Poor local partner choice costs CRCC Mexico bid

Questionable dealings loom behind derailed contract

China and Mexico have not seen eye-to-eye on business affairs for a long time now. Mexico's membership in the North American Free Trade Agreement bloc and its reliance on exports to the US for economic growth make it a natural ally of its neighbor to the north. The two countries also used to be at similar stages of economic development and both offered cheap labor for assembly manufacturing. However, the takeoff of the Chinese economy and the power of its internal market persuaded many factory owners to move their operations from Mexico to China. Although this trend is now beginning to reverse, the rivalry has left Mexico City and Beijing feeling like rivals for foreign direct investment (FDI).

This also means that China's investments in Mexico have lagged behind those it has made in other Latin American countries. In 2012, China's non-financial FDI in Mexico amounted to $82.78 million, compared to the $100 million it poured into Brazil. And with Mexico's economy largely based on oil and gas, mining and automotive manufacturing, no excuse can be given, since these sectors are crucial to China as well.

One small step toward mending this relationship seemed to have been taken when a consortium led by China Railway Construction Corp (CRCC) landed a $4.3 billion bid to build a high-speed railway between Mexico City and the nearby town of Queretaro. The deal was surrounded by controversy early on though, when the likes of Bombardier, Alstom and Siemens expressed early interest in the project but were reportedly denied more time to prepare bids of their own. Nevertheless, the Chinese-led consortium won and this was seen as a way to begin thawing tense relations between the two countries and to have Chinese investment money pouring into Mexican coffers. However, a bombshell fell in early November with the news that Mexican President Enrique Peña Nieto had revoked the contract from the CRCC-led group, citing doubts as to the "legitimacy and transparency of the bidding process."

China's condemnation was instant and unilateral. CRCC said it was extremely shocked, while Wang Lan from the China Academy of Railway Sciences blamed "system-wide confusion in Mexico when dealing with overseas investment." Chinese Premier Li Keqiang told visiting Peña Nieto that "China's high-speed railway technology is advanced, reliable and cost-efficient." Following reports of the canceled deal, CRCC expressed shock at the Mexican government's decision and indicated that it would resort to legal measures to protect its interests. Later reports citing anonymous sources said the consortium was compensated some $16.2 million for the axed deal, although these reports were promptly refuted by transportation authorities in Mexico.

As this episode continues to fold, it has become clear that neither the shamed Mexican government, nor the infuriated Chinese responders considered one important thing. Whether out of a lack of local intelligence, misplaced trust or complacency, CRCC did not do full local diligence on its business partners. One of the partners in its consortium, Grupo Higa, a Mexican construction company, is being investigated for its close ties to the Mexican president and his wife. The owner of Grupo Higa, Juan Armando Hinojosa, is known to be a close friend of Peña Nieto and won a string of construction contracts between 2005 and 2011 when Peña Nieto was Governor of the State of Mexico. When he began running for President, Peña Nieto also rented hundreds of helicopter and private jet trips from another Hinojosa company to campaign.

Now, the attention is on real estate. Grupo Higa owns two vast luxury properties in the heart of Mexico City, one of which was being rented by the president's wife and the other by his legal advisor. While this might seem fair and above board, the first one was found to have been designed specifically for the presidential family, complete with marble floors, a spa and various other luxuries. Any claims that the president's wife simply bought a new house was negated when its architect revealed that he had consulted with Peña Nieto directly during the construction. In essence, Hinojosa's companies have benefited lavishly from Peña Nieto's career and, in return, designed him a perfect estate in the heart of Mexico City.

At a time when Mexico's reputation is tarnished by the barbaric murder of 43 students at Ayotzinapa, it is no surprise Peña Nieto revoked the contract to avoid further links to Grupo Higa. CRCC just happened to get caught in the crossfire. While it may have been innocent of wrongdoing in this case, CRCC and other Chinese companies teaming up with foreign players on their home turf would do well to study this episode. Finding the right partner goes deeper than just picking the company with the most presidential access.