Burgeoning tech sector in Mexico leads to thriving IT industry

The Mexican ICT sector is well established. There is, however, some ambiguity over the statistical measurement of its size and performance. Using data from the National Institute of Statistics and Geography, one industry lobby, the Mexican Electronics Telecommunications and Information Technologies Industries Chamber (Cámara Nacional de la Industria Electrónica, de Telecomunicaciones y Tecnologías de la Información, Canieti), has estimated that in the 15 years leading to 2014 the industry as a whole has represented between 4.3% and 5% of total GDP. In Canieti’s wide definition of the ICT sector, there are in fact three separate subsectors. In 2014 these were electronics, at 0.65% of GDP; telecoms, with 2.64% of GDP; and IT, with 1.43 of GDP. Using this wide definition, Canieti says ICT exports have accounted for around 10% of Mexican manufacturing exports. In 2014 the value of Mexican ICT exports was $62.4bn, ranking the country as the world’s fifth-largest ICT exporter, behind China (with over $500bn worth of exports), the US, South Korea and Japan.

Growth Drivers

Mexico’s ICT sector has been experiencing strong growth in recent years. There are several key factors driving the expansion in the country’s technology sector. The first is Mexico’s geographic proximity to the US, the world’s largest economy. This proximity has supported and encouraged a so-called near-shoring phenomenon, a process through which large international corporations locate parts of their manufacturing or services activities in Mexico to serve the US market, taking advantage of competitive labour costs, good logistics and other benefits.

Examples include GE, which set up its global procurement department to operate out of Aguascalientes in Mexico. Hewlett Packard, meanwhile, runs its global human resources function out of Guadalajara. IBM, Oracle and Intel also have Guadalajara-based innovation centres. Guadalajara has grown in importance in terms of high-tech industries, accounting for 55% of exports and employing 25,000 people. Since 2014 an estimated $120m has been invested in Guadalajara, with the majority of these funds coming from venture capital based in the US. According to the state of Jalisco’s innovation ministry, exports nearly $21bn in tech products and services every year.

A second and related factor is the ease of transport between the two countries. There are over 300 daily flights linking US and Mexican cities; that means that US-based business executives in cities like Austin or Dallas in Texas, or Miami in Florida, can fly to inspect operations or hold meetings with their Mexican plants in a range of locations across the north of the country, and return home on the same day.

Air travel in the opposite direction, allowing Mexico-based executives to pay quick visits to head offices located in the US, is equally easy. Javier Allard, director-general of industry at the Mexican Association for the IT Industry, explained that Mexico had the second-largest technology sector in Latin America, placing it behind Brazil but ahead of third-placed Argentina. Allard estimates that the IT sector, excluding communications, has an annual value of around $18bn and has been growing at a 7% annual rate.

Jesús Eugenio de la Rosa, executive director of external relations at IBM México, mentioned additional reasons why the country is attractive to technology companies. One important point was that the country had an open economy, with one of the largest numbers of free trade agreements with other countries in the world. “For a global company like IBM it is very important not to have limitations on the goods and services we can import or export,” De La Rosa told OBG.

In negotiations on the Trans-Pacific Partnership, the Mexican government had been responsive to issues raised by the tech sector, supporting the free flow of data across borders, and the unrestricted use of overseas servers. De La Rosa noted that as Mexican companies became more global in their outlook by interacting increasingly with overseas clients, they became more aware of the need to use more sophisticated data-management systems.

The Trump Factor

There was some concern in the Mexican IT sector that a more protectionist stance on bilateral trade by the administration of the newly elected US President Donald Trump, could have a negative impact on the industry. However, Allard suggested that Mexican technology suppliers were less likely to be singled out than Mexican automobile producers. This was because, in contrast to the automobile plants, Mexico-based tech companies were responsible for a much smaller share of US technology goods and service imports than companies in Asia. “Mexico is responsible for around 4-5% of global technology turnover, so we are not the highest profile players, and therefore are less likely to be targeted,” Allard told OBG.

Conversely, César Castro Rodríguez, president of Canieti, was worried that the new Trump administration might follow up an earlier suggestion made during the tenure of former US President Barack Obama to give US-based ICT producers fiscal incentives designed to favour local production and employment.

Some, in contrast, saw positive opportunities in the new situation. The Trump administration’s first moves on immigration included a suggestion that H1-B visas, used to allow US-based tech companies to bring highly qualified foreign talent to the US, might be restricted. In February 2017 Artistóteles Sandoval, governor of Jalisco state, whose capital city is Guadalajara, travelled to California to visit high-tech companies and promote the state of Jalisco as a friendly environment for international tech workers who might have difficulty entering the US. “We want tech companies to know that there is a huge opportunity in Jalisco for them to grow,” Sandoval told local journalists. He stressed that his state’s advantages include a time zone close to that of Silicon Valley in the US, strong infrastructure and a supportive local government.

Benefits Of A Weak Peso

The depreciation of the peso over the course of 2016 – a process that levelled out in the early months of 2017 – had a series of both positive and negative effects on the economy. On the one hand, there was the expected increase in the rate of domestic inflation; on the other hand, for Mexican companies operating in the tech sector, an important impact was that their exports became more competitive in US dollar terms. According to Martha Mendoza, an account executive at Mexican technology company Emcor Software, it would increase the company’s sales efforts in the US. “Even though the costs of infrastructure, equipment and other factors here in Mexico are increasing with inflation, we will still be seeing an increase in our income by focusing on the US market,” she told industry media.

Banking & Industrial Take-Up

There is still major potential for technology companies operating in the domestic market. Mexico has achieved significant levels of development in manufacturing industry and service sectors such as banking, but faces an ongoing challenge to increase productivity and competitiveness. Efforts to address sluggish economic growth across the economy as a whole, and more recently, potential adverse moves in terms of bilateral trade with the US, suggest there is a significant opportunity to increase the use of technology and digital systems.

One optimistic assessment of the potential for increased application of technology in Mexican manufacturing came from Iván Pelayo, executive vice-president for industry at Siemens’ regional headquarters for Mexico, Central America and the Caribbean. In local news reports Pelayo noted that manufacturing represents 18% of GDP and that the vast majority of companies in Mexico are small and medium-sized enterprises (SMEs) with relatively low levels of technology. Intense digitalisation of productive processes could, in his opinion, help Mexico become the world’s fifth-largest economy — up from its current ranking of 14.

Visiting the KIA Motors automobile plant in Pesquería, in Nuevo León state, Pelayo said the full digitalisation of assembly operations there had allowed the company to achieve a 25% gain in efficiency, cutting the time taken to produce each vehicle by 50%, and allowing KIA to produce two different models — RIO and Fortalecer — on a single production line. The “Alliance 4.0”, an agreement struck between the Ministry of Economy and a group of companies including Siemens, PepsiCo and Hewlett Packard, was designed to encourage the take-up of digital systems among the country’s SMEs.

“Some parts of the IT sector are growing at around 16 times the pace of the national economy. This means the infrastructure and supporting factors have to grow 16 times faster to keep pace with proliferation,” Javier Cordero, president and director-general of Oracle Mexico, told OBG. “Consequently, there could be a bottleneck, and development may be constrained in one of the most innovative sectors in the economy.” The challenge surrounding this is how to ensure the entire economy is digitally agile. “The key issue that needs to be addressed is how we undertake large digital transformation organically so that the systems are capable and people are willing to guide the change,” Alejandro González Estrada, director-general for Mexico and vice-president of Latin America for Unisys, told OBG. “There are certain key sectors that can drive this forward such as the banking sector and the availability of government e-services, both of which increase transparency and trust of e-services within the population.”

Outside Influencers

International IT companies have worked to expand their market share by targeting medium-sized companies, where there is still relatively little use of IT, seeking to capitalise on a similar process of IT-driven productivity increases in the US in the 1990s. Companies have worked to convince both the government and medium-sized companies themselves that IT systems could deliver a similar major improvement in output and efficiency in Mexico, using everything from customer relationship management systems through to bespoke software for different types of industry. In terms of transparency portals and providing government services, many observers are positive about steps being taken. “Over the past two years there have been significant advances in government efforts to connect with their citizens, helped on the one hand by the popularity of social networks, and on the other hand by government efforts to improve transparency and efficiency in the services they provide their citizens,” Cordero told OBG.

While some companies may be slow in moving to fully digitise their production processes, there are certainly signs of progress in the migration to cloud computing. In an interview with regional media Luis Ochoa, the director of telecoms company Alestra, said that close to 84% of Mexican companies were moving to adopt cloud services as of mid-2016, a significant advance on the roughly 25% that were doing so just three years earlier. Ochoa noted that smaller companies were able to move to the cloud very quickly, unlike larger enterprises with traditional IT infrastructure, where a similar transition could take weeks or even months.

Financial Services

In banking and finance, major institutions are looking at ways to improve their operating efficiency, and whether they can apply the ideas of a number of small innovative start-ups that are beginning to emerge across the country. Typical of rising interest in tech applications was the January 2017 announcement by BBVA Bancomer, the largest bank in the country, that it was acquiring Openpay, a financial technology start-up specialising in real-time payments for individuals, small businesses and larger enterprises (see Banking chapter). Openpay offers credit or debit card, cash and loyalty-points payments through a single point-of-sale platform. Like a number of other large financial institutions, BBVA has expressed interest in adopting and developing blockchain or “distributed ledger” technology that provides more efficient, secure and decentralised payments systems.

Industry lobby group Canieti has signed an agreement with Bankaool, an online banking company, to promote credit for micro- and small enterprises willing to invest in technology. Canieti says its aim is to encourage smaller companies to increase their investment in areas such as hardware, software, specialised machinery and telecoms equipment. Bankaool will offer credit from MXN100,000 ($6027) to MXN1m ($60,270) to companies affiliated with Canieti.

Networked Readiness

According to the World Economic Forum (WEF), global economies are entering a “fourth industrial revolution” based on increased use of ICT and the digitalisation of production processes,. The forum compiles an annual Networked Readiness Index (NRI), which attempts to measure the ability of countries to extract benefits from ICT investment. In 2016 Mexico was ranked 76th out of 139 countries, broadly in the middle of the table. Those with the highest networked readiness scores included Singapore, Finland, Sweden, Norway and the US. The WEF breaks the ranking down into three separate categories, reflecting government, business and individual ICT use. Mexico ranked 52nd for government usage, 66th for business usage and 84th for individual usage. The WEF noted that individual usage was beginning to catch up due to the growing popularity of mobile broadband subscriptions. Government usage moved up 13 places, reflecting improvements in the way authorities use ICT to interact with the population. However, the regulatory environment was seen as having deteriorated because of reduced efficiency of the legal system in settling disputes. Mexico was nevertheless improving its readiness in terms of the economic and social impacts of ICT.

Creative Industries

An important group of activities linked to ICT are carried out by Mexico’s creative industries. According to a report by global consultancy PwC, the country’s creative industries were expected to have grown by 8.9% in 2016. The report went on to say that Mexico was one of the world’s top-20 exporters of creative industry products and services, with seven regional production centres around the country. The state of Jalisco and Mexico City were seen as particularly strong in terms of animation and special effects; Nuevo León, Baja California, Aguascalientes, Querétaro and Yucatán covered a range of specialisations, but stood out in terms of video and computer games along with interactivity. There are an estimated 60 animation companies currently operating in Jalisco, and a further 100 advertising and PR companies that have animation skills, according to industry sources. The state government has been working with these companies and industry lobbies to support its project of building a Creative Digital City (Ciudad Creativa Digital, CCD). The idea behind the CCD is to create a cluster that would include film and TV production companies, video game producers and animation studios, along with software firms and app development companies. A similar cluster is being developed in Nuevo León. Alejandra Sánchez, president of the Monterrey Interactive Media and Entertainment Cluster, said it aims to support and promote digital marketing, video games, films, animation, e-learning and 3-D visualisation. The state has supported a video game incubator for start-ups known as Games Starter.

Cloud Computing

Most large Mexican companies have moved to adopt cloud computing services, but the take-up among SMEs has been slower. Despite this, executives in the technology sector are convinced cloud computing will become the standard. “The belief that the cloud is insecure is being overcome. Today, we have many clients across different industries, which shows that Mexican business is ready for this technology,” Cordero told OBG. Company sources say 40% of its Mexican revenue is now coming from the cloud, a proportion that is set to increase. Globally, SMEs have been slower to take up cloud computing, but in some areas adoption has surged, recording 30-40% annual growth.

While technology has been improving levels of security, since 2014 the government has identified the need for a national policy on cybercrime and cybersecurity. One of the issues being assessed is the need for new legislation to define cybercrime. Mexico’s Federal Police already has a specialised cybercrime unit, but experts say it has been set up to react to current security breaches, rather than prevent future ones. According to a November 2016 report by PwC, compared to other nations, Mexico is still lagging behind in the area of cybercrime prevention. Awareness of the risks does seem to be improving, however. In a survey of Mexican corporates, PwC found 70% had increased spending on cybersecurity, above the global average of 59%.

Big Data

Another area where Mexican companies are finding promising opportunities is big data analytics. A survey by Gartner revealed 73% of Mexican firms are investing or planning to invest in big data operations. Oracle has suggested that data management techniques could ultimately boost margins in the retail sector by as much as 60%. One of many companies seeking to develop big data in Mexico is Spanish-owned mobile phone operator Telefónica, which is sees big data, along with the internet of things and enhanced security, as an essential part of its future growth strategy.

Outlook

There is clearly major scope to increase technology penetration in Mexico, particularly by increasing digital management systems across the manufacturing industry and services sector, where take-up has been limited. The fundamentals of the technology sector point to strong medium- and long-term growth.

 

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The Report: Mexico 2017

Telecoms & IT chapter from The Report: Mexico 2017

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