TBY talks to Carlos Hank Rhon, President & CEO of Grupo Hermes, on growth strategies, diversifying business operations, and international business.
THE BUSINESS YEAR What is the history of Grupo Hermes?
CARLOS HANK RHON We started as a family company, and in 1978 we became a holding. We began with the manufacture and assembly of trucks, and then we moved into energy generators, which is the second most important business at Grupo Hermes, our industrial branch. Grupo Hermes later entered into the construction and operation of infrastructure: highways, dams, water treatment facilities, hospitals, and museums.
How have your individual groups been growing, and what has been Grupo Hermes’ growth strategy?
Grupo Hermes has four divisions: infrastructure, energy, transport, and tourism. What has given Grupo Hermes a strong position is its ability to specialize in each of the sectors in which it participates, and to focus on contributing to Mexico’s growth through developing key infrastructure. We now have a presence in the most important states and cities in Mexico, having built more than 500 kilometers of highways and 13,600 meters of high-specification tunnels in some of the most challenging projects in the country. We have had a major presence in the international market since 2005 in the energy sector, and we were recently awarded a $148 million project for energy generation in Saudi Arabia by the Sadara Chemical Company. The whole project is the largest petrochemical plant in the world built in one stage, worth $20 billion. We will be supplying four steam energy generators. Each one is as tall as a five-story building. We have started to assemble everything in Mexico, and ship the units to Saudi Arabia. In fact, the first two were shipped on January 2013. Grupo Hermes has been selling to Saudi Arabia for a while, and it has been quite successful so far. We have already developed more than 10 projects there. Ours is a very cyclical business, so it changes a lot and we must be ready for the good times and the bad. We have been developing our own technology and we have joint ventures with a number of highly prestigious international companies. By developing our own technology, we have become largely self-sufficient.
How have you been diversifying your business operations?
We began the construction company more than three decades ago, and now it has a lot of expertise in water-related businesses, such as dams and waterwheels. We also specialize in highways. Grupo Hermes owns and operates several highways and bridges in the country. We see a lot of potential in roads, because Mexico has a huge need for new infrastructure if it wants to regain competitiveness vis-á-vis other emerging economies. Recently, the association between the public and private sector in schemes such as public-private partnerships (PPPs) has been going well, and we have carried out some construction projects for the government. Usually, we finance everything so we own and operate our own roads; after 20-30 years we give them back to the government. I am confident that this is the way Mexico will go in the future. For our latest highway, Durango-Mazatlán, we worked in alliance with a Spanish company to develop a project the government had wanted to do for 20 years. However, it was very expensive and difficult because it had to cross one of the major mountain ranges in our country, the Sierra Madre. It is almost complete now, and has been one of the biggest challenges we have faced. We are also building a large dam in Central Mexico called El Zapotillo to supply water to more than 2 million people in the cities of Guadalajara and León. There is a lot of potential and we are well equipped to compete. We are well positioned to associate ourselves with international companies to develop infrastructure in the country.
Will PPPs become increasingly important for companies like Grupo Hermes?
I am convinced that PPPs are the development scheme of the future. We have some projects, such as large roads, being financed by Mexican institutions. We also have Spanish and Mexican companies that provide the financing, buildings, and operations. The projects that are built by the government just need reliable construction companies. Then there are some projects that need construction, financing, and operations. We can contribute in all these areas. We offer integral solutions through PPPs. This model has a lot of potential. So far, we Mexicans have been investing about half of what we should in much needed infrastructure. Under the Calderón administration, PPPs were most important, and that will continue on to the next government. Our financial situation is much better in Mexico now. The US and EU are facing many deficit problems, but Mexico had its problems in 1994 and 1995. We have learned from those challenges and strengthened the fundamentals of our economy. In Mexico, the public deficit is very small, the commercial balance is still positive, our institutions are strong, so we are in good shape to grow. There is a lot of money in the world, and we are able and ready to attract investments. Brazil has been successful and now it is our turn. I am optimistic that the situation in Mexico is very positive.
What about Interacciones Financial Group?
In parallel to the growth of Grupo Hermes, we saw the opportunity to enter the financial sector and the need to finance infrastructure, and as a result created Grupo Financiero Interacciones. In 1966 we started as a small insurance company. In 1993 we started to operate a bank, which today is the third largest Mexican financial group. This year we are celebrating its 20th anniversary. The financial group is composed of four divisions; banking, brokerage, insurance, and investment funds. We have successfully positioned ourselves as the largest specialized bank in Mexico, focused on the financing of infrastructure for states and municipalities. This is our niche and there is great demand for funds in the subnational market. We have a clear competitive advantage; we know the country, we know its needs, we know who to talk to, and we know how to deal with local legislation and other regulations. Project financing is one of the solutions we offer to serve our clients. In Mexico, Interacciones can be a perfect partner for international companies willing to finance and develop infrastructure projects. We are the clear leaders in the financing of government projects. Total assets for the financial group have grown from $540 million in 2003 to more than $8 billion in 2011.
You have successfully bid for work in Saudi Arabia. How easy is it for Mexican companies to compete in Middle Eastern markets?
It is all a matter of being competitive. You begin by finding small windows of opportunity and doing things better and better. First, we started selling small energy generators to Chile, and continued selling small energy generators to Saudi Arabia. That was the case for us 12 years ago. It becomes a small world. We are probably one of only 10 producers of those generators globally. Slowly, people begin trusting your products. They buy small products at first, then medium ones, and so on. There is fierce competition from the South Koreans, the Indians, and the Italians, and we probably end up winning 10% of what we bid on—mainly key strategic projects. With our technology, sometimes we have to be innovative to meet the special needs of our customers. For example, there is one company in Canada that wants to use tree bark as a combustible material, so it asked for our help and we came up with a solution. It is a completely different generator than the one that runs with coal or gasoline; however, we were able to find the best solution. It’s good to get to know the market, but also good to get to know your products, and we have also the ability to develop the technology to face these new challenges.
What kind of initiatives does Grupo Hermes have in place to reduce carbon emissions and improve sustainability?
Grupo Hermes is a leader in the reduction of carbon emissions and sustainability. When we started selling to Saudi Arabia, we had to sell products that were better for the atmosphere. Saudi Arabian standards were higher than in Mexico, so now we are way ahead of the competition because we have been supplying to very strict companies. Now that governments are imposing stricter regulations, we are very well positioned. We were born as a company facing tough challenges, and we have learned how to deal with them.
This interview will be published in 'The Business Year: Mexico 2013'. To pre-subscribe please e-mail us at email@example.com
© The Business Year - February 2013