bmi mexico information technology report q1 2014

Q1 2014www.businessmonitor.com

MEXICOINFORMATION TECHNOLOGY REPORTINCLUDES 5-YEAR FORECASTS TO 2017

ISSN 1750-5100Published by:Business Monitor International

Mexico Information TechnologyReport Q1 2014INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: October 2013

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CONTENTS

BMI Industry View ............................................................................................................... 7

SWOT .................................................................................................................................... 9

Wireline SWOT ....................................................................................................................................... 11

Political ................................................................................................................................................. 13

Economic ............................................................................................................................................... 14

Business Environment .............................................................................................................................. 15

Industry Forecast .............................................................................................................. 16Table: Mexico IT Industry - Historical Data And Forecasts (MXN mn) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Broadband ............................................................................................................................................. 20Table: Telecoms Sector, Internet, 2010-2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Macroeconomic Forecasts ............................................................................................... 22Economic Activity .................................................................................................................................... 22

Table: Mexico - Gdp By Expenditure, Real Growth % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Industry Risk Reward Ratings .......................................................................................... 27Table: Americas IT Risk/Reward Ratings, Q1 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Market Overview ............................................................................................................... 30Hardware ............................................................................................................................................. 30

Software ............................................................................................................................................... 34

IT Services ............................................................................................................................................ 36

Industry Trends And Developments ................................................................................ 41

Regulatory Development .................................................................................................. 44

Competitive Landscape .................................................................................................... 47International Companies ......................................................................................................................... 47

Table: IBM Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Table: SAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Local Companies ................................................................................................................................... 49Table: Kio Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Table: Dextra Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Table: Microsip . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Company Profile ................................................................................................................ 51Softtek ................................................................................................................................................... 51

Sonda SA ............................................................................................................................................... 55

Regional Overview ............................................................................................................ 59

Mexico Information Technology Report Q1 2014

© Business Monitor International

Demographic Forecast ..................................................................................................... 63Demographic Outlook .............................................................................................................................. 63

Table: Mexico's Population By Age Group, 1990-2020 ('000) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Table: Mexico's Population By Age Group, 1990-2020 (% of total) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Table: Mexico's Key Population Ratios, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Table: Mexico's Rural And Urban Population, 1990-2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Methodology ...................................................................................................................... 67Industry Forecast Methodology ................................................................................................................ 67

Sources ................................................................................................................................................ 68

Risk Reward Rating Methodology .............................................................................................................. 69Table: It Risk Reward Rating Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Table: Weighting Of Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71



BMI Industry View

BMI View: Mexico stands out as the second largest IT market in Latin America behind Brazil. Its proximity

to the US is a huge advantage, ensuring consumers and businesses gain access to the latest services and

products. We estimate the market passed MXN200bn in value in 2012 and will rise steadily to MXN260bn

by 2017. Government projects aimed at getting more of the population online and providing e-government

services will underpin market growth, while new developments such as cloud computing will provide strong

growth impetus. The IT services segment will be supported by IT outsourcing demand from the US and key

industries such as telecoms and financial services.

Headline Expenditure Projections

■ Computer hardware sales: MXN96.7bn in 2013 to MXN117.4bn in 2017, increasing 21.4% over theperiod. Migrations to Windows 8 should provide a boost to hardware upgrades in the short term, whileincreased connectivity and lower internet prices will help spur demand.

■ Software sales: Fastest growing segment of the market, increasing from MXN39.8bn in 2013 toMXN50.1bn in 2013, an increase of 25.9%. Downside risk to this outlook depends on the success inbringing down illegal software use, which at 63% is well above OECD levels.

■ IT services sales: This will increase from 35.3% of the market to 35.6% between 2013-2017, risingto MXN92.7bn. Driving growth will be sectors such as government, telecoms and financial services.

Risk/Rewards Ratings: Mexico's score is 49.8 out of 100.0. Mexico ranks fourth in the Americas region in

our latest RRR table.

Key Trends And Developments

■ Government efforts to reduce the digital divide are beginning to come to fruition. The government willremain a major spender in the IT market over our five-year forecast period 2013-2017, with initiatives toprovide greater e-government services and support informatisation for enterprises. SMEs willincreasingly push growth trends as companies use IT services and software to lower their costs andimprove efficiency.

■ Increased access to mobile data networks will change the nature of hardware sales and IT service usage.Greater connectivity for fixed and mobile devices will drive interest in cloud computing, with theservice's advantages easier to appreciate as networks extend and improve to offer the speeds necessary fora move to the cloud.

■ Cities such as Mexico City, Guadalajara and Monterrey are the key markets for IT hardware, but webelieve states in the south east and pacific regions offer growth over the medium term. New financing toacquire devices will help extend the reach of networks, to encourage more Mexicans to acquire thedevices to get online.

■ A new bill signed into law by President Enrique Peña Nieto in June 2013 aims to limit the power ofdominant operators in the telecoms sector. This will encourage competition in the broadband industry,



currently dominated by Telmex, lowering prices and helping achieve the goal of universal online access.However, by October 2013, the new regulator Ifetel was reported to have made little progress in its goalof increasing competition.

■ The launch of new tablets continues to drive growth in the computer hardware market. New launches inthe fourth quarter of 2013 include the Philips 7, while the Nokia Lumia 2520 was poised for an imminentlaunch.

■ In May 2013, Mexico's IT industry association, AMITI, published its 'Roadmap to 2025' ('Mapa de ruta2025') for transforming Mexico via the use of IT. The study was part of AMITI's strategy to encouragethe government to include information and communications technology (ICT) as an integral part of theNational Development Plan (Plan Nacional de Desarollo; PND).



SWOT

SWOT Analysis

Strengths ■ Mexico has a supportive government and the ambitious long-term e-Mexico policy

framework has been in place since 2001.

■ The second-largest domestic market in Latin America, with a significant multinational

presence and large domestic companies.

■ Proximity to the US spurs development of outsourcing and IT services segment.

Weaknesses ■ Low average incomes and large regional disparities.

■ Limited availability of credit, particularly for small businesses.

■ Low level of IT investment at just 1.4% of GDP, compared with an average of 4.3%

for OECD countries.

■ Investment levels particularly low in the software sector, which also suffers due to

piracy.

■ Uncompetitive telecommunications sector keeps connectivity prices high, limiting

demand for IT products.

Opportunities ■ There will be increasing demand for services and this will contribute to revenue

growth for companies, especially outsourcing for US businesses looking to cut

costs. The banking, tourism and restaurant sectors are carrying out technology

upgrades.

■ The e-Mexico policy and internationally funded programmes are aimed at increasing

PC and internet penetration, particularly in education.

■ Increasing informatisation in small and medium companies will drive demand for a

range of new IT services.



SWOT Analysis - Continued

Threats ■ Competition for investment and markets from China and other low-cost countries.

■ Economic growth heavily dependent on US economy.



Wireline SWOT

Wireline SWOT Analysis

Strengths ■ Competition exists in the fixed-line sector; the alternative operators continue to

expand their market share vis-à-vis incumbent operator Telmex.

■ Some alternative operators have been reporting growth in demand for fixed-line

services.

■ Regulator reported accelerated growth in the number of internet users in 2010 and

fixed-line does not appear to be declining.

■ Broadband market showing strong growth with several operators present.

Weaknesses ■ Dominance of Telmex has limited growth in the broadband sector; poor service

quality has also been cited as a problem.

■ Size of Mexico makes rolling out fixed infrastructure difficult.

■ Alternative operators are considerably smaller than Telmex with networks generally

concentrated in major towns and cities.

Opportunities ■ Bundled services have been instrumental in encouraging fixed-line retention, and

market share of smaller operators is growing as a result.

■ Number portability should allow alternative operators to continue decreasing Telmex's

dominance.

■ Operators continue to reduce the cost of broadband while also raising download

speeds.

■ Cable TV operators promoting cheaper service bundles that will drive further growth;

triple-play packages should help to reduce the speed of fixed telephony decline.

■ New fibre-optic network to be built by Telefónica, Televisa and Megacable will

provide a challenger to Telmex.

■ Proposed legislation will encourage competition and will restrict dominant operators.



Wireline SWOT Analysis - Continued

Threats ■ Mobile substitution will ultimately reduce demand for fixed services.

■ Fixed-line market could decline more rapidly, despite the promotion of bundled

service packages.

■ Mobile broadband could become major driver of market growth, limiting prospects for

fixed operators.



Political

SWOT Analysis

Strengths ■ Democracy seems to have taken root after the 71-year tenure of the Partido

Revolucionario Institucional ended in 2000, and there are effective checks and

balances on executive power to prevent a return to one-party rule.

Weaknesses ■ State officials cannot be re-elected, which makes them effectively unaccountable to

the electorate and reduces the incentive to pass legislation.

■ High levels of violence in the government's war against powerful drug cartels have

highlighted that much more work is necessary to reduce regional inequalities.

Opportunities ■ We expect ongoing structural reforms to go at least part of the way towards reforming

an outdated judicial system.

Threats ■ Endemically high levels of violence have called into question whether the federal

government is truly in charge of large swathes of the country. This looks set to

continue in the short term, as the cartels battle for territory in Mexico and expand their

operations into Central America.



Economic

SWOT Analysis

Strengths ■ Close proximity to the US and membership in the North American Free Trade

Agreement (NAFTA) give Mexico important advantages when trading in the US

market.

■ The country has the most free trade agreements of any country in Latin America,

fostering international exchange and investment.

Weaknesses ■ The economy remains largely tied to economic prospects in the US, which is a

concern given the still-weak outlook for the US consumer over the next few years.

■ Most of the capital flows into the country are still short term, threatening the health of

the country's financial account should investors grow cautious and making it hard to

implement loose monetary policy.

Opportunities ■ Sound economic policy under the administration of former president, Felipe

Calderón, has continued under Enrique Peña Nieto's new government, supported by

an independent central bank. This means Mexico is well placed to register sustainable

growth.

■ Large numbers of vehicle and vehicle parts manufacturers relocated to Mexico to gain

easier and cheaper access to US markets. This process shows little sign of slowing,

and as such we forecast that foreign direct investment (FDI) will increase over our 10-

year forecast period, provided the government maintains business-friendly policies.

Threats ■ The substantial short-term capital inflows could be reversed when the developed

world begins to normalise monetary policy.



Business Environment

SWOT Analysis

Strengths ■ The government's focus on improving infrastructure is likely to aid the overall

business environment in the longer term, making Mexico a more attractive location for

future foreign direct investment inflows.

■ The government appears to remain committed to free trade and has been slowly

diversifying its exports base away from dependence on the US.

Weaknesses ■ Education is an issue, with Mexico having one of the lowest levels of education

achievement of all OECD countries, though recent reforms should go some of the way

to addressing this.

■ More focused regional policy is required to help shift resources from the relatively

prosperous north to the poorer south.

■ Heavily regulated labour markets and powerful trade unions make hiring and firing

difficult for employers.

Opportunities ■ Rules on foreign investment are relatively relaxed in some sectors, with majority

ownership allowed in some circumstances.

Threats ■ We see only limited scope for the new government to tame the violence in the near-

term given the more fractured criminal landscape.



Industry Forecast

BMI has revised local currency forecasts, taking into account the effects of exchange rate fluctuations and

other developments in the local economy. We believe Mexico's IT market will grow just under 5% in 2013

to MXN210.8bn after rapid growth in 2012. Although growth will slow because of economic headwinds,

there are a number of factors that will contribute to the market's continued development. Low PC

penetration and an increasing move towards online services will drive demand for IT services and software,

while the hardware market grows at a steady pace. Government spending will remain a key driver across all

segments of the market.

2013 Overview

Overall conditions will be favourable for the consumer PC segment in 2013 as the move to update to

Windows 8 from late 2012 continues. Supporting this is the continued expectation for peso appreciation in

2013, averaging MXN12.50/US$ over the year. As of Q313, we continue to expect Mexico will post real

GDP growth of 1.6% in 2013, reflecting our expectation that after the robust 3.9% growth in 2012, the

economy will slow on the back of moderating external demand

While consumer spending is looking up, creeping inflation is a concern and likely to remain so throughout

2013. Nevertheless, consumer credit looks likely to remain robust, having levelled off around 24.0% year-

on-year (y-o-y) in 2012, which should encourage private spending. The popularity of new form factors such

as tablets and lighter notebooks should provide new growth areas and reduce the market share of traditional

PCs.

Business confidence appears to be on the rise, with a boost from business-friendly legislation. Much will

depend on the strength of the US recovery, which remains uncertain. The labour market remains weak and

consumer credit is expected to cool.

Given the government's commitment to fiscal consolidation, we do not expect public sector expenditure to

be a significant driver of economic activity over the coming decade. However, public sector IT spending

should grow again as public sector organisations roll-out e-services and support infrastructure. Key national

government IT spending areas include solutions to improve tax collection efficiency and health services,

promote trade and enhance security.



Interest in cloud computing should continue to grow. The economic crisis encouraged many organisations

to look closer at cloud computing models such as Software-as-a-Service (SaaS), and there are estimates that

a majority of Mexico's large companies have conducted cloud pilots. Vendors have reported faster-than-

expected growth in demand for cloud services in some IT verticals such as finance.

Some vendors have expressed concerns about an apparent rise in drug violence, which was affecting

channel activities in some regions and driving up operating costs. For the most part, vendors seemed likely

to maintain their operations. The most affected northern and western regions were 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 set to include

healthcare, utilities and small- and medium-sized enterprises (SMEs).

Market Drivers

As Mexico's economy expands over the next five years, some fundamental drivers, including low PC

penetration, growing PC affordability and US corporate demand for IT outsourcing, should ensure growing

IT demand. Mexico certainly has plenty of potential for progress on a range of ICT indicators, including a

computer penetration level of less than 20% and underdeveloped e-services.

IT spending, as a percentage of GDP, is about 1.4% and remains well below OECD levels. BMI projects

that per capita IT spending will rise significantly over the next five years. Higher disposable incomes will

allow for growth in consumer loans and will mean more money to spend on 'big-ticket items' such as 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. Mexico's underpenetrated south east and Pacific regions are expected to

offer growth opportunities over BMI's five-year forecast period from 2013-2017, 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 should help 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 an ongoing growth area.



Government initiatives, accounting for around 20% of Mexico's IT budget, should help drive the market.

The government's 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 the Economy Secretariat's PROSOFT programme and the government's focus

on boosting the underdeveloped software sector will keep moving the sector 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 more than 52mn Mexican internet users

by 2017. Telmex has emerged as a major distributor of PCs over the past few years, with annual volume

shipments of more than 1mn units bundled with its internet services. Increasingly, however, mobile

operators are likely to take centre stage, with operators such as Telmex's sister company Telcel promoting

mobile internet packages at prices comparable to those offered by Telmex. Telcel has also begun selling

Apple's iPad is set to offer a variety of netbooks and laptops.

Segments

The government's 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 an 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 one-third of Mexican enterprises are

believed to have made IT investments, meaning there is significant room for growth.

There is still considerable potential for ERP sales, as companies focus on cost efficiencies and regional

expansion. HR applications are being implemented to enable better communication with other

functionalities such as accounting. Meanwhile, storage and database solutions are a significant growth area

in the Mexican market.



In the Mexican 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 from 2013-2017, 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. Mexico's relatively high broadband charges are expected to act as an inhibitor to the

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 offset

the effects on consumer demand of higher unemployment and a higher savings rate. Low PC penetration

also offers a growth opportunity as Mexico lags in comparison with regional rivals 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.

Summary

The computer hardware market is forecast to grow from MXN96.7bn in 2013 to MXN117.4bn in 2017,

with computer sales rising from MXN80.1bn to MXN97.2bn. Software spending should rise from

MXN39.8bn to MXN50.1bn, and IT services from MXN74.3bn to MXN92.7bn.

Table: Mexico IT Industry - Historical Data And Forecasts (MXN mn)

2010 2011 2012 2013f 2014f 2015f 2016f 2017f

IT Market 158,351 174,629 201,127 210,801 225,290 235,560 247,285 260,221

IT Market As % of GDP 1.21 1.22 1.27 1.20 1.21 1.22 1.22 1.23

- Hardware 76,800 80,984 92,770 96,705 102,789 106,886 111,587 117,438

o/w PC Sales 62,208 65,759 76,071 80,072 85,109 88,501 92,394 97,238

- Software 26,128 32,525 37,711 39,789 42,805 45,051 47,602 50,080

- Services 55,423 61,120 70,646 74,307 79,696 83,624 88,095 92,704

f = BMI forecast. Source: BMI



Broadband

Table: Telecoms Sector, Internet, 2010-2017

2010 2011 2012 2013f 2014f 2015f 2016f 2017f

No. of internet users 34,872 40,605 45,107 47,664 49,703 51,176 53,203 55,843

No. of internet users/100 inhabitants 30.75 35.37 38.86 40.57 41.84 42.63 43.86 45.58

No. of broadband internet subscribers 11,985 12,586 13,845 16,165 18,212 20,151 21,894 23,349

No. of broadband internet subscribers/100inhabitants 10.57 10.96 11.92 13.76 15.33 16.78 18.05 19.06


According to the regulator there were 45.107mn

internet users in Mexico at end-2012, 38.86% of the

population. BMI is forecasting sustained year-on-

year (y-o-y) growth in internet usage, reaching

55.84mn users by end-2017, about 45.6% of the

population.

BMI's internet forecast for Mexico is based on the

latest regulatory data for the end of 2011. Based on

subscriber data published by the leading broadband

service providers, we estimate the number of

broadband subscribers grew to 13.8mn. Data from

the regulator do not include 3G mobile subscribers,

although WiMAX data modems are included.

Despite having a broadband penetration rate in

excess of 12.6%, it is important to remember this

figure reflects business and residential subscribers. Broadband internet services remain expensive for many

Mexicans and there are still a significant number of PC owners without home connections. An OECD report

in 2012 criticised Mexican internet services for being highly priced, putting the country at a disadvantage,

with the cost of high-speed connections a concern as well as the cost of modems and related equipment. The

government has outlined a series of reforms to tackle this problem and we have factored in the positive

effects this will have on the market to our estimates.

Industry Trends - Internet

2010-2017

Number of Internet Users ('000) (LHS)Number of Internet Users/100 Inhabitants (RHS)Number of Broadband Subscribers ('000) (LHS)Number of Broadband Subscribers/100 Inhabitants (RHS)

2010

2011

2012

2013

f

2014

f

2015

f

2016

f

2017

f

0

25,000

50,000

75,000

0

20

40

60

f = BMI forecast. Source: BMI, Cofetel, operators



We maintain our view that the broadband sector would grow even more strongly if prices were lowered.

This could be achieved if the proposed legislation is passed by the government and would result in an

increase to our forecasts. In October 2012, Cofetel approved a resolution to facilitate the provision of

broadband in rural areas, namely isolated settlements where it would be unprofitable for telecoms operators

to extend their networks. Cofetel claims it will set up Wi-Fi hotspots in these areas, offering residents free

access to the internet. BMI welcomes this scheme as a means of raising internet usage across the country,

but the problem of expensive computers and other devices remains.

Our current forecast for Mexico's broadband sector envisages about 23.4mn fixed broadband subscribers at

end-2017. We expect mobile broadband to become an increasingly important feature in expanding the reach

of broadband services. Although our 3G subscriber forecast still depicts relatively slow growth, it is

important to remember that mobile broadband subscribers include customers who use devices such as USB

sticks, smartphones and netbooks with built-in broadband modems. Growth in this segment should start to

take off over the next few years and we believe that there is potential for Mexico to follow trends seen

elsewhere in Latin America.



Macroeconomic Forecasts

Economic Activity

BMI View: We maintain our Mexico real GDP growth forecast of 2.3% in 2013 and 3.5% in 2014,

compared to 3.8% in 2012. Real private consumption has held up relatively well despite the weakening of

the overall economy in H113, and we expect household spending to pick up over the coming months. In

addition, we believe President Enrique Peña Nieto's reforms will attract significant investment over the

coming years.

Macro Strategy

We have revised our forecasts for several components of GDP by expenditure for Mexico, following the

release of Q213 figures and the recent historical data revisions made by the national statistics agency.

However our headline real GDP growth forecast remains unchanged from our recent downgrade (see 'Weak

2013 Growth To Give Way To Stronger 2014', August 21) at 2.3% in 2013 and 3.5% in 2014, compared to

3.8% in 2012. We believe that while the recent string of hurricanes poses a downside risk for growth in

Q313, the Mexican economy will sustain a broad recovery through the end of the year, after a weak

performance in H113, and accelerate at a robust pace in 2014. The main drivers of growth over the coming

years will be household spending, which has held up relatively well this year despite unfavourable

economic conditions, and stronger exports, driven by greater demand from a strengthening US consumer.

We also believe that President Enrique Peña Nieto's reform drive will succeed in attracting additional

foreign investment as early as next year, though much will depend on the scope of energy reform (see 'A

Step Forward, But Investment Still Uncertain', August 14), which is currently being debated in congress.



Household Spending Holding Up Despite Economic Slowdown

Mexico - Real GDP & Real Private Consumption Growth, % chg y-o-y

Source: BMI, INEGI

Expenditure Breakdown

Private Consumption: We have revised up our real private consumption growth forecast from 2.8% to

3.4% for 2013, and from 3.2% to 3.8% for 2014. Real private consumption expanded by 3.0% year-on-year

(y-o-y) in H113, despite a significant deterioration in the economy, with real GDP growth coming in at

1.0% y-o-y during the same period, illustrating the consumer's resilience. Moreover, improving consumer

confidence and retail sales growth, the latter expanding by 1.3% y-o-y in July after contracting by 0.4% y-o-

y in H113, point to greater consumer spending in the second half of this year. In 2014, we believe that

declining unemployment, which we forecast to fall from 5.2% in August to 4.2% by the end of next year,

combined with an overall improvement in economic activity, as the US economy also picks up, will lead to

stronger household spending in Mexico.



The Worst Is Over For The Consumer

Mexico - Consumer Confidence Index And Retail Sales Growth

Source: BMI, INEGI

Government Consumption: Real government consumption expanded by only 0.3% y-o-y in H113, due to

spending delays associated with the transition to President Peña Nieto's government. As a result, we have

revised down our 2013 real government consumption forecast from 1.4% to 0.8%. That said, we have made

an upward revision to our 2014 real government consumption forecast from 1.3% to 2.0%, as President

Peña Nieto's recently proposed budget for next year allocates additional fiscal stimulus to support the

ongoing economic recovery.

Gross Fixed Capital Formation: The delays in government spending seen this year have also weighed

heavily on gross fixed capital formation (GFCF), prompting us to downgrade our 2013 real GFCF growth

forecast from 2.4% to 0.6% in 2013. Indeed, public GFCF contracted by 7.4% y-o-y in H113, driving the

0.2% contraction in total GFCF seen during the first half of this year. That said, we expect President Peña

Nieto's recently announced US$315bn 2013-2018 National Infrastructure Plan will accelerate capital

spending into infrastructure over the coming months and into next year. In addition, President Peña Nieto's

ongoing reform drive will attract significant foreign investment next year, and we therefore forecast real

GFCF to expand by 3.5% in 2014.



Spending Delays Weighing Heavily On Investment, But ImprovementsAhead

Mexico - Real Gross Fixed Capital Formation, % chg y-o-y

Source: BMI, INEGI

Net Exports: Real export growth weakened significantly from 5.7% y-o-y in H112, to 0.9% y-o-y in H113,

as pent-up US demand last year drove a significant expansion in manufacturing exports, which was unmet

early this year. As a result, we revised down our 2013 real export growth forecast from 2.8% to 2.1%. We

also downgraded our 2014 forecast from 6.4% to 5.0%, though a strengthening US consumer will contribute

to a significant expansion of exports, particularly of manufactured goods. Real import growth also slowed

significantly from 7.0% y-o-y in H112 to 0.9% y-o-y in H113, driven by a weaker consumer, prompting us

to downgrade our import growth outlook. We now forecast real import growth of 2.0% in 2013, compared

to 3.8% previously, and 5.0% in 2014, compared to 5.4% previously. However, despite the recent

downgrades, the expected consumer recovery will still result in robust import growth over the coming years.

Risks To Outlook

Risks to our real GDP growth outlook lie mostly to the downside. First, a string of deadly hurricanes, along

the coasts of both the Pacific Ocean and the Gulf of Mexico, could weigh on economic activity through

output disruptions and declines in consumer and business confidence, which could see Q313 GDP come in



below our expectations. Second, any significant setback in the ongoing US recovery would have major

implications for growth in Mexico, mainly through the trade and investment channels, but would also

impact the consumer through a weakening in labour market conditions. Third, the failure by President

Enrique Peña Nieto to pass his planned reforms, particularly energy sector reform, would see investor

sentiment towards Mexico deteriorate significantly, and have substantial negative effects on medium and

long-term real GDP growth.

Table: Mexico - Gdp By Expenditure, Real Growth %

2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Real GDP growth, % change y-o-y 1,2 -4.7 5.1 4.0 3.8 2.3 3.5 3.7 3.7 3.9

Private final consumption, real growth% y-o-y 1,2 -6.5 5.6 4.8 4.6 3.4 3.8 3.8 3.7 3.9

Government final consumption, realgrowth % y-o-y 1,2 2.2 1.9 2.5 2.4 0.8 2.0 1.4 1.5 1.5

Fixed capital formation, real growth %y-o-y 1,2 -9.3 1.3 7.8 5.5 0.6 3.5 4.5 4.4 4.8

Exports of goods and services, realgrowth % y-o-y 1,2 -11.8 20.5 8.2 4.2 2.1 5.0 5.6 5.4 6.1

Imports of goods and services, realgrowth % y-o-y 1,2 -17.6 20.5 8.0 6.0 2.0 5.0 5.5 5.3 5.9

Net exports of goods & services, realgrowth % y-o-y 1,2 -88.8 14.6 -13.8 230.0 -1.1 4.7 -0.0 -3.4 -4.0

Notes: f BMI forecasts. 1 Base year=2003. Sources: 2 INEGI/IBMI calculation.



Industry Risk Reward Ratings

BMI's latest industry Risk/Reward Ratings for the Americas saw only one change in position as Mexico

moved above Argentina to fifth in the table as the latter's score declined due to forecasts for weaker

consumer demand. While there were no other positional changes in the table in the Q114 update, the

average score for the region declined q-o-q, on the back of downward revisions for IT hardware sales in

most markets. This trend is partly the result of a mixed income growth and consumer confidence outlook for

the Americas, but also a consequence of the shift in the composition of sales from notebooks to low-cost

Android tablets. Demand for tablets is maintaining unit growth in most markets, but the declining cost of

devices is squeezing increases in market value.

The US continues to occupy top position in our Americas Risk/Reward Ratings, with an unchanged score in

Q114. The US dominates the global IT market so its high position above regional peers is to be expected.

US IT firms continue to be global leaders with rapid innovation, while enterprises generally have high

levels of adoption of emerging technologies such as big data analytics and complex cloud deployments.

This sustains buoyant IT software and services markets, even as on-premises IT spending is declining. The

hardware market continues to expand, sustained by strong demand for premium tablets, particularly Apple's

iPad.

Canada is in second position, and like the US, there was no change to its score in Q114. It remains some

distance behind the US, largely owing to the smaller size of its domestic market, but due to high incomes it

is far ahead of the leading Latin American markets in terms of overall score. Canadian consumers have

many similar characteristics to their US counterparts in terms of hardware spending and a preference for

premium devices. However, in the enterprise market, in addition to smaller size, the Canadian market trails

the US with slower adoption of emerging technologies. This difference between the markets could increase

in 2014 in the wake of the NSA PRISM revelations. Canadian enterprises have largely relied on US cloud

providers. However, surveys in 2013 showed enterprises are reconsidering their exposure to an uncertain

regulatory environment through US providers. If Canadian firms do look to switch to domestic providers

there could be a slowdown in cloud adoption in the short term as data centre capacity in Canada would have

to be increased.

Chile is in third place as the leading emerging market in the region, with high incomes and penetration of IT

software and services among enterprises helping to offset the small size of the market due to its population

being far smaller than that of the leading Latin American markets. IT is more widely used among Chilean

consumers and businesses than in many of its peer markets, so the market is relatively large as a share of



GDP. Another feature of Chile's market, as is the case with most developed markets, is the greater

weighting of IT services. However, it remains far behind the US and Canada in terms of adoption of

emerging technologies.

Brazil has the second highest industry rewards in the region in Q114, supported by the large population.

However, it scores below the regional average in the other three categories. Economic growth has been

strong over the past few years but BMI believes the consumer story has weakened, leading us to revise our

forecasts for hardware, software and services spending. This revision pulled down the industry rewards

score by 1.2pps q-o-q. Like most of the Latin American markets, hardware spending growth is also being

limited by the availability of discretionary spending and consumer preference for low-cost Android tablets

as substitutes for more expensive notebooks.

While the Brazilian market presents significant challenges its high position reflects the strong prospects as

the region's largest market. Low PC penetration and rising incomes will support hardware market

expansion, while the modernisation of enterprises will provide opportunities for software and services

vendors. Finally, as Brazil looks forward to hosting the FIFA 2014 World Cup and 2016 Olympics

Games, it will need to update infrastructure and services, providing a boom for vendors.

Mexico leapfrogged Argentina in the Q114 update despite receiving an unchanged score. Mexico has a

relatively strong consumer outlook, with rising incomes and a large population. There is considerable scope

for hardware sales growth due to a supportive macroeconomic environment combined with low PC

penetration. Enterprise spending continues to benefit from modernisation initiatives, with spending on

software suites, including enterprise resource planning and consumer relationship management, areas of

growth.

Argentina received a lower score as a result of the weak macroeconomic environment, pushing it one place

down the table to sixth. We highlight ongoing risks to the county's outlook, particularly in light of currency

depreciation, which have negatively impacted the industry rewards score. Although an increasing share of

devices is produced domestically, as a large number of components are imported, price pressures will hit

vendors operating in the country. Government initiatives to promote the domestic ICT sector will offset

some of the squeeze from a weak macroeconomic environment, but nonetheless BMI forecasts it will be the

underperformer from the large Latin American markets.

Peru was the only country to receive a higher IT Risk/Reward Rating score q-o-q in Q114, but it remains

behind the larger markets in the region. Demand for commodities has boosted the domestic economy and

translated into retail, enterprise and public sector spending on IT products and services. We expect this



trend will continue, although there is downside risk arising from a potential slowdown in demand from

China. IT market growth is closely linked to the fortunes of Peru's commodities sector, as is the economy as

a whole, and therefore any drop in demand from China would have significant impact.

The bottom two markets in the Americas Risk/Reward Ratings continue to be Colombia and Venezuela in

eight and ninth position. Both markets received lower scores in Q114, with their respective industry rewards

scores down by 1.7pps q-o-q. This is partly due to challenging economic conditions, particularly in

Venezuela uncertainty around the currency and fiscal position is high. There is also an additional challenge

posed by imports of low-cost Android based tablets which could cannibalise sales of higher priced

notebooks. Colombia and Venezuela are characterised by high levels of economic and political uncertainty,

with both scoring below the regional average in every category, and BMI does not foresee them moving up

the table, at least in the short term.

Table: Americas IT Risk/Reward Ratings, Q1 2014

Rewards Risks

Country Industry Rewards Country Rewards Industry Risks Country Risks IT Rating RankPrevious

Rank

US 82.5 90.0 55.0 66.8 78.2 1 1

Canada 62.5 90.0 65.0 66.7 70.3 2 2

Chile 52.5 70.0 50.0 68.2 59.3 3 3

Brazil 65.0 60.0 45.0 50.8 58.8 4 4

Mexico 60.8 60.0 52.5 48.1 57.3 5 6

Argentina 53.3 75.0 40.0 52.1 56.8 6 5

Peru 56.7 55.0 45.0 55.1 54.6 7 7

Colombia 53.3 55.0 47.5 46.8 51.9 8 8

Venezuela 40.0 70.0 35.0 34.6 45.8 9 9

Average 58.5 69.4 48.3 54.3 59.2 - -

Scores are weighted as follows: 'Rewards' at 70%, of which Industry Rewards, 65%, and Country Rewards, 35%; 'Risks'at 30%, of which Industry Risks, 40%, and Country Risks, 60%. The 'Rewards' rating evaluates the size and growthpotential of a telecoms market in any given state, and a country's broader economic/socio-demographic characteristicsthat impact the industry's development; the 'Risks' rating evaluates industry-specific dangers and those emanating fromthe state's political/economic profile, based on BMI's proprietary Country Risk Ratings that could affect the realisation ofanticipated returns. Source: BMI.



Market Overview

Hardware

Computer hardware sales account for the largest proportion of Mexico's IT market, with sales reaching

MXN92.8n in 2012 and expected to rise to MXN117.4bn by the end of our five-year forecast to 2017. The

economic outlook plays a strong role in the expectations of market growth, as well as factors such as

availability of communications infrastructure and launching new products.

2013 Outlook

We maintain our estimate of 6mn units sold in 2012 for Mexico. While PC penetration continues to grow, it

remains below 25%, and the affordability of devices remains a difficulty to address. Low annual average

incomes, of about US$5,000 per annum, and financing have long been bottlenecks to faster growth of PC

penetration.

Data from the telecoms regulator highlights that Internet users reached 45.1mn at the end of 2012, with just

over half accessing the internet outside the home. Of those accessing the internet outside the home, 19.1mn

did not have access to a computer, while 3.5mn did. The number of internet users that have computers at

home that are not connected to the internet continues to decline, suggesting consumers are less likely to

purchase computers without including internet access. However, the rapidly growing number of internet

users without computers at home provides a large potential market for computer hardware vendors to reach.

Pricing is likely to be a key hurdle for consumers to overcome, with lack of connectivity also a major

disincentive.

In 2013, migrations to Microsoft's new Windows 8 operating system should provide a boost to hardware

upgrades, even if its dimensions are uncertain. Retailers claimed that many businesses and consumers were

waiting for the October 2012 release of Microsoft's new Windows 8 operating system before investing in an

upgrade. The release of Windows 8 could also provide a fillip to the ultrabook market, as tablet makers

leverage its capabilities to offer devices with touch screens and convertible designs.



A significant PC market growth opportunity exists in

provincial areas and second-tier cities, where

multinational vendors are now trying to strengthen

distribution. Mexico's under-penetrated south east

region is expected to offer growth opportunities over

BMI's five-year forecast period to 2017, particularly

in the public sector.

Government sales are an important segment of these

provincial markets. IT penetration in the public

sector remains relatively low in such regions, but

larger Mexican IT distributors have now taken notice

of latent demand in this area. The Pacific region is

also a potential opportunity, but development

potential is not expected to be as great as in the south

east.

Mexican business demand should also grow, but there is much uncertainty about the economic situation

north of the border, which has a strong influence on Mexican and business sentiment and investment. New

financing programmes for businesses to acquire IT solutions will also support more spending. Businesses

have maintained a cautious attitude to IT investment due to uncertainty about a sustainable economic

recovery, but there should be a boost from computer hardware tenders previously deferred as a result of the

economic situation. Continued growing demand for mobility will drive sales.

Segments

Notebooks will remain the major growth area in 2013. Notebook shipments, including netbooks, are set to

grow at a CAGR of 14% over the forecast period. Migrations to the Windows 8 operating system have the

potential to help trigger a new cycle of hardware upgrades, although much will depend on business and

consumer confidence. There was some evidence in 2012 that the surge in demand for tablets could cut into

sales of Windows PCs.

The share of laptops in total computer sales is estimated at more than 60%, with the dollar value of laptop

sales growing five times that of desktops. This trend is evident in the household and company sectors,

where notebooks have become the main driver of growth. Customers are responding to greater affordability,

Hardware Market (MXNmn)

2010-2017

PCs Servers

2010

2011

2012

2013

f

2014

f

2015

f

2016

f

2017

f

0

25,000

50,000

75,000

100,000




better features and more choice. The ability to pay for devices over a longer period is also making PCs and

laptops more affordable to a greater range of consumers. Tying this in with broadband contracts also

provides ongoing demand for data services which benefits telecoms operators.

Smaller companies are also exhibiting a growing preference for mobility. As desktop prices fall, in some

cases below those of notebooks, the main market for desktops is becoming large companies, which have a

relative preference for higher-end products.

During the economic slowdown, netbooks emerged as a growth driver, but the upwards trajectory of

netbook shipments growth may flatten as the price differential with full-featured notebooks becomes less

significant. Most netbooks currently sell in Mexico in the US$300-500 price range, which puts pressure on

average PC prices and revenue. Netbooks and notebooks face competition from high-end smartphones,

which are being offered by vendors as alternative connectivity solutions and often include a Wi-Fi option.

Tablets

Tablets are a niche, but growing, area of the computer hardware market, which we expect to continue

expanding in 2013. Initial sales of the Apple iPad were strong, with around 2mn units sold worldwide

within the first two months. Other vendors, such as Samsung with its Galaxy Pad, have followed Apple in

releasing net tablet devices. Tablet notebooks are being designed to appeal to consumers who find a

smartphone inconvenient for consuming video media or surfing the web, but for whom a netbook is still too

big or heavy.

Most tablets are expected to be significantly more expensive than laptops at US$400-800. However, 2012

saw the Mexican release of a broad range of locally produced devices at lower prices. Despite a mixed track

record for this format, they are seen as a growth area in 2013. Some analysts forecast that tablet sales could

overtake sales of netbooks within the next two to three years, and be well ahead of desktops. While tablets

were initially seen mainly as a consumer device, there is evidence from several markets of increasing

demand in the business segment.

Ultrabooks

Ultrabooks, higher-performance notebooks designed as a response to Apple's increasingly popular

MacBooks, are an emerging product category that Intel and certain vendors backed heavily. However, in

H112 sales of the devices fell far short of Intel's prediction that ultrabooks would comprise 40% of US

notebook sales by the end of 2012. While exact sales figures were hard to arrive at, as vendors do not yet



typically break out ultrabooks as a separate category of notebook sales, a Gartner estimate of global

ultrabook sales, in the region of 500,000 units in H112, about 0.5% to total notebook sales in that period.

Drivers

One key PC market driver is the involvement of

telecoms service operators in the PC market.

Increasingly, mobile operators such as Telcel are

promoting mobile internet packages at prices

comparable to those offered by Telcel's sister

company Telmex. The internet is also providing a

new purchasing channel, with more customers

buying hardware online.

Demand for PCs and related hardware has grown in

all sectors, particularly SMEs and home users. The

strongest growth, even among business users, will

continue to be in the generic computer sector. PC

sales are driven especially by higher consumer

purchasing power, lower prices and more credit

availability.

Other factors include the renewal of equipment by large corporations, the adoption of technology by

medium and large corporations, and government spending. A survey by software firm Symantec found

growing awareness of green IT among Mexican companies, with 39% of surveyed firms reported to be

developing a green IT investment plan.

PCs remain the mainstay of hardware revenue. With the modernisation drive set to continue, there is

obvious potential for growth to continue over our forecast period. The government's e-Mexico plan aims to

get 98% of all Mexicans online. According to surveys, the main barrier for non-PC-owning households is

cost, with 60% saying they were unable to afford a computer.

Meanwhile, the long-term demand outlook and government programmes are drawing more brand-name

vendors to seek opportunities outside Mexico City and other primary markets. More than half the desktop

computers sold in Mexico are home assembled. Prices have fallen substantially in recent years, placing tight

pressure on distributor and retailer margins. Several firms in the domestic market are trying to move up the

Mexico Internet Users ('000)

Access The Internet Outside The Home

Source: Cofetel



quality ladder. Some PCs with parts of Asian origin allow profit margins of up to 10%, twice that obtained

by global vendors.

Software

We expect the roll-out of Windows 8, which took place at end-2012, to continue driving software sales

throughout 2013, with the market growing 5.5% in 2013 to reach MXN39.8bn. Imported software is the

market's driver, with the country's proximity to the US an advantage in gaining the latest software releases.

Cloud computing, although still a relatively small share of the total software spend, continues to make rapid

advances.

2013 Outlook

Software CAGR for 2013-2017 is forecast at around 5.8%, outpacing general IT market growth, as the

government turns its attention to overcoming Mexico's long-standing underinvestment in this area. Mexico

has the second largest software market in Latin America, although it also ranks second in losses through

software piracy. The software piracy rate is around 63% currently, well above OECD levels.

In 2013, migrations to the Windows 8 operating system is expected to impact positively on market revenue,

although pre-launch publicity for the new system was more low-key than for its predecessor Windows 7.

Meanwhile, with business confidence recovering the market should see a boost from systems upgrades

previously deferred because of the global economic situation. Another factor that could boost investment is

government regulations requiring companies to integrate with the Servicio de Administracion Tributaria

(SAT) for real-time approval of electronic invoices. Software vendors will see an opportunity to help

businesses prepare to meet regulatory compliance for senders and receivers of invoices.



Segments

Mobility, smart devices, broadband and cloud

services are among the trends encouraging more

software spending by Mexican SMEs, which have to

deal with increasing data flow. Government financial

support for informatisation among enterprises should

help to counteract the impact of margin pressures on

IT budgets. The software sector's growth is driven

partly by increasingly strong demand for solutions

from SMEs. A lack of IT infrastructure contributes

to the high failure rate among SMEs in many parts

of the country.

The most popular applications include basic

enterprise resource planning (ERP), supply chain

management solutions, integral administration and

accounting suites, inventory control, hotel

administration packages, point-of-sales applications,

e-business solutions and computer-aided manufacturing applications. Companies are implementing new HR

management solutions to facilitate seamless communication with other areas such as finance and

accounting.

Business intelligence software is another strong performer, with sales of databases growing steadily.

Demand for storage solutions has also grown considerably, and will be further driven by new Mexican

government legislation regarding information governance, and the trend of server virtualisation. Storage

optimisation has become a key driver of storage solutions sales as organisations look to manage costs, and

this is currently a growth area in the Mexican market. Systems management and security software should

also provide opportunities, with growing demand for more sophisticated security solutions, and more

spending on networked security solutions.

Cloud Computing

Vendors have expressed surprise at the speed of take-up of cloud computing in some Mexican IT verticals

such as finance. Mexico's relatively high broadband charges were expected to act as an inhibitor to the

Software Market (MXNmn)

2010-2017

2010

2011

2012

2013

f

2014

f

2015

f

2016

f

2017

f

0

20,000

40,000

60,000




development of cloud computing and could see Mexico lag other countries in the region. Despite this, a

combination of enterprise objectives such as cost reduction and greater efficiency should combine to drive

adoption of cloud services in 2013. Further growth is expected for cloud computing models such as

Software-as-a-Service (SaaS), with estimates that around 50% of Mexico's large companies have conducted

cloud pilots.

Demand should grow as vendors and service providers, including new market players, roll-out a greater

variety of service offerings. The biggest software opportunities will be in non-critical file storage or

customer-facing applications such as customer relationship management (CRM). SaaS has won more

acceptance as smaller businesses have increasingly had to meet performance, visibility and compliance

standards previously expected more of larger companies.

Verticals

In terms of verticals, public and financial sectors, healthcare, the chemical industry, utilities and SMEs are

seen as those with the most growth potential. Despite the financial crisis, there should continue to be

opportunities in the financial sector thanks to regulatory compliance and a desire to cut costs. More

Mexicans are likely to use internet banking as mobile communications networks improve. The industrial

and services sectors have also seen high growth.

Government spending on software is one of the sector's main drivers. Key national e-government demands

include solutions to improve tax collection efficiency and health services, promote trade and enhance

security. At state level, areas of planned spending include document administration, as well as ERP and

financial applications. New areas of development include telecare and e-education that will help bring

improvements to government services.

The limited share of commercial software in Mexico's total IT investment, at just 10.3%, has attracted

concern from some analysts. In terms of the domestic industry, Mexico's main software geographic centres

are located around Mexico City and three technology parks in Monterrey and Guadalajara, the latter city

enjoying the label of Mexico's 'Silicon Valley'. All four locations possess a sizeable pool of existing

technology companies and labour and good telecommunications infrastructure, as well as tax and other

incentives for investors.

IT Services

IT services offers the greatest area of growth, with 5.6% CAGR for 2013-2017. We forecast the market will

grow 5.2% in 2013 to MXN74.3bn, accounting for around 35% of the market's total. IT services continue to



grow despite economic pressures, with consumers and businesses alike becoming more accustomed to

spending on services.

2013 Outlook

Mexico's outlook remains tied into developments in the US and the country's economic performance. At

home, government, telecoms and financial services sectors provide opportunities for a variety of vendors in

the service market. IT services is one resource priority for the government's information and knowledge

society budget, creating opportunities for companies in the sector.

The government's e-Mexico programme, launched in 2000, aims to promote universal access to knowledge

through IT. A programme of budget cuts as a result of the economic crisis had an impact on spending, but

may result in a boost as previously planned projects are finally implemented.

A similar phenomenon occurred in the private sector. Early signs indicated that only around 30% of

companies were cutting budgets, while many firms in key IT verticals such as finance, telecoms and retail

were maintaining previously budgeted spending. Due to the financial crisis, financial services organisations'

IT budgets were cut, but vendors reported continued interest from some banks, which are now looking at IT

as a key element of their strategy for increased operational efficiencies. There have been an increasing

number of support and maintenance outsourcing contracts in the region. Regulatory compliance will also

continue to drive IT spending.

Drivers

The IT services market has become one of the most dynamic drivers of IT sector spending in Mexico and

the Latin American region as a whole. Local companies are trying to use computing resources more

effectively and integrate investments made in hardware and software. Demand to utilise cloud computing

should be a major opportunity, despite Mexico's relatively high broadband charges. Growth opportunities

reside even within the SME sector, where companies are trying to use computing resources more effectively

and integrate investments made in hardware and software.



In the long term, the increasing number of

multinational corporations operating in Mexico is an

important driver for spending. The global economic

slowdown stimulated new demand for outsourcing

from some US organisations. Outsourcing is also

becoming a spur to growth for the IT services sector,

with vendors increasingly adapting their focus to

take advantage of the opportunity. Earlier rates of

growth around 20% have slowed in later years, but

business process outsourcing still offers plenty of

potential.

One major demand driver will be organisations

looking for help to utilise efficiencies from cloud

computing such as SaaS and infrastructure-as-a-

Service (IaaS). 2011 saw a wave of new cloud

service offerings from service providers such as Kio

Networks. Demand will grow as more companies enter the market and roll-out new cloud services such as

SaaS, IaaS and Platform-as-a-Service (PaaS).

A major target segment for public cloud applications is SMEs, while vendors are focused on providing

private cloud services for corporations and other larger organisations. Particular areas of opportunity for

cloud computing include banking and retailing, as organisations in those fields look to save money on

hardware investments.

Outsourcing

Business process outsourcing (BPO) was estimated to have grown around 17% in 2012, although we

believe the years of double digit growth are now passed. BMI estimates the BPO market will pass

MXN30bn in 2013 and approach MXN40bn by 2017. In the past, the BPO market has overshadowed the IT

outsourcing sector, but the latter continues to gather momentum.

The main driver of the growth is Mexico's cost advantage in comparison with the US. Costs of outsourcing

back office and call centre processes are still around half those of comparable services in the US. Mexico

offers IT services vendors a number of other advantages, including proximity to the US and other regional

IT Services Market

2010-2017

IT Services MXNmn (LHS)Cloud computing % of IT market (RHS)

2010

2011

2012

2013

f

2014

f

2015

f

2016

f

2017

f

0

20,000

40,000

60,000

80,000

100,000

0

10

20




markets. Because of the sizeable number of multinationals and large national companies, Mexico is

therefore already a significant and growing market for BPO and IT outsourcing. Mexico also has an

advantage over competitors in that its IT workforce of between 600-650,000 is far larger than countries such

as Brazil, which has an IT workforce of around 250,000. Moreover, Mexico is currently producing an

additional 65,000 IT professionals each year.

In this context, fast demand growth is expected, especially from corporate and government clients.

Currently, outsourcing is mainly used for non-mission critical applications, but infrastructure management

(from simply renting space at a datacentre through to higher end management services) will also be a

segment to watch. According to research, 62% of IT budgets currently go on products and services offered

by third parties. The government is also contributing to the growth, with an aggressive programme targeted

at attracting investment in the sector from foreign technology firms. The Economy Secretariat's PROSOFT

programme provides funding of up to 50% for investment projects, with the money coming from both the

federal and state governments.

IT Services End-User Analysis

Government

Government IT spending generally accounts for as much as 20% of total Mexican IT spending. Around a

third of government spending is accounted for by state and municipality level governments. Although the

public sector market is relatively small, the Mexican government has launched several programmes to

stimulate IT use throughout the economy. The e-Mexico programme will continue to drive spending, with

IT services one priority for resources. The global economic crisis had an inevitably negative impact on

government spending in the short term, but we expect it to grow in line with overall market spending over

our forecast period 2013-2017.

Financial Sector

Mexican banks and financial services companies are among some of the country's major IT spenders.

Consolidation, competition and compliance with new international guidelines are among factors that should

continue to encourage spending, despite the financial crisis. In recent years, several foreign-owned banks

have been operating in the market, spurring local competitors to ramp up spending on IT. 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, due in part to 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.

Healthcare

Mexican hospitals and doctors will provide an opportunity in both the public and private sectors. There is a

drive to improve efficiency in the private sector while, in the public sector, the government wants to

develop infrastructure and raise health sector standards. The healthcare market is estimated to be in the

region of US$20mn and is expected to grow rapidly.

Enterprises

Enterprise computer penetration is uneven, with more than 90% of firms in the agriculture industry and

construction sectors having computers, and the figure being considerably lower elsewhere. For software, the

financial sector is the largest overall end-user, followed by the manufacturing and retail sectors. Other fast-

growing sub-sectors include construction, transportation, and hotels and restaurants.

SMEs

SMEs comprise the majority of business in Mexico, at around 97%, and they will be an important driver of

IT investment during our forecast period. Smaller Mexican companies are expected to increase their

investment in IT, as larger firms put pressure on their downstream business partners to make advances in

this area. Lack of access to credit remains a problem. An important factor will be government programmes,

many of which emphasise boosting IT use by SMEs.

SMEs have also emerged as an important market opportunity for netbook vendors. The segment could

potentially form around 1mn unit sales in the next six months. The main driver of netbook purchases among

SMEs is their low price.

According to statistics from the economy ministry, more than 500,000 of the more than 4mn registered

SMEs have an internet domain, while around 27% do not even have internet access. Only about 10% of

SMEs sell on the internet, while about 40% use the internet for advertising. Most exporter SMEs largely

limited their computer use to emailing, messaging services and other communications technologies such as

voice over internet protocol (VoIP).



Industry Trends And Developments

Government Spending

The majority of the MXN86.4bn 2011 budget for Mexico's Ministry of Communications and Transport was

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

ends. This means the information and knowledge society agency was due to receive more funding in that

month than state entities such as the federal telecoms regulator Cofetel and the postal agency Sepomex.

Under the e-Mexico programme, the government aims to promote universal access to knowledge and

education through the utilisation of IT and communications. IT services were to be prioritised, accounting

for some MXN2.25bn in January. Government IT spending had been budgeted to increase in 2010 by

around one-third in local currency terms. Key national government IT spending areas in 2010 included

solutions to improve tax collection efficiency and health services, promoting trade and enhancing security.

Government spending was expected to grow again in 2011 as public sector organisations rolled out e-

services and support infrastructure.

A number of initiatives were launched as part of e-Mexico in 2012, including free Wi-Fi access in 144 parks

across 10 states as part of the Programa de Rescate de Espacios Públicos (Public Spaces Rescue Programme

- PREP). December 2012 also saw the launch of the Bicentario satellite, with more advanced technologies

expected to be launched in 2013 and 2014.

E-Government

In 2011 the federal government continued to implement major e-government initiatives. In April Mexico's

tax administration body, the SAT, announced that it had implemented a plan to bring its federal tax

collection and investigation systems online. The new system, provided by Novell, will centrally manage the

identities for 9mn taxpayers and 35,000 employees.

SAT has also responded to a new government mandate requiring real-time approval of electronic invoices.

The new regulation became effective as of January 1 2011. Software vendors have seen an opportunity to

help businesses prepare to meet regulatory compliance for both senders and receivers of invoices. The

regulations also require companies to prepare outgoing invoices in a specific XML format, with both



outgoing and incoming invoices to be externally validated, archived and stored. The regulations apply to all

invoices in excess of MXN2,000.

IT Industry Development

In May 2013, Mexico's IT industry association, AMITI, presented its 'Roadmap to 2025' ('Mapa de ruta

2025') for transforming Mexico via the use of IT. The presentation was part of AMITI's strategy to

encourage the government to include information and communications technology (ICT) as an integral part

of the National Development Plan (Plan Nacional de Desarollo; PND). The presentation revealed that ITC

is one of Mexico's most dynamic and competitive sectors, and has progressed from generating 2.6% of GDP

in 1998 to as much as 5.6% in 2010. It also predicted that the number of connected devices in the world will

shoot up from 12.5bn in 2012 to 50bn in 2025, and that the number of internet users will double to 5bn over

the same period.

Mexico is already the fourth largest provider of IT services globally, according to a study by market

research firm Gartner. The country's rise has been supported by government initiatives to attract domestic

and foreign investment in the ICT sector. In 2010 the government reportedly spent US$700mn to attract IT

services companies and multinationals to invest in Mexico. Meanwhile, the government and associated

industry bodies are also cooperating to increase the local IT skill base.

In 2012, Canieti - which is an industry association for the electronics, telecommunications and IT sectors -

with MXN400mn funding from the Economy Secretariat, launched an initiative to train more Mexican IT

professionals. The programme set a target of 17,000 Mexicans to receive IT-related certificates from local

training institutions in the current year. The IT sector is currently estimated to employ around 600,000

people in Mexico, and the country is one of the world's largest exporters of services after China, India and

the Philippines. The country's proximity to and free trade agreements with the US also help to place its IT

sector in a strong position.

The government is determined to take advantage of this by stimulating IT investment, 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. The Nuevo Leon state capital had

originally looked to the Economy Secretary's PROSOFT programme for funding. Instead the financing is

from the federal government's SME fund. The park is to house software and IT firms, including SMEs.

Jalisco remains a major hub of the Mexican software industry. In 2010, Jalisco receive nearly 50%

(48.89%) of PROSOFT resources. The state's software industry has reported a double-digit annual growth



rate and, with revenue of US$1,170mn in 2010, accounts for 24% of the total Mexican software industry by

turnover. Jalisco hosts 151 software developers as well as IBM.

Enterprise IT Adoption Measures

During the economic crisis in 2009, the government launched three initiatives designed to promote

technology adoption among enterprises. One initiative, dubbed Innovatec, earmarked MXN200mn (US

$13.8mn) for firms that increase production capacity through innovation and technology. A second

initiative, Innovapyme, will allocate MXN600mn for micro enterprises and SMEs that use technology to

grow their businesses. The third programme, Proinnova, is intended to channel additional funds to

businesses that incorporate technology into their operations.



Regulatory Development

The Secretariat of the Economy is responsible for the competitiveness and growth agenda, of which

informatisation and IT sector development are key elements. There are branch offices in Mexico as well as

abroad. In 2001, as part of the National Development Plan, the government launched an e-Mexico

programme to focus on the internal IT market, developing an optimal regulatory environment and

increasing the use of IT within government. Some have found the plan rather ambitious, despite the 25-year

timetable. Specific objectives as outlined in the plan include:Driving the development of a national software

industry.

■ Increasing the different ways to access and optimise education through technology use.

■ Facilitating access to health information and e-health initiatives.

■ Promoting small and medium-sized enterprises (SMEs) and creating new opportunities for them.

■ Integrating all the different cultures and linguistic groups of Mexico.

■ Providing access for the disabled.

■ Guaranteeing that the legal framework promotes access, as well as the rights of Mexican citizens, and thesocial and ethical values of the Mexican people.

■ Coordinating the different groups that hit the growth of technology (public and private).Promotingappropriate funding of necessary activities.

• Accelerating telecommunications and information technology penetration.

Background

While Brazil remains in pole position as the largest regional IT market, Mexico has a special significance

due to its proximity to North American markets and status as the country in the region where many foreign

vendors first launch brands.

Mexico has plenty of room for 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, and an

increasing number of federal and state government initiatives are looking to stimulate more activity.

Since liberalisation in the early 1990s, which was given further stimulus through Mexico's North American

Free Trade Agreement accession, the IT sector has benefited from lower prices, increased investment and

more competition for protected domestic industries. However, until the country launched its 'e-Mexico'

programme in June 2001, the sector generally suffered from lack of a national commitment to increase the



use of technology, and a lack of funding to realise this. Mexico's IT investment level remains low, at just

1.2% of GNP.

Under e-Mexico, there has been a more coordinated attempt to develop necessary infrastructure and

increase PC and internet usage. In 2011 the goal of the programme remained to widen access to education

and knowledge through utilisation of IT and communications, with a substantial information and knowledge

society budget administered through the Ministry of Communications and Transport. The government

sector also wants to take more advantage of IT, not only to reduce corruption, but also to increase efficiency

and be able to offer quality services. In 2011, the government introduced new e-invoicing regulations that

affect all Mexican companies.

Among the barriers to faster development, particularly for the internet, are the continued uncompetitive

nature of the telecommunications sector, which remains dominated by Telmex, and restrictions on foreign

investment in this sector. The domestic market has been on something of a roller coaster over the past

decade, with a dramatic contraction between 1990 and 1995, followed by double-digit growth for a few

years, before the global technology slowdown in 2002. Although several sectors of the market remained

fairly flat in 2003, faster growth resumed in 2004. Among the general economic factors holding back the

sector are low income levels and limited access to bank credit, for SMEs in particular.

Most global vendors are represented in the Mexican market, especially those from the US and Asia.

Computers are both domestically produced and imported, whereas the majority of software is imported.

More software is being customised for the Mexican market than previously.

In June 2013, President Enrique Peña Nieto approved a new law which targets phone, internet and TV

providers with over 50% market share, with a view to promoting greater competition in the telecoms

industry. This would reduce the power of dominant companies in the broadband industry, and help Mexico

to meet its target for universal access to the Internet.

During the signing, Peña Nieto identified six key points on which the success of the reform will be based:

■ Support fundamental rights; freedom of expression and access to information.

■ Modernise existing legislation in order to keep up with evolution in technology that characterises thetelecoms sector.

■ Strengthen government institutions through the creation of a new regulator Ifetel with greater powers tocombat monopolistic practices.

■ Promote competition through the removal of a 49% cap on foreign investment in satellite providers.



■ Introduce policies that target universal access and digital inclusion.

■ Use the digital switch-over to free up 700MHz spectrum to be used for a public telecoms network thatwill expand infrastructure.

The new law authorises the creation of a new autonomous regulatory authority, the Federal

Telecommunications Institute (Ifetel), which was due to be established by September 2013. Ifetel will be

imbued with more powers than incumbent organisation Cofetel, to classify as 'dominant' any operator with

over 50% market share. In practice, it will be given 180 days to carry out this classification process, which

means that the repercussions of the telecoms reform will not be relevant until at least 2014. Ifetel's powers

will allow it to impose punitive sanctions on any company that resists competition, which include

asymmetric termination rates, fines and even asset sales. Whether or not the targeted companies will submit

to Ifetel without costly legal disputes, remains to be seen, and we remain cautious until then.



Competitive Landscape

International Companies

Table: IBM Mexico

Address Alfonso Nápoles Gandara 3111, Col. Parque corporativo de Peña Blanca, C.P. 01210, México D.F.

CompanyHistory

IBM was originally founded in Mexico 1927, and introduced the first supercomputer to the country. IBMbegan its manufacturing operations in Guadalajara in 1975, and was a pioneer in the development of ITin the country.

In 2003, IBM's Guadalajara plant entered a new phase when it became known as the IBM TechnologyCampus. The facility houses the company's sales and outsourcing operations, and includes thesoftware development unit of IBM Global Business Services. In 2009, IBM announced an investment ofUS$20mn in the IBM Technology Campus. Today, the Campus exports more than USD1mn ofhardware, software and services to all corners of the globe. All of IBM's magnetic and tape storagesolutions, as well as over 80% of its disk storage solutions, are made in the Campus, and thenexported around the world.

Services andProducts

IBM's goal in Mexico is to bring innovative technology to business, government and academic sectors.The company aims to offer its customers a combination of industry knowledge, consultancy, software,applications, infrastructure and global alliances with specialist technology providers. These productsand services are available not only in Mexico City, but also in cities such as Guadalajara, Monterrey,Querétaro, Puebla and beyond. In March 2011, IBM established its Innovation Centre in Mexico, aspart of a worldwide network of similar centres. The Innovation Centre connects local companies andentrepreneurs with technical and business experts from around the world in order to promote growthand support entry into new markets. The Centre also offers new Mexican companies free software andR&D support, in order to help them develop and launch new business ideas. IBM also operates aServices Command Centre in Mexico, which is the third of its type in Latin America. The centre offerssupport to various local cl

CompanyDevelopments

■ IBM has teamed up with mid-market enterprise resource planning (ERP) vendor Epicor Software tolaunch an enterprise offering for Mexican SMEs. The solution comprises an IBM server loaded withEpicor ERP and configuration and deployment software, with both companies providing technicalsupport.

■ Smarter Cities Challenge: in 2011, Guadalajara was the first city in Mexico chosen by IBM to developit's a "smart city" plan, which aims to promote the modernisation of urban infrastructure. Working inconjunction with the municipal authorities, IBM's made a number of recommendations such asintegrating various services, processes and agencies; the use of mapping and social networks toconnect better with people and companies; and the development of an integrated IT platform and asystem of e-government.

Source: BMI



Table: SAP

Address Edificio Plaza Reforma, Prolongación Paseo de la Reforma 600 -- 2, Col. Peña Blanca Santa Fe,México D.F

CompanyHistory

SAP Mexico and Central America was established in 1994, and specialises in enterprise applicationsoftware. The company is part of SAP Americas, which is itself a subsidiary of the German parentcompany, SAP AG. The company''s most important revenue driver is the sale of software licences,given that this often generates additional revenues such as support and consulting services.

Services andProducts

Parent company SAP AG is a global leader in enterprise application software, and also providesservices and support. Business areas include applications, analytics and mobile solutions. Keyproducts include SAP Business One, while a dynamic area of growth is Managed Cloud as a Service(MCaaS).

CompanyDevelopments

In Q313, SAP Mexico and Central America reported its 12th consecutive quarter of growth, with salesof software and services up by as much as 17%. The company highlighted the strong performance ofits SME segment which includes the SAP Business One platform, whose sales shot up by 61%. Thiswas in fact the third consecutive quarter in which SAP Mexico and Central America had outperformedother SAP subsidiaries in terms of sales of SAP Business One. The company's success is derivedpartly from the fact that it has 45 specialist partners, with indirect sales rising by 19% and nowrepresenting 40% of overall turnover. Its partnership system was boosted by the introduction of itsrecently-introduced Managed Cloud as a Service (MCaaS) model. During Q313, SAP Mexico andCentral America reported that it had generated more than 109 new customers in various verticals,including consumer, financial services and public sector. Its clients include DAPSA, Puebla towncouncil, Mabe, Kuo, Nacional Monte de Piedad and Financiera Independencia.

Source: BMI



Local Companies

Table: Kio Networks

Address 8503 2600 (Mexico D.F.) • 01 800 5 CALL KIO (interior)

Company History Kio is a Mexican-owned company, founded in 2002, consisting of specialists in IT.The company provides its customers with personalised IT services for mission-critical solutions. It prides itself on being the most reliable and innovative partner,maintaining a high degree of operational flexibility.

Services and Products ■ Data centres: Kio operates 14 data centres in four technological campuses inMexico City, Querétaro, Panama and Guatemala.

■ Kio Solutions: Kio delivers total solutions in terms of equipment andtelecommunications.

■ Kio Hosting: offers hosting solutions with hardware and software equipment fordifferent platforms.

■ Kloud Kio: offers on-demand cloud infrastructure, with the hiring of virtual servers.It encompasses cloud deployment for both private and public cloud models, andincludes ready-to-use platforms.

Company Developments ■ In June 2011 Kio Networks extended its cloud service portfolio with a newBusiness-Process-as-a-Service (BPaaS) offering. The new offering, which involvedan investment by Kio of around US$50mn, are hosted at the company's datacentre in Mexico City, as well as in other centres.

■ In August 2013, Kio Networks launched two new data centres in Mexico City andQuerétaro. According to the company, the launch consolidated its leadership ofthis sector in Latin America, giving it a total of more than 500,000 square feet ofcampus technology.

■ In 2013, Kio Networks was awarded TIER IV classification by the global data centreregulator, the Uptime Institute. It thereby became the only company in Mexico tohold this classification.

Source: BMI



Table: Dextra Technologies

Address Ave. Hidalgo No. 922-1 Pte. Col. Mirador, C.P. 64070, Monterrey, N.L. Mexico

Company History Dextra Technologies was founded in 1997 as a consulting company focused onsoftware technologies. Dextra provides services to a wide range of clientsthroughout Mexico and North America, including both midmarket, as well asFortune 100 ranked companies. Dextra's headquarters and main developmentcentre are based in Monterrey, México. Additional centres are located inGuadalajara and Aguascalientes, as well as a sales office in Dallas, Texas.

Services and Products Dextra operates as a technology partner for the development of its clients'products, processes and operations, by supporting their software developmentswith innovative tools and technologies and tools available. Its services arefocused on the following business lines: Enterprise, Engineering and Testingthrough Outsourcing Services. Dextra makes use of Unified and Agile Softwaremethodologies

Company Developments • Dextra has developed strategic alliances with leading players in the IT industryincluding OMAP (Texas Instruments), Microsoft, BlackBerry, Intel and Mexico IT.

Source: BMI

Table: Microsip

Address email: www.microsip.com

Company History Microsip is a Mexican software company which was established in Torreón in thestate of Coahuila in 1986, and which has expanded across the country via afranchise model. It now has regional offices in Mexico City, Guadalajara, Monterrey,Puebla and Mérida, which serve a total of 41 franchisees. Microsip's clients rangefrom small businesses to companies with more than 100 computers. The companyhas also established agreements with a large number of public and privateuniversities, which receive free software from Microsip. The company makes muchof its Mexican roots, using the motto "El Software Confiable de México"(Dependable Mexican Software).

Services and Products Microsip prides itself on being the most comprehensive enterprise resourceplanning (ERP) partner for SMEs. The company develops software for a wide rangeof uses, including accounting, banking, payroll, inventories and sales.

Company Developments Microsip recently stated that it would continue to focus on local SMEs, and that itexpected revenue to grow by 20%.

Source: BMI



Company ProfileSofttek

SWOT Analysis

Strengths ■ Proximity to US market and creation of the 'nearshore' concept has propelled Softtek

to become a leader in global outsourcing.

■ It has expanded its original offerings to include state-of-the-art processes,

governance models and delivery from Europe and Asia.

Weaknesses ■ While it remains a leader in Mexican outsourcing, many firms favour companies in

India and other Asian countries, which offer cheaper services.

■ The US is its largest market - ongoing economic problems may weigh heavily on its

balance sheet as a result.

Opportunities ■ Strong foothold in the fast-growth Brazilian market. Expanded 28% y-o-y in 2010

according to news reports.

■ The IT sector in Latin America is set to outpace growth in other regions, which places

native Softtek in a strong position to capitalise on this.

Threats ■ The economic shift towards Asia may put Softtek at a cultural disadvantage when

compared with other IT firms in the region.

■ Security threats in Mexico are deterring investment in the IT sector, which may impact

the company's domestic business.

Company Overview Softtek is a privately-owned Mexican company that provides process-driven IT

solutions to customers across North and South America, Europe and Asia. Its four main

business areas are Application Related Services, IT Support Services, Business Process

Outsourcing and SAP and Business Intelligence Software Licensing. It often acts as a

value-added reseller for SAP, Informatica, Cognos and Business Objects among others.

Softtek aims to reduce the complexity of IT services management, to optimise costs

and support globalisation of IT and BPO operations. Through creation of the nearshore

model, the company has become a leader in the outsourcing market, and currently this

is the main area of expansion for Softtek.



Following a number of acquisitions, Softtek is one of the five largest Latin American

firms in the software industry. By 2007, it had around 5,000 staff. Revenue in 2007

was reported at US$260mn, up from US$175mn in 2006. About 40% of the company's

clients were from the financial sector, 45% from manufacturing and many of the rest

were from the high-tech sector. However, the fact that the company is privately owned

means that financial details are hard to come by.

Softtek claims several Fortune 500 companies as clients. The company is 100%

Mexican owned and the plan is to fuel its future growth through private investment or by

going to the capital markets. Areas of expertise include programming, development,

commercial and government banking, retirement funds, telecoms and the internet.

Softtek's main area of work is applications, with particular strength in SAP, but the

company also has a small BPO and infrastructure outsourcing business.

In February 2013, Softtek acquired Systech Integrators, a SAP channel and services

partner global IT solutions provider co-founded by an Indian American to make an entry

into India. This acquisition will further strengthen Softtek's SAP qualifications by adding

capabilities for cloud, mobility solutions as well as cross-process and industry domain

expertise to its solutions portfolio. The addition of Systech's SAP solutions expertise

and India delivery centre enhances Softtek's SAP capabilities through its existing

network of global delivery centres in Mexico, Brazil, Argentina, Spain and China.

The US is Softtek's largest market, but Brazil is the second largest, with 29% of

earnings coming from this market in H211 (latest data available). It reported that it

earned BRL170mn in Brazil in 2010, 29% growth on 2009.

Softtek is a privately owned company, and releases no financial or operational data.

Strategy In 2013, BMI believes Softtek is likely to continue expanding in international markets, as

evidenced in its acquisition of Systech Integrators. On its website, it describes the

company vision to become a global leader of IT and business related process solutions

based on long-term relationships with clients. In 2011, it invested heavily in acquisitions,

and in news reports it has expressed a desire to acquire niche businesses that focus on

specialised areas of the market.

In a June 2011 report, Softtek identified financial services, government, consumption

and retail as the most promising areas for its Brazilian expansion, and as a result is

looking to make acquisitions in those sectors. The company planned on adding 1,200

employees in the country in 2011, and to invest in partnerships with universities and

training professionals.

Company History Softtek was founded in 1982 as a small IT services company to help customers to

develop customised software and to manage IT infrastructure. Growth was bolstered by

the North America Free Trade Agreement of 1994, which helped expand business ties

between Mexico and the US. Mexico became an increasingly important centre for US



companies looking for outsourcing partners, given the proximity to the US. Softtek was

able to capitalise on this, and enjoyed strong growth in its home market subsequently.

In 1995, it opened international offices in Brazil, which quickly became one of the

company's most important markets.

In 1997, Softtek expanded into Venezuela and Argentina. It also created the nearshore

concept - an outsourcing solution near a company's preliminary market, to share

benefits such as proximity, timezone, cultural affinity and ease of doing business. The

following year, it opened its first global delivery centre in Monterrey.

At the turn of the millennium, the company hired Blanca Treviño as president and CEO.

Treviño is one of the world's few female CEOs leading large multinational

corporations. In 2006, Softtek opened a centre in Galicia, Spain, to serve European

clients, joining its four development centres in Mexico and two in Brazil, which serve

Latin American clients. Softtek works closely with Mexican government organisations to

promote Mexico as a nearshore resource location. In December 2003, it bought

Ddemesis for an undisclosed sum. As part of the deal, GE continued to buy services

from Softtek until the end of 2006. The acquisition of Ddemesis enabled Softtek to

cover more areas and provide more complete support, in line with the company's

ambitions to become one of the most important offshore players by opening

development centres in low-cost countries close to major markets.

In 2007, the company acquired China-based IT United as its first venture into the Asian

market. It expanded its operations into Beijing, Shanghai, Xiamen, Xi'an and Hong

Kong, and unveiled a global delivery centre there in 2009. The faculty is located in the

city of Wuxi in the Jiangsu province, and was a platform from which to gain a strong

foothold in the Chinese market.

In 2009, Softtek saw the economic and financial crisis affecting US companies as an

opportunity to enhance its position as a nearshore services provider. It mounted a major

push with its BPO unit, which it hoped would generate 10% of total sales in 2009. The

corresponding figure for 2007 was 5% and the BPO unit is growing at around 120% a

year. The company offers various types of BPO services, including procurement finance

and customer support. The company came into the BPO segment by acquiring

Ddemesis, the Mexican software division of General Electric.

Company Details ■ Softtek S.A.

■ Blvd Díaz Ordaz km 333Plaza Leona Sección IV

Garza García, N.L.

Address line 4

66210

Mexico



■ Tel: +52 81/8153 2000

■ Fax: 8153 2001

■ [email protected]

■ www.softtek.com



Sonda SA

SWOT Analysis

Strengths ■ Strong track record with 37 years of growth and profitability, alongside solid financials

with low levels of financial debt.

■ Leading position in the IT services industry in Chile and relevant player in the largest

Latin American markets.

■ 70% of recurring revenues are from long-term contracts.

Weaknesses ■ Lost major contract to develop Chile's national ID system in August 2011 due to lack

of necessary experience.

■ Corruption scandal in 2006 in relation to the Transantiago tender damaged Sonda's

reputation in its domestic market.

Opportunities ■ In Latin America IT is outpacing global growth - revenues and EBITDA rose at a 28%

compounded annual growth rate (CAGR) from 2006-2011.

■ Sonda's expertise and foothold in the region bodes well for its future.

Threats ■ Many acquisitions are yet to be consolidated.

■ The company's portfolio of services is very wide and there are risks on non-

specialisation.

Company Overview Founded in 1974, Sonda SA is Chile's largest information technology company, and its

largest markets are Brazil, Chile and Mexico. It specialises in three main areas:

platforms, IT services and applications, and has a presence in nine countries in Latin

America, with more than 1,000 cities covered. It has close to 11,000 employees in the

region, half of which work in Brazil.

Platforms

Platforms provided 39.0% of Sonda's revenues in 2012. Sonda is a multi-brand

integrator, working in partnership with global IT manufacturers such as Cisco, Autodesk

and EMC. It offers value solutions combining hardware, software and services. These

provide end-to-end solutions, alongside infrastructure and services related to this

infrastructure.



IT Services

IT services are the key driver of Sonda's revenues, providing 52.8% in 2012, and this

share is expanding. IT services cover cloud computing, outsourcing, systems

integration, infrastructure support and datacentre services such as hosting and site

operation, among others. It developed an Enterprise Cloud Computing unit called

Qumulos. This is aimed at large and mid-sized companies and has four service

categories - virtual servers, virtual desktops, recovery in case of disasters and

Software-as-a-Service (SaaS).

Through its Business Processes Operation (BPO) services, Sonda takes over the

provision and operation of certain IT-heavy business processes.

In February 2011, Sonda was awarded a major IT outsourcing contract to modernise

Panama's public transportation payment system. On the country's Metrobús service,

clients are able to pay with a rechargeable card from February 2012. Sonda is

responsible for the financial administration and the delivery of the service to the end-

user.

Applications

Applications provided 8.2% of Sonda revenues in 2012, and cover three main areas -

vertical market solutions, management solutions and applications services. Sonda is

SAP's main business partner in Latin America and many of the management solutions

Sonda offers are complementary solutions to SAP services.

The company made five acquisitions in 2010. These included Softeam, Telsinc and

Kaizen in Brazil, Nextira One in Mexico and Ceitech in Argentina.

Strategy According to company president, Carlos Testolini, Sonda's main goal for 2012 is the

consolidation of its operations acquired in Brazil. The company's 2010 acquisitions as

well as Procwork (acquired in 2007) have been operating as Sonda Software, Sonda

Telsinc, Sonda Kaizen and Sonda Procwork since then. The company wants to bring all

companies under the Sonda IT banner. The company also revealed it has no major

plans to make further acquisitions in 2012.

Sonda also outlined plans to expand a channels programme, allowing certified partners

to deliver software to clients. This will be country specific and will focus on selling SAP

and Sonda's finance and tax software, and Sonda aims to generate 10% of sales from

such channels by the end of 2012.

There were also rumours that the Brazilian arm of Sonda would launch an IPO in 2012.

However, this was unconfirmed and still being discussed by the board of directors.

Company History Founded in 1974, Sonda SA was founded in association with energy and forestry

company Copec. During the first 10 years of operation, it focused on the national

market. Significant contracts included representation of American manufacturer Digital



Equipment Corporation, and an outsourcing contract with the Chilean National Savings

and Loans Association. In the 1980s, Sonda expanded internationally, gaining contracts

in Peru in 1984.

Also during this decade, Sonda won a number of contracts with the Chilean public

sector, undertaking its first large systems integration project for the Chilean Civil

Registry. It began banking projects in a number of Latin American countries, and a

traffic lights control system in Santiago and São Paulo.

Its first foray into mobile telephony was in the early nineties in Argentina, but similarly

this area of Sonda's business was rolled out in Brazil and Paraguay. In Q406 the

company listed 25% of its shares in the Chilean stock exchange.

In 2005, Sonda was awarded the contract for modernising the transport system in Chile,

Transantiago, which was due to be completed in October 2006. However, by February

2007, it still was far from completion, and questions were raised over how Sonda won

the contract. A company called Transporte Inteligente Multimodal (TIMM) filed a lawsuit

against Sonda, questioning the bidding process and claiming that the US$428mn

contract was exorbitant - the roll-out of the system would cost no more than US$40mn,

they argued, leaving Sonda with profits totalling almost US$400mn. TIMM also accused

Sonda of using confidential information and technology belonging to TIMM for its own

benefit, and sought US$390mn in damages. Following this, all contracts with the public

sector during the five years previously were evaluated.

Financial

PerformanceIn its 2012 financial year Sonda reported revenues of CLP681.2bn, led by its strong

performance in its home market. Chile accounted for 44.9% of the company's total

revenues, ahead of Brazil (33.7%) and Mexico (8.9%). Revenues rose in all segments

except Mexico, where revenues decreased 11.6% y-o-y. Total revenue grew 14.9%,

driven by strong growth in Sonda's non-core markets. EBITDA was CLP117.3bn, up

28% y-o-y, with all units showing growth. Despite a decrease in revenues, Mexico saw

a 10.5% y-o-y increase in EBITDA, reaching CLP9.6bn. Brazil saw a particularly strong

increase, improving its EBITDA by 50.3%. Net income attributable to the owners of the

company was CLP45.6bn, up 16.2% y-o-y.

IT services remains the largest revenue generating segment for Sonda, accounting for

52.8% of revenues in 2012, up from 56.1% in 2011. Applications growth was slight,

increasing less than 1% to CLP55.863bn. Platforms drove much of the company's

growth, generating a 29.8% growth rate and accounting for 39% of revenues, up

4.4pps.

Financial Data ■ Revenue (2010): CLP444.5bn■ Revenue (2011): CLP593bn■ Revenue (2012): CLP681bn■ EBITDA (2010): CLP76.98bn■ EBITDA (2011): CLP91.7bn■ EBITDA (2012): CLP117bn



■ Net Income (2010): CLP33.55bn■ Net Income (2011): CLP46.62bn■ Net Income (2012): CLP45.6bn

Company Details ■ Sonda S.A.

■ Teatinos 500275v- correo 21

Santiago

■ Tel: 54-11/4331 7500

■ Fax: 4343 3561

■ [email protected]

■ www.sonda.com



Regional Overview

The Americas IT markets can be broadly categorised into three groups. Leading the region are the highly

developed North American markets of the US and Canada, which have among the highest value IT markets

globally, as well as rapid adoption of emerging technologies. There is then a second group of middle

income emerging markets in Latin America with strong growth prospects, including Argentina, Brazil,

Chile and Mexico. Finally, the smaller less developed markets of Colombia, Peru and Venezuela are

playing catch-up due to low incomes and small domestic markets.

Tablet Opportunity Tempts Vendors

The diversity of markets in the region means they

have been impacted by trends in different ways. For

instance, the shift in consumption away from

relatively expensive desktops and notebooks to

tablets has limited increases in market value in North

America, especially as lower cost Android tablets

account for a larger share of sales in 2013 and 2014.

Meanwhile, low-cost Android tablets have been a

boom for vendors in Latin America where the lower

price points have deepened the market in cases

where consumers did not have sufficient income to

purchase traditional form factors.

Tablets have been a major trend in Latin America,

and the region is a focus for vendors that are looking

for growth to compensate for the declining desktop and notebook market. For instance, in October 2013 the

leading global chipset manufacturer, Intel, announced its target of double-digit growth in Latin America by

focusing on the tablet segment of the device market. Lower cost Android-based devices are proving popular

with consumers in the region, and Intel was supplying chips in 30 devices from 11 manufacturers in Q413,

which bodes well for its prospects.

There is considerable growth potential in Latin American markets where there is not only an upgrade/

replacement market as in North America - but also large pools of untapped first-time buyers. Household PC

penetration was below 50% in Argentina and Brazil in 2011, while in Mexico, Peru and Venezuela the

IT Spending Per Capita (US$)

2013

Source: BMI.



figure was below 30%. By hitting lower price points compared to notebooks vendors can tap into this

potential in the short-to-medium term and offset the squeeze in the traditional form factor markets.

Policies And Infrastructure Should Accelerate Catch-Up

In the software and services segments there are indications that the least developed IT markets in Latin

America will begin to close the gap with the rest of the region over the duration of BMI's medium term

forecast. We expect the two major drivers of this trend will be strengthening of supporting infrastructure

and government policy.

The development of broadband infrastructure across the region will boost market growth by creating use-

cases for device ownership, incentivise enterprises to develop e-commerce and analytics capabilities, and

enable new products and services such as outsourcing and cloud computing that rely on connectivity. Our

forecasts envisage strong growth across the region, but the stand-out performers will be the less developed

markets as they close the infrastructure gap to more developed markets.

Supporting Infrastructure Strengthens IT Outlook

Americas Broadband Subscription Growth ('000)

e/f - BMI estimate/forecast. Source: BMI.



A second driver is government policy, which was a key factor in the rapid development of East Asian IT

markets, but has traditionally been underutilised in the Americas (with the exception of the US and

Canada). In recent years this trend has changed and governments have been much more proactive in a range

of policy areas - from local production requirements for tablets in Brazil to attract investment in production

facilities, through to promotion of emerging technologies such as cloud computing and smart infrastructure.

In 2013 some of the most ambitious policy initiatives have come from the markets with the least developed

IT markets. For instance, in October 2013 the Peruvian government announced it would provide PEN50mn

(US$18mn) to launch the StartUp Peru program, aimed at boosting entrepreneurship in the country. The

concept is modelled on Chile's program StartUp Chile, which has experienced a great level of success in

fostering innovation among local technology companies.

Meanwhile, Colombia is benefitting from its Vive Digital project, which aims to build a national fibre-optic

network, through investment from cloud computing companies. In September 2013 IBM announced it was

investing US$17mn in a new data centre in Bogotá, which followed the announcements from Level 3

Communications and Telefónica in March and June 2013 respectively that they would open data centres in

the country.

Government policies are assisting technological upgrade and increasing investment in Latin America's least

developed IT markets, however peers in the region are not standing still and as such we do not expect rapid

convergence over the medium term.

While wider economic uncertainty in Argentina undermines confidence, the government continues to

priorities the IT sector, driving development even in difficult times. The government most recently

announced large tax incentives to boost software development companies in the country as it attempts to

boost higher value services growth. Local consultancy Claves Información Competitiva estimates that

54% of Argentina's 3,600 IT companies produce hardware, 21% software and 25% produce IT services. The

government policies should help to improve this mix in favour of higher value higher margin software and

services.

BMI expects these policy initiatives that target higher value activities will boost market development,

however it should also be noted that the leading Latin American markets are deploying emerging

technologies such as smart infrastructure, and not simply playing catch-up. In September 2013 Microsoft

announced its first smart city deal in Brazil, as part of its CityNext initiative. The first contracts have been

agreed with the Minas Gerais state government, with 23 other contracts signed with government



institutions. The contract follows on from the investments in smart infrastructure by Belo Horizonte and Rio

de Janeiro with IBM and other technology companies.

IT companies believe that these ventures could become multi-billion dollar businesses as they interconnect

areas such as energy and water; buildings; planning and infrastructure; transportation; public safety and

justice; tourism, recreation and culture; education; health and social services; and government

administration. BMI shares this positive outlook, as we argue that the potential for smart infrastructure

deployments, and associated investments in data analytics and real-time enterprise software, is strong over

the medium term. A relative lack of legacy infrastructure combined with rapidly expanding urban

population means that there should be demand from across the region that could even surpass the

investments in developed markets.



Demographic Forecast

Demographic Outlook

Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model. Not only is

the total population of a country a key variable in consumer demand, but an understanding of the

demographic profile is key to understanding issues ranging from future population trends to productivity

growth and government spending requirements.

Population Pyramid

2013 (LHS) and 2013 v. 2050 (RHS)

Source: World Bank, UN, BMI



Population Indicators

Population, mn (LHS) and Life Expectancy, yrs (RHS)


The accompanying charts detail Mexico's population pyramid for 2013, the change in the structure of the

population between 2013 and 2050 and the total population between 1990 and 2050, as well as life

expectancy. The tables show key datapoints from all of these charts, in addition to important metrics

including the dependency ratio and the urban/rural split.

Table: Mexico's Population By Age Group, 1990-2020 ('000)

1990 1995 2000 2005 2010 2013e 2015f 2020f

Total 86,077 95,393 103,874 110,732 117,886 122,332 125,236 131,955

0-4 years 11,373 12,062 12,293 11,953 11,573 11,273 11,081 10,726

5-9 years 10,926 11,366 11,868 12,118 11,868 11,665 11,505 11,019

10-14 years 10,827 10,812 11,238 11,668 11,978 11,897 11,774 11,415

15-19 years 10,354 10,428 10,577 10,839 11,351 11,697 11,830 11,630

20-24 years 8,393 10,020 9,997 9,952 10,365 10,784 11,069 11,551

25-29 years 6,739 8,173 9,596 9,393 9,523 9,783 10,020 10,726

30-34 years 5,710 6,654 7,895 9,176 9,100 9,104 9,193 9,694

35-39 years 4,839 5,601 6,464 7,608 8,974 9,051 8,968 9,068

40-44 years 3,644 4,890 5,442 6,235 7,446 8,409 8,868 8,870

45-49 years 3,102 3,618 4,743 5,244 6,082 6,781 7,338 8,751



Mexico's Population By Age Group, 1990-2020 ('000) - Continued

1990 1995 2000 2005 2010 2013e 2015f 2020f

50-54 years 2,482 3,100 3,487 4,562 5,081 5,555 5,961 7,205

55-59 years 2,183 2,351 2,957 3,321 4,373 4,725 4,936 5,806

60-64 years 1,807 1,990 2,201 2,770 3,121 3,762 4,186 4,742

65-69 years 1,400 1,584 1,813 2,001 2,533 2,719 2,922 3,941

70-74 years 917 1,203 1,384 1,576 1,750 2,074 2,290 2,662

75-79 years 682 695 986 1,126 1,298 1,392 1,499 1,985

80-84 years 404 490 507 722 838 929 992 1,165

85-89 years 205 235 286 298 441 494 526 638

90-94 years 72 92 104 128 140 184 216 265

95-99 years 17 24 30 34 44 46 50 80

100+ years 3 4 6 7 9 11 12 14

f = BMI forecast. Source: World Bank, UN, BMI

Table: Mexico's Population By Age Group, 1990-2020 (% of total)

1990 1995 2000 2005 2010 2013e 2015f 2020f

0-4 years 13.21 12.64 11.83 10.79 9.82 9.21 8.85 8.13

5-9 years 12.69 11.91 11.43 10.94 10.07 9.54 9.19 8.35

10-14 years 12.58 11.33 10.82 10.54 10.16 9.72 9.40 8.65

15-19 years 12.03 10.93 10.18 9.79 9.63 9.56 9.45 8.81

20-24 years 9.75 10.50 9.62 8.99 8.79 8.82 8.84 8.75

25-29 years 7.83 8.57 9.24 8.48 8.08 8.00 8.00 8.13

30-34 years 6.63 6.97 7.60 8.29 7.72 7.44 7.34 7.35

35-39 years 5.62 5.87 6.22 6.87 7.61 7.40 7.16 6.87

40-44 years 4.23 5.13 5.24 5.63 6.32 6.87 7.08 6.72

45-49 years 3.60 3.79 4.57 4.74 5.16 5.54 5.86 6.63

50-54 years 2.88 3.25 3.36 4.12 4.31 4.54 4.76 5.46

55-59 years 2.54 2.46 2.85 3.00 3.71 3.86 3.94 4.40

60-64 years 2.10 2.09 2.12 2.50 2.65 3.08 3.34 3.59

65-69 years 1.63 1.66 1.75 1.81 2.15 2.22 2.33 2.99

70-74 years 1.07 1.26 1.33 1.42 1.48 1.70 1.83 2.02

75-79 years 0.79 0.73 0.95 1.02 1.10 1.14 1.20 1.50

80-84 years 0.47 0.51 0.49 0.65 0.71 0.76 0.79 0.88



Mexico's Population By Age Group, 1990-2020 (% of total) - Continued

1990 1995 2000 2005 2010 2013e 2015f 2020f

85-89 years 0.24 0.25 0.28 0.27 0.37 0.40 0.42 0.48

90-94 years 0.08 0.10 0.10 0.12 0.12 0.15 0.17 0.20

95-99 years 0.02 0.02 0.03 0.03 0.04 0.04 0.04 0.06

100+ years 0.00 0.00 0.01 0.01 0.01 0.01 0.01 0.01

f = BMI forecast. Source: World Bank, UN, BMI

Table: Mexico's Key Population Ratios, 1990-2020

1990 1995 2000 2005 2010 2013e 2015f 2020f

Dependent ratio, % of total workingage 74.8 67.9 63.9 60.2 56.3 53.6 52.0 49.9

Dependent population, total, '000 36,826 38,568 40,514 41,632 42,471 42,683 42,866 43,910

Active population, % of total 57.2 59.6 61.0 62.4 64.0 65.1 65.8 66.7

Active population, total, '000 49,251 56,825 63,359 69,100 75,415 79,650 82,369 88,045

Youth population, % of total workingage 67.3 60.3 55.9 51.7 47.0 43.7 41.7 37.7

Youth population, total, '000 33,126 34,240 35,399 35,739 35,419 34,834 34,360 33,159

Pensionable popn, % of total workingage 7.5 7.6 8.1 8.5 9.4 9.9 10.3 12.2

Pensionable popn, total, '000 3,700 4,328 5,115 5,893 7,053 7,848 8,506 10,751

f = BMI forecast; 1 0>15 plus 65+, as % of total working age population; 2 0>15 plus 65+; 3 15-64, as % of totalpopulation; 4 15-64; 5 0>15, % of total working age population; 6 0>15; 7 65+, % of total working age population; 8 65+.Source: World Bank, UN, BMI

Table: Mexico's Rural And Urban Population, 1990-2020

1990 1995 2000 2005 2010 2013e 2015f 2020f

Urban popn. % of total 71.4 73.4 74.7 76.3 77.8 78.7 79.2 80.5

Rural popn. % of total 28.6 26.6 25.3 23.7 22.2 21.3 20.8 19.5

Urban popn, total, '000 61,475 69,988 77,616 84,497 91,745 96,236 99,223 106,224

Rural popn, total, '000 24,602 25,405 26,257 26,235 26,141 26,097 26,013 25,731




Methodology

Industry Forecast Methodology

BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and

causal/econometric modelling. The precise form of model we use varies from industry to industry, in each

case being determined, as per standard practice, by the prevailing features of the industry data being

examined.

Common to our analysis of every industry, is the use of vector autoregressions. Vector autoregressions

allow us to forecast a variable using more than the variable's own history as explanatory information. For

example, when forecasting oil prices, we can include information about oil consumption, supply and

capacity.

When forecasting for some of our industry sub-component variables, however, using a variable's own

history is often the most desirable method of analysis. Such single-variable analysis is called univariate

modelling. We use the most common and versatile form of univariate models: the autoregressive moving

average model (ARMA).

In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality

is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for

analysis and forecasting.

BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of

objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple non-

linear models, such as the log-linear model, are used when necessary. During periods of 'industry shock', for

example poor weather conditions impeding agricultural output, dummy variables are used to determine the

level of impact.

Effective forecasting depends on appropriately selected regression models. BMI selects the best model

according to various different criteria and tests, including but not exclusive to:

■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account

■ Testing the directional movement and magnitude of coefficients

■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value)

■ All results are assessed to alleviate issues related to auto-correlation and multi-collinearity



BMI uses the selected best model to perform forecasting.

It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry

forecasting. Experience, expertise and knowledge of industry data and trends ensure that analysts spot

structural breaks, anomalous data, turning points and seasonal features where a purely mechanical

forecasting process would not.

Sector-Specific Methodology

A number of criteria drive our forecasts for each IT variable.

IT forecasting is complicated due to the fragmented nature of the market, with little transparency of vendor

data and low apparent agreement between many sets of figures in terms of market definition, base and

methodology. In addition, forecasts are affected by consideration of a variety of internal and external

political and economic factors.

Within best-practice techniques of time-series modelling, BMI's quarterly updated forecasts are improved

substantially by intimate knowledge of the prevailing features of each local market.

Individual variables taken into account in creating each forecast include:

■ Overall economic context, and GDP and demographic trends;

■ Underlying 'information society' trends;

■ Projected GDP share of industry;

■ Maturity of market structure;

■ Regulatory developments and government policies;

■ Developments in key client sectors such as telecommunications, banking and e-government;

■ Technological developments and diffusion rates;

■ Exogenous events.

Estimates are calculated using BMI's own macroeconomic and demographic forecasts.

Sources

Additional sources used in IT reports include national ministries and ICT regulatory bodies, national

industry associations, and international industry organisations such as the International Telecommunication



Union (ITU), officially released company results and figures, and international and national industry news

agencies.

Risk Reward Rating Methodology

BMI's Risk Reward Ratings (RRR) provide a comparative regional ranking system evaluating the ease of

doing business and the industry-specific opportunities and limitations for potential investors in a given

market.

The RRR system divides into two distinct areas:

Rewards: Evaluation of sector's size and growth potential in each state, and also broader industry/state

characteristics that may inhibit its development. This is further broken down into two sub categories:

■ Market Rewards (this is an industry specific category taking into account current industry size andgrowth forecasts, the openness of market to new entrants and foreign investors, to provide an overallscore for potential returns for investors)

• Country Rewards (this is a country specific category, and the score factors in favourable political andeconomic conditions for the industry)

Risks: Evaluation of industry-specific dangers and those emanating from the state's political/economic

profile that call into question the likelihood of anticipated returns being realised over the assessed time

period. This is further broken down into two sub categories:

■ Market Risks (this is an industry specific category whose score covers potential operational risks toinvestors, regulatory issues inhibiting the industry, and the relative maturity of a market)

• Country Risks (this is a country specific category in which political and economic instability,unfavourable legislation and a poor overall business environment are evaluated to provide an overallscore).

We take a weighted average, combining market and country risks, or market and country rewards. These

two results in turn provide an overall Risk Reward Rating, which is used to create our regional ranking

system for the risks and rewards of involvement in a specific industry in a particular country.

For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall

risk/reward rating a weighted average of the total score. Importantly, as most of the countries and territories

evaluated are considered by BMI to be 'emerging markets', our rating is revised on a quarterly basis. This

ensures that the rating draws on the latest information and data across our broad range of sources, and the

expertise of our analysts.



BMI's approach in assessing the risk/reward balance for infrastructure industry investors globally is

fourfold:

■ First, we identify factors (in terms of current industry/country trends and forecast industry/countrygrowth) that represent opportunities to would-be investors.

■ Second, we identify country and industry-specific traits that pose or could pose operational risks towould-be investors.

■ Third, we attempt, where possible, to identify objective indicators that may serve as proxies for issues/trends to avoid subjectivity.

■ Finally, we use BMI's proprietary Country Risk Ratings (CRR) in a nuanced manner to ensure that onlythe aspects most relevant to the infrastructure industry are incorporated. Overall, the system offers anindustry-leading, comparative insight into the opportunities/risks for companies across the globe.

Sector-Specific Methodology

In constructing these ratings, the following indicators have been used. Almost all indicators are objectively

based.

Table: It Risk Reward Rating Indicators

Indicator Rationale

Rewards

Industry

IT market value, US$bn Denotes breadth of IT market. Large markets score higher than smaller ones.

Sector value growth, %year-on-year (y-o-y)

Denotes sector dynamism. Scores based on annual average growth over five-year forecastperiod.

Government initiatives andspending

Denotes spending boost provided by public sector, which can be a crucial determinant ofsector development.

Hardware, % of total sales Denotes maturity of market. A high proportion of hardware sales, compared to services/software, indicates that the overall IT market is immature.

Country

Urban-rural split Urbanisation is used as a proxy for development. Predominantly rural states therefore scorelower.

GDP per capita, US$ A high GDP per capita supports long-term industry prospects.

Overall score for country rewards is also affected by the coverage of the power transmission network across the state.

Risks

Industry

Intellectual property (IP)laws

Markets with fair and enforced IP regulations score higher than those with endemiccounterfeiting.

ICT policy Subjective evaluation of official policy towards IT development, as enshrined in statute andtax code.



It Risk Reward Rating Indicators - Continued

Indicator Rationale

Country

Short-term external risk Rating from CRR evaluates the vulnerability to external shock, which is the principal causeof economic crises. Such a crisis would cut investment.

Short-term financial risk Rating from BMI's CRR, to denote risk of currency crisis and stability of banking sector. Theformer would hit revenues in hard currency, while the latter would curtail investment funding.

Trade bureaucracy Rating from CRR to denote ease of trading with the state.

Legal framework Rating from CRR denotes the strength of legal institutions in each state - security ofinvestment can be a key risk in some emerging markets.

Bureaucracy Rating from CRR denotes ease of conducting business in the state.

Corruption Rating from CRR denotes the risk of additional illegal costs/possibility of opacity intendering/business operations affecting companies' ability to compete.

Source: BMI

Weighting

Given the number of indicators/datasets used, it would be wholly inappropriate to give all sub-components

equal weight. The following weighting has been adopted:

Table: Weighting Of Components

Component Weighting (%)

Rewards 70 of which

- Industry 65

- Country 35

Risks to 30 of which

- Industry 40

- Country 60

Source: BMI



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