Why you should care

American tech firms are setting up research centers south of the border, targeting an affordable talent pool they’re increasingly unable to find at home. 

Maria Fernanda Lopez had a paying job lined up even before she graduated in computer systems engineering from Mexico’s prestigious private Tec de Monterrey in Guadalajara — a city broadly considered the country’s Silicon Valley — two months ago. Then she applied for another one and got it. “The salary and the amount of benefits that I have right now … I mean, it’s insane,” she says. Nearly all of her fellow students in a class of 23 already have jobs.

They’re riding a boom that could fundamentally transform Mexico’s economic relationship with the U.S. across their contentious border. For decades, American outsourcing south of the border has evoked images of factory assembly lines where agile, working-class hands put together electrical appliances or cars. Now, a whole different sector of businesses — tech companies from Silicon Valley and other American cities — are moving engineering and other technical operations to Mexico in search of intellectual talent. That, in turn, is feeding Mexico’s own startup industry and ecosystem, and changing the working culture of companies on both sides of the border.

In the first half of this year, Startup GDL — a nonprofit dedicated to building Guadalajara’s tech industry — engaged with 25 fast-growing U.S.-based tech companies interested in setting up their engineering operations in the city. That number was 11 for the whole of 2018. Bismarck Lepe, the Stanford-educated president and chief executive of Wizeline, a global product development company that moved to Mexico in 2015, says more than 100 American companies have opened offices in Mexico over the past 12 months. Among them is Amazon, which set up a research and programming facility in Mexico last year.

The vast majority of talent and companies have to look outside of Silicon Valley in order to be able to scale their business.

Bismarck Lepe, chief executive, Wizeline

Both big firms and startups that are moving south are citing a vibrant talent pool they’re increasingly struggling to find at home: affordable engineers, designers, programmers and other specialists. Worries that the Trump administration’s restrictive immigration policies could further shrink the supply of tech talent are also driving this move south. And Mexico’s proximity to Silicon Valley makes it a lucrative competitor to other tech outsourcing destinations such as India.

“The problem in Silicon Valley is that Google, Facebook, Twitter and Apple suck up the vast majority of talent and companies have to look outside of Silicon Valley in order to be able to scale their business,” says Lepe.

This shift is altering the landscape of opportunities for Mexico’s tech-sector graduates. Lopez recently got a job with Brightcove, a company offering online video solutions that expanded to Mexico via the acquisition of Ooyala, which provides cloud video technology. The purchase also prompted a recruitment drive. It’s the company’s first office in Latin America, she says.

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Tec de Monterrey campus at night.

Source Monterrey Institute of Technology

Nearly 90 percent of graduates like Lopez from the Tec de Monterrey have a job within three months of graduating, according to Mario Flores Castro, president of the university’s Guadalajara campus. Across Mexico, the college produces some 3,500 engineers or tech-related graduates a year, a quarter of whom already have a job to go to when they leave. “That’s a very high percentage,” says Flores Castro. “Fifteen years ago, it was 1 to 3 percent.” Software engineers are in high demand as well as developers and experienced designers. Although the wages are lower than those in Silicon Valley (itself part of the reason tech outfits are looking elsewhere), they are still high for Mexico, starting at $40,000 a year for senior engineers.

Jeremy Almond, chief executive of the business-to-business payment platform Paystand, says he “100 percent” expects Silicon Valley’s southern search for talent to continue. He expanded his company’s operations from Silicon Valley to Mexico in 2017. And unlike with factories and production lines for cars, experts consulted by OZY say parent companies in the U.S. are as interested in their Mexican counterparts as the Mexicans are in them. Almond says his entire Mexico team just got back from a trip to the company headquarters in California, and that later this year the U.S. team will head south to pay a visit to the Guadalajara offices.

“Here in the valley there is a little bit of [an] entitlement culture that has been created from all the success,” says Almond. “People in the California office have something to learn to see what it’s like to have a culture that’s highly hungry to swing big and want to make [a] big impact.” Companies are also finding higher retention rates in Mexico than in Silicon Valley, says Cindy Blanco, managing director of Startup GDL.

But it’s not just American industry that could stand to benefit, says Roberto Martinez, chief executive of software development firm Nearsoft. He expects the employment of Mexican talent at home by largely foreign companies to help Mexico establish itself as a major innovation hub with its own unicorns — companies whose valuation exceeds $1 billion. Many of these engineers and innovators might well — as they have in Silicon Valley — turn into innovators and entrepreneurs themselves.

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Students of the UNIAT (University of Advanced Technologies) in class at the Business Innovation and Technology Center in Tijuana, Mexico.

Source Bénédicte Desrus/Sipa USA/AP

That’s also something international investors are increasingly counting on. Venture capital interest in Mexico and the region have spiked in recent years — investment in Latin America doubled for the second consecutive year to just under $2 billion in 2018, up from $500 million in 2016, according to the Association for Private Capital Investment in Latin America (LAVCA). This year, SoftBank alone has pledged to invest $5 billion in the region. Mexico receives most investment in the region after Brazil — in 2018, Mexico accounted for more than 20 percent of investment deals in the region, and received $175 million in VC funding across 95 deals, according to LAVCA. “In the next five to 10 years it will be Mexico that will be a place for tech innovation,” says Martinez.

That won’t necessarily be a smooth journey. So far, despite technology success stories such as payment company Clip, unicorns in Mexico have proven elusive — Kio Networks, a data-center company valued at over $1 billion, is seen by many as Mexico’s only one. Lopez also worries about Mexico hurting its own chances. Austerity cuts under new President Andres Manuel Lopez Obrador have led to the closure of the country’s National Institute for Entrepreneurs, although the government says it is planning an alternative.

But Antonio Rallo, co-founder of Kio Networks, thinks the increasing inflow of investment could prove a game-changer in the coming months and years. “It’s going to make a huge difference,” he says. “Now that all these funds and accelerators are looking into Mexico and Latin America, it’s going to grow.”

Many experts also say that the ecosystem around Mexico’s tech industry — the people, VC funders and organizations around startups to support them — is also maturing. “The more the industry gets to critical mass the more it’s good for the economy and growth in general and good for people’s professional careers. You don’t want just one tech company doing well, you want a class of them,” says Almond.

And Lopez is convinced that the flood of opportunities before her right out of college is only the tip of the iceberg. “When I first graduated I wanted to go to other places,” she says. “But now … I don’t think that there is a need to go out there and look for other opportunities when there are so many opening here.”

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