MEXICO COMPUTER REPORT
Sept. 25, 1998
COPYRIGHT © 1998 Jason Dedrick and Kenneth L. Kraemer
The following report is based on a visit to
Guadalajara and Mexico City from August 9-19, 1998.
Guadalajara: Silicon Valley South?
We visited Guadalajara, Jalisco to examine Mexico's largest computer industry cluster, sometimes referred to as Mexico's Silicon Valley. Based on interviews with a number of companies, as well as academics and government officials, we found that Guadalajara is indeed a fast-growing center for computer production, but is hardly another Silicon Valley. However, it is beginning to exhibit characteristics that suggest it could become a ``mini" or ``satellite" Silicon Valley
The local IT industry began to take off in 1986, when IBM opened a PC plant there, after difficult negotiations with the Mexican government over various restrictions put on foreign producers. IBM complied with the requirement that it produce PCs in Mexico in order to sell in the local market, and it agreed to targets for exports, local content and local R&D. It refused, however, to enter a joint venture, as the government had wanted. Shortly thereafter, Hewlett-Packard, which also had a plant in Guadalajara, ended its joint venture with a local company and set up a wholly-owned subsidiary.
IBM and HP have served as the core companies of Guadalajara's computer industry. Their presence, along with that of communications and electronics companies such as Philips, Motorola, Lucent, NEC and Siemens, has attracted a second tier of contract manufacturers and suppliers, including SCI, Solectron, Dovatron, Molex, Electronica Pantera, and NatSteel (see Table 1). The industry now employs tens of thousands of workers in the region and exported US$5.2 billion worth of computer, communications and electronics products in 1997.
Table 1. Computer makers and suppliers in Guadalajara
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Guadalajara's attractions to foreign electronics companies include: (1) a stable, well-educated work force, with low turnover rates; (2) a good supply of engineers, technicians, managers and other skilled people from local universities and trade schools; (3) the presence of a good supplier base; (4) proximity to the U.S. market, allowing goods to be shipped by air in a few hours or by truck in a couple of days; (5) a good transportation and communications infrastructure; (6) pleasant living conditions in a very attractive city; and (7) incentives from the Jalisco state government that can amount to 5% of the total investment in tax breaks, training or direct grants.
There were only a few problems mentioned by managers. For instance, the rapid growth of the local industry has begun to overtax the local supply of technicians (there are programs at local technical institutions to train people with specific skills needed by industry, however). Also, some of the social problems that are on the rise throughout the country, from crime to drug use, are becoming evident in Guadalajara. The growth of the city has caused traffic and pollution problems, although compared to many Asian cities, traffic flows quite smoothly.
In summary, the notion of Guadalajara as a Silicon Valley South is more of a public relations tool than a realistic assessment, confirming the earlier findings of our research partner, Juan Palacios of the University of Guadalajara. Some shortcomings include:
There is also almost no software industry, although we did visit three interesting companies: Compac, which produces administrative and financial software products; KidsPC, which makes educational software for primary grades; and CompuCampo, which makes agricultural software to control animal production, irrigation, pest control, and fertilization.
Guadalajara could be better described as a high-tech production cluster for multinational corporations, comparable to Penang, Malaysia; Guangdong, China; Dublin, Ireland; or for that matter Singapore ten years ago. The state government and electronics industry chambers have targetted upstream components and materials industries for development in order to create a more mature industry cluster. If successful, the plan will increase the value added of Guadalajara's computer and electronics industries, but there are still no plans that would nurture the entrepreneurship and local technology development that marks Silicon Valley.
Impacts of NAFTA
One of the key issues we are investigating is the impact of NAFTA on the computer industry in Mexico, and on the division of labor between the U.S. and Mexico in computer production. For the most part, NAFTA is seen by companies as having positive effects in that it lowers tariffs in both directions on trade between Mexico and the U.S. This, along with local content requirements, gives Mexico a competitive advantage over other regions, particularly Asia. NAFTA also has led to lower prices on PCs and other products sold in Mexico, helping to expand the market for U.S. computer makers.
NAFTA does not seem to be pulling many jobs from the U.S. to Mexico. Rather, it is enhancing the position of North America as a production platform for the industry. In spite of the availability of low-cost production and supply networks in Asia, there appears to be a desire within U.S. companies to maintain a North American production capability. This serves as a counterbalance to Asia and helps to justify the continued presence of design, engineering and production operations in the U.S. What we did not hear, but suspect may be true, is that U.S. companies are uncomfortable depending entirely on Asian suppliers who may eventually become competitors, using technology licensed, or otherwise acquired from the U.S. companies.
Impacts of the Asian financial crisis on Mexico
The impacts of the Asian crisis have been mixed, depending on the company. The big issue for companies operating in Mexico is pressure to match ``Asian prices" which have fallen dramatically since the devaluation of most Asian currencies. For big multinationals, the competition may come from Asian divisions within their own company, which have access to lower cost local suppliers and cheaper labor due to devaluation. For other companies, the competition is directly from Asian companies in the same market. Producers in Mexico benefit from NAFTA, proximity to the U.S. market, and the previously-mentioned desire to maintain a North American production capacity, but they ultimately must match or come very close to Asian prices to stay in business.
Possible domestic financial crisis
Mexico is now facing a home-grown problem that could have a greater impact than the Asian crisis. That is the emerging controversy over FOBAPROA, a government agency created to deal with the bad debts of Mexican banks after the 1994 peso crisis (something like the RTC that oversaw the savings and loan bailout in the U.S.). FOBAPROA acquired about US$65 billion in bad debts, or about 15% of Mexico's GDP, and the government now wants to convert this debt into government bonds that can be traded and are included in the budget. However, the plan has come under fire due to accusations that the agency bailed out wealthy, politically connected bank shareholders who allegedly made privileged loans to themselves. There are also accusations by the U.S. government that narco-dollars were being laundered by the same banks. In the past, such accusations would probably have been ignored, but President Zedillo's Institutional Revolutionary Party (PRI) no longer controls a majority in the Congress, and opposition parties (and even some PRI legislators) are demanding a full investigation into FOBAPROA before allowing the government to convert the debt. In the end, it seems likely that the deal will go through Mexico's Congress, but the process could lead to political instability and create uncertainty for investors who are already spooked about emerging markets.
Mexico's IT market
Mexico's IT market rebounded in 1996 and 1997, finally surpassing the level achieved in 1994 before the peso crisis. However, the combined impact of the Asian crisis and lower oil prices (sales of oil by state-owned Pemex accounts for over a third of Mexico's government revenues) have already led to slower growth in the market for 1998. Select-IDC (http://www.select-idc.com.mx) initially forecast a growth rate of 28% for 1998, but has since revised its forecast down to 18%. The fastest growing market is for information services, while hardware growth is more modest, a fact confirmed by at least one PC vendor. Even the 18% forecast could be overoptimistic if the Asia crisis, FOBAPROA, or a general loss of investor confidence drives down the value of the peso or hurts economic growth. While the probability of another financial crisis in Mexico may be low, the serious potential impact of such a crisis should figure into any market forecasts and strategic planning for the next year or two.
Prices on brand name PCs in Mexico remain slightly higher than in the U.S., but so-called ``white boxes" or clones are available at bargain prices. This price gap has enabled the clones to reach a market share of about 35%, up from just 5% in 1992, when Compaq entered the market with an aggressive price strategy. Now, the availability of very cheap components from Asia makes it possible for clone makers to undercut the brand names and grab market share in a very price sensitive market. Perhaps the biggest casualty of the price wars has been Acer, which was Mexico's number one brand for six straight years until Compaq passed it this year. Acer had succeeded in part by offering a brand name at lower prices, but now Compaq is again being more aggressive in its pricing, and the white box makers offer even lower prices than Acer.
The biggest spenders on IT in Mexico are the public sector, which accounts for about 35% of the market, the financial sector (23%) and manufacturers (20%), according to Select-IDC. The smallest, but fastest growing sector is services, as many smaller service companies are just starting to computerize for the first time. For instance, we were surprised to see a very small parking lot with a computerized system for calculating and recording parking fees. On the other hand, computer use in schools is very limited. Private schools often have computers, but only one public elementary school in the entire country has PCs. The government has a goal of putting at least one PC in each public school, but there is no specific budget to do so.
Internet use
A survey of 1301 Internet users by Select-IDC found that users are predominantly young (70% between 21 and 40 years old), male (80%), professional (55%), and well-educated (67% have a bachelor's degree or equivalent). Not surprisingly, income is a big factor in a country with a very uneven income distribution, but surprisingly, 10% of the users surveyed earn less than 3000 pesos (about US$350) per month, and another 14% are between 3000 and 5000 pesos (US$350-580). The main uses are e-mail (93% of users), research (83%), file transfer (76%), and education and entertainment (67%). Only 14% have used the Internet for shopping and 8% for banking.