Bloomberg News

China Said to Discuss Funding for $750 Million Mexico Network

April 09, 2014

America Movil SAB Telcel Store

Customers look at mobile phones on display at an America Movil SAB Telcel store in Mexico City. Photographer: Susana Gonzalez/Bloomberg

Chinese officials have met with the Mexican government to offer funding for two telecommunications networks the Latin American country is planning to build, people with knowledge of the matter said.

The networks, estimated by the government to cost about $750 million, are meant to reach rural areas of Mexico where Carlos Slim’s America Movil SAB is often the sole phone provider. If Mexico accepts the loans, it would probably use equipment from Shenzhen, China-based Huawei Technologies Co. as a result, said two of the people, who asked not to be identified because the discussions are private.

China Development Bank, which awards competitive low-interest loans as part of China’s push to encourage domestic companies to go abroad, is in discussions to provide the funding, said two of the people. Other state Chinese banks could participate in the deal, one of the people said.

A deal would help China expand its influence in Latin America, where Huawei has been a supplier to companies such as America Movil and Telefonica SA. Mexico would get a boost in its plan to create more competition against America Movil, the nation’s dominant phone company.

A press official for the Communications and Transportation Ministry declined to comment. Xu Fei, a spokesman for China Development Bank, didn’t answer calls to his mobile phone and calls to the bank’s publicity department weren’t answered.

While Mexican President Enrique Pena Nieto’s administration hasn’t disclosed talks with Chinese officials about the networks, it has embraced the idea of working with the Asian nation.

‘Huge Potential’

“There’s a huge potential to generate more investment, more jobs, if Mexico succeeds in attracting Chinese capital,” Finance Minister Luis Videgaray said in a March 20 interview when asked about talks with China on telecommunications networks. “We see a positive trend and growing Chinese investment in Mexico.”

Videgaray declined to talk about specific projects and wouldn’t confirm or deny the talks with China on telecommunications.

The government is also talking to groups from other countries and may choose not to work with the Chinese, one of the people said. The planned networks, which seek to reach rural areas where it has been unprofitable to operate, will begin installation by the end of this year and be fully operational by 2018.

The networks include a web of fiber-optic threads crisscrossing the country to haul data across long distances and wireless spectrum that would be sold on a wholesale basis to mobile-phone companies that need capacity.

‘Important’ Investment

“We’re meeting with operators, funding groups and consultants to determine what the best business model is for the wireless network as well as the backbone one,” Mexico’s Deputy Communications Minister Jose Ignacio Peralta told reporters on March 24. “Definitely, we think there must be an important private capital investment, from national or international groups.”

China Development Bank has experience investing in the telecommunications sector in Mexico. In 2009, it loaned billionaire Slim’s America Movil (AMXL)$1 billion to upgrade its mobile network. At the time, Chief Financial Officer Carlos Garcia Moreno said it received “very good financing.” The credit line was used to refinance purchases of wireless-network equipment from Huawei.

NII Holdings Inc. (NIHD:US)’s Mexico unit also received a $375-million credit line from the bank in 2011. The loan was expressly for the purchase of Huawei products.

Irking U.S.?

The relationship between Chinese lenders and Huawei has put pressure on rivals, such as Paris-based Alcatel-Lucent SA (ALU), Ericsson AB and Nokia Oyj (NOK1V), which also compete for hardware business and have worked in tandem with their own nations’ export banks.

Huawei, which didn’t win its first contract outside China until 1997, reported 239 billion yuan ($38.6 billion) in sales in 2013, an 8.6 percent increase from the year before.

“Our customers choose to partner with us purely based on commercial reasons,” Scott Sykes, a spokesman for Huawei, said in an e-mail. Sykes declined to comment on speculation about Huawei’s plans in Mexico.

A deal with China could irk Mexico’s northern neighbor. Huawei has been defending itself against U.S. lawmakers’ assertions that its equipment could be used for spying. SoftBank Corp. and Sprint Corp. told U.S. lawmakers last year they wouldn’t integrate equipment from the Chinese company into Sprint’s network.

‘Great Importance’

“The Mexican government will have to say, here’s the increase in risk, here’s the savings -- what’s the trade-off?,” James Lewis, a senior fellow at the Center for Strategic and International Studies in Washington, said in a phone interview.

Mexico estimates its new fiber-optic network will earn a return of about $12 billion in five years, based on the positive economic growth in areas that broadband didn’t reach before.

The government’s cost estimates of about $15,000 per kilometer of fiber installed don’t include the equipment needed to offer services to the final user, just the deployment of the network and the access infrastructure.

Large infrastructure projects will need outside help, said Alfredo del Mazo, head of Mexican development bank Banobras. He said he didn’t have information regarding talks with Chinese officials about the networks.

“Collaboration with a country like China is of great importance to Mexico to be able to carry out large projects,” he said.

To contact the reporter on this story: Patricia Laya in Mexico City at playa2@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net Crayton Harrison, John Lear


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