Is Texas the New El Dorado
of Spanish Companies?

21 Mar 2007

The Manufacturer US, Published in Knowledge@Wharton

Little by little, Spanish companies have been moving into Texas, and they are beginning to enjoy the benefits. In the infrastructure sector, Ferrovial, through its highway subsidiary Cintra, has become a strategic partner with the government in developing the Trans Texas Corridor (TTC-35).

OHL, the construction and service company, has acquired two construction firms. BBVA bank has just acquired Compass [Bancshares], whose headquarters are in Alabama, but which has a larger presence in Texas. However, this is only the beginning. Construction firms, engineering companies, road construction companies and banks, among others, have Texas, the paradise of American oil, in their sights. Their goal is not oil wells but infrastructure, and the growing power of America’s Hispanics.

During the 1990s, large Spanish companies crossed the Atlantic in an effort to conquer Latin America with a vigor that was unknown until then. At that time, their business odyssey was compared to the heroic effort made by Christopher Columbus five centuries earlier. Spain had once more found its El Dorado in Latin America -- a territory that, during the era of the Great Spanish Empire, extended as far as New Mexico, as Spain conquered most of what is now the southern part of the U.S.

Now history appears to be repeating itself. Attracted by the growing Hispanic presence, Spanish companies have begun to extend their tentacles throughout the U.S., especially in Texas. Why has that market attracted so much attention among Spanish companies?

“In the case of the banks, BBVA is looking at a growing and attractive market,” notes David Allen, professor of strategic management at the Instituto de Empresa. “Many of their potential customers have ties to Latin American markets where Spanish banks already have a presence. In this context, Spanish banks have considerable experience. They have had success offering their services to the same segments of customers in Spain.”

A little more than a decade ago, Latinos represented 27.6% of the population of Texas. In 2025, they are projected to exceed 10 million people, or 37.6% of the population. It’s no accident that Texas, along with California and Arizona, has become the new center of attraction for the Latino population, given the opportunities available for financial institutions, especially those that have an infrastructure on both sides of the border, such as BBVA.

In addition, the American Southwest has become the new economic engine of the United States. Markets in that region are growing at an average rate of one point above the rest of the country. They enjoy lower taxes, a greater supply of jobs and lower housing prices. These factors combine to attract companies – not just foreign companies, but U.S. companies – to the detriment of Northern states.

Looking Beyond Hispanics

The Latino population is a magnet for Spanish investors and a possible platform for jumping into neighboring states. In addition, Texas offers other attractions, including its ambitious plan for infrastructure development that offers opportunities to construction firms, road builders, engineering companies, and companies that provide technology, electricity and railroad equipment.

Reflecting this interest, a delegation of big Spanish companies traveled to Texas last February to learn first-hand about the state government’s infrastructure plans, budgeted at $150 billion.

The list of companies that spent tour days analyzing their business options in Texas includes construction and infrastructure companies such as ACS, FCC, Acciona, Ferrovial, OHL, Sacyr Vallehermoso, Azvi and Elsamex; technology firms such as Abengoa, Elecnor, Indra and Soluziona; railroad manufacturer CAF, and Banco Santander. This market has opened its doors more easily thanks to a trade mission led by Jose Maria Aznar, former prime minister of Spain, at the beginning of the year, during which Aznar held meetings with the U.S. Chamber of Commerce.

“The U.S. is an ideal market,” says Mauro Guillén, a Wharton professor and director of the Lauder Institute of Management and International Studies. “The infrastructure is in bad condition; it’s been years since investments have been made in it.” Guillén, who authored a Universia-Knowledge@Wharton article titled, “Ferrovial, Following in the Path of Carlos V,” adds that “central and local governments have a fiscal crisis, which means they are looking for ways to get funding through privatization and concessions that attract private capital. It would not be surprising if Spanish infrastructure companies, which are very competitive, wind up with a piece of the pie.”

Along these same lines, Esteban Garcia Canal, a professor in the University of Oviedo’s business department, explains that “in the case of Spain, the remarkable development of infrastructure projects in recent decades, plus more recent international experience, has provided Spanish companies with advantages that explain their current successes.”

This experience, along with its rapid entry into Texas, has enabled Ferrovial to join with the government to develop the Trans Texas Corridor. Ferrovial has been awarded two toll roads in this project -- sections 5 and 6 of SH130, the high-speed highway, as well as, SH-121, barely a month ago. These two concessions alone add up to an investment of $4 billion.

A testing ground?

The same logic that applies to Texas can be applied to other states, at least in such sectors as infrastructure where construction firms, engineering firms, and providers of technology and railroad equipment are looking into every opportunity. The financial institutions are also there. Nevertheless, it is impossible to avoid a key question: Are Spanish companies using Texas as a testing ground?

Guillén does not think so. In his opinion, their arrival in Texas reflects several different factors that all coincide in one space at one time. “Cintra-Ferrovial came into this market because they obtained a concession for the San Antonio-Dallas toll road. BBVA did so because it is looking for synergies between its banks in Mexico and the Hispanic community in the United States,” he explains.

Allen, however, suggests a wait-and-see attitude. “Currently, the money that has been invested in the United States is being used for exploring the market. A much bigger step would have a significant impact on the bank’s results. There is no reason to run that sort of risk at this moment.”

BBVA has invested 7.410 billion euros in its acquisition of Compass. The deal has enabled BBVA to enter the list of top 20 banks in the U.S. However, the sub-prime mortgage crisis is beginning to spread across the country, leading to a higher rate of late payments. Given such conditions, Allen opts for caution.

“It remains to be seen if Texas is the springboard for Spanish companies into the entire U.S. market,” says Allen, adding that companies from the entire world “try their luck in the United States. This is all part of becoming a big multinational. In manufacturing sectors, things have gone quite well, but the service sector is another [story]; very few companies have yet to get results. Spanish retail banks are very good at what they do. I believe that they have what it takes to achieve their goals. Unfortunately, they have chosen a tricky time to get in because a growing number of mortgage firms are dealing with late payments.”

Guillén, as well, notes the great diversity of the U.S. market. “In consumer markets, including banking, the United States is a fragmented market, with various cultural standards and levels of buying power. It is a very big country.”

As a result, you cannot assume that the same sorts of opportunities will exist in the rest of the country. One example of the problems facing Spanish companies is Zara. The all-powerful Spanish company has taken decades to acquire a niche in the U.S. Although the company entered other markets quickly, in the U.S. its progress has been slowed by cultural differences from one coast to another, as well as the logistical difficulties involved in fulfilling its goal of re-supplying its shops every 15 days. Although Zara has managed to acquire a niche in the United States, it has done so at a much slower pace than usual.

A similar problem could exist for financial institutions. “Perhaps the most important obstacle involves the integration process for banks that have tried to deal with murky problems they face,” says Allen. “From day to day, BBVA has worked in a positive economic environment in the United States. To the degree that this might change, we will see how well or poorly the bank understands the market.”

In addition, Texas is not necessarily the operational center for every Spanish company in the U.S. Many companies have set up shop in other U.S. markets. “Everything depends on the sector,” says Guillén. “Freixenet [the sparkling wine company] operates out of California, which is logical because it is a region with extensive vineyards, but it sells throughout the United States. BBVA is in a large and difficult sector because it is going from state to state. Inditex also operates in many different U.S. states,” he notes.

Whatever strategy Spanish companies follow in Texas and the rest of the U.S., Allen points out the ultimate factor that can be taken as the moral of the story: “Exceptional companies such as Zara and the larger Spanish banks -- Santander and BBVA -- will succeed in practically every market. My major worry is that [Spanish companies] may wind up buying businesses that are overvalued or have hidden problems.” Regarding BBVA’s recent purchase of Compass, he says, “The current challenge for BBVA in the U.S. is the emerging loan crisis, especially among mortgage firms. If BBVA is a winner despite such conditions, it could become a serious player within the U.S. market.”

As published in Knowledge @ Wharton (http://knowledge.wharton.upenn.edu), the online research and business analysis journal of the Wharton School of the University of Pennsylvania