Mexico Information Technology Report Q3 2008: Industry Research Report

Mexico Information Technology Report Q3 2008

Published Date: July 2008

Published By: Business Monitor International

Page Count: 43

Order Code: R302-3603

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Market Overview

BMI expects that the size of the Mexican IT market will increase from US$10bn in 2007 to aroundUS$16.9bn in 2012. Mexico has plenty of room for progress on a range of ICT indicators, includingcomputer penetration and e-government. IT spending as a percentage of GDP at less than 2% remainswell below OECD levels. Greater affordability, lower prices and expanding retail channels will act asstrong drivers for the consumer segment. However, despite strong GDP growth recently, Mexico doesremain vulnerable to the effects of a slowdown in the US.

One uncertain factor for the IT market in 2008 is the government’s current austerity decree. Somevendors anticipate that this will mean fewer government IT tenders. In the longer term, however, BMIanticipates that the decree may promote more of an emphasis on service contracts rather than just sales.Government will continue to be important for the market, with substantial new funding announced foreducation, and for regional IT development. Meanwhile, demand for software is growing among SMEs,which also benefit from various informatisation programmes.

Overall, the Mexican IT market is expected to grow at a CAGR of 9% over the 2007-2012 period,although with strong regional variations. Some deals which were postponed in the latter part of last yeardue to the US economic situation will be signed in 2008. Meanwhile, the IT services market is becomingone of the most dynamic drivers of IT-sector spending. Local companies are trying to use computingresources more effectively and integrate IT investments. Outsourcing is also becoming an important spurto growth for the IT services sector.

Industry Developments

The Mexican government’s Secretariat of Public Administration (SFP) announced that it saved someUS$2.4bn in 2007 as a result of its austerity decree. The initiative set a target of cutting operationalexpenditures by 5%, with IT identified as a core area for potential savings. Technology reports have yet tocome in from some government bodies, and so it was not yet certain whether the targets were met.The impact of the decree on the IT market has yet to be fully evaluated. There were reports of lowerdemand as the austerity decree encouraged the rent of technology rather than outright purchase. However,2007 was a learning period for both vendors and government purchases, and some vendors are adaptingtheir behaviour accordingly.

The government is determined to increase IT exports from Mexico. The government’s softwarepromotion body Prosoft received a 40% increase in its budget in 2008. Resources earmarked by thegovernment for Prosoft were increased to MXN650mn (US$60mn). The government has said that nearlyMXN40mn of the MXN650mn budget will be earmarked to promote companies in interactive media

Competitive Landscape

PC vendors are adapting their strategies to take advantage of growth in sales through resellers andretailers. According to local market data, sales through resellers and retailers grew 21% in 2007, anddirect sales grew 16%. In HP’s case, indirect sales currently represent 90% of units shifted in theMexican market. Meanwhile, Dell has signed an agreement with retailers, including Wal-Mart, to sellDell Inspiron desktops and laptops, while Lenovo has also been recruiting new channel partners.The government’s austerity decree has caused some software vendors and channels to expect a reducednumber of government tenders this year. The austerity decree, announced last year, aims to make savingsin operational expenses, including IT. Mexican software distributor Capitec has said that it expects theprivate sector to account for 40% of revenues this year, compared with just 10% in 2007.Mexico is continuing to be an important destination for investment from IT services and BPO servicesproviders. Among recent investments, Unisys is to invest US$50mn in the next three years to construct anew software development centre in Mexico. Meanwhile, IBM has established a Global ArchiveSolutions Centre in Mexico, with an initial investment of US$10mn.

Computer Sales

BMI projects that Mexico’s computer and accessories market will have a CAGR of around 9% over the2007-2012 period. 2007 computer sales were put at US$3.9bn, and should pass US$6bn by 2012. Greateraffordability combined with more credit options, lower interest rates and tax concessions have boostedsales. Growth is being driven primarily by consumer sales, especially of notebooks. The growingpopularity of internet and broadband access also strong support, with Mexican telecoms companyTelmex’s PC bundling offer becoming one of the biggest channels for PC sales.

The biggest barrier to higher PC penetration remains low annual average incomes, of about US$5,000 ayear, and financing has long been a bottleneck to faster growth of PC penetration. Distributors andretailers are becoming more flexible at devising new financing options, and this has resulted in themaccounting for a larger share of the market in 2007. The financing bill options offered by Telmex haveclearly unleashed fresh demand. Banks are also now offering more financing options, meaning healthierprospects for the consumer and SME segments.

Software

The total software market in 2007 was estimated at US$1.8bn. Imported software accounts for at least80% of the total, which for 2008 is expected to come out at around US$2.1bn. Software CAGR for 2007-2012 is put at around 12%, outpacing overall IT market growth. The software sector’s current high single-digit growth is being driven partly by increasingly strong demand for enterprise resource planning (ERP)solutions from SMEs. Lack of IT infrastructure is thought to contribute to the high failure rate amongSMEs in many parts of the country. Investment by key verticals such as financial services, telecoms andutilities is also important. Another factor is Mexico’s growing significance as a provider of BPO andoutsourcing services. As the government turns its attention to overcoming Mexico’s longstanding underinvestmentin software, there should be more opportunities.

IT Services

The IT services market is estimated to have grown around 12% in 2007, to a value of around US$3.2bn,with similar or slightly higher growth expected in 2008 and throughout the forecast period. Indeed, the ITservices sector has been increasing steadily for the last 10 years. The increasing number of multinationalcompanies operating in the market is an important driver for spending. IBM has recently stated that itconsiders the Mexican market as one with high growth potential for installation and services. Growthopportunities also reside within the SME sector, where companies are trying to use computing resourcesmore effectively. Meanwhile, Mexico is becoming an increasingly important hub for provision of BPOand outsourcing services, with Monterrey in particularly attracting significant investment.

Special Focus: Financial Sector

Mexican banks and financial services companies are among some of the country’s major IT spenders,with consolidation, competition and compliance with new international guidelines fuelling the trend. Inrecent years, several foreign-owned banks such as Spain’s BBVA and Canadian Scotiabank Inverlathave been operating aggressively in the market, spurring local competitors to ramp up spending on IT asthey compete for customers. With a wave of hardware and infrastructure installations in the past fewyears, the focus is now shifting to software and services, as companies look to enhance productivity andimprove offerings to customers. Compliance and risk management applications are among the top sellers,with the need to manage compliance with Basel II capital guidelines, and legislation tightening upcorporate governance standards. Another trend is for banks of all sizes to outsource the hosting,management and maintenance of software and hardware.

E-Readiness

According to the Social Research Institute of the National Autonomous University of Mexico (UNAM),one in five people in Mexico now have internet access. This means that the ratio has doubled in a decadefrom one in 10 only 10 years ago. As ever, income is strongly correlated with access to internet. Eight outof 10 people defined as living in ‘marginal conditions’ do not have access to the web, according to thesurvey.

The World Economic Forum’s latest annual survey found Mexico continuing to make steady progress onnetwork indicators. The survey had Mexico climbing six positions in the rankings from 55th. The reportattributed the improvement to the adoption of more efficient electronic strategies for digital networks andinfrastructure connection both nationally and regionally.

E-Government

Recent state and municipal statistics have highlighted slow progress in the implementation of egovernmentin Mexico at a federal and state level. In 2001 the government launched an e-governmentinitiative which prioritised providing health, education and other government services online, as well asthe development of e-commerce. Since then however, funding has rarely been sufficient for muchprogress to be made given the substantial task involved, and state and municipal governments areincreasingly seeking to launch their own initiatives. Many states are seeking funding from the privatesector to make good gaps in public funding.

Patterns Of Internet And PC Usage

In 2006 the Mexican Internet Association (AMPICI) revealed some results concerning patterns of internetusage in Mexico. Putting the number of users at around 20mn, AMPICI found that children and youthsremain the most frequent users, with 39% of total users between the ages of 12 and 19. Around 19% ofinternet connections were from the office, with 39% from public internet access sites such as internetcafes, and 43% from home. Average time online was two hours per day.

Recent figures from the National Statistics Institute (INEGI) claimed that the number of computers in thecountry increased 11.9% from 2001 to 2006, from 23.6mn to 26.6mn. Other data has revealed that26.6mn Mexicans have access to a computer (60% in an educational context, 30% for work). The report,also from INEGI, says that IT is becoming increasingly central to Mexicans’ lives, even outside majorcities.

Looking at the business sector, the Mexican IT Association claims that 99.7% of the 2.8mn Mexicancompanies face serious limitations in information technology which affect their capacity to compete. Theassociation recently called on the government to increase funding for SMEs to secure access to IT.Some 68% of Mexican internet users currently go online from places outside the home, such as schools,workplaces and internet cafes. One of the goals of the e-Mexico plan, announced in 2001, is to connect98% of the nation to the internet, with co-operation from telecommunications carriers. Low disposableincome and the related low PC penetration rate remain barriers to further expansion.

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