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Analysis

Connectivity Spurs New Businesses, Transformation

Wed, 05/08/2019 - 13:32

Transformation and evolution are key for business survival. Tools like Big Data, AI, machine learning and automation, combined with the mobile capabilities of smartphones and other devices, have broken paradigms regarding the way business is conducted. Today, business transformation means more than a change in processes or machinery. Felipe Labbé, CEO of Global Hitss, says the digital transformation is based on three cornerstones: user experience, efficiency and new business models. “New business models were generated thanks to new technologies that did not exist when many traditional businesses were created. For that reason, companies must understand new business models.”  
The digital transformation is the convergence of two opposite approaches, adds Elie Haibi, Co-Founder and CEO of Hermes Systems: “One that originates at the business strategy and derives from operational, organizational or technological initiatives and another motivated by technology capabilities that enable new operational mechanisms and help to better execute a company’s business strategy and even inspire new strategic objectives.”
According to PwC, as a result of the implementation of AI, by 2030, global GDP could be 14 percent higher. In Mexico, the McKinsey Global Institute found that digitalization and the implementation of transformative tools could boost the country’s GDP between US$82 billion and US$144 billion per year by 2025. To deal with the transformation, creating a development strategy for AI is crucial, says Eduardo Farina, Director General of BlueMessaging. “AI will provide benefits like increased productivity but will also have a social impact that needs to be considered.” 
There already is a coherent effort from the Mexican business community to transition to a digitally-driven business strategy, but Juan Francisco Aguilar, Vice President of Dell EMC Commercial Mexico, says many Mexican players are still not ready to undertake the challenge that such a transformation entails. According to Dell’s Index of Digital Transformation, six out of every 10 companies already perceive technological disruption in their business and six of every 10 companies do not know how their industries will work in the next three to five years. “Companies that are digitally lagging face the possibility of disappearing in the next five years,” says Aguilar. 
Despite the operational changes related to digitalization, Aguilar believes the main hurdle will come from the software processing and storage capabilities that companies will require. “The challenge of digital transformation is that new applications and the way companies interact with their clients require a new level of software development.” This is exemplified by the arrival of business models such as OTT (over-the-top) media services and ride-hailing apps that need to be available 24/7. “These applications must have short response times and understand consumption patterns to achieve a greater degree of interaction,” says Aguilar
Although some companies have been reluctant to incorporate new technologies and change the way they approach business, competition from the arrival of disruptive players has incentivized change, according to Labbé. “Digitalization has created to two types of companies: digital natives and digital migrants, the latter being large old companies that are migrating toward a digital model.” That being said, the real driver toward digital transformation will be neither companies nor the government but the end consumer. “Users who adopt new technologies do not return to old ones. For example, if you can order a taxi through your phone and automatically charge it to your credit card, you do not want to wait for a taxi and carry cash,” says Labbé. 
 

CONNECTIVITY

For consumers to adopt new technologies, the country must first solve the key issue for a true digital transformation: connectivity. According to the Federal Institute of Telecommunications (IFT), telephone coverage and 3G mobile internet reach 88.4 percent of the population, while 4G reaches 84.1 percent of the population. However, President López Obrador argues that only 25 percent of the country’s territory is connected. Although IFT’s measurements reflect international standards, it is undeniable that several areas of the country still face connectivity issues. The institute states that a 1 percent gain in the digitalization index generates a productivity increase that translates to a 0.3 percent rise in the country’s GDP. The federal administration’s goal is to bolster the existing telecom infrastructure to reduce the digital gap. 
Although the previous federal administration focused mostly on the implementation of the Shared Network, the current government has chosen to implement a so-called Backbone Network in the country. Telecommunications of Mexico (Telecomm) says the implementation of the Backbone Network would allow concessionaries and marketers to access a high-capacity network to offer more telecom services to the general population. 
Given the lack of public telecom infrastructure, the private sector has taken up the challenge to provide telecom services to remote locations through different business models. Carlos Morales, CEO of Telefónica Movistar México, says the company has decided to generate alliances to provide these services. “We have a project of rural franchises that allows us to make alliances with engineering and financing companies to provide coverage to small towns across the country. Our allies are in charge of building the infrastructure and we connect it to our core network. That small town becomes a franchise for the investor and a shared-revenue project with Telefónica Movistar México.” 
Still, Morales believes the only way to convince the private sector to work alongside the government to provide connectivity is to tackle the problem of spectrum costs in the country. “For 2019, our estimates show the country’s three main players will pay around US$1 billion for use of the spectrum,” he says. “Spectrum costs could be lowered in line with international practices to incentivize investment. Similarly, the government could provide spectrum-related incentives to companies that invest in rural infrastructure.”

CHANGE IN MINDSET

Along with the implementation of new technologies, there is a need for stronger educational programs with a focus on technology to help the country become more competitive, says Luis Meza, Managing Partner at Deloitte Consulting Group. “Most children in Mexico still receive a traditional education and it is necessary to make technological tools available to them from a very young age. Programming skills will be extremely useful to children, not just because they are in demand but because they teach a flexible way of thinking.”
The private sector can play a key role in this process. Maribel Dos Santos, Managing Director of Oracle Mexico, says part of Oracle’s strategy to strengthen its role in the community is to establish collaborations with public academic institutions to lure young people into the technology environment. “Our goal is to help these students incorporate into the working environment or support them in the development of their own technology solutions.”   
Generating technology-specialized talent obeys to an investment need. “Guadalajara is a growing technology hub supported by investment from big tech companies and academia ... It is important to ensure there is enough talent to support these operations and that the country is invested in generating more talent. If we do not create a large enough pool of talent, the country’s attractiveness as a technology destination will be threatened,” says BlueMessaging’s Farina. The change, adds Aguilar, must be extended to society as a whole: “In Mexico, we need to think not as a manufacturing country but as a country that develops software, applications and new technologies. We need to imagine Mexico as a technology development hub.”