In the Face of a Major Crisis, Mexican IT's Future Depends on Flexibility
In this new edition of The Exchange, we focus on how the Mexican IT industry is coping with the COVID-19 crisis, and the scenarios it might experience in the mid-term, based on insights from Mexican CTOs as well as recruiters, analysts and business leaders – from both sides of the border.
The consensus is that, for now, the industry seems to be living “the calm before the storm.” The struggle with come, there’s no doubt, particularly for smaller IT-focused businesses. The dimension of the struggle is, at this stage, hard to gauge. Difficulties in obtaining investment, a volatile exchange rate, slowing economic conditions, and dubious federal government decisions are some of the most worrying factors.
Size and Crisis Management
IDC projects that the Mexican IT industry -as a whole- could shrink between 4.1% and 8.7% in 2020, mainly because of a reduction in the purchase of business and consumer hardware, but also because of the temporary freeze in projects along the IT supply chain.
Small IT Nearshore providers might be particularly hard hit by the COVID-19 crisis, at least in comparison with more prominent companies. However, beyond size, the most significant factor determining survival often rests with the quality and durability of the customer base.
Jorge González, Head of IT for Latin America at Clear Channel, an international outdoor advertising company, has watched business steadily declined as attention on the pandemic has accelerated. As people are forced to stay home, outdoor advertising contracts are in free-fall.
“At the business level, we already have a direct impact. With no people on the streets or few people on the streets, as in the case of Mexico, all companies that invested in outdoor advertising have stopped doing so,” González told Nearshore Americas.
González’s team, however, remains essential for the company’s operation, as online platforms are crucial in supporting at home-workers. Nevertheless, he recognizes that several projects that were previously planned for this year have been put on hold.
José Jesús Nava, Director of Software Engineering at Pinnacle Aerospace, a company that offers IT solutions to the aerospace and other industries in the US, thinks the IT sector in his area (the state of Sonora, just under Arizona) has been deeply affected and emphasizes that this is just the “tip of the iceberg.”
“Software providers, both in the US and Mexico, have seen a sharp reduction in work. But it´s encouraging that there are still active contracts that will allow Pinnacle to keep working with the entire engineering team. He also mentions there will be a lot of mergers and acquisitions, this will be an enormous change for all the industries worldwide,” Nava told Nearshore Americas.
The aerospace industry represents 50% of all Pinnacle clients, and the other 50% corresponds to sectors like healthcare and legal, among others, all of them in the US. Nava says that the aerospace industry goes always in a continuous cycle of ups and downs, and it turns out that the aerospace down cycle started last year and that this new crisis increases the level of uncertainty.
“Last year the industry went through a recession, which continued with the Boeing and Airbus accidents that stopped many fleets. Worked stopped last year on some projects with several aerospace clients, and now the industry is seriously impacted, and that they all need to work together to revert these impacts” Nava said, adding that some of their projects are nearly finished. What comes after that is totally unclear.
On the other hand, some small IT companies that provide software to governments are experiencing better times in workflow, but uncertainty remains strong there as well. That is the case of Cívica Digital, a small Monterrey-based focused on citizen-empowerment software.
Paulina Bustos, Co-Founder and Growth Lead at Cívica Digital, says that the health crisis has forced the governments they work with to prioritize online services, which has guaranteed the continuity of contracts, at least for now.
“Our advisors have told us is that, depending on how this situation develops, some governments could decide that their funds are going to go to healthcare and that they cancel some contract with us, but it hasn’t happened yet,” Bustos told Nearshore Americas.
With members from all over the country, the Mexican Chamber of Electronics, Telecommunications and Information Technologies (CANIETI), sees that the first IT businesses affected by the crisis in the country are the small ones, particularly those that are dependent of a few clients or even just one.
Carlos Funes, who became the National President of CANIETI a little over a year ago, told Nearshore Americas that the organization has tried to minimize to impact on the IT sector by lobbying for certain measures, such as pursuing recognition that IT be designated an ‘essential service.’ At the beginning of April, the federal government agreed and set forth special exemptions for IT businesses.
On the buy side, companies in Mexico are trying to find ways to maintain the contracts with providers, even as the situation grows more severe. That is happening, for instance, at DISH, a Mexican satellite TV provider.
“We haven’t made any operational changes with our providers. At a contractual level, we have worked in support of new financial schemes, or other differentiated schemes because of the emergency, but this is not affecting the operational side. It is more a matter of legal, commercial, and financial negotiation,” Carlos Miranda, CTO at DISH, told Nearshore Americas.
In terms of the direct relationship with their technology providers, Miranda says there haven’t been any radical changes. “Obviously, there are no meetings or personal interaction; all of that happens via video or phone calls now. Regarding support, because of the platform we use, a big part of the operation was already done remotely,” he said.
Meanwhile, many expect the commercial real estate sector to be one of the leading sectors to confront the challenging economic conditions and re-define their market requirements. Rodrigo Baz, Founder at The Baz Advisory Group and a commercial real estate strategist, is in constant communications with clients as consider significant reductions in the amount of office space they require.
“I just had a conversation with a client, who has had most of his employees working from home for about a month. They realized that the physical facilities are not really that relevant to the operation of their business, and they are even analyzing the possibility of reducing their real estate occupation by 80%,” said Baz.
Exchange Rate and Economic Chain
The economic uncertainty has had a major effect on the Mexican peso. By the end of March, the currency plunged to 25 pesos to the US dollar, a historical low. Since then, it has recovered some value, but it is still sitting at almost 24 pesos to the dollar, far below the 19 pesos mark, where it sat at the beginning of March.
Although a depreciated currency can benefit some exported-based operations, the level of fiscal pain is often dependent on the types of currency the provider is required to use to pay for services, labor and other expenses.
Cívica Digitalis a good example. The company uses cloud services to support some of its American companies, and the historic plunge in the peso has made things difficult. “Now the peso is at 23 to the dollar, so it’s not that concerning. But if it continues to fluctuate like that, it could mean an increase of 20% in expenses,” Bustos said.
According to Baz, the dollar fluctuation in Mexico has also been problematic for IT businesses leasing office space in Mexico, since most of the contracts are established around a fixed rate against the US dollars.
Talent and the Crisis
Enrique Cortes, Leader at the AI Initiative Hub of the Tecnológico de Monterrey, has observed in social media slight increase in available talent. For him, this could be a sign that small IT companies are laying off qualified talent amidst the COVID-19 crisis.
“Multinational companies might take this as an opportunity to hire qualified talent, considering that in Monterrey there has always been more demand than suply of talent,” Cortes said.
Ruben Santana, a US-based recruiting specialist with strong knowledge of the Mexican market, agrees.
“Surely Surely there’s a lot of more talent that is becoming available because people are getting laid off,” Santana told Nearshore Americas.
For Santana, even when IT is becoming essential for many companies to continue operating, many non-critical IT projects are being put on hold, which direct affects the employees. It also depends on the type of industry they service since some IT companies are actually hiring at the moment.
In the middle of all this economic turmoil sits the federal government. Many of the sources we spoke to are critical of the government, arguing political leaders are not engaged.
There are no signs that the government will be willing to offer fiscal support, and there is fear that companies that lay off employees will be punished.
For Carlos Miranda, CTO at DISH, this crisis teaches the IT industry the relevance of flexibility. “We need to be capable of understanding how to adapt our business, our technology, our services, our structures, everything, learn to be flexible in a timely way, once the situation begins to be clear. That’s the only adequate way to respond to what will come in the short and mid-terms,” he concluded.