Mexico Information Technology Report Q2 2008

Market Overview Spurred by buoyant consumer demand and stronger spending in government and corporate segments, BMI expects that the total value of the IT market will increase from US$10bn in 2007 to around US$16.9bn in 2012. Mexico's IT spending does remain vulnerable to the possibility of a slow down in the US, despite the economy posting strong quarterly GDP growth in Q3 at 3.7% year-on-year (y-o-y).

However, BMI expects that some public and corporate sector deals which were postponed in the latter part of last year due to the US economic situation will be signed in 2008.

Mexico has plenty of room for potential progress on a range of ICT indicators, including computer penetration and e-government. IT spending as a percentage of GDP at less than 2% remains well below OECD levels. An increasing number of federal and state government initiatives are looking to stimulate more activity in various provinces. One major driver of PC demand has been more availability of credit facilities from retail vendors and distributors.

Overall, the Mexican IT market is expected to grow at a CAGR of 9% over the 2007-2012 period, rather faster than GDP growth over the forecast period, although with strong regional variations. Demand for software is growing in all sectors, especially among SMEs, which again will benefit from government initiatives and new funding. Substantial new funding has also been announced for education, and for regional IT development.

Industry Developments The government's software promotion body Prosoft has received a 40% increase in its budget in 2008.

Resources earmarked by the government for Prosoft have been increased to MXN650mn (US$60mn).

Last year Prosoft supported around 350 projects related to encouraging software use, and the body has some involvement in most Mexican states.

The Mexican government is determined to stimulate increased IT investment in the regions, particularly in software. In a further example of that commitment, Mexico's economy ministry pledged MXN30mn towards the construction of the IT cluster park (IIT) in Monterrey. Mexico City's municipal government also plans to open its second software cluster in mid 2008.

In September 2007 the Mexican government asked congress to approve a budget of US$445 to expand a programme to integrate federal education resources. The IT programme, which is called Enciclomedia, is run by the education ministry and aims to integrate resources such as text books and virtual content and activities. The requested 2008 funding represents a rise of 39% from the 2007 allocation of MXN3.55bn.

Competitive Landscape Many foreign retailers are taking advantage of growth in sales through resellers and retailers, which was a significant trend of 2007. In December 2007, leading US vendor Dell announced a shift in focus from concentration on the corporate market to aggressive expansion in the retail sector. Meanwhile, HP saw unit sales in Mexico rise 21% in 2007, and expects a 25% rise in 2008. In HP's case, indirect sales currently represent 90% of units shifted in the Mexican market.

Turning to software, and market leader Microsoft plans to equip more servers sold in the Mexican market with preinstalled operating systems. In an effort to combat piracy, last year a total of 22% of Microsoft servers sold in Mexico had preinstalled operating systems. In the enterprise software segment, SAP's local partner Bexap achieved a nearly 100% growth in implementations last year, due to great focus on of medium sized companies.

Computer Sales BMI is forecasting that Mexico's computer and accessories market will have a CAGR of around 9% over the 2007-2012 period. 2007 computer sales were put at US$3.9bn, and should pass US$6bn by 2012. Unit sales were up as much as 30% y-o-y in some quarters of 2007. Growth is being driven primarily by residential sales, especially of notebooks. The growing popularity of internet and broadband access is providing strong support for PC sales, with around 1mn of an estimated 1.7mn PC units sold in Mexico last year being purchased bundled with leading telecommunications company Telmex's internet service.

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

Software The total software market in 2007 was valued at US$1.8bn, with imported software accounting for at least 80% of the total, and the figure for 2008 is expected to come out at around US$2.1bn. Software CAGR for 2007-2012 is put at around 12%, with sales outpacing general 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. A lack of IT infrastructure is thought to contribute to the high failure rate among SMEs in many parts of the country. Investment by key verticals such as financial services, telecoms and utilities is also driving the market. Another factor is Mexico's growing significance as a provider of BPO and outsourcing services. As the government turns its attention to overcoming Mexico's longstanding under-investment in 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 IT services sector has been increasing steadily for the last 10 years, with the increasing number of multinational companies operating in the market being an important driver for spending. IBM has recently declared its intention to expand its Mexico market business, stating that it considers the market as one with high growth potential for installation and services. Growth opportunities reside particularly within the SME sector, where companies are trying to use computing resources more effectively and integrate investments made in hardware and software. Meanwhile, Mexico is continuing to become an increasingly important market for provision of BPO and outsourcing services, with Monterrey in particularly attracting increasing amounts of investment.

Special Focus: Financial Sector Mexican banks and financial services companies are among some of the country's most significant IT spenders, with consolidation, competition and compliance with new international guidelines fuelling the trend. In recent years, several foreign-owned banks such as Spain's BBVA and Canadian Scotiabank Inverlat have been operating aggressively in the market, spurring local competitors to ramp up spending on IT as they compete for customers. With a wave of hardware and infrastructure installations in the past few years, the focus is now shifting to software and services, as companies look to enhance productivity and improve 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 up corporate 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 decade from one in 10 only 10 years ago. As ever, income is strongly correlated with access to internet. Eight out of 10 people defined as living in 'marginal conditions' do not have access to the web, according to the survey.

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

E-Government However, recent state and municipal statistics have highlighted slow progress in the implementation of egovernment in Mexico at a federal level and the insufficiency of state funding. In 2001 the government launched its e-government initiative, which prioritises providing health, education and other government services online, as well as the development of e-commerce. Since then however, funding and political willpower have rarely been sufficient for much progress to be made given the substantial task involved, and state and municipal governments are increasingly seeking to launch their own initiatives. Many are seeking funding from the private sector 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 internet usage in Mexico. Putting the number of users at around 20mn, AMPICI found that children and youths remain the most frequent users, with 39% of total users between the ages of 12 and 19. Around 19% of internet connections were from the office, with 39% from public internet access sites such as internet cafes, 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 the country increased 11.9% from 2001 to 2006, from 23.6mn to 26.6mn. Other data has revealed that 26.6mn 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 major cities.

Looking at the business sector, the Mexican IT Association claims that 99.7% of the 2.8mn Mexican companies face serious limitations in information technology which affect their capacity to compete. The association 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 connect 98% of the nation to the internet, with co-operation from telecommunications carriers. Low disposable income and the related low PC penetration rate remain barriers to further expansion.