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• The threat from China

  24 April 2007 Hits: 2007

  Mexican and regional policymakers are becoming almost obsessed by the threat that China poses to their economies. Mexico is one of the most vulnerable: while Brazil has profited (temporarily?) by selling raw materials, notably soya, to China, Mexico is seeing China force it out of traditional markets and Chinese products flood into its local market  
  
  The bald facts of Mexico's trade with China make for uncomfortable reading. In the first five months of this year, Mexico exported US$232m worth of products to China. It imported US$3.085bn worth of products from the Asian powerhouse.  
  
  China has now replaced Japan as the country with which Mexico has its biggest trade deficit. The worrying point is that the deficit with China increased by 43% in the first five months of this year, compared with the same period of 2002. This is a huge increase, from a reasonable base, in such a short time.  
  
  It is sobering to note that 10 years ago, in the first five months of 1993, Mexico's deficit with China was a mere US$194m.  
  
  Mexican officials point out that the measly US$232m that the country sold in China in the first five months of this year was, in fact, a new record.  
  
  The big worry, however, is the effect China will have on Mexico's position in its key markets, such as the US. There is little doubt that Chinese products, not just manufactures, are undercutting and forcing Mexican products out of the US market.  
  
  Alejandro Moisés Ceja, vice-president responsible for international trade at the Consejo Nacional Agropecuario (CNA), claimed that China posed as great a threat to Mexico's agricultural exports to the US as it does to its manufactured exports.  
  
  To meet the potential threat from China, the Mexican government must, he said, provide incentives to help farmers improve their production quality. Ceja is not crying wolf. Figures from the US Department of Agriculture (USDA) show that food exports from China to the US have been growing fast over recent years.  
  
  This year. Ceja noted that, in the first four months of the year, Chinese food and agricultural exports to the US were equivalent to 17.5% of Mexican food exports to the US. What worries the CNA is that Chinese agricultural exports to the US are growing much faster than Mexican ones. In the first four months, Chinese exports were up by 31%, while Mexican exports were up by 10%.  
  
  There is even some evidence, from the USDA, to suggest that China has pulled ahead of Mexico in markets that Mexico imagined it owned, such as fruit juices.  
  
  Fruit juices. To be fair, some of the problems Mexican producers are facing may be temporary. Last year, Mexico's output of citrus fruit fell by 70% because of the drought. China stepped into the gap in the market. Mexican producers are finding it hard to claim back the market.  
  
  Figures from the USDA show that in the first four months of the year, Chinese exports of fruit juices were US$16m, or double Mexico's. Compared with the first quarter of 2002, China's exports of fruit juices have risen by 94%, while Mexico's have fallen by 31%.  
  
  Meat. Another major worry for Mexican ranchers is the increase in exports of red meat from China. These were up by 146% in the first four months of the year. China's exports of red meat are now half Mexico's in value terms.  
  
  Central America. The Chinese threat to maquiladora (assembly) industries in Central America is so acute that one expert has warned that the industry in the region could be wiped out within two years. This would have major implications, not only for the Central American economies but also for Mexico and the US, which would have to cope with more immigration.  
  
  Pedro Morazán, from a German research insitute, Southwind, argues that the Honduran maquiladora industry, which currently employs 120,000 people (mostly in textiles) could be gone by 2005. He said that the big problem was the ending of the Multifibre Agreement (MFA). Without the MFA, which distorts and shapes the world trade in textiles and clothes, China will be able to flood the world market. The MFA has allowed countries such as Honduras to process US cotton and cloth and to export it back to the US. Such niches will be obliterated. Without the MFA, China's cheap labour will be the decisive factor in the industry.  
  
  What bothers the Central Americans is that the US seems unwilling to let them use the free-trade deal it is negotiating with them, or the Free Trade Area of the Americas agreement, to protect them. The US line is that both those agreements must be on the principles agreed by the World Trade Organization.  
  
  Human rights workers point out that Chinese companies pay textile workers a fraction of what they earn in Central America, and Chinese workers have no rights to organise unions. These advantages have been magnified by huge foreign investment which left China with efficient plants with the capacity to supply a large chunk of the world market.
  

• INDUSTRY PROFILE: Satelites Mexicanos on the brink

  24 April 2007 Hits: 831

  Satélites Mexicanos, another disastrous privatisation, was already tottering before its main shareholder, Loral Space from the US, filed for bankruptcy in mid-July. The other shareholders, the Autrey family and the Mexican government, are mulling over ways of helping the company to survive. The most likely solution is for the government to pick up the bill
  
  Satélites Mexicanos (Satmex) is another example of a privatisation gone wrong. In 1997, the government sold 75% of the state satellite company, Satmex, to a US satellite manufacturer, Loral Space and Communciations, and Principia, essentially a start-up backed by the Autrey family, which had made its name from its eponymous store chain.
  
  The bidders overpaid wildly for Satmex: they offered US$500m, which was double what the government was expecting.
  
  At the time of privatisation, Satmex had a monopoly of the satellite communications business in Mexico and three satellites. Satmex lost its monopoly in 2001 and has been haemorrhaging clients ever since. Now it has 10 other competitors and its market share is, probably, scarcely 50%. The arrival of Intelsat into the North American market is likely to make Satmex's life even more difficult.
  
  The likely result of the problems facing the company is that the Mexican taxpayer will end up bailing out the company. There may be good reasons for doing this, but these reasons, arguably, should have precluded the privatisation.
  
  The main justification for a bailout is that the satellite communication business will remain a lynchpin of the communications industry. Telecoms companies as well as broadcasters depend on satellites. So, long-term, the industry is a strategic one, and one in which Mexico should have a stake.
  
  The Mexican government itself has reserved 7% of Satmex's capacity for its own exclusive use.
  
  The problem is that the telecoms and high tech bust has left the satellite industry with vast overcapacity. Only four orders for commercial satellites have been placed this year. Although satellite manufacturers talk bravely of 300 new satellites being needed by 2007, this forecast seems to be based on some fiercely optimistic views of how the world economy will grow in the meantime.
  
  Current position. Satmex is the classic case of a company operating in a difficult market with weak shareholders and a feeble capital structure. The company's debts are threatening to overwhelm it.
  
  The deeply indebted company has to launch its new satellite, Satmex 6, to generate the revenues it needs to survive. Although the company claims that it has enough cash to see itself through to the launch, outsiders have major doubts.
  
  These doubts were compounded in mid-July when Loral Space announced that it was filing for Chapter 11 bankruptcy in the US. Loral Space has 50% of the shares in Satmex but only 49% of the votes. The other two shareholders are Principia (which has 26% and is linked to the Autrey family) and the Mexican government (25%). The Autrey family made its money in retailing, through Casa Autrey.
  
  Loral. Loral Space applied for Chapter 11 in order to sort out its debts, without creditors complicating matters, following its much trailed decision to sell its crown jewels, its six North American satellites (four of which are operational), to Intelsat, which is now the world's dominant satellite company. Loral says Intesat is paying US$1.1bn in cash. (Intelsat says that it is paying US$1bn.).
  
  The deal will mean that Loral Space will be left with five other satellites, plus its satellite manufacturing business and various other businesses, such as its stake in Satmex.
  
  As part of its deal, Intelsat has ordered a small (US$100m) satellite from Loral. This deal would seem to have sorted out Loral's problems. Its debt was only US$959m.
  
  Loral admitted that it had been overgeared for some time and that it misjudged the effect that the telecoms bust would have on its business. It also tried to integrate vertically, building a substantial stake in Globalstar, one of the main users of satellite communications. This company is emerging from Chapter 11. Loral will have a residual 5% to 6% stake in it.
  
  Sky. Satmex's problems are directly linked to the loss of its major customer, Sky. The media group accounted for 20% of the company's total sales.
  
  As a result of this lost business, Satmex has pruned its overheads. The company has announced plans to lay off 45 staff, 21% of its total headcount.
  
  The company is already having to scrimp and scrape to remain reasonably current on its borrowings. The pressure it is under prompted Standard & Poor's to put the company firmly in the speculative investment category CCC+.
  
  Crunch. The crunch for Satmex comes next year when most of its US$525m debt falls due. It has to repay US$205m in floating rate debt, US$203m in bonds and a good chunk of the US$170m in liabilities it has with the Mexican government. This is a legacy of the company's privatisation in 1997.
  
  Under the terms of the deal, if the company fails to clear the liabilities it has to pay a fine equivalent to a further 10% of the liabilities. With interest payments, the company is due to pay out US$600m.
  
  With one launch. The company does have an escape hatch. It has lined up loans from the US Eximbank and the European export promotion agency, Coface, worth US$226m. This would enable the company to launch Satmex 6 and go some way to generating the revenues it needs to sort out its balance sheet.
  
  Although both export credit agencies have agreed to make the loan, they do not want to be alone in ensuring that Satmex has a future. They said that they would not disburse the loans until the company had clinched a refinancing agreement with its creditors. This was due to happen in July.
  
  The decision by Loral to go into Chapter 11 in the US complicated the relationship with the creditors.
  
  Operations problems. The company has had its share of operational problems. The main one is that its Solidaridad 1 satellite has jumped out of its orbit. This happened in 1999 and meant that the users could not use it.
  
  This problem is why Satmex 6 is so important to the company's future. The US$300m satellite will have a footprint stretching from the US-Canadian border to Chile. The satellite, when it goes up, will account for 60% of Satmex's total sales.
  
  Originally, the satellite should have been launched by the accident-prone Ariadne rocket, in February. The launch date is now scheduled for some time in September. The latest official statement from Satmex is that the satellite will be launched in the second half of this year.
  
  Pressure. In the meantime, the pressure on the company to limp through to the launch means that it has been cutting prices to hang on to business.
  
  This may not be enough. One of the company's key remaining clients is the Mexican government, in its various guises. Until this year, Satmex had a monopoly of the government and state-owned companies satellite communications business.
  
  Not any more. Besides the fed-eral government, state companies such as the Comisión Federal de Electricidad and Petróleos Mexicanos used Satmex for their satellite communications. Satmex has started to lose this business because of the government's new transparent business rules. Under these rules, government contracts cannot be awarded without a public tender.
  
  This requirement has opened the door for rivals such as PanAmSat. At the beginning of this year, PanAmSat landed a contract
  
  Government. If Satmex is to pull through, the Mexican government will have to play a key role. Bancomext, the foreign trade bank, has already offered it US$50m. The government could also rejig the terms under which the US$170m of outstanding liabilities are to be paid.
  
  One idea to be floated was that the government should offer Satmex a tax break equivalent to the amount of its initial overpayment for the company when it was privatised.
  
  This would not cost the government much, since Satmex is unlikely to be generating much in the way of taxable profits in the immediate future. But it would signal that the government was committed to ensuring that the company sur-vived. This would encourage other creditors.

  The postponed launch galvanises competitors

  The delays in the launch of the Satmex 6 satellite is causing major short-term strains on the company's finances. Already, at least US$130m in expected revenues for this year have been foregone
  
  More importantly, the delay has given Satmex's rivals an opening. PanAmSat has picked up the contracts Satmex has lost with DirectTV and Sky. Its business was built around the Mexican broadcasters, Televisa, TV Azteca and Multivisión.
  
  The grisly state of the world economy, and the satellite business in particular, means that the only way satellite operators can make money is by pinching each other's customers. There are 11 companies offering satellite services in the Mexican market.
  
  PanAmSat and Intelsat: the main challenger

  PanAmSat, which is ultimately controlled by General Motors, has a satellite network that covers 98% of the world's population. Its business distributes entertainment and information for cable television systems, TV broadcast affiliates, direct-to-home TV operators, Internet service providers, telecommunications companies and corporations.
  
  PanAmSat was founded in 1984 by Rene Anselmo and became the first private company to provide international satellite services. In 1996 it merged with Hughes Electronics. The company now operates 30 satellites, 23 of which it owns. PanAmSat is 81% owned by Hughes Electronics Corporation.
  
  Intelsat comes from the opposite end of the business spectrum. It was an intergovernmental agency, set up in 1964, the International Telecommunications Satellite Organization, which was privatised in 2001. Intelsat now has 26 satellites (24 wholly-owned and two leased, plus now the others it is getting from Loral). Its business is more tilted towards telecoms and internet backbone services than broadcasting. Intelsat argues that the satellite communications business will benefit from the move to broadband.
  
  Intelsat is, probably, the strongest of the three main satellite companies (the other two being PanAmSat and Loral). In 2002, its sales were US$992m and its net income was US$274m. Its shareholders' equity was US$2.15bn. Even after the Loral deal its debt will not be US$3bn.
  
  Principia: unlucky

  Satmex was closely linked to the the ill-fated Globalstar satellite telecoms service. Indeed, Lauro González, the head of Satmex, was Globalstar's chief executive in Mexico. Globalstar was launched at the peak of the telecoms boom, in the first quarter of 2000.
  
  Globalstar de México's shareholders were Prinicipia, in which the Autrey family and González are the main shareholders, Loral Space and Communications and Air Touch. Globalstar filed for Chapter 11 in 2001.
  
  Principia's other big bet was Optel Communications. This is a data network to link 17 Mexican cities. The company has also branched into the public telephone business, which it claims has a 10% net margin on each call. The key to the business, Optel executives say, is having a big enough callbox network. The most profitable places for public telephones are in popular Mexico City streets: phones here can take M$15,000 in coins each month. Other decent locations are metro stations in Mexico City, hospitals, shopping centres and restaurants. Phones here can take M$2,500 in coins each month.
  
  In Mexico, the former state telecoms company, Teléfonos de México, still has a monopoly over public telephones.