Foreign Relations of the United States: Diplomatic Papers, 1944, The American Republics, Volume VII

812.75/9–2344

The Ambassador in Mexico (Messersmith) to the Secretary of State

No. 20,322

Mexico, D. F., September 23, 1944.
[Received September 28.]

Sir: I have the honor to acknowledge the receipt of the Department’s confidential instruction No. 6285 of September 20, 1944,⁴⁵ which has just come to my desk on the eve of my departure for the United States for a month’s holiday. The Department requests that before reaching a final decision in this matter, it would appreciate at my earliest convenience my present views with regard to this whole question, particularly in the light of the enclosures⁴⁶ to the instruction under reference. Although the circumstances are such that I have only a few hours at my disposal before my departure that it will not be possible for me to consult the files of the Embassy on this matter which are voluminous, I am, prior to my departure, giving the Department in the best form possible my present views on this matter.

The Department will wish to consider this despatch in the light of previous despatches and communications of the Embassy on this matter.

I have noted with interest the enclosures to the Department’s instruction. I believe that the I. T. & T., in view of the fact that it has not been able to secure financing for a purchase by the Mexicana, its subsidiary, of the Ericsson Company in Mexico, is prepared to sell to the Ericsson Company. The Department is aware from previous despatches and reports of this Embassy that the Ericsson Company has been gradually developing a superior position in Mexico. According to the letter of the I. T. & T. of August 22, 1944, the Ericsson at present serves approximately 114,000 subscribers and the Mexicana approximately 80,000. For various reasons the Ericsson Company has been forging ahead of the Mexicana in Mexico. Because of the availability of stocks of equipment which the Ericsson had in Buenos Aires and Montevideo from its parent company, it has been in a better position during the war to supply new subscribers. It is said that the management of the Ericsson in Mexico is closer and less expensive than that of the Mexicana. While I am not able to perceive any difference between the quality of the service rendered by the Mexicana and the Ericsson, there seems to be a more or less general idea among the public that the Ericsson service is better than that of the Mexicana. A very important factor is that the relations of the Ericsson with the Mexican Government have been closer than those of the Mexicana and in Government offices where there is only one telephone, it is usually the Ericsson. I think a factor which cannot be ignored in this situation is that among the public and in the Mexican Government the Ericsson has a more favored position than the Mexicana. This latter factor alone seems to me to be one of the reasons why our Government should be interested in seeing that any merger which may be brought about is one in which the Mexicana, the I. T. & T. subsidiary, will not disappear.

At the outset of the war certain agencies of our Government were of the opinion that it was in the interest of public security that our Government should finance the purchase of the Ericsson by the Mexicana on account of the Swedish ownership of the Ericsson. This argument at no time was a very valid one and perhaps the fact that it was not valid did not help the consideration given to the matter of Government financing on our part for the Mexicana. The Ericsson Company in Mexico during the war has not been a menace in spite of the situation of Sweden in Europe in view of the fact that the Mexican Government is a co-belligerent with us and the Mexican Government, therefore, was in a position to assure any measures which were necessary to prevent any improper use so far as the public safety is concerned of the Ericsson system. On the other hand, if Mexico had not been in the war as an Ally, but a neutral and a rather unfriendly neutral as during the previous world war, the Swedish owned Ericsson Company would have been more difficult to control and perhaps less controlled by the Mexican authorities and could have become an uncertain element in the communications system in this important country of this hemisphere.

For this reason I feel that the statement of the Attorney General in his letter to Assistant Secretary Berle of September 4, as follows “In these circumstances the difference between having the Mexican telephone properties merged under the I. T. & T. and merged under the Ericsson Company does not seem to me to be sufficiently substantial to justify the intervention of this Government in favor of one form of merger as against the other” does not give, I believe, an adequate statement of the position. It seems to me that it would be highly disadvantageous to our Government, looking into the future, to have a merger of the two telephone companies in Mexico which would involve the disappearance of the Mexicana and leave the Ericsson the sole company in the field, either as the sole operating company or the Ericsson in partnership with the Mexican Government. While I believe that the policy of the Mexican Government, which is so definitely one of collaboration with us in this war is likely to continue in the future, there are none of us who is wise enough to look too far into the future, and Mexico because of her contiguity to us is one of the countries on which all sorts of European pressures will be brought in the postwar period and in which certain European nationals or countries will endeavor to secure a favorable position as compared with ourselves. It would seem to me, therefore, that in so important a matter as telephone communications, it is of vital importance to us as a country that any merger which may be made will not involve the elimination of the Mexicana, which is an American owned company.

I go so far as to say that even if both the Mexicana and the Ericsson were to be acquired by the Mexican Government and operated as a Mexican monopoly, the safety for us would not be as great as if the merger were accomplished in the form of the Mexicana going into partnership with the Mexican Government.

It seems to me that in the consideration of this problem as to what degree of interest our Government has in a merger of the telephone companies in Mexico, or in the telephone situation in Mexico, we must bear in mind what would be a wise long-range policy for our Government in the matter of communications in general. I doubt whether any one who has in mind the peace and security of our country in the future, and the peace and security of this hemisphere, would not agree that it is important that all forms of communication, whether they be by telephone, telegraph, cable, shipping, or airways should be in the control of nationals of this hemisphere and that nationals of the Far East and of Europe should be excluded from the communications field in this hemisphere. The situation which we have in the Argentine today, in the very midst of war, in which British nationals in the Argentine are at least indirectly interested, if not directly, in a Fascist regime which is directly opposed to inter-American solidarity and to the United States⁴⁷ should give us reason for thought. Without assuming any extremely nationalistic attitude but merely looking at the problem from the point of view of security and realism, there would seem to be no doubt that all communications systems in this hemisphere should be either in the hands of the nationals of the countries of this hemisphere or in the hands of the Governments of the respective countries, or in joint enterprises in which the nationals of the Governments of the respective countries are associated with the nationals or the Government of our country. This to my mind is the only sound and secure policy for us and for the other American Republics to follow in the ownership of any communications facilities in the other American Republics. The foregoing thought is in line with the thought which the Attorney General in his letter of September 4 states President Roosevelt had in mind in a conversation which Secretary Jones and he had with the President on this telephone matter, during which the President stated that it was unwise in his opinion for our Government to promote actively any project whereby a Mexican public utility was to be owned and operated by a foreign company. What the President had in mind I feel confident was that so far as possible the communications facilities, such as telephones within the respective American countries, should be in the hands of nationals of the particular country or of the Government. In many countries of the American Republics the Governments themselves or the nationals thereof are not in a position unaided to secure the control of communications facilities and will need our financial and technical and administrative assistance.

There has for some reason been a prejudice against the International Telephone and Telegraph Company in certain agencies of our Government. On what this unfavorable attitude is based, I am not able to say but it would seem to be most likely because the I. T. & T. has international connections. In the very nature of things it is obvious that if our Government is to assume the obligations which it must assume in the international picture for our future security and peace, that we are definitely in this communications picture not only in the Americas but all over the world. I do not believe that any one would dispute this in the field of aviation. The same principles apply in the field of shipping and telephone and cable communication. In order to carry through the international procedures which are necessary in the communications field in order to maintain our peace and security and to keep communications open to us at all time, and without prejudice to our nationals and to our interests, it is necessary to have instruments in the form of strong companies which will operate beyond our frontiers and in the international field. The maintenance of international communications, no matter in what field, involves the maintenance of companies which are branches of the parent company in the United States. It means the maintenance of all sorts of facilities in order to serve these companies. In the field of telephone communications it means that there must not only be companies for actual operation of telephone systems but in some countries it will be necessary to maintain manufacturing facilities of telephone equipment which are owned by the telephone operating company. Experience has amply demonstrated this. The International Telephone and Telegraph Company, whatever may be its deficiencies in the way of management, has built up a considerable and on the whole, sound organization in the international telephone communications field. It is the only American company in this field. It not only has operating facilities but it has manufacturing facilities for equipment in many countries. It is the ideal instrument through which in the field of telephone communications our Government and our country can carry through a wise and sound policy in the international telephone communications field. If there are any reasons why there may be some reserves with regard to the I. T. & T. which are well founded, then unquestionably it will be a relatively easy matter to bring about such changes in the I. T. & T. and its operation and management which would remove these reserves. That any reason for such reserves with respect to the I. T. & T. exists, I have not been able to determine over my long experience with the operations of this company in various countries.

To summarize, it is therefore my opinion that our peace and security make it necessary for us to take an active part in the international communications field, including telephone communications. I believe that it is particularly important for us as a Government and as a country to see that all forms of communications, including telephone systems in this western hemisphere, are under the control of Governments or nationals of countries of this hemisphere. I believe that to carry through any sound policy in the communications field it is necessary for us to have strong American companies with international connections and that where such companies do not exist we must build them up. In the field of aviation we have several such strong companies which can serve as a national instrument. In the field of telephone communications, we have for the present only one company, which is the I. T. & T., and there does not seem to be any sound reason for not using it as an instrument of policy.

The foregoing briefly are only a few of the considerations but the major ones, which, I believe, make it essential for us to have a definite interest as a Government and a country in this telephone communications field in this hemisphere.

Specifically with respect to the situation in Mexico, the Ericsson Company does not wish to sell if it can avoid it, for it is more, interested in the supply situation than it is even in the operating end of it. Sweden is a country which is interested in maintaining its exports and particularly interested in maintaining the exports of telephone equipment and the Ericsson Company is a good outlet for such equipment. Recently the manager of the Ericsson Company in Mexico City at a public dinner stated that a telephone merger would take place in Mexico after the war, leaving clearly the impression that the Ericsson Company would be the controlling interest in the telephone field in Mexico. I believe that this unwisely premature statement of the manager of the Ericsson Company in Mexico reflects a situation which exists and it is probable that the Ericsson has plans of entering into some form of an arrangement with the Mexican Government which will eliminate the Mexicana, the American Company. This is more than likely in view of the fact that the relations between the Ericsson and officials of the Mexican Government are close and friendly. This is a factor which I think we cannot disregard for the manager of the Ericsson Company would not have spoken so openly, if unwisely and prematurely, without having knowledge of the attitude of high officials of the Mexican Government.

The matter, therefore, seems to be coming to a head in spite of our reluctance at home up to now to face this situation. The Mexicana seems to be disposed to sell out to the Ericsson, as indicated by its letter to the Department. The Ericsson apparently has at least some tacit understanding with high officials of the Mexican Government which has encouraged its manager to make such a public statement.

It is quite clear in my opinion that the I. T. & T. through the Mexicana cannot buy the Ericsson if it is obliged to finance the purchase entirely through private banking channels. I will not go into this phase of this matter but it is well understood at home. Private banking channels are not likely to finance an operation of this kind which would involve anywhere from $16,000,000 to $20,000,000 when it would mean the financing of a public utility in a country in which the tendency is so definitely towards the public ownership of utilities as it is in Mexico. Neither the Ericsson nor the Mexicana are making good earnings in Mexico. The Ericsson, because of perhaps some better management and less overhead, is operating at a slight profit. The Mexicana is operating at practically no profit and perhaps at some loss. All public utilities, including telephones in Mexico, are at a disadvantage when owned by private interests for the tendency is not to give them the reasonable rates which are necessary in order to provide a reasonable profit. I view, therefore, the future of entirely privately owned public utilities in Mexico as very uncertain.

In Mexico the tendency already is very strong for the Government to go into the light and power situation and it is probable that within a period not too long in the future the American and foreign owned electric light and power companies in Mexico will find themselves obliged to sell to the Government in view of the fact that they cannot receive the authority to charge the rates which are necessary to make the moderate profit necessary. This movement, I believe, in Mexico is already so far advanced in the field of light and power that the handwriting on the wall is clear. It is my opinion, therefore, that in the same way it will be the inevitable tendency in Mexico for the Government to absorb communications systems within the country, including the telephone system.

For this reason I have always considered a merger of the two telephone companies in Mexico as not feasible, whether it involves public or private financing from the United States, unless the Mexican Government is a partner in the merger. The I. T. & T. has always hoped to acquire the Ericsson through financing by our Government and thus become the only operating company in Mexico. I do not believe that this will be feasible for I do not believe that the Mexican Government will permit a merger of the two companies either under the Ericsson or the Mexicana in which the Mexican Government is not a partner, either a majority or minority participant. My view, therefore, is that this matter should be approached from the point of view of the Mexicana going into a partnership with the Mexican Government and acquiring the Ericsson. The financing of the new company could be both public and private. The Mexican Government could have a certain capital participation. The United States Government through the Export Import Bank could have a certain capital participation. Private banking interests could have a certain capital participation or stock participation through American citizens. I believe that this is the only feasible solution because unless the Mexican Government or Mexican private interests have a very large participation in any merged company, there would be no possible hope of the company getting the adequate rates in order to earn the reasonable money it should and without that there can be no public or private interest in the financing of a merger and therefore no merger.

The only possible hope for public utilities, including telephones in Mexico, to have a firm future is for the Mexican Government to participate therein for it is the only way in which reasonable rates can be assured. The existing foreign owned public utilities in Mexico are having a precarious existence because they are met by constantly increasing operating and labor costs with very little opportunity of getting increased rates. On the other hand, in the Government owned and controlled petroleum monopoly, Pemex, which at present has the monopoly of exploration, production and marketing within the country, higher production and distribution costs and higher labor costs are absorbed by increased prices. Just recently the Government has approved a wage increase for the employees of Pemex in the amount of 24,000,000 pesos a year and has accompanied it by an increase in the price of gasoline and fuel to the Mexican public. The telephone, electric light and power companies, etc. in Mexico, which are privately owned, are met by these constantly increasing operating costs, including labor whenever a labor contract expires, but with practically no opportunity of getting increased rates or such increases as are utterly inadequate. The consequent result is that these privately owned utilities are dying a slow and painful but nevertheless sure death.

This Embassy has given a great deal of consideration to this matter of a telephone merger. Its views and conclusions are expressed in despatches and informal letters to the Department. When Mr. Warren Lee Pierson, President of the Export Import Bank, was in Mexico last year we had a conversation with the President of Mexico⁴⁸, who indicated that he would be prepared to consider proposals with respect to a merger in which the I. T. & T. would participate through the Mexicana. The President was informed that we would endeavor to submit to him proposals. In view of the attitude of the Department of Justice and perhaps of other agencies of the Government, no such proposals have been made. It is for this reason, I think, that the Mexican Government has perhaps, at least through some of its officials, been discussing this matter with the Ericsson interests. This latter would be indicated by the public statement made by the manager of the Ericsson Company, already referred to in this despatch.

The idea of entering into an association with the Mexican Government to bring about a merger and the absorption of the Ericsson will probably not appeal to the I. T. & T., which would prefer to remain the sole interest in the field. In my opinion, however, the Mexican Government will not permit any merger which will involve the I. T. & T. being the sole operating company without participation by the Mexican Government and Mexican interests. There is a good deal of capital available in Mexico, both public and private. I believe that if a merger is worked out between the I. T. & T. and the Government of Mexico, an adequately firm basis for sound operation can be established to assure a reasonable profit from the operation. This would serve as adequate basis on which the Export Import Bank or private capital in the United States could participate in the merger. It is my considered opinion that any merger which does not involve the participation of the Mexican Government would not provide any secure basis for participation either by public or private capital in such a merger of the telephone companies in Mexico. With the participation, however, of the Mexican Government or of Mexican capital in the merger, it is reasonable to believe that the operating company would be able to secure at least a reasonable profit on its investment through the form of rates.

The time at my disposal prior to my departure does not permit me to go into this matter more fully but I dissent from the opinion which has been expressed from time to time that our Government does not have an interest in this merger. I believe we have an interest from the point of view of hemisphere security in the sense that the communications systems in this hemisphere should remain in the hands of the Governments or nationals of the countries concerned either solely or in collaboration with Government and private capital in the United States. I believe adequate basis exists for the interest of our Government in this matter, even to the degree of part of the financing, provided the merger involves the participation of adequate Mexican Government or Mexican private interest to assure the security of the enterprise from a commercial point of view.

It is, therefore, my recommendation that our Government should reach the conclusion in principle that we have an interest in this matter of the telephone merger in Mexico and that we formulate on that basis proposals which can be made to the Mexican Government through which the I. T. & T. would enter into some arrangement with the Mexican Government as an owning and operating company. The financing of such an owning and operating company would undoubtedly involve at least a measure of financing through the Export Import Bank. I believe the circumstances would justify this. In spite of the more favorable attitude towards the Ericsson Company in Mexico by Government officials, I believe that the Mexican Government is very definitely attached to the idea of hemisphere security and would prefer to enter into such a merger with an American company than with a Swedish company. I see no reason why the I. T. & T. should not become the instrument of our national policy in the telephone communications field in this hemisphere.

I should have liked to go into this matter more fully but I hope that the foregoing will be sufficient for the Department’s purposes. I shall be glad to make any further specific recommendations or observations which the Department may desire. I do believe that we should not lose further time in making this major decision for if we lose further time, it is probable that either the I. T. & T. will sell out to the Ericsson or the Ericsson will enter into some arrangement with the Mexican Government which will involve the elimination of the I. T. & T. subsidiary.

I believe that the proposals which I have made in this despatch would fall in line with the views expressed by the President to Secretary Jones and to Attorney General Biddle for my proposals would not involve any foreign company assuming control of the communications system in Mexico by an arrangement between the Mexican Government and an adequately competent American Company.

Respectfully yours,

G. S. Messersmith

45. Not printed.
46. Letters of July 29 and August 3, from Mr. Berle to Mr. Biddle, not printed; letter of August 22, from Mr. Page to the Secretary of State, p. 1276; and letter of September 4, from Mr. Biddle to Mr. Berle, supra.
47. For correspondence regarding the concern of the United States over relations with the Farrell revolutionary regime in Argentina, see pp. 252 ff.
48. Manuel Avila Camacho.