Robust infrastructure, tech parks and talent drive growth in Mexico's ICT sector

Mexico’s IT services and software sector reported a compound annual growth rate of 12% between 2010 and 2016, with its market value estimated at $11.3bn in 2016, according to ProMéxico, the country’s investment and export promotion agency. In 2017 Mexico placed 13th out of 65 countries in terms of the best locations to provide IT, business process outsourcing (BPO) and call centre services, according to US-based global management consultancy AT Kearney.

Among the factors contributing to the country’s level of attraction are its robust and widespread telecommunications infrastructure; the large number of engineers and technicians in the workforce; its time zone, coinciding with major business hubs in the US; and a growing bilingual population. Demand for IT professionals in Mexico reportedly increased by 30% in 2017, with demand highest for app designers and data analysts, according to local media reports.

Opportunity

As of May 2018, the IT industry was the country’s eighth-largest contributor to GDP, though sector growth was expected to moderate in 2018, with the global market intelligence firm International Data Corporation (IDC) predicting a rate of 3.8% and around 2% in 2019, as the peso’s depreciation against the US dollar affected consumption of technology. Mexico is in the process of transitioning from an efficient economy to one of innovation, and security, enterprise resource planning and big data are the services in which companies are expected to grow their investments, according to the IDC. In a November 2017 report the consultancy predicted that through to 2020 there would be a 129% increase in big data investment in Latin America as companies across the region digitalise their operations.

There are currently around 4000 IT companies in Mexico and 25 out of 30 of the world’s largest software and hardware developers have a presence there, including Microsoft, Oracle, IBM, SAP, Symantec and Hewlett Packard Enterprise, while a number of outsourcing companies are also present, including Accenture, CBRE and ISS. According to ProMéxico, between January 2013 and September 2017 IT and software investment in Mexico topped $1.5bn, with companies from Germany, Ireland, India, Spain and the US, among the investors. Another feature that has made the country’s IT sector attractive is the emergence of clusters and tech parks, of which there are 19 located in 16 of the 32 states, and home to nearly 1000 companies. Mexico has 30 industrial estates in 20 states, specialised in IT and BPO, the result of alliances between the public and private sectors and academia, the majority of which are in the country’s central and northern regions.

The country also has more than 700 registered development centres, which have been certified by international bodies such as the CMMI Institute, which provides a training and appraisal programme to improve a company’s capabilities. In addition, the industry also has a significant IT talent pool, with more than 500,000 professionals working in the industry, according to ProMéxico, while operating costs for companies are significantly lower than in the US, with software companies enjoying 33% cost savings compared to those north of the border. According to the 2016 KPMG Competitive Alternatives report, Mexico ranked first among the 10 countries included in the study, across all business sectors. By city, the index rates Monterrey as 2.1% cheaper in terms of business costs than Mexico City.

Development Ranking

Mexico’s average internet connection speed is 7.5 Mbps, slightly above the worldwide average of 7.2 Mbps, according to a report by US-based cloud services provider Akamai. Mexico ranked 87th out of 176 countries on the 2017 UN International Telecommunications Union’s (ITU) ICT Development Index, placing it behind Venezuela and ahead of Suriname, up from 90th place the previous year, with growth of 6%, which was above the worldwide average growth rate of 5.16%. Meanwhile, 47% of the country’s households have internet access, while 59% of individuals use the internet, 12.6% of inhabitants have fixed-line broadband subscriptions, and 58.8% have active mobile broadband subscriptions.

The development index is measured based on access, use and skills, and Mexico’s rise in ranking is due to greater usage of IT services by the population, according to the Social Intelligence Unit (SIU), a think tank part of the Competitive Intelligence Unit (CIU), a telecoms and IT consulting and market research firm.

In 2017 usage of IT services increased by 8.9%, as a result of more individuals using the internet, and rise in the number of mobile broadband subscriptions. That same year the percentage of the population with internet access increased by 4.8%, while mobile phone penetration rose from 85% to 88%, or from 51 to 59 out of every 100 inhabitants. The improved ITU ranking is also attributable to higher levels of education, with 91% of the population completing secondary school in 2017, up from 87% the previous year, according to the SIU, which identified the need to meet growing demand for IT infrastructure and goods as the main challenge facing the sector in Mexico. In terms of overall regional performance, the country ranked 18th out of 35 economies in the Americas.

Nonetheless, despite greater accessibility since the instrumental reform of 2013, access to IT is still subject to household income levels, according to the SIU. The “National Survey of Household Income and Expenditure 2016” report found that 97.5% of the most affluent households had internet access, compared to 55.9% of the poorest, with the poorer households spending an average MXN285 ($15.62) per quarter on mobile telecommunications, compared with an average MXN1520 ($83.33) in the richest households. However, while that amount only represented 0.9% of the richest households’ income, the poorest were spending the equivalent of 3.5% of their income on mobile telephony.

Wealthier households are therefore the greater beneficiaries of the 2013 telecoms reform, although said reform has not effectively guaranteed the right of access to ICT and, according to the CIU, the task of bringing the benefits of competition in the sector to the poorest households is significant. Nevertheless, mobile penetration among the poorest households has risen by 25% over the last two years, compared with an increase of just 5% in the most affluent households, according to the Centre for Economic Research and Teaching.

NAFTA & Elections

Mexico faces two uncertainties in 2018: the ongoing negotiations for a new North American Free Trade Agreement (NAFTA) with Canada and the US, and the policy outlines from the incoming government, headed by Andrés Manuel López Obrador of the National Regeneration Movement, which prepares to take office in December 2018. The IT sector is hoping that a new NAFTA agreement will see an elimination of tariffs on software and technical services, Jorge Buitrón Arriola, president of tech cluster Vórtice IT ech Park in Querétaro, told local media in February. Mexico has also proposed the issuing of a special visa for IT executives to be able to enter and work in all three countries with greater ease, thus allowing the facilitation of trilateral technological exchange.

In April 2018 three leading industry figures – Mario de la Cruz Sarabia, president of the Mexican Chamber of Electronics, Telecommunications and Information Technologies (Cámara Nacional de la Industria Electrónica, de Telecomunicaciones y Tecnologías de la Información, CANIETI); Javier Cordero Torres, president of the Mexican Association for the IT Industry; and Enrique Culbro Karam, director-general of the Mexican Internet Association – announced that they would meet with the country’s presidential candidates to discuss their proposals and visions for the sector, according to Mexico IT, an industry programme operated by CANIETI. The three industry representatives planned to present a joint agenda for the sector to attract investment and enable the country to best take advantage of the benefits of the digital economy, while also discussing measures to enhance cybersecurity.

While uncertainty may prevail as the industry awaits new policy outlines, no major changes are expected that would affect investment. “We undoubtedly have a formalisation issue, but although progress is slow, the government is taking small but promising steps towards a more comprehensive digital solution,” Sergio Rosengaus, CEO of locally based IT infrastructure provider Kio Networks, told OBG. “For example, Mexico is one of the only countries where both individuals and businesses can pay their taxes online, and digital certificates are issued by the tax authorities so that all payments are digitally tracked according to date, origin and destination.” The firm announced in March 2018 that it would invest around $50m in the country and build data centres in Mexico City and Querétaro. Rosengaus added that he expected double-digit growth in the sector for 2018, and also called on the new government to employ technology as the best way of fighting corruption.

Budget

Mexico’s 2018 budget proposal to Congress earmarked MXN1.5bn ($82.2m) for the IT sector, which represents just 0.03% of total spending, and is 40.6% below the amount allocated to the sector in 2017. The decrease in funding is largely due to a reduction in investment in the MexSat satellite programme, as investment is redirected from implementation to consolidation. Some IT programmes will see an increase in investment this year, such as the México Conectado scheme, which provides internet connectivity to public spaces, whose reserves will be increased by 6.3% to MXN517m ($28.3m) in 2018. The IT budget also allotted MXN51m ($2.8m) to the Ministry of Public Education’s @prendeMX programme, which aims to teach computer skills and enhance the connectivity of schools in a bid to foster IT knowledge among future generations.

Cloud Computing

Mexico climbed two spots on the Software Alliance (BSA) 2018 Global Cloud Computing Scorecard to rank 13th out of 24, behind Korea and ahead of Malaysia. While Mexico has implemented laws concerning cybercrime, privacy and data breach, improvement is still required in intellectual property (IP) enforcement and protection, where significant gaps remain. For example, there is no safe harbour for cloud service providers. Additionally, Mexico lacks a national broadband plan, as well as speed and connectivity targets, and it faces challenges in delivering a modern IT infrastructure to facilitate cloud computing.

Nonetheless, overall forecasts look positive given current market conditions. “The Mexican market has significant potential to expand its use of key IT services, such as cloud computing,” Dionisio Castillo, CEO of Mexican software provider Intelisis, told OBG. “For example, the decline in the cost of internet and software, together with increased fibre-optic coverage, are key factors driving demand from small and medium-sized enterprises.” According to a 2017 IDC survey, cloud computing in Mexico will reach market growth of 24.7% through to 2020, with 63.5% of respondents saying they are already using cloud platforms, compared with 83.7% in the US, and security in the transfer of data was identified as the main concern when migrating to the cloud. “The first thing IT directors at companies need to do is find a public cloud that offers a hybrid mix of choice and consistency, and which includes advanced security and a scale for future growth,” María Rosa Casillas, director of cloud sales for Mexico at IBM, told OBG.

Fintech

On March 1, 2018 Congress approved a bill to regulate financial technology (fintech) and the circulation of cryptocurrencies, with the aim of creating greater stability and compliance by combating money laundering and financial fraud. The bill is expected to spawn the rise of more payment firms, which are well used in Mexico as remittances from migrant relatives make such a large contribution to revenues. It will also allow for open banking, and the sharing of user data by financial institutions through application programming interfaces is expected to lower costs and spur competition among lenders, thus making the country’s fintech firms more attractive to foreign investment.

According to credit ratings agency Fitch Ratings in a 2017 statement, the law will also reduce banks’ operational risks, enhance transparency and improve security for borrowers and lenders. Furthermore, the growth potential of fintech firms is strong given the country’s large size, widespread mobile phone and internet penetration, and substantial unbanked population. In terms of mobile banking the “Towards a Stronger and More Inclusive Mexico” report by the OECD in 2017 found that the number of adults using mobile banking rose from 5% in 2012 to 10% in 2015. In addition, around 45% of Mexicans reported using savings accounts in 2015, compared to 35% three years previously.

In February 2018 local IT firm Softtek partnered with US software firm Mambu to launch a banking platform, which Mambu described as a flexible take on the “bank-in-a-box” concept, offering a combination of software-as-a-service platforms and local applications from multiple vendors on one cloud platform to reach the country’s large underbanked population. Investment in technology is beneficial to the credit profiles of financial institutions as it boosts their business and profitability, and Fitch Ratings believes this trend will continue in Mexico over the long term. However, benefits usually only accrue over the medium to long term, and the impact will only be positive if accompanied by commensurate and robust risk control frameworks, and levels of transparency and security equal to those in existing business models.

Outlook

While Mexico is geographically well placed to attract investment into the IT sector, and its diversified economy and manufacturing base provide opportunities for tech companies to enhance their competitiveness, one short-term challenge could be a lack of trained professionals, despite its sizeable talent pool and education opportunities. According to the IDC in 2016, recruitment demand will outstrip supply, and the sector could be lacking up to 150,000 skilled employees by 2019. This could prove to be an impediment to the sector’s growth and the adoption of new technology by companies and government agencies, slowing down economic development. The uncertainty surrounding a new NAFTA deal and the slowdown of investment in certain sectors is unlikely to have a significant impact on IT and telecoms; however, the outcome of the elections may lead to uncertainty until Obrador’s new administration’s investment plans are unveiled.