Fuelled by economic expansion in key sectors, the IT industry is becoming increasingly important for Mexico’s development. Although the segment has had to battle with an underdeveloped telecoms sector, which has translated into low penetration levels for internet and expensive consumer access for services, regulatory changes are bringing about a new cycle of growth for IT and telecoms.
Government policy has made expansion of the IT sector a priority, not just as a means of economic growth, but also for the social integration and development of Mexico’s remote regions. This has been implemented through several support programmes, not only to increase the amount of interaction that citizens and the state can have digitally, but also as an instrument to enhance the delivery of public services, such as security and education.
Stronger Together
The development of Mexico’s IT sector has also been linked to its proximity to the US, which has allowed several domestic companies to grow by providing IT services across the border. Although prices for Mexican IT services are not as low as other markets, this has been offset by the short distance, which allows for direct business links. Additionally, the growing presence of multinational companies in sectors such as aeronautics and automotive manufacturing in Mexico is increasing the demand on services of the domestic IT sector.
The reform process is also having a gradual impact on the telecoms sector and improving the overall environment for IT adoption throughout Mexico. “More than the market share of operators, the reforms are affecting consumer prices, interconnection costs and so on. It is important, because telecoms provides access to IT,” Rodrigo Gallegos Toussaint, director for climate change and technology at the Mexican Institute for Competitiveness ( Instituto Mexicano de la Competitividad, IMCO), told OBG.
Figures
Mexico’s IT sector reached a total market value of $23.6bn, according to the International Data Corporation (IDC), an IT and telecoms consultancy. Together, the two sectors accounted for $58.3bn. Although the IT sector registered growth of 8.6% in 2013, the following year was less favourable for the industry due to a generally less positive outcome for the wider Mexican economy, leading the IT sector to post growth of 1.6% in 2014, according to the IDC.
For 2015 the IDC expects the market to return to a more positive performance and see growth of 6.4%. About 55% of the Mexican IT market was made up of equipment sales in 2013, according to IT consultancy Select, while the second-biggest element is IT services with 27%. Software development, which has become a strategic segment for Mexican IT firms looking to enter new foreign markets, made up 12% of the sector, followed by consumer goods at 6%. Government investment in the IT industry currently accounts for 40% of the market. “The public sector offers great opportunities for tech companies. Driven by a need to streamline its processes, the government’s adoption of state-of-the-art technology is on the rise,” Vicente Salazar Gómez, vice-president and general manager of Unisys Mexico, told OBG.
Of the total IT market value in 2014, $5bn resulted from IT exports. Crucially, business process outsourcing and software development, which are becoming important segments for the Mexican industry, have allowed the country to expand its presence internationally. “The most important part of our export business is software development, linked to a strong influx of human resources capabilities. Mexico is graduating just over 100,000 IT graduates at all levels of education, and these courses have a lot of quality people,” said Javier Allard, managing director at the Mexican Association for the IT Industry (Asociación Mexicana de la Industria de Tecnologías de la Información, AMITI).
Creating Opportunitites
Connected to this, the development of IT capabilities has become a means to promote regional growth, create jobs and attract foreign direct investment (FDI) into the country. In 2014, for example, figures from the Ministry of Sustainable Development and the National Institute of Statistics and Geography confirmed that the IT sector had being growing at an average annual rate of 17% over nine consecutive years, leading to the establishment of 150 IT companies and 15,000 direct jobs during that time. This dynamism has also been affected by FDI coming into Mexico in search of qualified human resources and favourable conditions.
A Model City
In 2013, for example, the state of Querétaro received $780m in investment from IT services firm Alestra to establish a data centre, as well as a $13m global services centre set up by Ericsson. Guadalajara, the main city in the state of Jalisco and Mexico’s second-largest urban centre, has also made a name for itself in the sector, attracting start-ups, seasoned IT players and associated services.
More investment is expected to come out of the establishment of the Digital Creative City (DCC) and a business centre, which authorities set up in Guadalajara in 2014 hoping to create 15,000 new jobs by connecting technology companies with the city’s pool of human resources. German company Bosh also recently announced the opening of a $5m research centre in Guadalajara’s DCC.
Government Policy
State policy has also played a role, with successive governments giving increasing attention to the sector and its potential trickledown effect on employment and business sector performance. In November 2013 President Enrique Peña Nieto’s administration launched the National Digital Strategy (Estrategia Digital Nacional, México Digital), which aims to expand IT usage and access to all Mexicans not only by reducing the cost of telecommunications and making equipment accessible, but also through the expansion of internet access across the country. Cost has traditionally been a problem, but rising competition following the application of constitutional reforms is bringing prices down. Furthermore, government schemes are supporting increased IT use by Mexican firms.
One key government tool has been the Prosoft fund, operated under the Ministry of Economy ( Secretaría de Economía, SE) and running since 2002. The financial support is targeted at developing Mexico’s software industry by improving conditions on both the demand and the supply side. For 2015 the programme has set aside MXN749.7m ($50.5m) for grant schemes, slightly higher than the funding pool of MXN720m ($48.5m) in 2014. Prosoft financing schemes are based on a 50:50 structure, under which a beneficiary company will match the funds requested from the government. Furthermore, 50% of the investment coming from the state is divided between an equal contribution from the Prosoft fund on one hand and state governments on the other. Financing allocated under Prosoft can be used for human resources training, acquiring industry certification or buying IT equipment. Grants provided by Prosoft have also helped to develop the industry by freeing up investment funds for both domestic firms and foreign companies operating in the country.
Support
Since its launch in January 2013, significant support has been channelled through the National Institute of Entrepreneurship (Instituto Nacional del Emprendedor, INADEM) under the SE. The fund was formed from the merging of two funds, the Entrepreneurship Fund and the Micro, Small and Medium-sized Enterprises Fund. Support programmes under INADEM for 2015 totalled MXN8.9bn ($599m), which is distributed through 31 different initiatives.
One big change in the way the fund operates is the division of the country in three different regions in order to ensure that more support goes out to where it is needed. Several programmes under the fund grant financial support for micro and small companies to improve IT usage, through the acquisition of new equipment or training of human resources. The programme to increase IT use allocates 80% of a specific investment, with a maximum funding of MXN20,000 ($1346) for micro companies and MXN50,000 ($3365) for medium-sized firms. According to government figures cited by local media, INADEM and the National Council for Science and Technology have made MXN1bn ($67.3m) available for investments related to the IT industry in 2014.
Technology Adoption
Improving IT usage has been an important element of government policy, which has supported access to technology and skills. As a result, the uptake of IT has been improving among small and medium-sized enterprises (SMEs), as well as individual customers. Although the volume of businesses using IT in their activities has become more important, sector observers question whether or not this increased usage has become more sophisticated. “Incorporation of IT, especially in small businesses, tends to be very basic internet access and emailing. Although those initial steps are all positive, when we look at IT usage that improves accounting, management, monitoring and information warehousing, the uptake by Mexican small businesses is much less relevant,” Gallegos told OBG.
Also relevant is the linkage of specific IT skills and technology access used to improve business and productivity. “Without relevant skills, the gains from IT for a company will be marginal,” said Gallegos. According to the 2014-15 “Global Competitiveness Report” by the World Economic Forum (WEF), Mexico ranked 70th out of 144 countries for firm-level absorption of technology. Brazil reached 59th for the same indicator, Costa Rica 45th, Chile 39th and Panama 35th. This is something the authorities have been keen to improve through funding of grant schemes and other means to ease access to technology.
Looking To Smartphones
One way in which a lot of micro companies have been able to access IT for their business operations has been through smartphones and apps. Specific applications include smartphone programmes that allow businesses to control inventories and their accounts, and maintain customer relationships. Use of such apps has reduced the cost normally associated with raising business usage of IT solutions. Understanding this, AMITI, in conjunction with Microsoft and Prosoft, established the APPlícate scheme in January 2014. The MXN14m ($942,200) programme’s goal is to promote the development of mobile apps, specifically those that can support the SME segment.
Mexico has also been good market for micro companies seeking to access the operational improvements allowed for by smartphone technology. According to figures from telecommunications consultancy firm The Competitive Intelligence Unit, in the first quarter of 2015 up to 59% of mobile phone lines in Mexico used a smartphone. “The combination of mobile applications and cloud services has reduced the cost for companies wanting to access productive IT equipment. This is very important in a country where 90% of registered businesses are SMEs,” said Allard. According to figures from AMITI, there are 500 IT firms operating in Mexico that develop computer software, although only about one in eight of these focus on mobile phone apps.
Internet Access
Low levels of internet penetration have hampered efforts to develop the IT sector, although that has been slowly changing. At the end of 2014 internet penetration stood at 51%, according to figures from the Mexican Internet Association (Asociación Mexicana de Internet, AMIPCI), reaching 53.9m users. This represents a 5.3% increase on 2013 figures, and over the past eight years the number of internet users in Mexico has more than doubled from the 2006 figure of 20.2m.
Internet consumption habits in the country have also been evolving. Average time spent online has been growing steadily, rising by 24 minutes between 2013 and 2014 to settle at an average of six hours and 11 minutes a day. The technology used to access the internet has also been changing. Desktop computers have been relegated to the third-most-important means of internet access, after laptops and smartphones. Smartphones have been one of the main drivers of growth in internet usage in Mexico, leading the way in terms of internet usage. Higher penetration of internet services has obvious implications for businesses, with an increasing amount of money spent on e-commerce across the country. Between 2010 and 2013 the value of e-commerce sales in Mexico rose from $2.8bn to $9.2bn, according to a 2014 report by AMIPCI.
Improving Access
The government’s digital policy goals and, to some extent, continued economic development will depend on improving internet access, especially the broadband access needed to increase data capacity. This is a challenge, especially given the country’s difficult geography. Part of the government’s México Digital strategy is to expand coverage of communications services and internet links, especially in areas that are commercially difficult for telecommunications operators to service.
Already planned is the establishment of broadband internet access at over 250,000 public institutions, including schools, hospitals and other government buildings located in rural areas. This will be a significant step towards improving internet usage among younger generations of Mexicans, especially in the more isolated regions of the country. The WEF’s 2014-15 report ranked Mexico 93rd out of 144 for internet access in schools, below regional neighbours Chile (42nd), Costa Rica (57th) and El Salvador (81st), but higher than Brazil (98th).
In addition, the government will also fund the establishment of 900 access points that offer free wireless internet, primarily in rural communities. The project will be managed by state company Telecomunicaciones de México, which is in charge of the system that provides connections in several rural areas, as well as the national satellite system.
After the approval of telecommunications sector reforms, Telecomunicaciones de México also became the handler of the country’s fibre-optics network. The state-owned network was previously managed by Mexico’s Federal Electricity Commission. Telecomunicaciones de México will now be responsible for maintaining the existing fibre-optics network, which measured 30,000 km in 2014, adding 35,000 km of lines already planned over the coming years.
Broadband Infrastrucutre
These efforts will be linked to others intended to improve infrastructure, which are already attracting the attention of international investors. The constitutional reform calls for the establishment of a broadband network that is expected to allow competitors in the sector to increase their coverage. The project was initially budgeted at $10bn, but in May 2015 the government announced that under its tender requirements the total investment would be set at $7bn.
“IT is opening new opportunities in a wide range of sectors, such as health care, education and defence, and is a mechanism that allows us to see and perceive the world in different ways. However, without a viable and comprehensive framework for transport, this technology is useless, which is why the telecommunications reform is vital in the advancement of IT use in Mexico,” Javier Cordero, the managing director at ICT firm Oracle, told OBG.
The contract to set up the network will be run under a public-private partnership agreement, in which the winning company or consortium will be required to build and operate the network, as well as manage the wholesale distribution of network space. Mobile and internet providers will then rent space on the broadband network as a way to improve their national coverage. The new broadband network will require the construction of at least 12,000 towers, according to the Ministry of Communications and Transportation. Furthermore, the contract holder will be able to use certain government lands to establish the necessary towers, as well as access to the whole digital dividend of 90 MHz in the 700-MHz band of spectrum and to the Telecomunicaciones de México fibre-optic network.
With the period for potential participating consortiums to show interest ending in May 2015, the government said there had been over 40 applicants, some of which were operators themselves, although the government remained uncertain as to whether or not telecommunications operators would be able to participate in the tender, given their potential role as final users of the future broadband network. As of mid-2015, telecoms networks companies such as Huawei, Nokia, Ericsson and Cisco Systems had all shown interest in the contract.
E-Government
One measurable improvement in the government’s digital agenda has been the advancements of e-government policies, which have translated into more state-to-citizen interactions on digital platforms. Enhancing e-government accessibility had traditionally been impeded by the high cost of telecoms services. According to the UN’s global 2014 E-Government Survey, about 40% of Mexican internet users only accessed the internet in public places, whereas 90% of higher-income households had at least one computer. This is set to change over the coming years, as increased competition in the sector brings connection prices down.
Much improvement has also been possible due to reform of the country’s fiscal system, which is now fully digitised. All business invoices in Mexico are now electronic, except for very small companies earning less than $40,000 a year. Furthermore, after implementing electronic invoices in 2014, tax authorities established a system for Mexican workers to receive their salary receipts digitally. The move towards digitisation of state services has been accelerated by the ongoing fiscal reform.
Slow & Steady
Nonetheless, some delays have affected other e-government projects. The Ventanilla Única (single window) programme aims to centralise the most demanded documents requested by Mexican citizens into a single platform, but has taken more time to implement than initially expected. With plans to offer more services, such as identity cards or vaccination bulletins, the challenge has been to properly integrate different digital and physical information from both federal government agencies and individual state governments.
Although the measure was announced in 2013, the decree authorising its creation was published in early February 2015 and gave the government 180 days to launch the portal. The system is expected to be built up gradually, but authorities have yet to announce which services will be available initially. In terms of the success of the state’s e-government policies, authorities announced in mid-2014 that about 6650 digital documents and processes could already be accessed and completed online.
Also linked to efforts to streamline government procedures online, the state is working to enhance the capacity of government data centres. AMITI is currently doing a study to identify the data centre capacity of the federal government across the country, as well as to consolidate it. This will entail a standardisation of security levels, operational capacity and overall performance. The initial results of the study are expected to be ready by the end of 2015.
Future Trends
Understanding the role that IT can play in the country, private and public sector observers have been trying to chart how future industry advancements will impact the Mexican IT sector. A study published in 2013 by AMITI, IMCO and Select pointed to key areas of change that will impact sector firms and the industry overall. The sector is expected to see a compounded annual growth rate of 8.4% between 2012 and 2025. A considerable part of this growth is expected to come from business services, with software design and cloud computing services to be key drivers.
As sector reforms in Mexico bring more private investment into growing industries, IT players will increasingly need to adapt. “The industry is in the middle of an in-depth transformation that will lead to a strong consolidation. In the near future only a few companies will be able to offer integrated cloud computing solutions. This change has made tech companies become service companies, offering efficient solutions to all types of industries,” said Cordero.
Outlook
Continued economic growth has supported the development of Mexico’s IT sector. More recently, market changes brought about by constitutional reforms in the telecommunications sector are already having a positive impact by reducing consumer prices and easing access to technology. This is important for a country in which technology adoption has lagged behind in certain segments. Government support programmes for the acquisition of IT equipment at SMEs is also helping to expand the prevalence of IT solutions in Mexico. In some cases it is the market itself that is driving change. The exponential growth of smartphones in the country, which now account for more than half of mobile phones, is serving as a cheap alternative for companies and entrepreneurs seeking to access technologies in order to improve their businesses. While México Digital advances, a key aspect of policy implementation will be to accurately integrate overall federal directives with state-level implementation.
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