Mexico Information Technology Report Q4 2009

This report projects that Mexican IT spending will dip by 6% in 2009 to around US$12.0bn, due to current economic uncertainties and a decline in private sector credit growth. In a challenging economic climate in H109, consumer sentiment reached an all-time low, and business IT spending fell further, with hardware updates particularly vulnerable to cuts. Government spending was a relatively strong area in H109, but could be hit in H209 and 2010 by a new austerity drive. Despite the difficult environment, there should still be opportunities in H209 in key IT verticals such as financial services, telecoms and government. The government has responded with stimulus measures, assisted by a US$47bn bailout package from the IMF.

Spending on government IT projects was budgeted to increase by as much as one-third in 2009, although a new wave of austerity drives launched in Q309 is now likely to have an impact. Going forward, the consumer fundamentals of low household penetration of many digital devices such as notebooks computers, and greater affordability should return the IT market to an upwards parity. Meanwhile, growing broadband penetration, including 3G mobile, will drive the PC market. Netbooks will be the main growth area here, with their main attraction for price-sensitive consumers and small businesses being their low cost. Industry Developments In August 2009, the government launched budget cuts that seemed certain to have an impact on current and future IT projects.

Total government IT spending had been budgeted to increase this year by around one-third in local currency terms, but this must now be in question. Areas of spending at the federal level included integrated enterprise resource planning (ERP) and back office systems and e-services platforms and interfaces In the short term, most 2009 budgets had already been confirmed. However, it was unclear whether continuing tight credit conditions and fiscal pressures would ultimately impact on government IT spending should the economic downturn be prolonged. Meanwhile, fiscal pressures were behind a federal government proposal to end financial assistance for companies that end in technology. The proposal, heavily criticised by Mexican IT association Canieti, threatened to eliminate the provision of federal funds to cover 30% of companies' investments in innovation and technology development. Competitive Landscape

In H109, the main domestic PC market driver was laptop sales, an area where foreign vendors retained a competitive advantage. The popularity of netbooks has reinforced the preference for mobility in the Mexican market, with a wave of rival product roll-outs from vendors such as Asus, Acer, HP, Dell and Toshiba. Local companies competing in the netbook segment in 2009 included Lanix, Blue Light and Dextra. In February 2009, Chinese PC giant Lenovo launched a new plant at Apodaca (Nuevo Leon) with 1,500 employees. The company plans to spend US$40mn to manufacture laptops in Mexico. The plant is reportedly the biggest investment made by Lenovo outside China and indicates the strategic significance of the Mexican market for PC vendors. Lenovo has also expanded its Mexican retail sector presence by recruiting new channel partners through its principal wholesalers in Mexico: Ingram Micro, CompuSolociones, Avnet and Exel.

In early 2009, many software vendors in the Mexican market responded to the global economic crisis by adjusting their strategies and client focus. SAP announced plans to target its existing installed base of large customers in Mexico with the May launch of its Business Suite 7. Meanwhile, local software vendor Softtek identified the economic crisis as an opportunity to enhance its position as nearshore services provider for US firms.

Mexican computer hardware sales are projected to contract in 2009, with lower sales of desktops the main driver. Mexico's computer hardware sales are projected at US$5.7bn in 2009, down from US$6.1bn in 2008. Sales are projected to reach around US$8.3bn in 2013. In H109 there were reports of some companies deferring replacement purchases as hardware was generally the first target for Mexican businesses looking to make savings from IT budgets. Despite the challenging environment for PC vendors in 2009, there are still some opportunities. In particular, the popularity of netbooks will continue to boost sales in the notebook segment. Growing fixed and mobile broadband penetration has driven PC sales, as mobile network operators have emerged as a significant distribution channel for portable computers. The small and medium-sized enterprise (SME) segment is expected to be a significant opportunity for netbook vendors in H209. Most netbooks currently retail in Mexico in the US300-US$500 price range, however, adding to pressure on average PC prices.

The software market in 2009 is projected to dip to US$2.2bn, from US$2.4bn last year, with imported software accounting for at least 80% of the total. Software compound annual growth rate (CAGR) for 2009-2013 is put at around 12%, outpacing general IT market growth, as the government turns its attention to overcoming Mexico's long-standing under-investment in this area. There were reports in early 2009 of some companies scaling back non-essential investments in software, with most spending coming from existing clients. However, other companies view software investments as strategic, rather than operational, reducing their vulnerability to cutbacks. In 2009 the most popular applications remain basic ERP, and supply chain management solutions, while business intelligence and security software should provide growth opportunities, including more spending on networked security solutions.

The Mexican IT services market is projected at around US$4.2bn in 2009, with spending slightly down from last year. The economic situation is expected to be the main reason for negative growth in 2009. In H109 there were reports of IT managers in various sectors reviewing IT spending plans. Early signs were that only around 30% of companies were cutting budgets. However, government spending in H209 is now likely to be less than previously expected. Despite near-term economic exigencies, the market should ultimately grow at a CAGR of 12% through 2013. The increasing number of multinational companies operating in the market is an important driver for spending. Opportunities also reside within the SME sector, where companies are trying to use computing resources more effectively. Meanwhile, Mexico is becoming an increasingly important hub for provision of business process outsourcing (BPO) and other outsourcing services.

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 nationally and regionally. The potential for new broadband technologies to take hold in Mexico is high, with the energy utility owning fibre-optic infrastructure and WiMAX licences expected to be auctioned in 2009. With Cofetel taking a more combative stance to Telmex, BMI believes that there is a good chance that new operators will enter the market and be responsible for strong growth.

The 2008 UN e-government survey found that Mexico had the most advanced e-services development in Latin America, due to a 'strong national government portal', which encouraged online consultations between government and citizens. Recent state and municipal statistics have highlighted gradual progress in the implementation of egovernment in Mexico at a federal and state level. In 2001 the government launched an e-government initiative that prioritised providing health, education and other government services online, as well as the development of e-commerce. Since then, however, funding has 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 states are seeking funding from the private sector to make good gaps in public funding.