The IT services & outsourcing market in Mexico continues to show great opportunities given the increased implementation and renovation of IT infrastructure in all types and sizes of organizations, both in the private and public sectors. Mexico is not only becoming a strong market for U.S. technology products for the IT services industry, but also is becoming a stronger global player in the outsourcing markets developing IT hubs around the country in order to offer IT, software development, call center, high-tech manufacture and engineering services to users in industrialized economies in North America and Europe. The Mexican market overall, suffered in 2009, but will bounce back in 2010 and closing to the levels of 2008. It is estimated that the IT and Telecom market in Mexico will be worth over US$37.2 billion, whereas in 2008 it was worth almost US$40.4 billion. However, it is important to note that the biggest impact was when the sector is measured in USD due to the 30% devaluation of the Peso. If measured in Pesos, the sector grew motivated by mobile communications, IT services and software sales.
Market Demand Mexico is following a strong trend to have a service-centric IT industry where most technologies will be offered under a service contract or lease. We are seeing a growing interest of Software as a Service (SaaS) or Infrastructure as a Service (IaaS), and Platforms as a Service (PaaS). The main driver for users to support this new business model is cost reduction in areas that are not mission critical and represent cost without value added and offer commodity services. Due to the cost reduction attribute of IT services, this segment of the industry was the least affected in 2009 with the economic downturn. Due to the difficult financial circumstances in recent months, IT departments are being obligated to look at their infrastructure, operation, systems and staff in new ways to stay competitive, stay competitive and become a source of strategic advantage for the overall operation of the business. The biggest corporate challenges in Mexico are based on the necessity of cultural changes with the organization. Many have had to accept and manage change, and be willing to take new risks. IT managers, CTOs, and mainly CIOs are now required to align technology to the overall business objectives in order to obtain a greater Return On Investment (ROI). IT and systems become a strategic component for companies, while also a strong cost center that must be managed diligently. This process of evaluating new suppliers, new business models, new requirements, and new technologies, has pushed IT departments to seek information on issues like IT governance, contracts, certifications, thus pushing them to becoming a more knowledgeable user of technology. This represents a challenge for suppliers given that their clients are more aware of their main requirements, available solutions and alternative suppliers. U.S. technologies are well regarded in Mexico due good quality and to the large presence of the global firms in Mexico, which continue to set standards and Best Practices. There is, however, plenty of competition from various OEMs, integrators, technology firms and consultants from other countries, as well as from Mexico. It is important to evaluate not only your product/service, but also your capacity to enter new markets in business terms. More information on market entry below.
Market Data 2009 was definitely a difficult year for Mexico, and for the ICT market as a whole. In 2008 the total IT market, referred to as HW, SW, consumibles and IT services, grew 11%, and telecom services had no change in the same year. Select, a Mexico City based consulting firm, estimates healthy growth rates for 2010 for the IT industry with an 11% increase, and 7.7% for the telecommunications sector. For the ICT sector, overall, the estimated growth rate for 2010 is 9%. This 9% growth in 2010 will not be sufficient to restore the sector at the levels of 2008 when the total value was US$40.4 billion. The estimated market value of the sector by the end of 2010 will be US 37.3 billion.It is important to note that these changes are based in USD and not in pesos, thus reflecting a strong Mexican peso depreciaton of 30% during 2009. The three main factors affecting the ICT sector a whole in 2009 were: 1) 30% currency depreciation of the Mexican peso; 2) new special service related taxes on IT and telecom services; and 3) economic downturn & unemployment increases. Information Technology & Telecommunications Market in Mexico In 2010 the biggest expected winners will be the software and IT services subsectors with approximate growth of 12% and 15% respectively. Mexico has seen an increase in their IT investments in recent years, particularly in government and corporate solutions. Unfortunately, IT spending is 9 times less in Mexico than in the U.S. However, from experience we are seeing increased government spending in various projects in e-government, health, education, social coverage of telecom services, highways, safety & security, energy, and environment. In fact, government spending is perhaps, the main driver of the IT industry. Government is also the promoter of lease contracts through outsourcing of IT services. In 2007 the federal government published their Austerity Decree that obligated federal agencies to reduce spending and cost by contracting leased services. Since then, state and municipal governments have followed the lead, making leased integrated services the preferred model to sell to government accounts. Leased contracts are also very popular with medium to large companies. Users feel they can now focus their time and resources on evaluating proposals, reviewing contracts, defining their governance policy, and create IT strategies that are better aligned with the overall business objectives. IT Services firms are becoming more and more relevant today given that they can also act as integrators of turnkey solutions and directly participate in public or private tenders. Equipment manufacturers and distributors are losing leverage by only providing hardware; they must also integrate themselves and provide services that can offer value to an IT services/ integrator firm. OEMs are now pressured to not negotiate pricing and terms with the end user but with the integrator providing financed leasing solutions over extended period of time, usually from 3 – 5 years. The Mexican IT services market alone is expected reach an approximate value of US$3.5 billion by the end of 2010, and by the end of the year the Equipment market will have reached an estimated US$7.5 billion. Combined, they represent about 30% of the total ICT market in Mexico. As expected, the competition in Mexico in IT services & outsourcing is fierce and constant. Most all large, multinational firms, from the U.S. and other countries, are present in Mexico. Large corporate and government projects are disputed by international firms, while 2 tier projects in state/local governments and medium to large companies are being dominated by local firms that provide niche solutions in education, health, security, logistics and inventory. More and more of these 2 tier projects are becoming standard as medium-size companies seek to enhance their accounting, inventory, HR, CRM, and ERP systems. In the past companies would invested in technology was to gain a competitive advantage, today these investments are necessary to compete and comply to the Best Practices that international companies bring to Mexico. As Mexican IT services firms become more specialized and grow in the local market, they also begin to expand into the U.S. with niche services. Today, Mexico is the list of top countries for outsourcing and nearshoring for industrialized economies such as North America and Europe. The October 2008 Global Services Media report of the Top Emerging Global Outsourcing Cities (http://www.scribd.com/doc/6448818/Top-50-Global-Emerging-Outsourcing-Cities), mentions that today outsourcing is selective process where the right city is now more important than choosing the right country. By evaluating cities, the report mentions, companies gain a more realistic and accurate perception of the opportunities. The new entrants to the list were the Mexican cities of Mexico City and Guadalajara, with Monterrey also being relevant for its high value ITO (Infrastructure Managed Services) and engineering services. Mexico City is not only a delivery location for providers, but supports most of the contact centers in the country with high proficiency in English and Spanish, in turn offering many services to the Hispanic market in the U.S. Guadalajara, on the other hand, is said to be Mexico’s Silicon Valley mainly due to the city’s university to deliver a good number of engineers every year. Thus, engineering services are related to manufacturing but also to design. There are other important cities in Mexico that are creating the necessary conditions to develop IT hubs; they are particularly focused in the states of Baja California, State of Mexico, Puebla, Sinaloa, Sonora and Veracruz. Overall, the main countries that concentrate the top emerging outsourcing cities, according the above-mentioned report are: India, China, Vietnam, Philippines, and Mexico, among many others. Mexico then becomes not only a significant market through the increasing implementation of IT systems in small, medium, and large companies, as well as in local, state and federal government, but also as a destination to set up operations of IT services firms that wish to serve the Mexican market and the U.S. and/or European markets.
Best Prospects Demand of IT services will grow in to service contracts in different areas such as: 1. – SECURITY SERVICES 2. – TRAINING (bundled with an overall solution). 3. – TAILORED SW APPS. 4. – LEASED INFRASTRUCTURE (NOCs, SOCs). 5. – WIRELESS APPS (mainly focused on mobile broadband, such as TV). 6. – MAINTENANCE. 7. – CONSULTING & IT/SYSTEMS INTEGRATION 8. – CATV NETWORK APPS. 9. – BUSINESS INTELLIGENCE SW As mentioned above, technology as a service will be the predominant business model for users and suppliers. SaaS, IaaS, and PaaS will provide the best opportunities. Also, the general technology trends are present in Mexico where new opportunities will arise. These are: 1. – WEB 2.0 2. – SOCIAL NETWORKS 3. – CLOUD COMPUTING and network terminals using web-based applications. 4. – VIRTUALIZATION 5. – ONLINE ADVERTISING 6. – MOBILE BROADBAND 7. – GREEN IT
Key Suppliers Competition will be the driver for innovation, price reduction and the trigger for IT services firms to seek specific market niches, strategic partners, and a place in the adoption of trends in various vertical segments. As noted, the biggest opportunities lay in corporate and federal government projects. However, those are fiercely disputed between the various international IT firms. We have seen in recent past that the sectors that were was neatly defined such as networking, IT, software, and hardware are now converging, and the companies that once dedicated their efforts to any of these are now competing through integrated solutions.
Prospective Buyers The best prospective partner or client really depends of the type of US company that is seeking to enter the market. There are various factors that need to be considered when deciding on who will your business target be when seeking to enter or increase your presence in Mexico. Even though the product/service that is on offer determines the place of the company in the market, there are business factors that help decide who will be the best prospects. Consider the following to help you map you strategy when thinking in entering Mexico or any other country: 1. – Do you understand the market and where your company fits? 2. – Who will be your main competition? 3. – Who will be your main user? 4. – What is the value added proposition the company offers? 5. – Do you serve a particular vertical market or does it have application in various industries? 6. – Does my company have international experience, commitment and resources to enter new markets? 7. – Can you company commit between 9 – 24 months to developing a new market or increase its presence? 8. – Has your management developed a strategic plan to enter foreign markets? 9. – Does your management have knowledge on export-import procedures and regulations? 10. – Have your company been counseled on how to do business in your target market? The answers to these questions will help you decided on the best route your company can take to focus on the best prospects. However, if your company sells a particular set of HW or SW or perhaps training services the main opportunities are with the main technology/systems integrators that have active participation and understand the Mexican market. You will also need to see what different vertical you product/service covers because depending on the such industry the best partners will be geographically located in the most appropriate region of the country. For example, if you SW is a solution for financial services, your best prospect will be in Mexico City; but if you seek to target the manufacturing or auto industry, you search will need to be focused in Monterrey or Tijuana.
Market Entry For U.S. firms there are various ways to enter the Mexican market. Depending on the amount of market knowledge, financial resources and human capital, market entry can range from establishing a Mexican subsidiary to establishing an agreement with a local partner. Some firms prefer to sell directly and provide service from their U.S. headquarters. Telecom carriers will be primarily interested in learning about products and services that can be part of their added value service portfolio. Additionally, they will be interested in systems, equipment, and software that would lower costs and increase data protection and security. There is no standard procurement procedure used by companies. Each has its own way of determining when a supplier becomes a partner or strategic supplier. For example, some companies evaluate proposals first from the marketing perspective, then from the operational perspective, and finally from the financial perspective. On the other hand, there are companies that are straightforward; a team of specific area managers and procurement office staff make joint purchasing decisions. It is important to know where your product or service stands in the value chain of a prospective client. There are products or services that are targeted with specific applications for a certain type of company. When products or services are very detail focused, it is recommended to approach the clients directly and become involved in the sales cycle personally and the support of a local partner for follow up has proven to be useful for U.S. companies in the past. When your product or service has multiple applications in a variety of industries or vertical markets, it is easier to enter through any of the entities that form the market, such as distributors, resellers, integrators, wholesalers, or fulfillment and logistics companies. One or a mix of the above can offer your product or service introduction to the market, sales, service and tech support. In this case, you will be required to support your partners in the distribution channel by offering technical and sales training, provision of marketing materials, sales leads, and a representative to follow up and service their needs. It is important to make an effort to maintain a good market and commercial image with company presence. Local representation is key because it shows your prospective clients and partners that you have committed interest in the local market. It is important to remember that adjusting to the local business practices and understanding the commercial ecosystem as well building relationships provides valuable market intelligence that will help you understand the market as a whole and identify business opportunities when they arise.
Market Issues & Obstacles NAFTA has been a key tool for increased trade between Mexico and the United States. As of 2005, U.S. firms can export IT and telecom equipment tariff free, as long as the product complies with NAFTA Certificate of Origin, this means that the product must have at least 51% North American content. Software and hardware with 51% U.S. content can enter Mexico duty and tariff free. Countries that do not have a similar trade agreement will be subject to significant import duties depending on the product and country of origin. The company importing a U.S. product into Mexico will be required to be incorporated in Mexico and have a valid Tax ID number and the necessary import license, and will need to pay a 16% Value Added Tax (VAT) or Impuesto al Valor Agregado (IVA) for all imported products. The participation of a customs broker is not obligatory for import procedures if all legal and technical requirements are met. However, a customs broker will be helpful to navigate the customs procedures, inform about standards and certification requirements, deal with paperwork, liberate merchandise from customs, and provide support in logistics and transportation. A customs broker is particularly helpful for novice importers, especially when the U.S. firm has recently incorporated a Mexican subsidiary. Usually, a U.S. firm will provide delivery of products to the border, leaving all customs processing to the Mexican client importing the product. The documents required for importing software are: • Certificate of Origin • Electronic Sector Register • Sectorial Importing License (for import company in Mexico) The documents required to import hardware are: • Certificate of Origin • NOM Certificate (Norma Oficial Mexicana - Mexican Law) • Electronic Sector Register The requirements and regulations for importing are evolving under NAFTA. It is the responsibility of the importer to determine what certificates are required and from whom to obtain them. The Mexican government strictly enforces all customs regulations, particularly when it comes to potentially undervalued goods from Asia. NOM Certification is required for all hardware, and must be tested in an accredited laboratory in Mexico prior to import. New equipment can be tested and certified with the large network of testing labs throughout the country. Regarding software sales from a U.S. company to a Mexican buyer Article 15-B of the Fiscal Code (Código Fiscal de la Federación – CFF) establishes that royalties should include, among others, the payment for the temporal use of intellectual property right on scientific works or software licenses. Payment of software license is considered as a royalty payment, in terms of article 200 of the Income Tax Law (Ley del Impuesto sobre la Renta – LISR), such payments are subject to a retention rate of 25% of the total amount of the transaction. It’s important to note that the 25% rate is reduced to 10% by Mexico’s agreement on double taxation with the US. Thus, the retention rate for software license payments is 10% and NOT 25%. However, payment for training, installation and maintenance services, do not generate any retention payments.
The fixed and mobile markets in Mexico have enjoyed constant growth over the years, more than doubling GDP growth. Fixed lines have reached over 20 million users, and mobile communications today have over 56.5 million subscribers. Telecommunications services are becoming more readily available due to the increased penetration of fixed lines, lower rates and an explosive growth in the wireless subscriber base. Cable TV and wireless industries will be more aggressive and will show strong innovations in the near future. Technologies such as PLC, WiMAX, WiFi, and cable will be the tools for increasing penetration and offering newer services. The industry sees the coming of more mobility in the country along with smarter devices.
Internet and IT Services The 13% growth in IT Services in Mexico between 2006 and 2007 has been fueled primarily by the government/public sector, mainly from large projects and by a new decree that requires that federal government to lease (outsource) these services. The highlights in IT Services are production centers and data processing services, both of which registered 18% growth between 2006 and 2007. The biggest gainers were companies implementing IT security solutions, a segment with an estimated 26% growth for the same period.
IT Services: Mexico is becoming a producer and developer of software and provider of IT Services. Dozens of new graduate engineers are taking up positions in medium and large corporations in order to manage the IT infrastructure. Nevertheless, there is a growing trend to outsource such IT Services to third and specialized firms. The size is still comparatively small, as compared to the U.S. or India. Despite the small size of the industry, heavy IT users in the U.S. are looking south to Mexico due to the time zone, geographic, and cultural benefits.
Best products will remain in the convergence area. Following are the main sub-sectors where a majority of new acquisitions will be focused. Each offers great opportunities for American companies to participate in the Mexican IT & Telecom market during 2008:
Wireless: Wireless technologies and applications for corporate and personal uses are the hot topics today. WiFi, and the future WiMAX, will provide flexibility and lower cost for connectivity. It is expected that in 2008 the government will set out a bid for the different spectrum allocation in the following bands: 1.9 megahertz (PCS) for wireless services and 3G Internet access; 3.4 – 3.7 gigahertz for WiMAX; and 1.7 – 2.1 gigahertz for broadband wireless services.
Mobile Services: Mobile communications will still be the main growth industry in Mexico. Mobile operators are experiencing strong growth but are looking for new technologies to generate additional revenue. It is expected that in 2008 the government will set out a bid for the different spectrum allocation in the following bands: 800 megahertz for trunking services; 2.5 megahertz for high-speed Internet services.
The greatest opportunities for 2008 in the Telecom Equipment Sector are in:
· Security appliances
· ERP and CRM software for Small and Medium Enterprises
· Mobile applications
· Broadband applications
· Power Line Communications
· VoIP applications
· IPTV applications
· WiMAX equipment