Why Mexicans Don't Drink Molson

by Andrea Mandel-Campbell

  Canbras’s frustrated founders blame the failed enterprise on Bell’s monopoly position back home and a corporate culture that combined the worst of government civil service mentality with unchecked corporate conceit. “They were used to a monopoly environment in Canada where they could demand things and worry about the consequences later, and you can’t get away with that in a foreign country,” says another Canbras co-founder. Bell management mistakenly believed they could parachute in for a few years, flip their investments and make some fast and easy money. “They were never committed to being international,” says the one-time investor. “And as a result, bci doesn’t exist anymore.”

  For telecom analyst Eamon Hoey, no great fan of Bell, the mighty monopoly’s ignominious downfall can be distilled to one thing: arrogance. “They had a false sense of their our own capabilities and a false sense about being able to carry their Canadian experience to these countries, where there is a different culture and different ways of doing things,” he concludes. “What did they know about investing in these countries? Zip, zero. They lacked the experience, and when they saw it was really hard to do, they abandoned ship. It was a lot easier to go back to Canada, throw up their hands and leave shareholders with the brunt of the loss.”

  Still, it’s hard to say who had the last laugh. Vésper, now owned by Brazil’s Embratel, is reportedly doing quite well these days. Before things went sour with Editora Abril, the Civita family had asked Bell to be its strategic partner for its entire cable platform. Bell dragged its feet and eventually turned them down. The Brazilians went with an American partner instead, and Abril, through its cable company, tva, which owns the rights to mtv in Brazil and controls the country’s leading Internet provider, is now Brazil’s second-largest media conglomerate. “If Bell had had a little bit more sensitivity and more competent people, it could have been one of the largest, if not the largest player in Latin America,” says Grine.

  Instead, that title goes to Carlos Slim Helú. Telecom Américas is now a subsidiary of Slim’s América Móvil, the largest wireless carrier in Latin America, with 93.3 million wireless and two million fixed-line subscribers in fourteen countries. In contrast to bci, Slim has followed a very deliberate strategy that combines a long-term approach with opportunistic acquisitions and a policy of complete ownership control. In 2005 América Móvil posted revenues of us$16.4 billion and profits of us$2.8 billion. In 2006 Forbes magazine listed Slim as the world’s third-richest man; his fortune was estimated at us$30 billion.

  DANCING WITH THE DEVIL

  I interviewed Slim when I was a correspondent for the Financial Times in Mexico. It was difficult not to be in awe of a man who commanded so much wealth and power, and yet, although he had his views on how the media should cover his vast holdings, he was surprisingly approachable — one might even say hospitable. In contrast, when people met Daniel Dantas, they came away with an entirely different impression. The founder of an upstart Brazilian asset-management firm, Banco Opportunity, Dantas had the reputation for being ruthlessly brilliant and more than a little scary. Even his fellow Brazilians kept their distance from him. “It only took a few seconds for you to realize that he didn’t build his empire by being nice to people,” says a Canadian businessman familiar with Dantas. “It was the look in his eyes, I can’t even describe it. People were afraid of him.”

  Yet that didn’t seem to stop tiw’s Charles Sirois and his shrewd right-hand man, Bruno Ducharme, from getting into bed with him. Even before tiw (Telesystem International Wireless) teamed up with Opportunity in 1998 to acquire two privatized cellular-phone holdings, the Quebecers had been warned of Dantas’s wily ways. A fellow Canadian businessman who’d met with Dantas, and decided to steer clear of him, recalls warning Ducharme in 1996 to “watch his wallet” when it came to the Brazilian banker. “Ducharme never asked why, and didn’t want to know,” says the businessman.

  Instead, tiw, eager not to miss out on investment opportunities and confident it had found in Dantas someone who shared the same goals and entrepreneurial drive, downplayed the potential risks. To speed things up, it even dispensed with the time-consuming legal formalities of signing a shareholders’ agreement with Dantas. tiw figured it could cover its bases by structuring their joint venture, Telpart, in such a way as to give it strategic influence over the appointment of management and board members, in return for its 49 per cent stake. The rest of the company was divided between Dantas’s Opportunity fund, which held 27 per cent, and several pension funds, with a 24 per cent stake.

  “We trusted Opportunity. We figured they were like us,” says one former tiw executive. “We thought, if we get into a conflict, we could challenge him because we were smart enough to take him on.”

  But they had no idea what they were up against. tiw never anticipated the lengths Dantas was willing to go to secure an advantage, regardless of the agreements he’d made. The banker convinced the pension funds not only to join forces and create a second company, Newtel, which had a majority 51 per cent stake in Telpart, but to give Dantas a 51 per cent stake in the new venture. As a result, Dantas’s fund, with 27 per cent ownership, now indirectly controlled Telpart. tiw verbally agreed to this structure on the condition they sign a formal agreement later ensuring shared control of the mobile operator. That agreement never came about.

  TIW, which had paid some us$380 million for its share in Telpart, quickly lost control over the enterprise. The two sides squared off in an acrimonious power struggle involving phalanxes of lawyers and, by one count, twenty lawsuits.101 Ducharme, perhaps believing he could beat Dantas at his own game, reportedly helped finance lawsuits against the banker by his enemies. tiw descended deeper into the murky underbelly of Latin American magic realism when it recruited Nelson Tanure, the wealthy and well-connected owner of Rio’s second-largest newspaper, to outflank Dantas. Instead, the scheme was exposed when a well-respected journalist, believed to be in Tanure’s pay, was caught writing columns overtly in support of tiw. The discovery set off a massive scandal.

  By 2002 tiw was fed up and sinking under the weight of its disparate holdings, which stretched from China to Romania. Highly leveraged, it was forced into a major restructuring while under bankruptcy protection. Within a year, tiw sold out to Dantas for $70 million, in addition to paying untold legal costs. Says one Canadian veteran of Latin American business: “It was the worst case of being screwed by a partner I have ever seen in my life.” But according to tiw executives, there was little they could have done to avoid the ensuing disaster. While the company has been heavily criticized for failing to sign a shareholders’ agreement, executives argue that legal documents would have meant little in a country where judges can be bought and the rule of law is questionable. “When things start to go sour in real life, if you need to go back to this piece of paper, it’s finished, especially if you are a foreign operator,” says one insider. “The balance of power is what counts.”

  Eduardo Klurfan, the former representative for Scotiabank in Brazil and the ex-president of the Brazil–Canada Chamber of Commerce, has a different take. “It’s not the Brazilian system. The same thing would have happened in Canada if they had done the same stupid thing,” says the Argentine-born banker. “Their problem was, they underestimated the Brazilians and thought themselves more knowledgeable.” It’s a point that TIW executives, in hindsight, acknowledge. “We thought, wrongly, that we could manage any downsides because we were so smart.”

  MY WAY OR THE HIGHWAY

  Like Molson and bci, Alberta’s TransAlta had never set foot outside the heavily regulated confines of the Canadian energy market when it decided to take the plunge into Argentina. In the early 1990s, the land of pampas and gauchos, not unlike TransAlta’s own Alberta, was alive with possibility, racking up double-digit growth under the market-oriented reforms and privatization drive being pushed by the country’s silk-stockinged president, Carlos Menem. In addition to selling off creaking state-owned enterprises, the Argentines were busy building h
ydroelectric dams and generation plants for sale to giddy foreign investors.

  TransAlta, with its Chilean and American partners, dove in, acquiring the nearly completed Hydroeléctrica Piedra del Águila, a massive 1,400-megawatt dam in the southern state of Neuquen. Although the Canadians focused on ensuring that the construction was up to spec, they glossed over crucial elements that they either didn’t understand or failed to anticipate. Despite their technical expertise, they overlooked one of the most fundamental elements of any energy project — they never bothered to check whether they would be able to get their electricity to market. Perhaps used to the reliability of Canada, they assumed there was enough transmission capacity to transport the dam’s electricity to the capital of Buenos Aires, more than a thousand kilometres away. There wasn’t.

  Making matters worse, TransAlta, which was used to the steady, regulated fixed-pricing regime at home, was operating in a highly volatile spot market where prices could change “ten times an hour.” Hindered from reaching the much more lucrative Buenos Aires market, it was forced to sell into the local energy grid, which was already flooded with generating capacity, at a massive differential. Prices were depressed further by the 1994 peso currency crisis in Mexico, which devastated markets throughout the region and caught TransAlta, which was relying on short-term project financing, off guard. When its debt came due, the company was unable to secure new funding to replace it and was forced to pour more of its own money into the project, including into the construction of a new transmission line.

  In 1998, TransAlta finally bowed out, taking a $72 million writedown on the project and selling its 16 per cent stake the following year.

  “Why would you go from being a regulated business to investing $200 million in a country you’ve never been in before, with people you’ve never worked with, in a spot market that should terrify anyone who’s never done it before?” said a person familiar with the project. “They didn’t see the big picture. They came at it with an overconfident ‘We know everything and we don’t need any help, thank you very much’ attitude.”

  What is harder to understand is why TransAlta followed up its Argentine fiasco by moving into Mexico and making many of the same mistakes again. This time, the private power generators being auctioned off by the Mexican government ensured a guaranteed revenue stream. The problem was (and is) that the government had to rely on pemex, the state-run oil monopoly, to supply the gas that TransAlta’s two generating projects would convert into electricity. Not only was there was no infrastructure for getting the gas, but pemex was plagued by gas shortages, prompting the monopoly to play politics with the supply it did have while being forced to import higher-cost fuel from the United States.

  At the same time, TransAlta also ran into multi-million-dollar cost overruns in building the generators. Despite the notorious difficulty in getting just about anything done in Mexico, not to mention its rather militant electricity workers’ union, the company decided to manage the construction and initial start-up largely from Calgary, flying engineers in on shifts instead of basing them on site. Steve Snyder, TransAlta’s chief executive, admits it was perhaps the company’s biggest mistake. “We relied overly heavily on commuting back and forth. Culturally the engineers didn’t want to move and we thought it was good enough to handle that way,” he says. “But you need to be permanently on site to deal with everyday issues and develop government relations. We didn’t understand that the up-front costs of Mexico are higher than elsewhere.”

  To veteran observers, it comes down to a failure to understand that things are different in other countries. All too often, Canadians hold the misguided belief that somehow things will be easier, particularly in developing countries, where they assume that their skills and abilities are superior. “There’s this sense that five of our guys are worth fifty of theirs. They believe the farther away, the easier it is,” says one Canadian executive sent to manage a multi-million-dollar project on his “stomach lining,” as he puts it. “However much you think you need, you should put in double the effort; but they tend to put in half, so it’s out of proportion by a factor of four. What does that do? It sets you up for failure.”

  Unfortunately for TransAlta in Mexico, the unanticipated cost overruns could not be passed on to its customers because its revenues are capped. “They bid into a straitjacket situation,” says a person familiar with the project. “They’re stuck with it for fifteen years. They can’t apply a price increase, and they can’t apply it to new customers. They’re underwater.” Snyder insists the ventures are “successful,” but he is clearly chastened. “It’s still a challenge. Revenue is not what we thought, and costs are higher.”

  When it comes to counselling other companies to go abroad, he is decidedly bearish: “It’s riskier, costly, and if the rewards are relatively sure in your home base, why would you do it?”

  Thierry Vandal, chief executive officer of Hydro-Québec (HQ), needs no convincing when it comes to the pitfalls of international markets. Born in Germany to a French Canadian father who was born in Massachusetts, Vandal switches seamlessly from French to English thanks to having lived all over Canada following his father’s military career. Although he can trace his family’s Québécois roots back to 1680, the fortysomething executive is not cut from the same cloth as the typical hq rank and file, which is perhaps why he firmly believes that the lumbering, politically influenced provincial monopoly doesn’t have the constitution for international business.

  “Trying to do work internationally is a fantastic challenge. You are working with different political rules, different regulatory rules,” explains Vandal. “You figure you do it here, you have to do it there, but you tend to forget some of the reasons you do it successfully here — like the fact that you benefited from tariff barriers that gave you a head start. You figure it’s easy, so you go elsewhere,” he adds. “But international is very different and dangerous in an organization like hq, where you need total discipline in deciding where you put your development dollars. If you have a cultural habit of spending a lot of money, that may make sense in Quebec, but when it comes to the rest of the world, it’s a recipe for disaster.”

  Which is exactly what happened at hq. In 1994, environmental opposition put an end to the company’s proposed Great Whale hydro project and the utility was confronted with the prospect of no new development in the province. Going international seemed like the next logical step and fit in nicely with the separatist Parti Québécois’s bid to assert its independence internationally. Hydro-Québec International (hqi) was formed, becoming “one of the flagships for the state of Quebec,” says Vandal. Politically motivated and buoyed by an unlimited fount of investment dollars, hqi soon had more than two hundred new recruits with no international experience running amok, snapping up deals pell-mell, from Senegal to Vietnam.

  “They spent a huge amount of money travelling all over the world, flying business class and cocktailing around,” says one former hqi employee. “They were all over the map, paying one million here, ten million there. They had no plan, no focus and no strategy. It was disastrous.” The organization invested not only in generation but in energy transmission and distribution while routinely sending unqualified employees with no language skills to manage far-flung assets. “hq is not a world-scale distribution retailer,” admits Vandal, who assumed the company helm in 2005. “When it tried internationally, it failed.”

  HQ’s ignorance of international markets came to the fore in easy-going Australia. The Quebec utility, together with an Australian partner, built a costly underground transmission cable linking the electricity grids of New South Wales with Queensland state. Originally proposed as a private line, hq subsequently applied to the Australian government to regulate the service, but only after it began operating in 2001. The slightly baffled government regulator struggled with the request because, in trying to assess what tariff rates to apply, it determined that the cable should simply “never have been constructed” and therefore
was of questionable value. It compromised by issuing rates based on a significantly cheaper overhead cable, ensuring hq would not see any return on its investment for the next 10 years.

  Not surprisingly, within a year of the 2006 decision, hq sold its stake in the ill-conceived venture. It’s par for the course for hq, which has sold off or exited almost every market it has entered, leaving a trail of bad blood and red ink. “I wouldn’t be surprised if they have lost $200 million to $300 million in the past few years,” says a former employee of hqi, which has been reduced to a shell company and employs perhaps a dozen people.

  It has also been costly for Canadian companies that have entered markets in HQI’s ruinous wake and have struggled not to be tarred with the same brush. “HQI came up with a lot of duds, made commitments it couldn’t deliver on, and left a trail of very bad deals,” says one engineering company executive. “They had too much arrogance. For them, going to another country was like visiting the colonies; they had a ‘we’ll teach you’ attitude.’” The problem was, they’d never had to “sharpen their pencils to compete,” he says. “They had the financial might, but not enough sagesse to compete.”

  That same blunt-edged arrogance also explains how another Quebec-based company, Lassonde Industries, blew its chance to become one of the leading producers of fruit juice in China. The opportunity was practically handed to Canada’s second-largest juice maker on a silver platter. Like many Canadian companies, Lassonde, known for its trademark Rougement apple juice, earns a significant portion of its revenues licensing foreign-owned brands like Allen’s, Tetley and Sun-Maid in Canada, where 90 per cent of its sales originate. It had never ventured far from home when, in 1993, the company was contacted by Gervais Lavoie, a Quebec native who had been living in China on and off since the mid-1970s. A former Maoist turned entrepreneur, Lavoie believed China’s newly emerging consumer class would lap up the opportunity to buy fruit juice, still a relatively unknown product at the time.