nearshoring in mexico – right across the border

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Copyright © 2016 Neo Group, Inc. All Rights Reserved.

NEARSHORING IN MEXICO – RIGHT

ACROSS THE BORDER

NEARSHORING IN MEXICO – RIGHT ACROSS THE BORDER


The rise of Mexico as an outsourcing destination over the last

decade has been tremendous. And its close proximity to the US

has definitely made a big difference.

But is that all that’s there to it – the nearshore advantage? How

has this Latin American country managed to find its footing in an

area earlier dominated by its Asian counterparts like India, China,

Malaysia, and the Philippines located thousands of miles away?

How has Mexico managed to deal with competitors in the region,

say Canada or Brazil, who also have some similar advantages?

How has it faced controversial issues like drug-related violence

and high crime rates?

This Supply WisdomSM white paper attempts to explore all these

areas and then some more.

2

INTRODUCTION


Copyright © 2016 Neo Group, Inc. All Rights Reserved. 3

ADVANTAGE MEXICO – FIRST, THE OBVIOUS ONES

Proximity to the US is indeed one of the biggest benefits for Mexico. For the US clientele,

it means they save on travel time and also on money.

Source: Supply WisdomSM



SIMILARITY OF TIME ZONE means clients get to see their work done while they

are awake with higher chances for real-time collaboration, which is very necessary for overall

productivity. It is a big competitive advantage over countries like India and China which are in

a completely different time zone altogether, resulting in lesser interaction with the client -side or

people being forced to work during odd hours. This becomes all the more true in the current

day context because the nature of work being outsourced today is different from what it was,

say a decade ago. As opposed to basic processes, today the scope of outsourcing has

changed to higher-end work involving higher levels of innovation and complexities. Three

major outsourcing hubs in the country, Mexico City, Monterrey, and Guadalajara, are located in

the US Central time zone. Mexico also follows the concept of Daylight Savings Time (DST) like

the US.





CULTURAL AFFINITY is yet another big plus point, in terms of

language, food, clothing etc. Mexico’s culture is not exactly a carbon copy of

the US or vice versa, but they are similar in a lot of ways, which means

adjusting to the style of work and dealing with people becomes much easier

than having to go through cross-cultural training and other adjustments.

Border states such as California, Arizona, New Mexico, and Texas (nearly

25-30% of these states is made up of Mexican Americans) act as merging

points for the two countries on the US side, while on the Mexican side it is

Baja California, Sonora, Chihuahua, Coahuila, Nuevo Leon, and Tamaulipas.

Interestingly, some of the largest metropolitan areas in the US have huge

Spanish-speaking populations including New York (about 20%) and Los

Angeles (about 37%).




121

5348 46 43

Mexico USA Colombia Spain Argentina

0

20

40

60

80

100

120

140

In M

illio

ns

Top 5 Countries in the World with the Highest Number of Spanish-Speakers

Source: Instituto Cervantes and Supply WisdomSM

As per a study published by Instituto Cervantes in June 2015, the US has more Spanish

speakers than Spain itself, making it the second largest Spanish-speaking country in the

world after Mexico. Along with nearly 41 million native speakers of the language, there

are about 11.6 million bilingual speakers. The US Census Bureau also predicts that this

is only going to increase, with the US becoming home to 138 million Spanish speakers

by 2050.



FACTORS AUGMENTING THE OBVIOUS ADVANTAGES

Free Trade Agreements (FTAs): Currently, Mexico has about ten FTAs in a network of

around 45 countries covering three continents. Notable among these is NAFTA or the North

American Free Trade Agreement signed much earlier in January 1994, which has resulted in

improved economic growth, foreign direct investment, and trade relations between Canada, US, and

Mexico. Additionally, the country is also a member of the Trans-Pacific Partnership Agreement

(TPP), which was signed in February 2016 and consists of 11 other countries including Australia,

Brunei, Canada, Chile, Japan, Malaysia, New Zealand, Peru, Singapore, US, and Vietnam.

Intellectual Property (IP) Protection: Mexico improved its score in the recently released

International Property Rights Index (IPRI) 2016 from 5.4 in 2015 to 5.6 in 2016, where it is ranked

50th out of 128 countries globally. A lot of improvements are anticipated in the country’s IP

protection laws in future, beginning with the TPP signed earlier this year, which will require all its

members to align their domestic laws and policies as per the agreement’s provisions.




Strong Political and Economic Relations with the US: Mexico’s intense economic

bond with the US has definitely helped it move in the right direction over the last several years. Both

countries have promoted bilateral trade continuously, with Mexico being the third largest trading

partner of the US, the first two being China and Canada. In the past few years, the strain that came

into the US-China relations also translated to gain for Mexico. In 2015, US exports to Mexico (both

goods and services) amounted to $267.2 billion. Only service exports totaled to $30.8 billion, with a

trade surplus of $9.2 billion. Apart from trade, the two countries have very closely collaborated in

the areas of education, innovation, drug control, migration, and environment, among several others .

Ability to Cater to Higher-Level Work: With respect to IT outsourcing, the Mexican landscape has

evolved significantly over the years and the country has built a good reputation for higher -end work

requiring problem solving, innovation, and automation. For the US buy-side, there are also

advantages tied to specific verticals, especially the highly regulated ones like Finance and

Healthcare, where Mexico and the US have similar regulations, unlike countries in Asia or Eastern

Europe.



Diverse Skillsets and Strong Human Capital:

Mexico has a strong ITO workforce of about 560,000 people

which is estimated to be growing by 4% annually. Every year,

about 110,000 IT/Engineering graduates and more than 320,000

Non-IT graduates pass out of Mexican Universities and Colleges.

The country’s labor force is witnessing an average growth of

2.5% every year and currently stands at about 55.56 million.

65.8% of its population is in the age-group of 15 to 64 years,

indicating a young workforce. Millennials account for 34% of the

total Mexican population. While all these numbers point to the

strength of Mexico’s labor pool, it is also true that it is not just

about the numbers. Mexico has demonstrated some real IT

potential right from the beginning and the quality of its resources,

especially software professionals, is top notch. And the shortage

of STEM (Science, Technology, Engineering, and Mathematics)

labor in the US is an opportunity that Mexico can grab in the

coming years.


46.1

52.853.9

55.6

40.0

44.0

48.0

52.0

56.0

60.0

2013 2014 2015 2016

Mexico's Labor Force(In Millions)




Bilingualism: Along with a strong Spanish-speaking population, Mexico’s English-speaking

workforce is also relatively large, said to be about 16 million. But in the latest English Proficiency

Index (EPI) 2015 by Education First, Mexico ranks 40th out of 70 countries and is placed in the ‘Low

Proficiency’ band, which means that there is need for a lot more to be done. The government

continues to work in this direction and has taken many initiatives to make sure its people are trained

well in English. In 2014, it launched ‘Project 100,000’ through which it plans to gain from its

geographic proximity with its northern neighbor and send 100,000 of its students to the US for short-

duration, intensive English language courses.




Good Spread of Service Providers throughout Mexico: A network that covers its

length and breadth.


Some of the major IT-BPO service providers based in the country include: Sofftek, IBM, HP,

Alcatel-Lucent, Tata Consultancy Services, Infosys, Wipro, Accenture etc.




Infrastructure: With continuous attention paid towards infrastructure initiatives,

there has been a lot of progress on this front.

The number of secure internet servers in the country rose from a mere 1,000+ in 2006

to nearly 4,300 in 2014. With respect to electricity, recently introduced market reforms

to include private players in power generation is likely to strengthen the overall power

scenario in the country. With regard to commercial real estate, the office space market

is expected to grow by 40% by 2018, with a likely addition of 10.7 million square feet

of space in the coming three years.

The Mexican President also announced spends of $300 billion towards transport and

communication during his current tenure (2012-2018), which includes high-speed rail

projects, expansion of the Mexico City airport, improvements to ports, completion of

major highways/roads, and advancements in internet infrastructure.




TAKING A FEW STEPS BACK – THE RISK FACTORS

Current Macro-Economic Scenario: In terms of meeting GDP expectations, so far this year,

Mexico has lagged behind mainly due to low oil prices and reduced external demand. Many are

of the opinion that 2017 might not be very optimistic for Mexico, like BNP Paribas SA that

estimates a growth of 1.5% and the Bank of Mexico has trimmed its earlier figure of 2.3-3.3%

to 2-3%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Q4 2015 Q1 2016 Q2 2016 Q3 2016

Performance of Key Economic Indicators

GDP AnnualGrowth Rate

Inflation Rate

Interest Rate





In August 2016, Standard & Poor’s lowered Mexico’s sovereign credit outlook to negative

from stable, and also indicated that a further downgrade is possible in the next two years

depending on the government’s debt situation. Not so surprisingly, the GDP growth for the

US has also been revised down by the IMF (International Monetary Fund) recently.


-1.52%

-0.3%

-5.4%-5.1%

-6.00%

-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

Q4 2015 Q1 2016 Q2 2016 Q3 2016

Currency Performance - MXN/USD




Towards the end of September this year, Mexico’s central bank raised its base interest

rate to 4.75%, a level not seen since the June 2009 global economic crisis. Banco de

Mexico made this move after taking into account the combined issues of its depreciating

currency and rising inflation. It should be noted that the Mexican Peso has depreciated by

nearly 10% against the US Dollar since the beginning of 2016.

Corruption: Despite an improvement in its ranking on the Corruption Perceptions

Index 2015 where it is placed 95th out of 168 nations as compared to 103rd out of 175

countries in 2014, there is a lot more that needs to be done. As per Transparency

International, while Mexico has ample resources, long-standing corruption has had a bad

effect on investments in sectors such as security, education, and health, and therefore,

systemic steps have to be taken to improve the quality of life in the country which has

long-been victimized as a result. Recently, in a survey conducted by World Economic

Forum, Mexico was found to be the most corrupt country in the OECD (Organization for

Economic Co-operation and Development).




High Crime Rates, Violence, and Protests: While many big businesses

claim that organized violence and high crime rates in Mexico has not affected them a lot,

they haven’t remained completely immune. Mexico witnessed a 7.6% rise in its homicide

rates in 2015. The president of one of the country’s largest companies Coparmex claimed

that in 2011, nearly 160,000 businesses left Mexico due to persisting woes of violence.

Increasingly, youngsters are also seen moving out to international destinations for studies

because of lack of safety. And apart from the human costs, such issues also impact costs

related to insurance, office spaces etc.

The US Overseas Security Advisory Council (OSAC) rates the overall crime and safety

situation in Mexico as ‘Critical’. Mexico City’s crime levels are rated above the US

national average. The most commonly reported crimes include armed robberies,

kidnappings, car thefts, credit card fraud, and other street crimes.




Protests and demonstrations are common in Mexico and these often turn violent. In a

recent incident from June 2016, eight people were killed and nearly 53 civilians injured

when teachers’ protests in Oaxaca turned into clashes between residents, teachers, and

police. The demonstrators had been blocking major streets and disrupting traffic on a

major highway connecting Oaxaca to Mexico City.

Natural Disasters: Mexico’s susceptibility to earthquakes, volcanic unrest, storms,

and floods is high. However, with a robust and regularly tested Business Continuity

Program (BCP), such risks are manageable, and therefore, so far the buy-side doesn’t

seem to have shown any reluctance in Mexico citing these reasons.

Rising Labor Costs: Mexico is not as low cost as many of the leading destinations

in Asia. But that has not deterred companies from going there. Mexican IT-BPO salaries

are only 32-50% of US wages, depending upon experience. Senior roles are generally a

little more expensive than entry and mid-senior roles.




16

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10,000

20,000

30,000

40,000

50,000

60,000

70,000

Mexico Brazil China India Philippines

In U

S D

olla

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Average ITO Salaries Across Five Key Outsourcing Hubs

Entry

Team Lead

Manager


While labor costs may currently be higher than

India and to a good extent than China and the

Philippines (at the entry level), it should be noted

that average salary growth in Mexico is much

lesser when compared to all these nations,

averaging 4.8% for the ITO industry in 2016,

compared to 10.3% in India, 8% in China, and

7% in the Philippines.

Increase in Job Options and

Education could mean difficulty in

maintaining staff and executing expansion plans

in the long-run. Companies have to come up with

long-term strategies that help in sustaining top

talent, which includes regular training and

development programs, opportunities to

showcase creativity etc.



Among the Good and the Not So Good,

Mexico’s IT-BPO Sector is Thriving: Already a sizeable sector, Mexico’s IT-BPO sector is forecast to

continue at a CAGR of 11% over the next two years, despite the regional and global economic

challenges. It is forecasted to reach $26 billion in value by the end of 2018. The startup ecosystem in

the country is also flourishing, especially in the FinTech sector, with popular names like Aspiria,

Prestadero, Chapulin, Banlinea, Kiwi, Clip, Eiya etc. One should watch out for the emerging next-wave

cities other than Mexico City and Guadalajara.

Doing Business in Mexico is the Best in LatAm: In the recently released Doing Business 2017 Report

by the World Bank, Mexico ranked 47th out of 190 countries with an improvement noted in areas like

registering property, dealing with construction permits, enforcing contracts, and resolving insolvency.

According to the bank, Mexico has the most conducive business atmosphere in Latin America. While

the going’s good, even in the future, cross-border relations with the US are going to be immensely

important for Mexico. The recently concluded US elections are definitely a decisive factor as to what

direction the ties will take. It will be good to keep a close watch on the currency, government

measures to boost the market, and of course, Donald Trump!

CONCLUSION



Neo Group Can Help

To learn how Supply WisdomSM can help you identify, monitor and manage risks across your global suppliers and the

locations in which they operate, contact us today.

Sandeep Suresh William Sellers

Head Research Partner & SVP

[email protected] [email protected]

Kevin English Pankaj Sharma

Partner & SVP Partner & SVP

[email protected] [email protected]

About the Authors

20

Sandeep Suresh heads the Research and Supplier Relations division at Neo Group. With over 15 years of experience in

research and operations, he regularly leads custom research projects on the outsourcing industry, including ITO/BPO/KPO, for

large global clients.

Priyanka Nair is a Senior Analyst with the Supply Wisdom Team at Neo Group. With nearly six years of experience in business

research, she has expertise in analyzing and managing large data sets, and delivering high quality research and content.

mailto:[email protected]






About Neo Group

Founded in 1999, Neo Group helps organizations meet business objectives and address business

challenges by leveraging global services and sourcing. To learn more about Neo Group, please visit

www.NeoGroup.com.

About Supply WisdomSM

Supply WisdomSM is a unique cloud-based service that provides data and intelligence for sourcing risk

and opportunity monitoring of global countries, cities and suppliers. To learn more about Supply

WisdomSM, please visit www.SupplyWisdom.com.

No part of this report may be reprinted/reproduced without prior permission from Neo Group.

21

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