One of the most remarkable features of Grupo Cydsa is how much it has diversified its activities. What is the philosophy and the final goal behind this strategy?
Cydsa followed a development model very similar to the one that prevailed in Mexico until 15 years ago: based on an import substitution strategy, manufacturing in Mexico products that were previously imported. That is how we started in textiles and the rest of the business areas Cydsa is in, which are basically four. The number one in importance is chemicals and plastics, where we have some products that can be considered commodities. We are the market leaders by far when it comes to edible salt, but we also use it for our the production of chlorine and caustic soda. We manufacture PVC resins and make pipes and fittings with them. In partnership with Bayer, we produce TDI a product that is used for the manufacturing of foam products. Also, in partnership with an American company, Honeywell (previously Allied Signal), we manufacture refrigerant gases which are used for air-conditioning and refrigeration. Our number two business area is textiles. There we have our initial product, rayon, and have diversified into acrylic fibers, from which we make yarns and finished textile products such as blankets and sweaters. Our third business area is Flexible Packaging, where we offer a plain film, bi-oriented polypropylene, and also print and laminate flexible packaging for food and pharmaceutical products. The fourth and most exciting line of business is in Environmental Services. We are leaders in Mexico when it comes to waste water treatment plants both for municipal and industrial purposes, a field that is going to be growing enormously in the next few years. Indeed, as soon as politics are out of the way we will have a fantastic market opening up, because there are quite a few water treatment plants that need to be built in Mexico in order to clean and recycle waters.
You started as a textile company. How did all the diversifying process start?
We first started producing cellophane for packaging operations because it used the same raw material as rayon, our original product. Then we built a plant for chlorine and caustic soda, which made us enter the chemical business. Later on, Pemex sold us a company that enabled us to manufacture salt and to expand the chlorine and caustic soda production and B.F. Goodrich sold us a PVC resin manufacturing plant, while Bayer and Allied Signal asked us if we wanted to be their partners in Mexico for the production of TDI and Refrigerant gases, respectively. So you can see that little by little the chemical business started being very important to us. At the same time, we continued diversifying and expanding in textiles.
According to your experience, what are the requirements a company needs to succeed when trying to diversify its activities?
Management. Cydsa has traditionally had a very good and solid management, implementing Best Practices and Continuous Improvement programs that make our manufacturing operations more efficient and competitive every year.
You have been awarded with the ISO 9000 certificate. Is it the feature that justifies your products' quality?
There is always room for improvement, but as I told you, one of the things that distinguishes Cydsa is excellence in manufacturing. We have been awarded very prestigious prizes like the Shingo Award, which we have won five times already. We have also been the recipients of the Mexican National Quality Prize and, of course, of all the ISO certificates.
What has been the contribution of your partners? Are you still ambitioning more join ventures in the years to come?
Our partners have contributed technology and capital. If we diversify any further, it will likely be with partners, as we don't want to go it alone all the way any more.
What was the reason for CYDSA to go public in 1973 if you already had the technology and capital suppliers?
We had partners for only two of our business units out of 18 we have in total. So, we needed to raise equity capital for the rest of our business units where we didn't have partners.
In a country where pollution is a matter of concern and most of its sewage water is not being treated, why did you decide to make your entrance into the water treatment business?
In 1956, the municipality of Monterrey told us that they could no longer supply us with any water, because of the perennial shortage it faces, but proposed to us to sell us sewage water instead. So, we were forced to treat water for our own industrial purposes. Later on, in 1992, we established a business unit to pursue opportunities in this field. This unit represents a very small part of what Cydsa is today, but it is growing and it has an enormous future in Mexico. For example, the waste water treatment plants in Mexico City have been blocked by politics. At stake is a whopping 2 billion gallons per day (80 cubic meters per second) of sewage water that needs to be treated, twice as much as in New York City, and the same is true, although in lesser quantities, for Guadalajara and other cities in the country. We hope that the projects in question will become a reality, next year, once a new administration and a new set of political forces are in place.
Once this political resistance is removed, what will be your participation in the new scenario?
First of all, every project will be subject to bidding and we will participate in the process. We are very competitive, so we are hopeful of winning some of the plants that we will bid for. In Mexico City alone, because of its huge size, there will be three plants and we hope to win at least one of them. As an example of how competitive we are, we recently won four out of five waste water treatment plants that were put out to bidding by Pemex for its refineries.
The US is today your mayor export market. Did it use to be the same before the NAFTA agreement was signed? To what extent have you benefited from this treaty?
It has only been recently that the U.S. became our most important market. Up until five years ago we exported more to South and Central America than we did to the U.S. One of the reasons was that, prior to NAFTA, we could not export textile products to the U.S. market, because of high duties and quotas imposed on Mexico. Thanks to NAFTA, we have been able to export yarns, sweaters and home textile products to the United States. Incidentally, this has been a win-win situation for both countries. Before NAFTA, the U.S. used to import ready-to-wear apparel goods from Asia. Now, a great deal of manufacturing takes place in the U.S. and it is just shipped south of the border for some finishing, labor-intensive operations, but 80% of the value stays in the U.S. Likewise for Mexico: having no duties or quotas, it has become the most important supplier of textile products for the U.S. market, overtaking China. So, in this respect, what is stated on the front page of one of the editions of the Far Eastern Economic Review, "Adios Asia, Hola Mexico," has come to be true. | A free trade agreement with the Northern Triangle of Central America is about to be signed and there are similar negotiations underway with Brazil and other Southern American countries. What will be the impact of those agreements on your southern operations?
Brazil is the most difficult country for us in South America, as it is the only country that is not in favor of a Free Trade Agreement with Mexico. But look at the map: half of South America is labeled "Brazil." The agreement that is being negotiated with Brazil is limited to certain products.
Are you afraid of competition coming from Brazil?
No, it is the other way around. I think Brazil is afraid of competition coming from Mexico. Mexico in 1999 exported alone more than was exported in the same period by most South American countries combined, more than twice as much as Brazil, even though we are not as big as they are. As I said before, Brazilians are not in favor of a Free Trade Agreement with Mexico, and they dominate Mercosur. So, if Brazil does not want to do it, neither can Argentina, Paraguay or Uruguay. We have an FTA with Chile, but it is a relatively small country. We also have FTAs with Colombia, Venezuela, Ecuador, Bolivia and most Central American countries.
What do you think is going to happen when China enters the WTO?
We are very concerned about the Chinese. We used to export a lot of acrylic fiber to China, but are now limiting our exports because we don't want to depend on that market. China is and has always been unpredictable. Overnight, they can close the market, without warning, and create a big inventory problem for us. We don't know how they are going to behave as part of the WTO, but so far they have been unreliable when it comes to imports into their huge country. On the other hand, China is a huge market and we want to establish clear rules to trade with them.
In chemicals, what is the major market you are currently targeting?
Our major markets are in the Americas, North, Central and South. The only product that we can really export in significant amounts is PVC resins. We ship them to Asia, but it is not very easy to compete with Asian producers, given that the distances are huge and that there are no FTAs signed with any Asian countries. Other chemical or plastic products are either difficult to transport or too inexpensive to pay for traveling costs
How do you define the financial position of CYDSA right now?
Cydsa made some mistakes in the past. Mr. Tomas Gonzalez-Sada has only been Chairman and Chief Executive Officer for 6 years. Prior to his arrival as Cydsa's boss, Cydsa acquired businesses that turned out to be unprofitable. When Mr. Gonzalez-Sada arrived, his first move was to get rid of some of those businesses in order to reduce debt. So far he has been able to reduce Cydsa's debt to a great extent, but he hasn't gone far enough yet, because we were hit by a combination of the Asian crisis, which depressed textile markets around the world, and the low end of the cycle that characterizes the petrochemical industry, from which we are starting to recover.
What is your first priority for the future? Is the door open to the possibility of further diversification?
Debt reduction continues to be Cydsa's number one priority. For the time being, our strategy is to consolidate what we have and to get rid of some business units for which we see no future, thus reducing our debt and putting us in a position to grow again, with or without partners. And, yes, the door is open to the possibility of further diversification in the future.
What is your opinion about the controversial privatization of Mexico's petrochemical industry?
It is necessary, and it has not been done yet because politics is cutting the way. What was privatized in the previous administration was not properly done, and as a result there was a backlash against privatizing on the part of the legislators and the politicians. Look at the banking disaster, look at the highways disaster. So the politicians that are in favor of the government controls say "why do you want to privatize, look what has just happened". The petrochemical industry has just been a victim of prior privatizing processes that were poorly done, and politics cut in the way. But they will have to privatize the petrochemical industry or they will shut it down, because Mexico does not have the money nor the willingness to invest in that sector. All of Pemex petrochemical plants are dying, and getting worse every day. The next administration will have to face that. They will have to decide between privatizing, shutting down or awarding concession. The latter is the option I would recommend to the Mexican government. Don't sell, but sell a 50-year concession to an operating partner.
May I have your assessment on the privatizations that are taking place today in other sectors, such as airports and electricity?
They are proceeding today more carefully than in the past, as they have learned from previous mistakes. For example, airports are not being sold. Rather, the government is awarding concessions to operate them. Very much the same is happening or will shortly happen with electricity.
The 8th exporting power in the world, Mexico's economy seems to be on the right track of consolidation. What are the challenges that are laying ahead for the country?
The main challenges that we face today are political. First of all, we are concerned about the elections. We all hope that they will be the cleanest and most transparent in the history of Mexico and that, as a result, electoral fraud will not take place this year. But we are also concerned about the reaction of the losers. So, the problem is not what will happen on July 2nd, but what could happen on July 3rd. Are we going to have a peaceful post-election period? I sincerely hope so, for the good of our country. |
Grupo Cydsa 