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Analysis

Entrepreneurs, Innovation Push Mexico into Industry 4.0

Wed, 02/21/2018 - 12:19

Technology is the tool Mexican entrepreneurs and SMEs are using to lead the country toward a fourth industrial revolution (I4.0) that is radically changing the economy with alternative ways to access products and services, connecting different social players and including more people in the formal economy

Through disruptive technological developments, emerging Mexican startups have found opportunities in the market by introducing products and services that adapt to new consumer trends. The result is a burgeoning digital revolution, the so-called I4.0, that is reshaping the landscape across sectors, with SMEs among those finding a new foothold. 

According to the PwC report, Industry 4.0 Opportunities and Challenges of the Industrial Internet, “Industry 4.0 is driven by digitalization of vertical and horizontal value, digitalization of product and service offering and digital business model and customer access.” 

The ability of entrepreneurs to find solutions that facilitate existing processes is attractive to large companies and organizations. Many are already creating synergies with SMEs to build a system in which large companies take advantage of the talent of small companies. Visa is a good example. Visa Development Platform and the Application Programing Interfaces (APIs) invite fintech startups to co-create customized solutions with the technology company. Recently, Visa also launched in Mexico the Visa Everywhere Initiative in alliance with Finnovista to find the most innovative fintech startup in Latin America. The winner will receive a US$50,000 grant and will collaborate with Visa in the future. 

“As entrepreneurs, we need to think in business models that are entirely different to that which we know,” says Vicente Fenoll, CEO and Founder of kubo.financero. “Our technology proposal is managed to generate price differentials that favor both investors, with higher rates of return, and borrowers, with lower interest rates,” he adds. Online platform kubo.financiero specializes in crowdfunding and peer-to-peer (P2P) loans regulated by the CNBV. The platform is based on algorithms that analyze the information of borrowers, determines if they qualify to be on the platform and establishes payment plans, as well as interest rates. 

Technology has also become a vehicle for improving access to financial services and promoting integration into the formal economy in Mexico. According to the National Survey on Financial Inclusion, only 40 percent 
of the Mexican adult population has a bank account and less than 20 percent has credit cards. Conekta, a technology and security company that offers banking services, developed OXXO Pay, a solution that allows online purchases without a credit card. Instead of using a card, OXXO Pay provides a 14-digit reference that customers can use at any OXXO store. 

The lack of financial inclusion is linked to the breadth of informality in the Mexican economy. According to INEGI, in 2015, informal businesses accounted for approximately 24 percent of GDP. Paid domestic work is one of the most affected by informality, which led Ana Orvañanos and Rodolfo Corcuera to found Aliada, a market that connects users with domestic workers. Orvañanos explains that for workers to register on the platform they must go through a verification process that includes several trusted filters, including registering with SAT. 

SUPPORT NETWORKS

The economic impact of the technological initiatives from entrepreneurs and SMEs is in part a consequence of the creation of support networks. Endeavor, for example, selects and accelerates high-impact entrepreneurs around the world to access a mentorship system made up of senior managers from large consulting firms, CEOs of the best technological companies and former Endeavor entrepreneurs who have deep expertise in specific industries, and who donate between three and four hours of their time per month to coach the entrepreneurs. Endeavor’s purpose is to permanently grow this network with people willing to share their story. 

The government is also playing an important role to promote the creation of SMEs with the National Entrepreneur Institute (INADEM), a public organism created to support and promote small, medium and micro companies. The INADEM provides a support network for Mexican entrepreneurs, access to workshops and online tutorials in topics related to the creation of a company. In addition, former entrepreneurs with outstanding success stories are giving SMEs space to write their own story. This is the case of Facebook Entrepreneurship and Economic Growth, a division of Mark Zuckerberg’s social network that helps small businesses make the most of the business toavailable on the platform. “There are 78 million people in Mexico with an active Facebook account. Ninety percent of the population that has internet access has a Facebook account. Today, there are at least 1.5 million SMEs with a business profile on Facebook Mexico and 77 percent of Mexicans who have an account follow a local SME,” explains Zhaira Franco, Engagement Manager at Facebook Entrepreneurship and Economic Growth.

THE INDUSTRY 4.0 CHALLENGE

While a positive step, the existing support system is not enough for the Mexican economy in which, according to Peter Kroll, CEO of everis Mexico, 2,000 companies are born every year. A survey conducted by the IE Business School concluded the main obstacles to start a business in Mexico are: bureaucracy, compliance with the required paper work, lack of credit and lack of investors. According to PwC, one of the difficulties to enter I4.0 is to reach high investment levels. “Private equity in Mexico is lower in terms of GDP than in Chile and Colombia. We need more angel investors, which will only be possible through tax incentives,” says Hernán Fernández, Managing Partner at Angel Ventures, a venture capital firm. In addition, without the participation of pension funds, there is no possibility of creating a private equity or venture capital industry, says Fernández. Lack of support has led startups to find opportunities in stronger ecosystems, like Silicon Valley. In fact, companies  like Google and Centraal are helping to connect Mexican startups with companies in the US. 

STAYING ALIVE

That is another indication that what begins in Mexico could have an impact elsewhere, says Manolo Díaz, CEO and Co-Founder of Yogome, a Mexican startup that develops educational minigames for children. He recalls that the first mentors he and his team met in Silicon Valley asked them: how are you going to compete with Disney? “Of course, we did not know the answer and they told us that if we were raising capital and wanted investors to trust us, we should know how we plan to beat Disney from the beginning. We needed quality, a good concept and a great story. And we had to think beyond Mexico because technology allows us to cross borders and to look for opportunities everywhere,” says Díaz. Today, Yogome has more than 4 million active users per month in more than 50 countries.
Alongside the success stories are those who fail to make it out of the gate. The Failure Institute, an organization that gathers information from 50 researchers and 1,000 entrepreneurs on five continents, says that 75 percent of businesses in Mexico close after two years. The institute also says the top 5 reasons why businesses fail in Mexico are insufficient income to survive, lack of metrics, lack of process analysis, poor planning and operational challengesols