitization and good telecom networks. So we are providing those. The way in which we do business with our suppliers is as a marketplace, and that marketplace has been in operation for two years. We are allowing our customers to use that marketplace. We are allowing our suppliers to interact between each other. That is a major change in technology. That has changed how business procurement is done in this country. As a result, efficiencies in this company are increasing every year. So at the end of the day, be it the corporate customer, be it the residential housewife, we want to see ourselves as a provider of technology that will make for a positive change in the lives of our customers.

Is Telmex experiencing any problem in participating in the U.S. telecommunications market?

We are having fewer problems than we used to. Years ago, we had a problem because we were not allowed to enter the long-distance market in the United States. Today that isn't an issue because the U.S. long-distance market is simply not a good business to be in. But we are exploring other opportunities. I think the telecom market has provided opportunities for any participant that has the cash and the experience to operate well in any one country. So I think investment is more open today throughout the world than it was several years ago.

What do you foresee regarding the United States' threat to take Mexico to a World Trade Organization (WTO) dispute resolution panel in order to force Mexico to further open its telecom market to foreign competition?

Globalization entails the need to have discussion among countries over relevant trade issues, and telecom is a vital industry in today's world. We are not alone in the sense that the same dispute exists between the United States and Japan, and the United States and South Africa, and other countries. So it's something that I believe is constantly on the U.S. agenda. What we have said several times is that, we are more than open to support the country in dispute resolutions by providing information. We believe that the Mexican market is one of the most open markets in the telecom world. It is not only us saying it, it's by looking at the figures.

But isn't it about how the information is used once you provide it?

How that information is presented and the strength of competitors' lobbying efforts is important. But I think we are subject to a profound analysis. I think we, as any other country, always have the chance to improve. But I think Mexico has done great in the opening of its telecom markets, and the idea of being subject to an analysis of experienced people or professionals will do us better than worse. Our rules for foreign investment are better than they are in some other countries in the world. The fact that our competitors today have more than 30% of market over a shorter period of time than in any other country is another proof. So I think profound analysis will do better to clear up opinion in many of these quarters.

In May, the Supreme Court ratified the Federal Competition Commission's (CFC) ruling that Telmex is a monopoly in five different markets. Is Telmex being punished for its success?

I think there may be some authorities that think like that. But they are short-sighted and don't necessarily represent the majority. Fortunately, what we have in this country is a very different country than what we had years ago. We have the legislature, the judiciary and the executive areas of government. The virtue of this is that you get a fair chance to express your opinion. Today in the long distance market, we have lost more than 30%. But more importantly, in north-south traffic between the United States and Mexico we are No. 3 behind AT&T. We cannot be dominant when those conditions prevail. And again we should not be dominant, just for the sake of our size, but for the attitude of the company in those markets. You have the same example in the United States. Mergers and acquisitions happen every other day. Some of the biggest, most competitive companies in the world have been created by allowing this to happen. But that has not been prevented in the United States. Neither has it been prevented in the European Union. What you do in forward-looking regulation is make sure that those companies treat the customer right. So you establish a series of things that make sure that as an authority you supervise their behavior within the markets. And that's what we're saying. We should not be penalized for being big. We should not be penalized for being successful. But you should be keeping a strict eye on us to make sure that we comply with our social and community regulations in our country.

James Blears is a Mexico City-based freelance writer and a correspondent for Standard Radio News in Mexico.