After several years of expansion, Mexico’s IT sector now makes up 6-7% of GDP, and this is expected to grow rapidly as constitutional reforms reshape the industry. The sector combines positive and negative forces. On one hand, its growth has been exponential, attracting foreign companies and allowing a domestic industry to emerge. On the other, asymmetric market conditions have made Mexico one of the region’s least-connected countries for telecoms.
According to the OECD’s “Review of Telecommunications Policy and Regulation in Mexico”, published in 2012, the sector is “characterised by high prices, among the highest within OECD countries, and a lack of competition, resulting in poor market penetration rates and low infrastructure development”. The effect of this has been felt on the expansion of both telecoms services and internet access. Mexico has about 40m internet users, but only 17% of its 117m people currently have access at home, compared to 38% of Brazilians and 40% of Chileans.
MARKET STRUCTURE: The Mexican IT market’s total value in 2013 reached $20bn, according to Javier Allard, director-general of the Mexican Association for the IT Industry (Asociación Mexicana de la Industria de Tecnologias e Información, AMITI). Government is among its biggest buyers. For 2014, the federal government’s total budget for IT equipment is expected to reach $4bn, or 22% of the total market, according to AMITI. This is more than the total value of the IT sector in every Latin American country save Argentina and Brazil.
One factor that has helped galvanise IT development is close proximity to the US. “It is a natural market for us: a very big economy with dynamic players that demand IT services,” Allard told OBG. “The total cost of operations in Mexico is also very low. We probably do not have the prices that China has, but the short distance compensates.” Other factors are also pushing growth. A number of multinational manufacturers, especially in the automotive and aeronautics industries, have boosted demand for technology services and software development from domestic firms. Government policy gives a pivotal role to IT in society through its National Digital Strategy, while several financing and training programmes are increasing IT usage among Mexico’s large number of small and medium-sized enterprises (SMEs).
To gauge where the sector is going, industry representatives, including AMITI, the Mexican Institute for Competitiveness (Instituto Mexicano para la Competitividad, IMCO) and private IT consultancy firm Select, joined efforts to produce the “Road Map 2025” report. Published in 2013, the study establishes some of the key areas for development for Mexican IT over the next decade. It expects the sector to grow at an overall annualised rate of 8.4% between 2013 and 2025. Several trends are visible, according to the study, especially a move towards higher value added activities. Software development is projected to grow from only 5% of the Mexican IT sector in 2013 to 11% in the next ten years. Hardware manufacturing, which made up 25% of the sector in 2013 and is still growing, will become less relevant by 2025, then representing 21%. On the upward trend, cloud computing is expected grow at a regular rate to represent 6% of the ICT market by 2025. In anticipation of this, several major IT consulting firms are already investing in cloud data centres.
TECHNOLOGY ADOPTION: Part of public and private efforts to increase IT adoption in the country is related to its impact on the general competitiveness of Mexico, but also to its capacity to increase efficiencies within the private sector. Spending on IT at company level has increased slowly over the past decade. According to the “Road Map 2025”, expenditure grew from $25.5bn in 2003 to more than $42.5bn by 2011, only $22.6bn of which was spent at company level. “The government has significant visibility in the computer equipment market thanks to the large number of public tender invitations,” Scott Overson, general manager of Intel México, told OBG. “However, these bids are not the sector’s engine of growth. Two-thirds of the market depends on computer purchases by individual end users; the remaining third is divided between large enterprises, SMEs and government.
A report by the Competitive Intelligence Unit argues that intensive usage of IT could add an extra 5% to GDP. The level of IT penetration among Mexican businesses can be differentiated by the size of the company. The World Economic Forum ranked Mexico 64th for firm-level technology adoption. Large multinationals, both Mexican and foreign companies operating in the country, typically have a high level of IT usage, making it a part of their activities, from manufacturing to services. “These have very good levels of technology adoption,” said Allard.
Among medium-sized companies, IT prevalence falls to about 50% of firms. Most medium-sized companies do not use IT in productive processes, but mainly as communications tool such as email and for accounting purposes. The segment of small companies in Mexico is where adoption of IT remains at its most basic. “There are probably 3.5m small and micro companies formally registered in Mexico. I believe that of those, approximately 50% do not even have a computer yet,” Allard told OBG.
In terms of the big players, the sector has been attracting private investment from local and foreign operators. US technology firm CISCO has announced it will invest $1.3bn in its Mexico operations in 2014. The financing will serve to expand its manufacturing unit, create a new support centre for its Spanish-speaking operations in the region, and fund its education and training programme to help 50,000 students hone their IT skills.
IBM aims to open a new data centre in Mexico City, as part of a $1.2bn global investment plan to expand cloud computing capabilities in several of its locations, while telecoms operator Alestra also recently inaugurated a $59m data centre in Querétaro that will double its cloud operations. “Businesses are no longer interested in buying printers or technology equipment. The trend has shifted to buying services,” said Manuel Corti, the CEO of Dataproducts de México. Yet the adoption of technology at company level will ultimately be connected to how society in general deals with IT. This side of the equation is where authorities are focusing policymaking.
NATIONAL DIGITAL STRATEGY: Recently launched was the government’s plan to increase the use of IT through better access. The National Digital Strategy (Estrategia Digital Nacional, NDS), published in November 2013, is an ambitious plan to put IT at the centre of interaction between government and citizens. The new strategy is to be implemented during the current administration and is deeply connected with the recently approved constitutional reforms for the telecoms sector. By 2018 the Mexican government hopes to put the country at the forefront of Latin American nations in terms of IT use. It is also aiming to get closer to the OECD’s average levels of IT access and connectivity.
The administration of President Enrique Peña Nieto is trying to give new emphasis to IT access by establishing it as a right of all citizens, and cost reduction will be an integral part of making IT services more widespread. As the reform is rolled out through a series of secondary laws, the authorities hope that increased competition in the telecoms sector will boost investment in infrastructure and improve affordability across the country.
The NDS states five main goals to be achieved by a generalised use of ICT by the population. The first is to transform the way that society relates to government, increasing the use of IT as a door to access public services. Several measures have allowed strengthening of e-government. But more can be done, said Rodrigo Gallegos Toussaint, director for climate change and technology at IMCO. “The Mexican government distributes a lot of money through social programmes, subsidies, scholarships. It is a very paternalistic government, and all of this can be one through IT, forcing everyone to become more connected whether they are rich or poor,” he told OBG.
Another important element will be to better connect the use of IT with economic growth and job creation. This will be especially important at the SME level, where IT adoption lags behind compared to the bigger companies. Part of government efforts have typically been directed at facilitating access to IT equipment. But other general measures are proving effective to bring businesses into the digital age. “The government is doing very interesting things to increase IT adoption at the business level,” said Allard. “Starting this year, all business invoices will have to be electronic, so this is another measure that will accelerate IT adoption within companies.”
EDUCATION & HEALTH: Education and health policies are also set to see a closer connection with IT. Over the next five years, the authorities aim to start centralising citizens’ health history and vaccination information to make it accessible through different health services. Preventive medicine will also get a boost, as health authorities hope to be able to provide distance support through IT.
In education, the NDS aims to enhance IT teaching at all stages of the system by creating online content and making all educational materials available online, increasing distance-teaching possibilities. It will also underline the importance of IT as a learning tool in teacher training programmes.
GOVERNMENT SUPPORT: Interconnected with the NDS, several other instruments are targeted at increasing interaction between businesses and technology. Under the Ministry of Economy, the Prosoft Fund is directed at software development firms, and channels government cash grants to help finance up to 50% of investment projects, against the remaining 50% invested by a company. The grant can be used to upgrade equipment, train human resources to boost IT capabilities, increase training or improve industry certifications. The 50% granted by Prosoft is divided, with 25% from the federal government and 25% from state governments. For 2014, the programme is budgeted to distribute $56m. As funds can be accessed by international as well as domestic firms operating in Mexico, Prosoft has attracted foreign technology companies to set up operations.
INADEM FUND: The recently created Entrepreneur Institute (Instituto Nacional del Emprendedor, INADEM) has a fund to increase ICT use for productive activities among Mexico’s SMEs. Over a six-year term, the fund expects to support 300,000 companies with a total of MXN6bn ($466m).
Support through INADEM’s entrepreneurship fund is capped at a maximum of MXN20,000 ($1554) per company for micro businesses, and at up to MXN50,000 ($3885) for medium-sized companies, up to a maximum of 80% coverage of a specific investment. Depending on the size of the company, financial support can be used to improve internet connectivity or acquire software.
Government support will do much to encourage further private investment. Javier Cordero Torres, president and general manager of Oracle Mexico, told OBG, “The public sector is the biggest consumer of IT, but the lack of expenditure over the past two years has slowed investments from private companies. This has had a direct impact on productivity.”
E-GOVERNMENT: Higher spending will also help raise the number of government services delivered online. In the UN’s “Global E-Government Survey 2012”, Mexico ranked 55th of 199 countries, from 56th in 2010. Much has been done over the past decade, and the country has progressed from an earlier era, in which online government services were used mainly to provide information or request paperwork, to a more interactive level, with services provided and processed completely online.
TAX RETURNS: Several measures are already having an impact, especially for small businesses, which are now required to file their tax returns online. Although some still do this through accountants, digital taxation structures have had a big role in bringing businesses online, which in turn has helped to increase tax collection. As of 2014, all businesses invoices will be required to be electronic.
More is set to come with the implementation of the NDS. Authorities are centralising all bureaucratic links between citizens and public administration in a single platform. Establishing electronic signatures as a way of authenticating documentation will also be a goal of the current administration to increase the use of online processing of paperwork.
INTERNET ACCESS: All of this will further encourage internet access. In less than a decade, the number of internet users in Mexico has more than doubled. Between 2006 and 2012, the number of connected Mexicans rose from 20.2m to 45.1m, according to the Mexican Association for the Internet (Asociación Mexicana de Internet, AMIPCI). Internet adoption is driven mainly by Mexico’s young population: 62% of users are 12-34 years old.
Mexican users spent an average of five hours a day online in 2013, an increase of 67 minutes on 2012. This means that, although a considerable chunk of the population is still not regularly connected to the web, those with access have high consumption rates. The current telecoms reform is sure to boost investment in 3G and 4G networks, which cover mainly in big cities. A more competitive market will encourage firms to offer faster mobile broadband services, which will be increasingly accessible through the proliferation of smartphones.
Substantial room for improvement remains. “Penetration of communication services in Mexico is extremely low, and this creates a huge access gap mostly in rural communities,” said Hernán Garza Villarreal, planning director at Telecomunicaciones de México, the state entity in charge of Mexico’s rural telecoms expansion. Included in the digital strategy is a plan to take free broadband access to more than 250,000 public institutions in remote areas over the next five years, connecting schools, municipal buildings and hospitals. Also planned is the creation of 900 Wi-Fi hotspots in isolated communities that will provide internet access 24 hours a day. This should help to reduce dependence on the community centres that currently provide access in many villages. “Much of this will be managed by Telecomunicaciones de México, which already runs Mexico’s satellite system and a network of telegraph offices around the country that are vital for payment transfers in rural areas,” said Garza Villarreal. The current reform transfers the management of Mexico’s fibre-optic network from the Federal Electricity Commission to Telecomunicaciones de México, which will also be in charge of expanding it. “Today the fibre-optic network stretches for more than 30,000 km, and the national development plan mentions the construction of an additional 35,000 km,” Garza Villarreal told OBG. When the extension of the fibre-optic network is complete, Garza Villareal estimates that 98% of the population will be within 40 km of an access point for internet and telecoms.
Another programme, the National Network of the Drive for Broadband, aims to increase high-speed internet connections. Under this scheme, the Ministry of Transport and Communications awarded a contract in 2014 to Axtel, which will connect government institutions such as universities, hospitals and research centres in 40 urban centres with high-capacity internet, for an investment of $2.9m.
E-COMMERCE: Growing internet connectivity has allowed for the sustained development of e-commerce. Every year, AMIPCI reports on the evolution of transactions using the internet in Mexico, which have been increasing in value, especially in the past three years. Between 2009 and 2013 the value of e-commerce transactions jumped from MXN24.5bn ($1.9bn) to MXN121.6bn ($9.4bn). In 2012 the value of internet transactions rose by 57%, and by an additional 42% in 2013, according to AMIPCI.
Even so, much remains to be done. “Only one in 10 companies report internet sales, and 17% report doing part of their buying online,” Gallegos Toussaint said. A federal law to protect personal data, passed in 2010, helped bring a degree of confidence to online transactions, but as increased web access expands e-commerce, stronger internet security will be key. “The need for effective security solutions is increasingly evident, and biometric technologies can help meet this need,” Enrique Leiva Amour, general manager at NEC, told OBG. “More friendly regulations are also needed. The main deterrent to foreign direct investment is the level of legal uncertainty,”
OUTSOURCING: Rising costs in Asian markets have helped put the sector on the map, especially for US-based firms. Mexico has already made a name for itself in IT outsourcing and business processes outsourcing, and is currently the fourth-largest country in IT service provision, after India, the Philippines and China. The value of the outsourcing sector increased from $6.9bn in 2006 to $13bn in 2012, according to research firm Nearshore Americas. Outsourcing has benefitted from natural advantages. First, there is Mexico’s geographic proximity to the US, where call centre operations and back office services can cost 50% more, according to Nearshore Americas. Also important are Mexico’s language skills, which can cover most of Latin America, and also Spanish speakers in the US.
Despite this, a shortage of English-speaking workers has been felt in some key cities for IT services provision, such as Mexico City, Monterrey and Guadalajara, according to “The 2012 Investor’s Guide to Mexico’s Business and Technology Services”, published by Nearshore Americas.
Finding English-speaking workers can be an even bigger challenge in smaller emerging IT outsourcing centres, such as Aguascalientes, Hermosillo and Querétaro. This could eventually impact salaries. On average, a software programmer in Mexico earns $1884 per month, compared to $7800 in the US.
Grants included in Ministry of Economy programmes to help increase training will contribute to improving language skills. Other costs are expected to go down, however. The high price of telecoms services should fall as the government implements the sector’s constitutional reform.
OUTLOOK: The reform of Mexico’s telecoms sector is expected to give the IT industry a major boost. Yet the government’s plans to accelerate broadband access across the country at affordable prices will be essential to bring Mexico into the digital age, and increase the competitiveness of businesses. Outsourcing will remain an important component of IT exports and continue to provide employment in several urban centres, although future growth patterns in the segment will depend on how competitive prices remain over the coming years. More profitable for the industry’s growth will be the move into value-added activities. The “Road Map 2025” report points to areas for future development. Big data, cloud and smartphone applications are all set to become important growth engines for the sector.