kEY SEctoRS

Information Technology Report

This report is abstracted from our latest Mexico IT report, which includes in-depth research on the sector, full five-year forecasts and a thorough analysis of the competitive landscape. BMI currently covers 16 industries across 60 countries. For further information, or to order a report, please contact subs@businessmonitor.com. ernment IT spending areas include solutions to improve tax collection efficiency, improve health services, promote trade and enhance security. The government has introduced a new mandate requiring companies to integrate with the Servicio de Administracion Tributaria (SAT) for real-time approval of electronic invoices. Software vendors will see the new regulation as an opportunity to help businesses prepare to meet regulatory compliance for both senders and receivers of invoices. such as Baja California Norte, Baja California Sur and Chihuahua, as well as cities like Guadalajara and Tepic. For its part, US giant Dell has implemented a regional shift in focus from concentration on the corporate market to expansion in the consumer and small and medium-sized enterprise (SME) sectors. Dell has said that around 30% of its Latin American region revenues now derive from the SME segment. The company has launched new models in its low-cost Vostro line, which is aimed at the SME segment, as well as government and educational institutions. Through Dell Financial Services, it has also attempted to help smaller businesses overcome capital outlay constraints to investment in IT. In the past two to three years, previously business-segment focused Dell has also implemented a consumer strategy through new partnerships with retail chains and new product launches, as it challenges rivals HP and Lenovo. Dell Mexico has signed agreements with retailers including Wal-Mart to sell the entire line of Dell Inspiron desktops and laptops. Meanwhile, Chinese giant Lenovo has also expanded its retail sector presence through expanding channel partnerships. For 2011, Lenovo has set the target of achieving monthly sales of between 200,000 and 300,000 units in the Mexican market. To achieve this, the company said that it would increase the number of its local distributors from 3,000 to 8,000-10,000 in the medium term. Mexicos market share as of November 2010 was estimated at in the region of 6.5%-7%, up from below 5% at the start of the year. Lenovo has also invested in a major marketing campaign and in 2010 organised a Caravanas Lenovo marketing tour, which visited 13 cities in the country. Lenovo has recruited new channel partners through its principal wholesalers in Mexico: Ingram Micro, CompuSolociones, Avnet and Exel. Many of the companys new line of products for the Mexican market are targeted at SMEs and households, rather than Lenovos traditional government and business customers. Lenovo has said that it was aiming to win a 52% share of Mexicos retail market, which the company estimated was worth

executive Summary
BMI projects that Mexican IT spending will grow by about 16% in 2011 to US$14.7bn, consolidating the recovery in 2010. Government spending will be one area of opportunity in 2011 with a substantial IT budget and the rollout of national and local projects that had been delayed by an austerity drive. Interest in cloud computing should continue to grow after many of Mexicos large companies conducted cloud pilots last year. Mexicos IT spending is forecast to grow at a compound annual growth rate (CAGR) of 11% over 2011-2015, but with strong variation between sectors and regions. Mexico City and its surrounding area accounts for at least 50% of total IT spending in the country, but Mexicos underpenetrated south east and Pacific regions are expected to offer growth opportunities over BMIs five-year forecast period. IT spending is forecast to outpace GDP growth, with drivers including rising PC penetration and growing affordability, as well as US corporate demand for IT outsourcing. IT spending as a percentage of GDP of 1.4% remains well below OECD levels and BMI projects that per capita IT spending will rise from US$134 to US$197 by 2015. Industry Developments: In 2011, the majority of the MXN86.4bn annual budget for Mexicos Communications and Transport Ministry is expected to go towards its information and knowledge society division. According to the federally approved budget, in the first 30 days of 2011, 52.3% of spending was allocated to information and knowledge society initiatives. Areas of spending at the federal level include integrated enterprise resource planning (ERP), back office systems, e-services platforms and interfaces. Key national gov-

Market overview
Hardware: Overall, foreign PC brands claim a more than 50% market share of the Mexican PC market. HP was the brand PC market leader in 2010, with a share estimated by the company at 32%. This was more than double HPs nearer competitor. Mexico is the most important country for HP in the Latin American region, with indirect sales currently representing about 90% of units shifted by the company in the Mexican market. In 2007, HP launched a US$2bn investment programme in Mexico, creating about 1,200 jobs in the country. Many foreign vendors have adapted their strategies to take advantage of increased sales through resellers and retailers, which was driving growth. The Mexican market is dominated by a number of major IT wholesalers including US leaders Ingram Micro and Azerty, as well as local companies such as CompuSoluciones, Exel and Tecnologia Especializada Asociada de Mexico (TEAM). These big players are mainly active in the larger regional markets, while for the moment less developed regions such as the Pacific and south east are served by smaller local distributors. Foreign vendors have moved to strengthen their market presence. Taiwanese leader Acer said in 2010 that it was looking for new partners to help it achieve better results in government tenders. Acer already works with around 60 distributors focused on the key government sector, with support from wholesalers such as Ingram Micro, Tech Data, Computadoras y Tecnologia, PC Hardware, Intcomex and others. However, Acer wants to enhance its presence in states

MeXIco JUNE 2011

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US$2.5bn. The company has introduced a new brand, Idea, targeted at the retail segment and contrasting with the established Think brand. Software: Software market leader Microsoft hopes that migrations to its Windows 7 operating system will continue to boost its local sales. Microsoft recently predicted that it could take Mexico 15 years to bring software piracy under control. In May 2010, Microsoft announced that it had signed an agreement with the Mexican government for continued investment in IT in schools and technology support for smaller businesses. The three-year agreement includes US$485mn in software and training programmes for SMEs, and free access for 40,000 companies to the Office Live Small Business programme. Microsoft also claims to have provided software for over 200,000 Mexican student computers over the past three years. SMEs are considered a major potential opportunity, and in 2010, leading enterprise software vendor SAP said they were its fastest growing segment for its Mexico and Central American division. SAP Mexico and Central America have a client base of around 3,200 companies, of which 70% are SMEs, according to company data. The number of clients increased by around 20% in 2010, from close to 3,000 at the start of the year. SAP said one of the biggest trends in the SME segment in 2010 was standardisation of back-office processes. The company plans to continue to recruit new channel partners to target the SME segment in Mexico. Cloud computing remains marginal, but growing, and SAP has launched an online delivery solution, Business All-in-One Fast-Start, as part of a partnership with HP. SAP Latin America saw revenues from software and services leap 21% in the third quarter of 2010. While SMEs remain one of SAPs Mexicos priorities, the subsidiary has targeted the government sector as its top growth prospect for 2010. SAP also said that despite the recession in 2009 it had not experienced negative effects. SAP is increasingly looking to specialise its sales force by industry. Other verticals that SAP Mexico will prioritise include healthcare, due to the growth of the sector and the fact that it has a solid client base in that industry. SAP expects healthcare to generate more business in 2010. Meanwhile, IBM has teamed up with mid-market ERP vendor Epicor Software to launch an enterprise offering for Mexi-

can SMEs. The solution comprises an IBM server loaded with Epicor ERP and configuration and deployment software, with both companies providing technical support. Meanwhile, local software developer Microsip said that it would continue to focus on local SMEs and expected revenues to grow 20% this year. Growth areas for Microsip in 2009 included inventory control and pointof-sale software. The company claimed 25,000 software installations serving around 100,000 companies. IT Services: Mexico continues to be an important battlefield for IT services and business process outsourcing (BPO) services providers. IBM targeted the Mexican public sector in 2010. The companys priorities included solutions and services for health, security, customs and the Ministry of Finance. Meanwhile, the company has established a Global Archive Solutions Centre in Mexico, with an initial investment of US$10mn. The new facility will service the growing need for data backup, archiving and replication. IBM has been expanding in the region with plans to build its new Global Delivery Centres in Argentina over the next 10 years, at a cost of around US$650mn. This is in addition to the US$200mn that the company has already spent on expanding its presence in the Latin American markets. Leading rival HPs 2008 acquisition of fellow US giant EDS strengthened its position in the local market. HP hoped that the acquisition would help it to gain market share in several Latin American markets, including Mexico, where EDS was particularly strong. HP will also be able to leverage several EDS Latin America-based facilities from which services were provided to other geographies. In the past few years, other IT services companies have escalated investment levels in Mexico. Monterrey is continuing its rise as an important hub for the BPO and outsourcing industry. Since 2005, five IT majors (Infosys, Wipro, Sasken, Aricent and Sutherland) have reportedly invested close to US$20mn. The software firm Aricent invested US$2.5mn in a new facility in Monterrey, followed by further investment of US$3mn in 2008. Among other investments, Unisys committed to invest US$50mn in the next three years to construct a new software development centre in Mexico. The new centre will employ a staff of 250 people and will provide outsourcing services to clients in the US, Canada, Mexico and Latin America.

The major Indian vendors were also continuing to mount a strong challenge to US giants like IBM and HP. In November 2009, Infosys opened its second Latin American Development Center in Monterrey, offering clients a full range of IT services. The Mexican operation now has around 30 clients and 330 employees.

Industry Forecast
BMI projects that Mexican IT spending will grow by about 16% in 2011 to US$14.7bn, consolidating a strong recovery in 2010. Government spending will be one vendor focus in 2011 with a substantial information society budget and the roll-out of national and local projects that had been delayed by an austerity drive in 2009. PC sales also bounced back to solid growth in 2010 following a sharp contraction. Mexicos IT spending is expected to grow at a CAGR of 11% over 2011-2015, but with strong variation between sectors and regions. IT spending is expected to outpace GDP growth as the government turns its attention to overcoming Mexicos long-standing underinvestment in this area. In 2011, PC sales are forecast to remain in positive growth territory, although growth will be lower than in 2010, which was boosted by a low base effect compared with 2009. PC sales were estimated to have increased by a double-digit y-o-y factor in H110. According to the statistics institute INEGI, higher sales of computers was one of the drivers of an overall modest y-o-y rise in retail sales in July-August 2010. In 2011, the popularity of new form factors such as tablets and lighter notebooks should help to keep PC market growth going. Business confidence appeared to be on the rise in early 2011, fuelling growth in private sector credit, despite continued consumer weakness. There was a boost to sales last year from computer purchases delayed from 2009. Migrations to the Windows 7 operating system and new Intel core technology also impacted positive on sales, and this could continue in 2011. Meanwhile, interest in cloud computing should continue to grow in 2011. The economic crisis encouraged many organisations to look closer at cloud computing models such as software-as-aservice (SaaS), and there were estimates in 2010 that around 50% of Mexicos large companies have conducted cloud pilots. Some vendors reported concerns in 2010 about an apparent rise in drug violence, which was affecting channel activities in some regions and driving up operating costs.

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For the most part, vendors seemed likely to maintain their operations, with the northern and western regions that are most affected mostly secondary markets. Despite continuing economic and security uncertainties, there should be opportunities in key IT verticals such as financial services, telecoms and government, with other growth sectors in 2010 set to include healthcare, utilities and SMEs. Government spending should grow again in 2011 as public sector organisations roll out e-services and support infrastructure. Key national government IT spending areas in 2010 included solutions to improve tax collection efficiency, improving health services, promoting trade and enhancing security. As the economy expands, some fundamental drivers, including low PC penetration, growing PC affordability and US corporate demand for IT outsourcing, should ensure there growing IT demand. Mexico certainly has plenty of potential for progress on a range of ICT indicators, including a computer penetration level of below 20% and underdeveloped e-services. IT spending as a percentage of GDP of about 1.4% remains well below OECD levels and BMI projects that per capita IT spending will rise from US$134 in 2011 to US$197 by 2015. Higher disposable incomes will allow for growth in consumer loans and will mean more money to spend on big-ticket items like PCs. Mexico City and its surrounding area remains the mainstay of the market and accounts for at least 50% of total IT spending in the country. Mexicos underpenetrated south-east and Pacific regions are expected to offer growth opportunities over BMIs five-year forecast period, particularly in the south east. IT penetration in the public sector remains relatively low in the region and larger Mexican IT distributors have now taken notice of latent demand in this area. The consumer fundamentals of low household penetration of many digital

devices such as notebook computers and greater affordability should keep the PC market on an upwards trajectory. Growing broadband penetration, including 3G mobile, will drive the PC market, and help to encourage the popularity of new form factors such as tablets. Netbooks will remain attractive for price-sensitive consumers and small businesses compared to fully featured notebooks, although this advantage is being reduced. Meanwhile, tablets are expected to be a growth area in 2011. Government initiatives, accounting for around 20% of Mexicos IT budget, should help to drive the market. The governments e-Mexico plan, with its ambitious programmes of investment in digital community centres and the like, should ensure widening demand, even if targets are missed. In particular, continued funding of MXN650mn for PROSOFT and the governments focus on boosting the underdeveloped software sector kept things moving forward. Another key driver will be the increasing involvement of telecoms service operators in the PC market. The broadband market has seen exceptional growth and BMI projects over 41mn Mexican internet users by 2014. Telmex has emerged as a major distributor of PCs over the past few years, with annual volume shipments of above 1mn units bundled with its internet services. Increasingly, however, mobile operators are likely to take centre stage, with operators such as Telcel promoting mobile internet packages at prices comparable to those offered by Telmex. Telcel is set to offer netbooks and laptops. The governments overall policy framework for economic development includes an emphasis on using IT. There is a drive for informatisation in many sectors, including among SMEs and education. The government has also launched a US$445mn plan to introduce ICT into the education sector. Mexico has struggled to make much headway in e-government but local governments are now increasingly launching their own

initiatives and looking to private funding to make up for deficiencies in federal programmes. This makes local government tenders and important and growing source of opportunity for vendors, and has prompted some vendors to seek more distributors with the ability to penetrate this segment. In the enterprise segment, government support should encourage IT adoption to spread steadily from larger companies to their smaller partners and customers. Only around a third of Mexican enterprises are thought to have made IT investments, meaning there is significant growth potential. However, the vendors push to penetrate the SME segment will mean lower prices. In the corporate and industrial sector as a whole, the slump in technology investments has left a series of relatively obsolete equipment that needs replacing, creating sustainable demand. Despite this, IT services will show the fastest growth over the forecast period, especially outsourcing driven by demand from US companies. Cloud computing will be a major vendor focus and will drive investment. However currently this remains a small niche market. M exicos relatively high broadband charges are expected to act as an inhibitor to development of cloud computing and could see Mexico lag other countries in the region. In the retail PC segment, more creative financing plans and better access to credit will gradually help bring computer ownership within the reach of millions more Mexicans on lower incomes. This should help to offset the effects on consumer demand of higher unemployment and a higher savings rate. Low PC penetration also represents a growth opportunity, as Mexico lags in comparison with regional rivals such as Chile and Brazil. An expanding organised retail segment will also boost sales to the household segment, with notebooks and netbooks now readily available in popular retail chains such as Soriana and Chendruai, as well as department stores such as Palacio de Hierro.

MexicoiTSecToroverview,2007-2015(US$MnUnLeSSoTherwiSeSTaTed) IT market IT market as % GDP Hardware (computer market sales) Services Software PCs (including notebooks) Servers 2006 9,813 1.0 4,857 3,189 1,766 3,886 437 2007 11,187 1.1 5,482 3,692 2,014 4,330 493 2008 12,753 1.2 6,058 4,272 2,423 4,846 545 2009e 10,712 1.2 4,928 3,749 2,035 3,991 443 2010e 12,641 1.2 6,131 4,171 2,339 4,966 552 2011f 14,663 1.3 6,800 5,132 2,731 5,522 612 2012f 16,716 1.3 7,710 5,872 3,134 6,322 694 2013f 18,555 1.3 8,512 6,541 3,502 7,048 766 2014f 20,410 1.3 9,312 7,220 3,878 7,711 838 2015f 21,839 1.3 9,909 7,753 4,177 8,205 892

e/f = BMI estimate/forecast. Source: BMI, ITU (internet and broadband penetration data)

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