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A Golden Opportunity in Service

JAMES FLANIGAN / ON SOUTHERN CALIFORNIA

February 11, 1998|JAMES FLANIGAN

Salvador Villar came to Southern California from Mexico in 1981 to head the U.S. ventures of Banco Nacional de Mexico, or Banamex, which was confidently expanding at a time when Mexico was flush with oil wealth.

Then the bottom dropped out. Oil prices fell, Mexico went into a severe downturn, banks were nationalized. But Villar stayed north of the border, running Los Angeles' California Commerce Bank as a Banamex subsidiary.

He nurtured the small bank's business, handling cross-border transactions for U.S. companies and developing electronic transfer systems for the money that immigrants sent home to families in Mexico.

Then came powerful changes in the 1990s. Mexico joined the worldwide General Agreement on Tariffs and Trade (GATT), signed the North American Free Trade Agreement (NAFTA) and suffered a wrenching devaluation of the peso in early 1995.

And California Commerce Bank's business took off. Its assets have grown 50% to $1.2 billion in the last three years as Southern California companies found increasing opportunities to do business with Mexico.

But this region's companies didn't find opportunity in the automobile and other big businesses directly connected to the NAFTA agreement. Rather, they found opportunities in services such as finance, food and energy distribution and real estate development, because NAFTA and the aftermath of Mexico's devaluation changed the environment on both sides of the border. "NAFTA allowed companies to have a long-term outlook about business in Mexico," says Villar.

For example, Smart & Final Inc., a client of Cal Commerce among other banks, brought its innovation of bulk distribution of food and cleaning products for restaurants to Mexico in a joint venture with that country's largest food store chain. There were great opportunities for the Vernon-based operator of warehouse stores to improve distribution and cut costs for Mexican small businesses. And so Smart & Final succeeded. It now has five stores in Mexico and will open another in six weeks, in Tijuana.

Cal Commerce Bank also was able to come up with complex sale/lease-back arrangements involving two legal systems, languages and currencies that have enabled developers in Mexico to build condominium units for Southern California clients of the bank to buy.

In fact, innovative financing for Mexican development has become a Southern California specialty, in deals well beyond the capacity of tiny Cal Commerce. Developers in Mexico are building factories and housing units at a record pace because "financing is based on the credit rating of the foreign company using the premises, not on Mexican land values or the credit of the Mexican developer," explains Dennis Hearst of Cushman Realty's San Diego office. Hearst sees a lot of Japanese, Korean and Taiwanese companies as well as U.S. firms stepping up activities in the Mexican border region.

Southern California utilities are expanding natural gas distribution in Mexico. Enova Corp. of San Diego, in partnership with Los Angeles-based Pacific Enterprises, with which it is scheduled to merge this year, is investing $75 million to build gas distribution services in Mexicali and the state of Chihuahua.

Pacific Enterprises is seeking to build similar systems throughout South America.

But it is in financial services that the growing and varied connections between Southern California and Mexico are clearest. Money transfer, for example, is a big business. Wells Fargo Bank has a service called InterCuenta Express that transfers money directly to automated teller machines at Banamex branches all over Mexico. Depositors put dollars in Wells accounts here and pesos are available to recipients at Banamex branches.

The U.S. Postal Service is also in the money transfer business through a partnership with Mexico's Bancomer. The volumes involved are sizable; the governor of Guanajuato state in central Mexico, from which many have emigrated, estimates that $700 million a year comes in through remittances from immigrants to the U.S.

Credit is a major need in Mexico, where banks typically make only short-term loans, at 30% interest, to small businesses. Seeing opportunity, Antonino Morales, a onetime executive at Security Pacific bank, is setting up operations throughout Mexico for the Commercial Credit division of Travelers Group. Morales is basing his operation in San Diego.

And Bastion Capital, the Los Angeles-based venture capital company led by Daniel Villanueva, is backing cosmetics companies and other start-ups in Mexico.

People coming to Southern California from Latin America also need credit. So Villar's Cal Commerce bank has a credit card for people without credit history in the United States. "Initially, the card must be backed by cash in a savings account, but over six months we begin to extend credit on the card," explains Villar, 47, a lifelong employee of Banamex, whose father also worked for the bank. Interest on Cal Commerce's cards ranges from 12% to 17%, similar to most credit cards.

The point is that the opportunities in Mexico and Latin America are in services--sophisticated ways to lend money, reach customers and distribute goods. And those are just the kind of businesses that Southern California companies excel in. Services are our comparative advantage in less-developed economies.

Hard work and perseverance are necessary, of course. "Cal Commerce bank is very well placed now, Salvador [Villar] has a unique ability to tailor services for his customers," says Villanueva of Bastion, a friend of Villar's.

"And he deserves it," Villanueva goes on. "He hung in there through some pretty bleak times and has seen business improve." Like Villar and his bank, Southern California and Mexico, too, have seen bleak times--and now, finally--business improving.

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