How Do Mexico’s Outsourcing Incentives Stand Up to Nearshore Neighbors?

By Tarun George

With the new US visa fees in place for non-US nationals, Nearshore Americas recently predicted that companies have an added incentive to turn south across the border for their sourcing needs. Mexico is working hard to compound that effect. We’ve heard (admittedly from our Mexican contacts) that their incentives programs are the most aggressive and deep of any of the Nearshore countries. Those are fighting words, so this week we want to explore whether they’re true. Read on for an analysis of the nuts and bolts of Mexico’s offerings, and how they match up to the competition.

IT Sourcing at the Core

Mexico is second only to Brazil in terms of foreign direct investment (FDI) in Latin America, receiving inflows of US$ 24.7 billion in 2007.  A growing portion of that investment now comes from IT companies (IT services exports reached $3.16 billion in 2008), and Mexico exploits the advantages of being a NAFTA country sharing a border and timezone with the US. But are its financial incentives enough to differentiate it from newer locations like Chile and Colombia that literally roll out the red carpet for investing companies? The consensus we found is that while very strong, Mexico needs to focus its incentives more specifically on IT sourcing. We’re going to explore two kinds of incentives offered – federal and state level.

Federal Incentives

PROSOFT

On the national level, two organizations work in tandem to promote Mexico as the main Nearshore alternative for IT – MexicoIT, an initiative by the National Chamber of Information Technology; and PROSOFT, a program by the Ministry of Economy. They run the PROSOFT Software and IT Services Development Program, which offers companies cash

grants and government benefits that can reduce the cost of a given project by up to 50%, as well as tax credits of up to 30% of R&D expenses. It’s reportedly this program that attracted India’s TCS and Spain’s Telefonica to set up in Mexico.

“It’s my main selling point when I give presentations”, says Alfredo Pacheco, Executive Director at MexicoIT. “We offer $60-65 million for larger companies and $350 million for smaller companies each year. So far we’ve benefited around 150 companies”. We asked him to what extent those incentives were increased or tailor-made depending on the value of the investment and size of the company. “While I can’t comment on specific offerings made to each company, I will say this: TCS, Infosys, HP, Dell, IBM, Intel – they were all offered financial incentives to come to Mexico or to expand their operations here. And those are just the large ones. 80% of the beneficiaries are SMBs”.

ProMéxico

ProMéxico is the government institution in charge of supporting exports and attracting foreign investment to Mexico. Having declared IT and Software Services a strategic industry, the organization provides many tax incentives for companies locating in Mexico. “There are reduced income tax rates and trade facilitation programs for export oriented companies. We determine the incentives on a case by case basis”, says  Gerardo Patino, New York Office Director at ProMéxico. “There’s even a program that refunds 5-6% of your investment, provided that investment is over a certain amount”. Another lesser benefit, but significant if you’re a large operation – for every new job created, the government will pay 5% of the social security services.

ProMéxico and MexicoIT also offer advising services to companies, as well as non-financial help. ‘Softlanding’ is a short term rental service in which ProMéxico supports investors with the infrastructure and services they require when they first set up.

“What I see is that Mexico City, Guadalajara and Monterrey are the main cities that attract BPO and IT related outsourcing. Companies find that states provide quite aggressive incentives, and will go out of their way to attract strategic investments” – Luis Ricardo Rodriguez, Partner at KPMG’s Global Location and Expansion Services (GLES) Latin America

Service Maquiladoras

Mexico’s maquiladora industry is well known for manufacturing goods on a low-cost and tariff free basis. In 2006, the Ministry of Economy passed the IMMEX Decree which enhanced maquiladoras’ capacity to provide BPO and call center services, instead of solely manufacturing physical products. These are now quite widespread, and all services benefit from a 0% tax rate and VAT exemption since they’re deemed exports.

State Incentives

The incentives we’ve discussed so far are decent, but they don’t tell the whole story. “Mexico is different because each of the 32 states will usually provide additional incentives or complement those of the federal government”, says Patino. “The state level is where companies get the best incentives, and the reason is that states compete with each other”.

Mexican states administer incentives in two ways. Some have written them into law, and have put down specific terms and conditions that govern incentives. Others that don’t have the legal framework have an open-door policy where companies meet with state reps, who then determine what can be offered. “Incentives go up with the amount of job creation”, says Pacheco. “Many states offer rental subsidies, or simply give away property to companies if they promise a certain number of jobs. Also remember that for every dollar a company receives from the federal government, the state has to match that”.

So where are the best places to invest in Mexico? We spoke with Luis Ricardo Rodriguez, Partner at KPMG’s Global Location and Expansion Services (GLES) Latin America for his perspective. “What I see is that Mexico City, Guadalajara and Monterrey are the main cities that attract BPO and IT related outsourcing. Companies find that states provide quite aggressive incentives, and will go out of their way to attract strategic investments”. States like Jalisco and Queretaro are extremely IT-focused and provide exemptions on payroll taxes for new companies, as well as contributions to employee training programs at technical and professional levels.

Really More Aggressive?

All in all Mexico’s offerings are impressive, especially when combined with its proximity to the US. But are the incentives programs really the most aggressive of all the Nearshore countries? “I don’t think so, and it’s simply because there’s not much that’s industry-specific right now, targeted solely towards BPO and ITO”, says Patino. “If Mexico compares itself to Latin America, it’s very attractive because of the wage and the location. But in terms of incentives, they need to be developed to fit the outsourcing sector. The government must identify which types of activities they want to grant incentives for, and focus on those”.

In a more general sense, it may be that incentives programs are not as important in driving investment from companies. According to KPMG’s new Competitive Alternatives 2010 report, ‘State and Local Incentives’ only ranked 8^th on the list of key Site Selection Factors, below labor costs, tax exemptions, and availability of skilled labor. We’ll be doing an in-depth analysis of this and other topics from that same report next week. Stay tuned!