International Market Planning Program Pensoft

International Market Planning Program PenSoft

Transnational Issues Disputes—international: None 3. Information Technology in Mexico

3.1 Telecommunication Infrastructure During the last ten years, telecommunications has been the most dynamic industry in Mexico. It has grown more than the whole Mexican economy. This industry has been characterized by rapid change. Until 1996, Telephones of Mexico (Telefonos de Mexico - TelMex) had a monopoly on telephone services, including public telephony. In 1990, the Mexican government decided to sell TelMex, a direct descendent of a company founded by a Swede, Lars Magnus Ericsson, who introduced the first telephone in Mexico in 1878. Following the privatization of TelMex, serious modernization has taken place. Large investments have been made to improve both fixed networks and cellular services. Since 1997, long-distance telecommunications has seen increased competition, due to further liberalization of the market.

3.2 Major Telecommunication Companies Domestic production includes that of foreign suppliers having manufacturing operations in Mexico. Among the foreign suppliers already established in Mexico are: Alcatel, AT&T, GTE, Northern Telecom and Samsung. Most of these manufacturers plan to increase their production in order to export from Mexico to other countries. Low production costs provide the major competitive advantage for domestic producers. All foreign producers have plants similar to those in their country of origin. The latter allows them to offer products with the same level of quality as those produced in other plants. The following is a list of the major American telephone and pay phone manufacturers already operating in Mexico: Ameritech, BellSouth, GTE, Lucent Technologies (formerly AT&T), SB Communications (Southwestern Bell) (11).

3.3 Internet Activity Mexico is on the threshold of a new era. On January 1, 1997, new telephone companies started offering services to compete against TelMex. The companies that received

174 International Market Planning Program PenSoft authorization to operate are currently building their networks. More competition and lower rates will ease access to the Internet and other new telecommunications services.

As most of the information on the Internet is public and not confidential, academic and research institutions have not been concerned with confidentiality or international hackers. However, this situation has changed and many of institutions now use encryption software to protect scientific and technical research information. For academic purposes, this sector mainly obtains strong encryption without charge from firms or through the Internet. Leading Mexican firms have adopted the use of Intranets, a local area network that uses Internet's infrastructure for internal communication purposes. This will drive up the demand for routers and multiplexers. Another emerging trend in this area is toward the use of Asynchronous Transfer Mode (ATM) equipment. ATM equipment is increasingly being used in Mexico. For example, Bank of Mexico (Banco de Mexico - BANXICO), Mexico's central bank, installed its ATM network in late 1995. The National Autonomous University of Mexico (Universidad Nacional Autonoma de Mexico - UNAM) and the Technical Institute of Superior Studies of Monterrey (Instituto de Estudios Superiores de Monterrey - ITESM) also have their own ATM networks. In addition, the major Mexican banks (BANAMEX, BANCOMER and SERFIN) have expressed their interest in using ATM.

3.4 Internet Service Providers Approximately 120 Internet access providers exist in Mexico. Many of these are expected to consolidate as most have fewer than 500 subscribers, thus their costs are high. In addition, TelMex increased their monthly rate for the high-speed lines needed to access the Internet.

3.5 Internet Users The Internet access in Mexico has been developed during the last three-five years. The estimated number of Internet users nationwide were about 300,000 during 1996.

175 International Market Planning Program PenSoft

In the industrial sector, the main users of electronic information transmission and filing are large corporations, as well as some medium size and small companies. These types of organizations are connected to Internet.

The stabilization of the economy coupled with the government's vigorous economic reforms has created an environment that creates opportunities for US Exporters within the Internet sector. The Mexican market for computers and communication gear grew by 37% in 1997, reaching over US$5 billion. The number of Internet subscribers grew by 116% in 1997 from 1996, to over 400,000.

3.6 Electronic Commerce During the last ten years, important technological changes within the Mexican government and the private sector have made it easier to electronically transmit and store information. On the other hand, this situation has resulted in an increase in unauthorized access to this private and secret information. The number of electronic transactions including data transmission, money transfers, credit card charges and all types of electronic commercial transactions has increased substantially. However, the ability of firms and organizations to protect and maintain strict confidentiality for their transactions has developed at a slower pace. The increase in intellectual espionage and the presence and sophistication of international hackers are forcing users to install or upgrade their encryption systems. In Mexico, the main end users of electronic commerce include banks and financial institutions, research centers, Internet users and industrial companies. In addition, universities and research centers represent a sector at the forefront of telecommunications and online databases. Most of these institutions are connected to the Internet and communicate with other academic and research institutions around the world. These non- profit institutions are attempting to extend their communications capabilities. Many offer access to their networks and servers through Internet.

3.7 Obstacles to Electronic Commerce The main restriction in telecommunications is a limitation on foreign investment in telephone and value-added services to a 49% equity position. In cellular telephony, however, foreign investors may participate up to 100%. Nevertheless, foreign investor may only participate through a Mexican corporation.

3.8 Other obstacles include: The approval of the Secretariat of the Treasury (Secretaria de Hacienda y Credito Publico) to permit the use of electronic invoices. This issue is of interest to PenSoft as electronic money transfer is among its services. The passage of legislation to regulate the validation of documents and signatures contained in electronic transactions which will facilitate: 1) the establishment of intranet networks within large corporations in Mexico, 2) the increase of electronic trade, 3) an increase in the use of information exchange networks by firms, 4) the access of medium and small companies to networks, 5) the availability of new electronic banking and worldwide financing services, 6) the establishment of a Mexican standard (NOM) for encryption software.

3.9 Major Vendors Some American firms already represented in the Mexican market are: IBM, Sun Microsystems, Data Fellows, Raptor, Kerberos, Sterling, Netscape, Checkpoint.

3.10 Revenues and Sales

The Mexican market for electronic commerce grew by 37% in 1997, reaching over US$5 billion. It is expected to grow by another 31% in 1998 and reach US$9 billion by 2001.

3.11 Hardware/Software Manufacturing Both the hardware and software industry in Mexico is booming. Hardware and software manufacturers are experiencing a great return on investment. During 1997,

177 International Market Planning Program PenSoft computers and communication gear experience a 37% growth in the Mexican market, reaching over US$5 billion. The expected growth is at 31% in 1998 and estimated revenues of US$9 billion by 2001. The increase in use of the Internet has also been very beneficial for the hardware and software markets. Hardware, representing almost 60% of market sales, is expected to grow at 25% a year over the next four years.

The Mexican government is adopting new technologies and promoting the use of information technologies. This trend will continue over the long term. Moreover, the trend will permeate the business sector thus enhancing opportunities for American suppliers. Interconnectivity Software sales are expected to increase by 115% to over US$1 billion in 2001. Internet and fax software are also expected to expand its share of software sales from 6% to 19% in the same period. Some of the products/services of interest are: Fax Software, Modems, Notebook Computers, Power Packs, Pagers, Sound/Voice Boards, Multimedia, Scanners, Hand-Held Computers, PC Cards, PDAs, Portable Printers, Cellular, External Drives, Internet Software. The competition between American, Asian, and European manufacturers in end- user equipment is, and will remain, intense in Mexico. The Mexican market for software totaled US $237.2 million in 1995 after decreasing 52.4 percent because of the peso devaluation. This market grew at about 15 percent in 1996 and 10 percent in 1997. During 1998-1999, this market is expected to grow at an average annual rate of 12 percent. American software suppliers account for around 79 percent of total demand for software. They are expected to retain their market share over the next three years. The Mexican market for emulation software reached US $8.8 million in 1995, down from US $14.8 million in 1994. It grew 10.2 percent to US $9.7 million in 1996, and in 1997, growth was 15.4 percent to US $11.2 million. Since Mexico does not develop or export emulation software, the total market equals total imports. Despite a decrease of 40.5 percent as result of the peso devaluation, the market is expected to grow at an average annual rate of 15 percent over the next three years.

The need for emulation software arose from the need to exchange information among computers designed in different ways. In Mexico, end-users use emulation software to: link computers for transmitting files, link computers to multi-user systems, link computers to information services and bulletin board services (BBS), link computers to peripheral equipment

3.12 Major Suppliers Major domestic suppliers include: Administracion, Informatica y Servicios de Apoyo, CMS Sistemas, Ecomsa, EDS Mexico, Executrain, Grand/Tech, Grupo Cibernetica Genrencial, Grupo Tea, Infogama, Memorex Telex, New Horizons, SAS Institute, Servicios y Asesoria Integral en Telecomunicaciones, Siga Desarrollos Sistemas de Informacion IBM, Vertex 2000.

3.13. IT Geographics Guadalajara, Mexico's second largest city, has become the "Silicon Valley" of Mexico. Electronics manufacturing is experiencing incredible growth, with foreign investment doubling over the last two years. Hewlett-Packard, Solectron, Philips, SCI, Motorola, IBM, Jabil Circuit, Kodak, and Siemens all have plants in the area. 274 Asian businesses established operations between 1997-98. Products manufactured in Guadalajara which require electronic components include: computers, printers, telephones, cellular phones, pagers, phone answering machines, scanners, motherboards, PC boards, subassemblies, computer keyboards, and short-band radios. There is very little local manufacturing of electronic components. Over 90% of the components are imported, 85% from the U.S.. Although manufacturing is done primarily by foreign-owned companies, most purchasing decisions are made locally. The Jalisco state government and CANIETI (trade association) are trying to encourage development of local suppliers. The main types of integrated circuits that are generally sold into Mexico are digital (TTL), memories (DRAM, SRAM, EPRO), microprocessors (Pentium, X86), Application Specific integrated Circuits (ASICs), and linear. The US is the leader, overall, in selling

ICs into Mexico with a 40 percent market share, followed by Japan (30 percent), Taiwan (7 percent), and China (7 percent), and others. US manufacturers of ICs dominate Mexico's electronic data processing market, with Intel, Motorola, and Texas Instruments being the top suppliers. The microprocessor is the most prevalent type of IC sold to the EDP market, which is concentrated in the Guadalajara area. Japanese product, on the other hand, tends to dominate the consumer electronics market for ICs, which is located mainly in Tijuana and Ciudad Juarez. PenSoft should consider establishing its main distributor in Guadalajara as it appears to be the most friendly environment for Information Techonolgy. In addition, Guadalajara is also the countries second biggest market for PenSoft.

3.14 Government Policies Mexico has enjoyed political stability for most of this century, an uncommon phenomenon in Latin America largely due to the political system set up after Mexico´s bloody 1910-1917 revolution. The Institutional Revolution Party (PRI), has won everypresidential election since its founding in 1929. The PRI successfully adapted to changes in Mexican society over the years by alternating populist and conservative policies. The key parties in the opposition lie to either side of the PRI in the political spectrum. The center-right National Action Party (PAN) advocates private sector-oriented policies, and more honesty in government. As of June 1998, it held four state governorships, before 1989, governors were always PRI members, and it has many more officeholders at lower levels of government. The PAN has been particularly successful in urban centers. The leftist Party of the Democratic Revolution (PRD) espouses a populist outlook and believes in more government intervention in the economy.

3.15 Environment Mexico offers an extensive legal framework for the protection of intellectual property rights , as required by NAFTA and the WTO agreement on trade-related aspects of intellectual property rights. It is a signatory to most major international intellectual property

180 International Market Planning Program PenSoft rights conventions. The 1994 intellectual property law provides protection to patents, trademarks, industrial designs, trade secrets, and geographical indicators. Mexico passed a new copyright law in 1996, which strengthened copyright protection over its previous law. However, copyright and trademark piracy is extensive in Mexico. While the Mexican government has sought to enforce its intellectual property rights laws, anti-piracy resources are limited and applied penalties have not been sufficient to deter piracy. Although Mexico has strict laws to protect intellectual property, it is not enforced well. There are very few instances where pirates have actually been punished.

4. Taxation Mexican tax regulations are much more complex and dynamic than in the U.S. Each state has separate tax structure which changes very often. Since the NAFTA treaty was signed, many changes have taken place in Mexico. An example is the tax department, commonly known as Hacienda, though its name was changed last year to Sistema de Administracion Tributaria (S.A.T.) which means Taxpayer Administration System. Five years ago only 35% of all Mexican residents paid taxes. Not so any more! Now more than 85% of all residents in Mexico pay taxes and the number is growing daily. Declarations and payments must be made on April 17th of each month following the end of the quarter. In other words, declarations and payments must be made on April 17 th, July 17th, October 17th, and January 17th. An annual declaration is due no later than April 1st the following year and the difference between provisional payments made and total tax due, based upon global Mexican income, us due with the annual return. An individual resident in Mexico is liable for personal income tax on his or her worldwide income. Nonresident individuals are taxed on all their Mexican-source income, generally by way of withholding taxes. For tax purposes, a resident individual is a person who has established a home in Mexico, unless that person remains in another country for over 183 days within the calendar year and can prove that tax residence has been acquired in that other country.

4.1 Personal Income Tax Rates. Business tax earnings are taxed at a fixed rate of 34%, and some special rates apply to income from prizes. In other cases, progressive rates apply. The table of progressive rates for the year is in effect compiled by adding together the twelve monthly wage withholding tax tables in force during the year. (These tables are adjusted semiannually to take into account the effects of inflation.).

4.2 Taxable Income. To determine annual taxable income, individuals must determine the income earned in the calendar year for each income category prescribed by law, make the deductions

182 International Market Planning Program PenSoft authorized for each category, add together the net income from each category, and subtract authorized personal deductions from that sum. If the deductions for a given category of income exceed the income in that category, the difference may be subtracted from other categories of income, excluding income derived from independent personal services. As an exception, income from business activities is taxed separately from other types of income. Personal income tax is levied on receipts in cash, kind, or credit. Gains on the sale of shares, buildings, land, and personal property are chargeable as taxable income when the transaction is carried out, whether the proceeds are received in cash or by way of credit. Salaries, professional fees, income from renting out real property, most types of interest, and dividends are generally taxable on the basis of the amount received.

4.3 Employment income All income derived from employment is subject to tax, other than "Exempt income," including income from profit sharing, remuneration paid to members of boards of directors, bonuses, gratuities, allowances, and some fringe benefits. If the rate of interest on a loan from an employer to an employee is less than the daily average interest rate on a ninety-day treasury certificate during the prior month, the resulting difference or rate is applied to the outstanding balance and is taxable as part of employment income. Employment income is subject to tax withholding at source. The amounts withheld may be credited against the taxpayer's final liability. No deductions are authorized for expenses incurred in earning employment income.

4.4 Income from personal services. Income from personal services consists of all income from the rendering of independent personal services that does not fall within the category of employment income (for example, royalty income). Expenses that were necessarily incurred in earning the income may be deducted from gross income. An excess of expenditure over income may not be deducted from other income.

4.5 Real estate rental income. Individuals obtaining income from renting out residential real estate may either itemize their deductions or take a standard deduction of 50% of the gross rental income.

4.6 Income from the acquisition of goods. Income from the acquisition of goods includes goods received as donations, except exempt donations; treasure trove; goods acquired at a cost lower than their real value; and permanent constructions and improvements made to real property by the tenant when ownership of the construction or improvement is transferred to the owner. The tax authorities may require that the value of the goods be appraised by an expert. In the case of goods acquired at a cost below their real value, if the appraisal value is in excess of 10% of the agreed-upon price, the buyer is taxed on the difference. Individuals who obtain income from the acquisition of goods may deduct federal taxes (except income tax), local taxes, and notarial expenses incurred for the purposes of the acquisition; expenses incurred in lawsuits establishing the right to acquire; and appraisal expenses and commissions paid by the acquirer. Capital gains realized by individuals from the transfer of immovable property, securities, and personal property are taxed as income from the transfer or disposition of goods. Acquisition cost is reduced by depreciation under rules that vary according tothe nature of the asset sold. That reduced acquisition cost is then adjusted for inflation on the basis of a factor for the period from the date of purchase to the date of sale. The adjustments to be made in the case of shares are similar to those applying to companies. In the case of real property, payments made for real-estate appraisals, both in relation to acquisitions and sales, are deductible. To arrive at tax rates, the gain must be divided by the number of years that have elapsed between purchase and sale, subject to a maximum of twenty. The resulting amount is added to the individual's taxable income for the year. The amount of the gain not added to taxable income is taxed separately at the average effective rate applicable to the individual's taxable income for the year (including the portion of the gain added to income) or at rates over the last five years.

4.7 Income from business activities Individuals who carry out business activities must determine their business tax earnings (total income from business activities less authorized deductions, including carryforward tax losses). The rules for determining taxable income and provisional payments of income tax and for setting off losses are similar to those for companies. Business tax earnings are not added to income obtained from other categories; a fixed rate of 34% is applied instead of the rates applying to other income. However, individuals who obtain income from business activities may opt to add to their other income any withdrawal or earnings, in which case the accruable amount is that resulting from multiplying these earnings by the factor of 1.515. Tax at the rate of 34% of the accruable amount may be credited. Individuals engaged in business activities whose income for the previous year did not exceed Ps$1 million (as of January 1997) may opt to have their taxable income from those business activities determined on a simplified basis. Special rules also apply to some low-income retailers.

4.8 Dividend income. Dividend income includes profits distributed by resident companies; profits obtained by shareholders of resident companies from repayments arising in the course of a liquidation or capital reduction; and loans to shareholders, exceptthose that are a normal result of company transactions or are agreed upon for less than one year at an interest rate equal to or higher than that established yearly for late tax payments. Companies that make distributions to their shareholders must pay taxat the rates given in the section, "Withholding Taxes: Dividends". For residents and nonresidents alike, this is generally a final tax. For individuals, this means that they do not have to add dividends to other income in calculating tax payable. However, resident individuals whose level of income gives them an effective income tax rate below the maximum rate of 35% may add an adjusted figure for dividends earned to the other income earned during the calendar year. The adjusted figure for 1995 is determined by multiplying the actual dividend by a factor of 1.515. Tax at the rate of 35% of the adjusted figure may be credited to annual income tax.

4.9 Interest income. Interest income includes interest derived from any class of bonds, debts, financing granted by credit institutions, securities quoted on the Mexican stock exchange, and exchange gains on transactions denominated in a foreign currency but payable in Mexican pesos. Certain items of interest are regarded as "other income."

4.10 Income from prizes Income from prizes includes income from lotteries, raffles, games of chance, and contests. Income tax is charged at special rates of 8% on prizes of up to Ps$8 and 15% on prizes over that amount.

4.11 Other income. Other income includes all income of individuals that does not fall within any of the other categories and is not expressly exempt from tax. Various types of interest are regarded as other income, including interest on credit documents or credit acquired from or transferred to persons other than credit institutions or the stock exchange. The taxable amount of interest derived from such credit documents or credit is arrived at by deducting the inflationary component from nominal interest, which means that tax is incurred only when interest earned exceeds inflation for the period. If inflation is higher, the individual is not entitled to deduct the inflationary loss. Other types of interest regarded as other income, including exchange gains treated as interest, are taxable in full with no adjustment for inflation. Other income for individuals also includes that arising from derivatives, in which case the same rules applicable to corporations are followed to determine accruable gain or deductible loss and interest.

4.12 Exempt income. Exempt income includes fringe benefits provided to individuals earning only the general minimum wage for their geographical area, as long as the benefits do not exceed the minimum amounts prescribed by labor law; for employees earning more than the general minimum wage, a portion of vacation bonuses and profit-sharing payments; a portion of overtime pay and pay for work on nonworking days; a portion of retirement and

186 International Market Planning Program PenSoft pension fund benefits; as a rule, income from savings funds established by companies; severance or retirement pay received from employers, up to specified limits; fringe benefits such as scholarships for employees and their children, provided that they are extended to all employees; gains on the sale of a home if the taxpayer lived there for at least two years prior to the sale; gains on sales of specified shares or other securities traded through an authorized stock exchange or similarly active market; income from specified derivatives related to publicly traded shares or securities; gains on sales of other personal property, up to specified limits; yields on treasury certificates and some other bonds issued by the federal government if various conditions are met; inheritances; gifts to immediate family members; other donations that do not exceed specified limits; and royalties on copyrights for musical and literary works if conditions are met.

4.13 Personal Deductions and Reliefs In addition to the deductions that are allowed under the rules for each category of income, individuals may claim personal reliefs. A general credit may be claimed against the final tax liability, equivalent to 10% of wages at annual general minimum salary, restated semiannually. Deductions include medical and hospital expenses for the individual and dependents, to the extent that they are paid to persons or institutions resident in Mexico; funeral expenses for dependents; and donations to authorized institutions. In addition, residents may deduct from their total income deposits made in the tax year in special personal savings accounts, pension plan insurance premiums paid to Mexican institutions, and the cost of shares in specified investment companies. Thesedeductions may not, in total, exceed in any calendar year Ps$46,639 (as of January 1997). When the deposits are withdrawn, the pensions collected, or the shares sold, the proceeds are treated as other income for the year in which the event occurs. However, the applicable tax rate may not exceed that in force for the year in which the deposits or other payments were made. These transactions are subject to a withholding tax of 35%. If this withholding results in an overpayment of tax on total income,the taxpayer may set off the overpayment against future tax payments or may request a refund.

All individuals are entitled to tax credits that take into account both the income receivable and the tax chargeable on that income. In effect, the lower the amount of the individual's income, the higher the amount of the credit. Click here to see a table providing an example of these tax credits. Capital losses must be divided by the number of years that fall between the date of purchase and the date of sale of the asset, up to a maximum of ten years. The resulting portion of the loss may be deducted from taxable income in the year of sale or from capital gains only in the next three years. Tax may be recovered by way of credit for any portion of a loss that cannot be deducted. Recoverable tax is calculated by multiplying the relevant portion of the loss by the individual's average effective tax rate in the year in which the loss was suffered or, if no tax was payable in that year, by the rate for the next year in which tax is due, provided that the year falls within three years of the year of loss. Recoverable tax determined in this way is credited in the year in which the loss is suffered or in the subsequent three years against tax due on capital gains and not against tax due on other categories of income.

4.14 Personal Assessments & Payments In all cases, the tax year for individuals must coincide with the calendar year. Unless specifically exempted by law, every individual resident in Mexico and in receipt of taxable income must file an annual tax return between 1 February and 30 April of the year following that in which the income arose. Exempt individuals include employees whose salary income arises exclusively from one sole employer and those whose final taxes have already been paid by way of withholding at source. Taxpayers generally assess their own income tax when preparing their tax returns. Assessments can be made by the tax authorities in the same circumstances as those described in the section titled "Corporate Assessments and Payment." Individuals whose disbursements exceed the income reported in a calendar year may be regarded as having met the excess out of unreported income, unless the source of the excess can be proved. Individuals who earn professional fees or dividends or are engaged in business activities and whose expenses are higher than reported revenues in a calendar year will be penalized as for tax fraud if they cannot justify the discrepancy.

Many items of an individual's income are subject to advance provisional payments or to withholding at source. For example, tax is generally withheld from employment income at source and credited against the final tax liability. When provisional payments are required, they are due on the seventeenth of April, July, October, and January. For each type of income subject to advance payments, the individual must file a provisional return at the time when the advance payment of tax is made. Any balance of tax due is paid when the annual return is submitted. This balance may be paid in up to six equal consecutive monthly payments, at an interest rate approved annually by Congress.

Wage Withholding Tax Rates as of January 1997 Monthly Income Tax Withheld Lower Limit Upper Limit Fixed Amount Rate on Excess (Ps$) (Ps$) (Ps$) over Lower Limit (%) 0.01 130.22 - 3 130.23 1,105.21 3.91 10 1,105.22 1,942.30 101.40 17 1,942.31 2,257.85 243.71 25 2,257.86 2,703.25 322.59 32 2,703.26 5,452.08 465.12 33 5,452.09 8,593.23 1,372.23 34 8,593.24 - 2,440.22 35

Tax Credits as of January 1997 Monthly Income Tax Withheld

Lower Limit Upper Limit Fixed Amount Rate on Excess (Ps$) (Ps$) (Ps$) over Lower Limit (%) 0.01 130.22 0.00 50 130.23 1,105.21 1.95 50 1,105.22 1,942.30 50.70 50 1,942.31 2,257.85 121.85 50 2,257.86 2,703.25 161.30 50 2,703.26 5,452.08 232.56 40 5,452.09 8,593.23 595.40 30 8,593.24 10,904.14 915.80 20 10,904.15 13,084.96 1,077.56 10 13,084.97 - 1,153.89 -

5. Viable Customers: Major end-users include banks, manufacturing companies, companies doing business in the tourism industry and retailers. Software developers sell software to wholesalers who only sell it to distributors, retailers and owners of small outlets. Foreign software developers sell their software through their Mexican representatives who import it through custom agents. The products are then sold to wholesalers. Approximately six wholesalers, 2,700 distributors and more than 11,000 retailers exist in Mexico. Wholesalers have countrywide coverage, while 50 distributors have regional coverage (usually in the largest Mexican cities). The three largest wholesalers have business relationships with major American wholesalers. NAFTA provides business opportunities for American software and hardware suppliers. The expansion of the telecommunication infrastructure provides additional opportunities. Mexican customers are slowly but steadily upgrading their computer installed base. Also, American suppliers sell their products at an attractive price. They also provide excellent after sales support, including technical assistance. American suppliers have effective distributors and target their customers with proper sales promotional weapons. Banks are the largest end-user group, accounting for 39 percent of total demand. Banks use IT to transmit data, and to link computers with their own minicomputers and mainframes. There are 71 commercial banks operating in Mexico. Communications and database management are the largest service needs for banks. Data warehousing offers good opportunities because banks have large customer databases. Manufacturing companies are the second largest end-user group and account for 30 percent of total demand. Manufacturers use IT mainly to transmit data between their plants and corporate offices. Although a very big market for software in general, this group is not viable for PenSoft which targets small businesses. Companies doing business in the tourism area are the third largest end-user group. This group accounts for 20 percent of total demand and includes hotels, airline companies and travel agencies. Retailers are the fourth largest end-user group and account for the remaining 11 percent of total demand. This group uses software for office applications such

191 International Market Planning Program PenSoft as word-processing, spread-sheets, maintaining small datebase, Internet, etc. This is the most viable costomer group for PenSoft.

6. Distribution, Sales Channels And Partners The Mexican market employs many of the same sales, distribution and marketing techniques used in the United States. When developing a market entry strategy for Mexico, PenSoft should be aware of the wide variety of distribution channels. Small retailers and family owned businesses dominate the market. Additionally, the already large informal sector of the economy continues to expand. There is often a need for performing original market research, given the limited amount of reliable information in many areas. We encourage you to review the National Trade Data Bank for Industry Sector Analysis reports. As an alternative, you may wish to consider the use of custom market research. The Customized Market Analysis is available through either the Commercial Service offices in the U.S. or in Mexico. Most foreign firms sell into the Mexican market by appointing a Mexican agent and/or distributor. Nonetheless, many firms open direct sales offices. With few exceptions, direct sales into Mexico by U.S.-based manufacturers and distributors can be difficult to achieve. The improving, but still difficult, economic situation continues to cause many distributors to conserve scarce financial resources by reducing stocks of imported products; thus, stocking distributors can be hard to find. Selection of the appropriate agent or distributor requires time and effort. Though there may be many qualified candidates, use high standards in selecting the agent/distributor. Personal presentations and visits to potential Mexican counterparts are strongly suggested. In Mexico, the key to success is to get the right distributor who is reliable and has the required contacts, infrastructure, and technical competance to market the product. The best way to get the initial contacts is through the use of the Gold Key Service (GKS). In GKS experienced trade professionals in your target country will arrange appointments for you with prescreened contacts whose interests and objectives match your own. The service is now available in more than 70 of the world's best export markets, at fees ranging from $150 to $600.

The American Chamber of Commerce in Mexico maintains lists of Mexican agents/distributors and private sector trade organizations. They also provide initial market research at a nominal cost. The contact for AC/Mexico is listed in the Appendix. Another good source for market information is the US trade Center, Mexico City, Tel # (5) 25-591- 0155. Even this service is provided at a nominal cost. After identifying a suitable agent/distributor PenSoft is encouraged to conduct a commercial background check on the Mexican firm, such as offered by the U.S. Commerce Department's International Company Profile (ICP) report. An ideal distributor would be an accounting or tax firm. The network established by such firms and the fact that they have a similar target group as payroll software would give PenSoft some synergies. The second best distributor would be a pre-existing software distributor who sells software that does not compete with payroll. There are many opportunities for U.S. companies to form joint ventures with Mexican companies. Most of the old, restrictive investment regulations have been repealed after the NAFTA, and many good Mexican firms are in need of financial support. With interest rates commonly between 20 and 30 percent, foreign investors are welcome. Forming a joint venture with the right Mexican partner can be a quick and effective way to gain market access and the key to success of PenSoft in Mexico. The major suppliers of IT products in Mexico currently include Administracion, Informatica y Servicios de Apoyo, CMS Sistemas, Ecomsa, EDS Mexico, Executrain, Grand/Tech, Grupo Cibernetica Genrencial, Grupo Tea, Infogama, Memorex Telex, New Horizons, SAS Institute, Servicios y Asesoria Integral en Telecomunicaciones, Siga Desarrollos Sistemas de Informacion IBM, Vertex 2000. In Mexico, it is important to develop a close working relationship with the appointed agent/distributor. Providing appropriate training, product support, and timely supply of software is critical to your chances for success. There are no indemnity laws to prevent a company from canceling an agent or distributor agreement, but the cancellation clause should include specifics; this clause should be free of vague language. Sales performance clauses in agent/distributor agreements are permitted and failure to meet established standards can be a reasonable cause for contract cancellation.

Firms doing business from the U.S. that do not establish a presence in Mexico do not create income tax or other obligations with the Mexican government. If PenSoft wants to appoint an intermediary, such as an agent or distributor, the Mexican representative should be limited to doing market research, promotion, solicitation and negotiations for the sale of products and services. If desired, the U.S. firm can grant permission to the local company to execute contracts. In addition, it is common practice for the Mexican representative to provide their Mexican clients with information such as pricing, payment terms, etc. Also, the Mexican representative will normally receive payment on behalf of the American firm. Apart from the tax benefits, the idea of direct sales does not seem to be very encouraging for PenSoft. There is a wide range of broadcast and print media available. In Mexico, more than 450 newspapers and 300 magazines are published. Many magazines are industry specific. Similarly there are a number of Business magazines that cater to small and mid-sized businesses. Advertising on these magazines is the best marketing tool for PenSoft. Advertising in Mexican print media is usually more expensive than in the U.S. Advertising rates generally approximate those of large international cities. Successful ad campaigns are generally described as having a local touch, which may include both linguistic and cultural considerations. You may wish to seek assistance from one of the many full-service advertising agencies in Mexico City, many of which are branches of U.S. and other firms. PenSoft’s distributor in Mexico will be able to select the most efficient and effective medium of advertising.

7. Competition: Mexico already has a handful of well-established payroll software in the market. Most popular among them are: 1. Contak: This software sells for a one-time fee of approximately $ 200.00 and is highly popular among small businesses. Speaking to a local tax firm (listed in the appendix) it was learned that Contak would be the closest compititor for PenSoft. 2. Ramsal: Internet site is www.ramsal.com. Demonstration software is available on the Internet. This is a Mexican firm. Like PenSoft Ramsal software is compatible only with Windows 95/98. The contacts for Ramsal is tel # (5) 361-9911 and e- mail 3. Expert: www.expert.com.mx/eng/alianzas.htm This software is developed by the alliance of two software companies—Expert and Foresight Software--based in Atlanta, GA. Expert software is in Spanish and in used predominantly by large sized companies. 4. Aspel: Information about Aspel can be obtained at www.aspel.com.mx 5. Novell: Novell is a US based firm which has a strong presence in Mexico. 6. Coi: Much details were not available for Coi, but it apparantly is ideal for big companies. 7. MS-Money: This is generic software released by Software giant Microsoft Corp. 8. Quicken: Like Money, Quicken is a generic software and has very high market share in Mexico.

All the above payroll software companies have already established themselves in the Mexican market. All of them have their branch offices in Mexico and offer excellent customer services. However, none of them have bilingual software. But since Mexico has a small English speaking population, the local companies do not see the need to have a bilingual software. However, it should be noted that none of the above software companies have fully customized payroll software. Most of them have user friendly tables which the customer has to complete regarding the local taxes before the software gets fully customized. Most of these companies either mail out or publish in major news papers any changes in the

196 International Market Planning Program PenSoft taxes and as to the steps required to incorporate these changes into their software. Such publications also prove to be very effective marketing tools apart from assurance of customer service. PenSoft should not have much difficulty in breaking through the competition due to its ready to use features and its excellent after sale customer service. One more point to be considered is the exploding market for ASPs (Application Service Providers). A separate section on ASPs, discusses the implications for PenSoft. In Mexico, just as in most other markets, the use of ASPs by small and medium sized businesses is becoming increasingly popular. One of the most popular Application Software Providers in Mexico is the Progress Software’s ASPEN program (http://www.progress.no/aspen/index.htm)

8. Barriers/Incentives to Entry In December 1993, the Mexican Government passed a foreign investment law replacing a restrictive 1973 statute. The law is consistent with the foreign investment chapter of the NAFTA, and has opened more areas of the economy to foreign ownership. It has also provided national treatment for most foreign investment, eliminated all performance requirements for foreign investment projects, and liberalized criteria for automatic approval of foreign investment proposals. Mexico has implemented its commitment under NAFTA to allow the private ownership and operation of electric generating plants for self-generation, co-generation, and independent power production. In 1995, Mexico issued regulations for the first time allowing private sector participation in the transportation, distribution and storage of natural gas. In 1999 Mexico removed its tariff on natural gas in advance of its NAFTA commitment and published open access regulations for PEMEX' natural gas transportation network. These two measures level the playing field for U.S. natural gas companies. States, provinces, and local governments must accord national treatment to investors from any of the NAFTA countries. Unfortunately, there have been a few investments blocked by local and state authorities where national treatment was not granted of where the investments have been under dispute. In all sectors not subject to restrictions, foreign investment applications are automatically approved unless they exceed USD 25 million. If so, they require approval of the National Foreign Investment Commission. The Commission must act on applications within 45 working days. Criteria for approval include employment and training considerations, technological contributions, and contributions to productivity and competitiveness. The Commission may reject applications to acquire Mexican companies for reasons of national security. In addition, the Secretariat of Foreign Relations must issue a permit for foreigners to establish or change the nature of Mexican companies. The Mexican Constitution and Foreign Investment Law reserve certain sectors to the State, and a range of activities to Mexican nationals. Despite these remaining restrictions, the Foreign Investment Law greatly liberalized foreign investment, eliminating the requirement for Government approval in around 95 percent of foreign investments. The Mexican

Government in 1999 proposed constitutional amendments to remove restrictions on electricity, but the Mexican Congress has not yet approved these measures. Careful attention to the Federal Labor Law (LFT) is strongly advised, as penalties for failure to meet its obligations can have an important financial impact on operations, including the embargoing of equipment. The Constitution was amended in 1995 to allow foreign investment in railroads, telecommunications, and satellite transmission. Any further attempts at privatization in this sub-sector likely will be deferred until the next administration, which begins in December of 2000. Newly built petrochemical plants, meanwhile, may have up to 100 percent foreign investment. Investment restrictions still prohibit foreigners from acquiring title to residential real estate within 50 kilometers of the nation's coasts and 100 kilometers of the borders. Nonetheless, foreigners may acquire the effective use of residential property in the restricted zones via a trust through a Mexican bank.

8.1 Currency conversion and transfer policies Mexico has open conversion and transfer policies as a result of its membership in NAFTA and its accession to the OECD. In general, capital and investment transactions, remittance of profits, dividends, royalties, and technical service fees, and travel expenses are handled at the market-determined exchange rate. Peso/dollar foreign exchange is available on a same-day, 24- and 48- hour settlement basis. Most large foreign exchange transactions are settled in 48 hours.

8.2 Dispute settlement The Mexican Government has a good record of handling investment disputes. Despite the large volume of trade between the United States and Mexico, the Embassy is aware of only seven unresolved investment disputes: Two involving municipalities, three with Mexican states, one with a Government bank, and one with the Federal Government of Mexico.

Both the World Trade Organization (WTO), which governs Mexico's trade with other WTO member nations, and NAFTA provide a mechanism for dispute settlement. If a dispute can be addressed under either NAFTA or the WTO, an investor may choose which forum to use. In addition, a NAFTA investor may have recourse to the World Bank's International Center for the settlement of investment disputes. The U.S. Embassy has been concerned by a group of recent cases in which multinational and U.S.-Mexican joint venture firms have confronted criminal prosecution simultaneous with civil prosecution in standard commercial disputes. Each of these cases is properly the subject of civil proceedings alone. After raising Embassy concerns with the Interior Secretariat, we understand that this is not an uncommon practice in Mexico when one party seeks to gain additional leverage against another firm or its officers in a commercial matter. The Secretariat has stated, however that unfounded use of a criminal prosecution, as when there is insufficient evidence to support a claim of fraud or other criminal act, is an abuse of the Mexican legal system, which the Secretariat does not condone.

8.3 Fiscal Incentives The Mexican Government has eliminated most direct tax incentives. The only significant federal tax incentive is accelerated depreciation. Under the in-bond or maquiladora program, duty free imports under bond are authorized for equipment and goods to be re-exported and for inputs into the production of exports. Mexico is in the process of deciding how to amend the status of maquiladoras, as required by NAFTA, effective January 1 of the year 2001, to limit incentives in the case of components that do not originate in NAFTA countries. State tax incentives are limited. Some Mexican states have development programs for attracting industry. These include reduction of real estate taxes, land transfer taxes, and deed registration taxes.

8.4 Financing Nacional Financiera, a state-owned development bank, provides loans to companies in priority development areas and industries. It is active in promoting joint Mexican-foreign ventures for the production of capital goods. It offers preferential financing at non- subsidized rates for the following types of activities: Imports and capital investment by small and medium size businesses; environmental improvements; studies and consulting assistance; technological development; infrastructure and industrial de-concentration; modernization; and capital contribution. The National Foreign Trade Bank (BANCOMEXT) offers financing for both export and pre-export loans. "FOMEX" also offers financing for both export and pre-export loans. Its principal programs provide financing for sales and sales promotion, working capital, and imported inputs for products destined for export.

8.5 Right to private ownership and establishment Most foreign investors operate in Mexico through corporations (Sociedades Anonimas de Capital Variable, or S.A. de C.V.). Foreign-owned corporations are subject to the same laws as local companies and any special regulations governing foreign investment. A Mexican corporation must have at least five shareholders and, except in certain sensitive sectors, can usually be established within one to two months. Costs of incorporation vary according to the structure of the company but the average cost is USD 6,000. Upon registration with the Secretariat of Foreign Relations, Mexican companies with foreign participation are allowed to own land in restricted border areas for non-residential purposes.

8.6 Bilateral investment agreements The United States and Mexico have a Bilateral Tax Treaty to avoid double taxation and to prevent tax evasion. Important provisions of the treaty establish a ceiling for Mexican withholding taxes on interest payments and U.S. withholding taxes on dividend payments. Mexico and the United States also have a Tax Information Exchange Agreement to assist the two countries in enforcing their tax laws. The agreements cover information that may affect the determination, assessment, and collection of taxes, and investigation and

201 International Market Planning Program PenSoft prosecution of tax crimes. A Financial Information Exchange Agreement took effect in 1995 that permits the exchange of information with respect to certain currency transactions to combat illegal activities, particularly money laundering.

8.7 OPIC and other investment insurance programs Constitutional restrictions to-date have prevented Mexico from participating in insurance offered through the U.S. Overseas Private Investment Corporation. Mexico also is not a member of the Multilateral Investment Guarantee Agency {MIGA). Companies offering private investment insurance do operate in Mexico.

8.8 Transparency of the regulatory system The Mexican Government recognizes the need to reform its regulatory system and to provide for a more stable and attractive investment environment. To this end, the Government enacted an agreement for the deregulation of business activity in 1995. The agreement created an Economic Deregulation Council to work in conjunction with the Secretariat of Trade and Industrial Development. The Council was charged with implementing a systematic deregulatory process that amends or repeals outdated regulations, curbs the creation and ensures the quality of new regulations, and places the burden of proof on the institutions that introduce and administer them. By June 1998 the Government noted that over 85 percent of federal regulations had been reviewed, and that they had begun extending guidance to state and local governments for similar programs. According to the new standards, all rules and regulations must meet the following criteria: -- There must be a clear justification for Government involvement; -- Regulations must be maintained or issued only on evidence that their potential benefits exceed their potential costs; -- There must not exist regulatory alternatives which would cost less; -- Regulations must minimize the negative impact they have on businesses, especially those that are small and medium sized;

-- Regulations must be backed by sufficient budgetary and administrative resources to ensure their effective administration and enforcement.

All existing business regulations are being reviewed in conjunction with the Economic Deregulation Council. Under the Council's guidance hundreds of business formalities have been eliminated. The Federal Law of Administrative Procedures represents another significant investment policy accomplishment. The law requires all regulatory agencies to prepare an impact statement for new regulations which must include detailed information on the problem being addressed, the proposed solutions, the alternatives considered, the quantitative and qualitative cost and benefits, and any changes to the amount of paperwork businesses would face. Despite these measures, many difficulties remain. Foreign firms continue to identify bureaucracy, slow government decision- making, and lack of transparency as among the principal negative factors inhibiting investment in Mexico. Other factors listed include the tax burden and labor difficulties.

8.9 Political violence Political Violence, in the form of small-scale skirmishes and inter-communal disputes, has been largely confined to the southern states of Mexico. Since the initial uprising of the Zapatista National Liberation Army {EZLN) in Chiapas in January 1994, Government forces and the EZLN have only clashed on one occasion, although the state has been characterized by local violence. The Popular Revolutionary Army emerged in June 1996, and has carried out a number of small-scale attacks, mostly in the rural areas of Guerrero and Oaxaca. There have been no attacks on government or private infrastructure since 1994. Politically motivated civil disturbances, especially in the larger metropolitan areas such as Mexico City, Guadalajara, and Monterrey, are infrequent. Nonetheless, criminal activity in Mexico City and Guadalajara, including kidnappings, has reached critical proportions.

8.10 Corruption The Mexican Government recognizes that corruption is a severe problem and has taken steps to combat the issue. The Government has enacted strict laws attacking corruption and bribery, with average penalties of five to ten years in prison. Government agencies at the federal, state and municipal levels are engaged in the anti-corruption campaign. Chief among these agencies are the Secretariat of Commerce and Industrial Development, the Attorney General, and the Comptroller General. Many low- to mid-level officials have been found guilty of corruption. Mexico ratified the OECD Convention on combating bribery in May 1999. The Mexican Congress passed the legislation implementing the convention that same month. The legislation includes provisions making the bribing of foreign officials a criminal act.

8.11 Protection of property rights The 1994 Intellectual Property Law provides protection to patents, trademarks, industrial designs, trade secrets, geographical indicators, and integrated circuit layout design. Mexico passed a new Copyright Law in 1996, which strengthened copyright protection over its previous law. In November 1998, the Mexican government announced an anti-piracy campaign, which increased resources for enforcement. In April 1999, the Mexican Congress approved stiff penalties against piracy. Mexico is a member of the major international organizations regulating the protection of Intellectual Property Rights (IPR): the World Intellectual Property Organization (WIPO), the Geneva Convention for the Protection of Phonograms against Unauthorized Duplication of their Phonograms; the Berne Convention for the Protection of Literary and Artistic Works (1971); the Paris Convention for the Protection of Industrial Property (1967); the International Convention for the Protection of New Varieties of Plants; the Universal Copyright Convention, and the Brussels Satellite Convention. While Mexico was not on a "Special 301" Watch List in 1998, it was cited in the "Other Observations" category because of significant problems with piracy and counterfeiting, with U.S. industry losses increasing annually. Only a small percentage of raids and seizures have resulted in court decisions and the levels of penalties assessed when court decisions

204 International Market Planning Program PenSoft are made are inadequate to deter future piracy. As a result, manufacturers and distributors of pirated products continue to operate largely unfettered. The government has been strengthening its domestic legal framework for protecting intellectual property. In 1997 it implemented a new Copyright Law and amended its penal code to strengthen penalties against copyright piracy. It also amended its 1991 Industrial Property Law, effective October 1, 1994, to create the Mexican Institute for Industrial Property (IMPI), giving this agency enhanced powers to implement Mexico's IPR laws. Mexico passed a law in 1996 providing protection to plant species. Mexico has implemented NAFTA obligations providing for nondiscriminatory national treatment of IPR matters, establishing certain minimum standards for protection of sound recordings, computer programs and proprietary data, and by providing express protection for trade secrets and proprietary information. The term of patent protection is 14 to 20 years from the date of filing. Trademarks are granted for 10-year renewable periods. Although federal authorities conduct investigations and carry out raids against pirates, there have been few criminal convictions stemming from these actions. The Mexican authorities are untrained and ill equiped to check piracy. The new Copyright Law permits IMPI to take administrative action against copyright violations. Following a complaint by a right holder, Mexican customs authorities are able to seize pirated merchandise. Mexican and U.S. authorities continue to discuss means to improve IPR protection in the two countries. The current piracy rate in Mexico is believed to be between 65 and 70 percent down 20 percent from its mid 1980s figure of 85 to 90 percent.

8.12 Labor Scarcity There is a large surplus of labor in the formal sector of the economy, but much of that surplus is composed of low-skilled or unskilled workers. On the other hand, there is a shortage of technical workers and engineers, leading to raiding of companies for such personnel. This has been a major problem for companies that plan to establish a production unit in Mexico. Even if PenSoft plans to restrict itself to producing in the U.S. and distribute in Mexico it would be a challenge to find a qualified workforce which can match PenSoft’s expectations in terms of customer service and trouble shooting.

Due to a high degree of competition among companies to hire the limited skilled workforce, there is a tendency of workers switching jobs too often which excerts additional strain in terms of training the new worker.

8.13 Language Barrier One of the major problems faced by exports to non-English speaking county is the language barrier. Since Mexico is a predominantly Spanish speaking country, it would be difficult to communicate with the distributors and customers in Mexico. This would pose a severe challenge for PenSoft in providing the same quality of customer service and help desk service as it does in the US.

8.14 Complex and Dynamic Tax System Mexico’s tax system is highly complex and dynamic. This is among the major problems for Payroll services. PenSoft would have to deal with the challenge of keeping up with such regular changes.

9. Entrance Strategy From our brief study of the Mexican payroll software market, it appears that Mexico is a good market for PenSoft. Considering the points mentioned in the above sections and our observations during the study, the following enterance strategy can be derived. PenSoft should price the product very competitively in the Mexican market. Due to the low value of Peso the Mexican market will be price sensitive. PenSoft should look carefully at import duties (taking into account the NAFTA tariff reductions), broker's fees, transportation costs, and taxes to determine if the product/service can be priced competitively. A 15 percent Value Added Tax (IVA) is then assessed on the cumulative value consisting of the U.S. plant value (invoice) of the product, plus the inland U.S. freight charges, any other costs listed separately on the invoice such as export packing plus the duty. A low introductory price will help PenSoft penetrate the market. While designing software for Mexico it is important to make the product appear like a local product and not like a product exported from the U.S. This could be achieved by using backgrounds of local attractions or scenery. While designing PenSoft software for Mexican market is to be careful in using Spanish language translations obtained in the U.S., as these may not reflect current Mexican usage and dialect. In order for PenSoft to maintain the level of service it offers in the U.S. it is necessary to have a Spanish web site. It would be advisable for PenSoft to have a Spanish web presence even while considering entering into Mexico. The response the Spanish site generates would give you an idea of what to expect in the Mexican market. Attending trade shows would give you an idea of the Mexican market potential. In addition, it will also create an opportunity to develop network with the local distrubutors, organizations, and associations. It is better to time the trip so that you can visit both software trade shows and trade shows where small businesses participate. A list of important trade shows is given in the appendix. A list of Government holidays in Mexico is also provided in the “Geographic and General Information” section so as to aid you in planning your trip. Software piracy can damage sales prospects in Mexico if overlooked. The best way to combat this problem is by emphasising on customer service. When customer support is available only for registered users, it would compel the customers to buy legitimate

207 International Market Planning Program PenSoft software. Paradoxically, in certain instances piracy has expanded the market for the software as it gives the users an opportunity to try the software at a low cost. Such customers, if satisfied, would buy legitimate software for the newyear so as to get PenSoft’s high quality customer support. PenSoft should leave no stone unturned to find the best distributor. Distributors should not only concentrate on sales and service, but also be abreast of the extremely dynamic tax regulations. Distributors’ failures on this front would prove too costly for PenSoft. The best location for PenSoft to establish its main distributor is Guadalajara which has become the “Silicon Valley” of Mexico. Apart from being a big market for PenSoft, Guadalajara offers the best infrastructure for a software firm. With the above strategy taken care of and through planning, Mexico will be a good venture for PenSoft. Considering the fact that PenSoft is coming out with an English/Spanish bilingual software for the US market, it would be a good idea in a long run to enter the Spanish speaking countries as well. To achieve this objective, Mexico is the best Spanish speaking country to venture first. In addition to being a potential market by itself, Mexico will act as a gateway to the rest of the Spanish world when PenSoft is ready to venture into more international locations.

10. Appendix for Mexico

Trade Events

COMPUEXPO January/Annual Description: Show featuring computers and related products Location: Guadalajara Contact: Commercial Section, U.S. Consulate General, JAL, Progreso 75, Mail Box 3088, Laredo, TX 78044-3088; tel: 52-3-625-2998; fax: 52-3-626-3576

COMDEX/COMEXPO March/Annual Description: Show featuring information technology products; open to trade visitors only Location: Mexico City Size: 350 exhibitors; 40,000 attendees Contact: The Interface Group, 300 First Avenue, Needham, MA 02194; tel: 617-449-6600; fax: 617-449-6712

COMPUEDICION May 1994 Description: Show featuring information technology products Location: Mexico City Contact: IDG World Expo, 111 Speen Street, Box 9107, Framingham, MA 01701-9107; tel: 508-879-6700; fax: 508-872-8237

TELNETS May/Annual Description: Show featuring telecommunications and networking products Location: Monterrey Size: 75 booths; 2,000 attendees Contact: LATCOM, 9200 S. Dadeland Blvd. #309, Miami, FL 33156-2703; tel: 305-670-9444; fax: 305-670-9459

UNIX WORLD July 1994 Description: Show featuring UNIX and open systems products Location: Mexico City Contact: IDG World Expo, 111 Speen Street, Box 9107, Framingham, MA 01701-9107; tel: 508-879-6700; fax: 508-872-8237

SOFTWARE TRADE MISSION August 1995 Description: Trade mission for software firms interested in the rapidly growing Mexican market Location: Mexico City Contact: Heidi Hijikata, U.S. Department of Commerce, Office of Computers and Business Equipment, Room 2806, 14th Street and Constitution Avenue NW, Washington, DC 20230; tel: 202-482-0569; fax: 202-482-0952

MACWORLD EXPOSITION September 1994 Description: Show featuring Macintosh computer products Location: Mexico City Contact: IDG World Expo, 111 Speen Street, Box 9107, Framingham, MA 01701-9107; tel: 508-879-6700; fax: 508-872-8237

COMPUMUNDO October 1994 Description: Show featuring computer products Location Mexico City Contact: IDG World Expo, 111 Speen Street, Box 9107, Framingham, MA 01701-9107; tel: 508-879-6700; fax: 508-872-8237

Sources of Information:

Commercial Services in Mexico

Post: American Embassy Mexico Telephone: 011-52-5-209-9100 Fax: 011-52-5-207-8837 Street Address: Paseo de la Reforma 305, Colonia Cuauhtemoc, 06500 Mexico, D.F. Mexico Mailing Address: P.O. Box 3087 Laredo, TX 78044-3087

Post: U.S. Trade Center Mexico Telephone: 011-52-5-591-0155 Fax: 011-52-5-566-1115 Street Address: Liverpool 31, Co. Juarez, 06600 Mexico, D.F. Mexico Mailing Address: P.O. Box 3087 Laredo, TX 78044-3087 Contact Person for Virginia: Margo Galvan E-mail [email protected] Phone: (5) 25-140-2674 (direct)

Post: American Consulate General Guadalajara Telephone: 011-52-3-825-2700, X371/52-3-827-0258 Fax: 011-52-3-826-3576 Street Address: Jal. Progreso 175 Mailing Address: P.O. Box 3088 Laredo, TX 78044-3098

Post: American Consulate General Monterrey Telephone: 011-52-83-45-2120 Fax: 011-52-83-45-5172/343-4440 Street Address: N.L. Avenida Constitucion 411 Poniente Mailing Address: P.O. Box 3098 Laredo, TX 78044-3098

Mexican Government Agencies:

Secretaria de Comercio y Fomento Industrial (SECOFI) (Secretariat of Commerce and Industrial Development) Dr. Luis Fernando de la Calle Under Secretary of Foreign Trade and Investment Alfonso Reyes No. 30, floor 9 Col. Hipodromo-Condesa 06179 Mexico, D.F. Tel: (011-52-5) 729-9101/ 9102 Fax: (011-52-5) 729-9307

Secretaria de Comercio y Fomento Industrial (SECOFI) (Secretariat of Commerce and Industrial Development) Dr. Ignacio Navarro Zermeño Mines General Coordinator Puente de Tecamachalco # 26 Col. Lomas de Chapultepec 11000 Mexico, D.F. Tel: (011-52-5) 202-7339 / 7345 Fax: (011-52-5) 202-0016

Asociacion Nacional de Importadores y Exportadores de la Republica Mexicana, A.C. (ANIERM) Association of Importers and Exporters of Mexico Lic Robert Sonnenberger President Monterrey No. 130 Col. Roma 06700 Mexico, D.F. Tel: (011-52-5) 584-9522 Fax: (011-52-5) 584-5317 E-mail: [email protected]

Other Sources of Information

Law Office of Richard D. Burris 2830 North Swan, Suite 120 Tucan, Arizona 85714

Phone: 520-881-4000 E mail [email protected]

National Law Center for Inter-American Free Trade 1-800-LAW-FIND www.natlaw.com/ E mail [email protected]

Cardenas Barbosa Lopez Y Asociados (Accounting Services and Audit)

U.S. Address 9840 Via de la Amistad Box 3-510 San Diego, CA 92173 Mexico Address Plaza Patria 5th Level #10 El Paraiso, Tijuana, B.C. Telephone From US 1-888-823-4761 From Mexico 21-04-44, 81-17-35 Fax From US 1-888-823-4761 From Mexico 81-15-25 E-mail [email protected]

Internet Sites

MexConnect http://www.mexconnect.com/mexbusboard/index.html

Mexico Online http://www.mexicool.com/business

Mexico Trade Leads http://mexico-trade.com/leads/html

Mexico Trade Monitor http://www.mextrademonitor.com.mx

NAFTA Register www.nafta.net/global

World Wide Business Club http://www.wbc.com

World Trade Zone (Importers/Exporters directory) www.worldtradezone.com

Stat USA www.stat-usa.gov

US Department of Commerce www.ita.doc.gov

Maqguide http://maqguide.com

Contacts for Distributor Search

Softtek Blv, Diaz Ordaz 333 Garza, Garcia, Nuevo Leon Ph: (5) 28-153-2049 Fax: (5)28-153-2001 Contact: Blanca Trevino de Vega E mail < [email protected]>

Sipros Software Igancio Perez Sur # 28-104 Col Centro C P 76000 Queretaro, Qro Contact: Jorge Alfredo Buttron Arriola

Estrategias Y Soluciones Sendero Sur No 214-6, Country 64080 Monterrey, Nuevo Leon Contact: Diego A. Glores Rodriguez

Mextron Electronica Meralurgia No. 107 Col. Parque Industrial Escobedo 66062 General Escobedo, N.L. Contact: Leobardo Gomez

Intelecsis Calle 6 Nie No. 2604, Col. Buenavista 72760 Cholala, Pue. Contact: Elizabeth Manrique

Software Related Trade Magazines/Newspapers

Mundo Ejectivo http://www.mundoeje.com.mx

El Economista http://www.economista.com.mx

El Financiero http://www.elfinanciero.com.mx

Mexican Market Research Firms

Arthur D. Little Mexicana, S.A. de C.V. http://www.adlittle.com

Dun & Bradstreet, S.A. de C.V. http://www.dnbcorp.com

Bimsa Econometrics http://www.bimsa.com.mx

Section V Peru

1. General, Geographic and Cultural Information Peru is a small country in western South America bordering the South Pacific Ocean between Chile and Ecuador. Its area is 1.28 million square kilometers, or 496,225 square miles, making it approximately three times larger than the state of California. The capital of Peru is Lima which has a population of nearly 7 million people. The other major Peruvian cities are Arequipa, Chiclayo, Cuzco, Huancayo, Trujillo, Ayacucho, Piura, Iquitos, and Chimbote. July 1999 estimates place the Peruvian population at approximately 26,624,582 persons, of which 70% is considered urban. The annual population growth rate is 1.7% according to 1997 estimates. Peru is an ethnically diverse country composed of approximately Indian 45% persons; Mestizo 37% persons; White 15% persons ; with Black, Japanese, Chinese and other ethnic groups composing the remaining 3%. The official language of Peru is Spanish, used in the government, media, education and commerce. There is also an indigenous language, Quechua, frequently used by native persons. Cumpulsory education is required for 11 years and approximately 89% of the total population is literate.

Official Peruvian holidays are shown below:

Date Holiday January 1 New Year’s Day April 1 Maundy Thursday April 2 Good Friday May 1 Labor Day June 29 Saints Peter and Paul July 28 & 29 Independence Day August 30 Santa Rosa de Lima October 8 Battle of Angamos November 1 All Saints’ Day December 8 Immaculate Conception December 25 Christmas

2. Peruvian Economic Welfare

National product: GDP - purchasing power $73.6 billion (1994 est.) parity National product per capita: $3,110 (1994 est.) National product real growth rate: 8.6% (1994 est.) Inflation rate (consumer prices): 15% (1994 est.) Unemployment rate: 15% Imports: $5.1 billion (f.o.b., 1994 est.)

The Peruvian economy has become increasingly market oriented, with major privatizations completed since 1990 in the mining, electrical and telecommunications industries. The Peruvian Gross Domestic Product in U.S. dollars for 1991 was $20.6 billion or $920 per capita. Under the administration of President Fujimori, Peru started bold structural reforms. His administration ended price controls and restrictions on capital flows, freed exchange rates, simplified the tax structure, liberalized trade, slashed the fiscal deficit, and privatized state industries. The economic reforms quickly brought inflation under control, revitalized Peru’s stagnant economy and put it on the path to dynamic growth. By 1993, Peru was registering solid economic growth, and by 1997 Peru had a cumulative five-year growth rate of 41.9%, the highest in Latin America. The GDP growth rate for 1997 was 7.4%. 1998 is a key year for Peru in many ways. It is the last year of the second (and likely, last) three-year International Monetary Fund (IMF) Extended Fund Facility, which the Government of Peru (GOP) has used as a way of signaling to the international financial community its intention of keeping fiscal discipline. In its most recent letter of intention with the IMF, the GOP set certain targets for 1998: 4% growth in gross domestic product (GDP), inflation in the 7-9% range, a primary budget surplus of 1.7% of GDP, and a current account deficit of 5.9% of GDP. So far, Peru has met all of the quantitative targets it agreed with the IMF. Most observers estimate, however, that because of the two external shocks to the Peruvian economy -- "El Nino" and the Asian crisis -- it may be difficult for the Government to meet this year's targets.

In addition, pressures on the government to stimulate the economy out of its current slump, to provide additional employment, and to hasten El Nino reconstruction efforts may cause the government to loosen its former fiscal discipline in the run-up to the year 2000 elections.

3. IT industry The Peruvian market for the total computer industry hardware, services, and software, is considered small compared to other countries in the region. According to a representative from a large U.S. computer company, the total computer market in Peru will total U.S. $400 million in 1998. However, it should grow 22% per year through the year 2000. Given the little research infrastructure available for development of new software technology, Peruvian software production is based on applications developed from foreign software, largely controlled by U.S. companies.

1997 1998 1999 Total Market Size 96.0 117.1 142.9 Total Local Production 58.5 67.3 77.4 Total Exports 0.3 0.3 0.4 Total Imports 37.8 50.2 65.9 Total Imports from US 27.9 37.6 49.4 Exchange Rate 2.66 2.93 3.11

In 1997, the nearly 1,000 computer distributors sold 125,000 PC units in Peru, 30 percent of which are notebooks. The home market has been showing the greatest growth rates. However, the growth potential is still significant for it is estimated that only 6 percent of Peruvian homes have a PC. The modernization of most public entities and private firms, the increasing use of the Internet by firms and home-users, which is currently estimated at 40,000 end-users, the development of the telecommunications network, and the increasing competition in the business market, are key factors that will continue pushing up the demand for computer software in Peru. Telephone density is one of the lowest in South America, but the privatization of the phone system has brought phones into more homes and businesses, service levels have risen, and voice and data communications are generally reliable in Peru. Peru suffers from a shortage of electrical generating capacity and an over reliance on hydroelectric power, which has led to sporadic power outages in past periods of

220 International Market Planning Program PenSoft drought. The power utilities are being privatized, and the government is encouraging investment -- domestic and foreign -- in additional generating capacity. This electrical issue could possibly have some ill effects on the Peruvian computer usage. Peruvian software customers can be divided into two distinct and different markets, the corporate market and the non-corporate market. The corporate segment is comprised of a group of almost 62 companies that have a network of 1,000 or more workstations and a group of almost 800 companies having between 150 and 1,000 workstations. Most of these companies belong to sectors where there is intensive use of computers such as banking and financial, telecommunications, and government. The non-corporate segment includes both small businesses with less than 150 computers, and private or individual users (home market). The most important end-user of computer software in Peru is by far the corporate segment, which includes the private banking sector and large manufacturing companies. On a lower scale, small businesses require customized applications that include accounting, taxation, procurement, sales and entertainment. It is estimated that 60 percent of small businesses in Peru do not use computer networking yet. The increasingly competitive business environment in Peru has forced most companies to invest in new software. The software market in Peru has been steadily growing at an annual rate of 25%. The Peruvian software market in 1997 was valued at $71 million and is estimated to reach $120 million in 1999. It is further expected to grow 20 to 30 percent in the next three years. This includes the rapidly rowing demand for software in the Peruvian market, which includes software training courses and Spanish written industry literature. Although the corporate sector is by far the most important user of software in Peru, home-users are increasingly expanding the market. However, with a modest penetration of 12 computers per 100 homes, the home-user market is limited by the country's low average income level that still makes a $1,000+ desktop an expensive item.According to the Peruvian Chamber of Software, about 150 firms operate in the computer software market in Peru. Locally produced software varies from sophisticated application software for banks and financial institutions to customized application solutions developed for small businesses such as drugstores, hardware shops, bakeries, hotels and restaurants. Some of

the most popular customized applications include accounting, taxation, procurement, sales and entertainment. In 1997, Peruvian imports of software totaled $32 million, with the Unites States accounting for 46% of the total. Imports of software from Spain, Germany, Netherlands, Chile, Columbia, Canada and the United Kingdom have made the local market a very competitive one. The world’s most recognized brand names are currently sold in Peru. These names include IBM, Microsoft, Lotus, Novell, Oracle, Informix, Candle, Peoplesoft, 3Com, Artech, Landmark, Symantec, Golbalink, McAfee, SCO, Autodesk, Borland (US), SAP (Germany), Dimoni (Spain), BAAN (Netherlands), Microfocus (UK), Scala (Sweden), Aisoft and Orden (Chile). Software piracy remains a serious problem in Peru, particularly among home users and small companies. Mr. Gustav Leon, a representative in Peru for the Business Software Alliance, estimates that 75 percent of local businesses still use illegal software. Mr. Leon also reports a current software piracy report of 66% in Peru. The highest level of piracy is in the education sector where almost 85% of the software used is illegal. It is estimated that in 1997, software companies lost $31 million in sales in Peru due to software piracy. The government, in conjunction with the Business Software Alliance has begun to enforce the anti-piracy laws on the books, and software piracy has dropped from 95% to 65% over the past five years. Although the Peruvian software market is highly competitive, U.S. software firms have maintained an important presence and dominate the market for all kinds of software. In 1997, U.S. products led the import market with a 46% share. Major foreign computer software companies and brand names have offices in Peru and/or local distributors.

Three competitve factors mainly influence the Peruvian software market:  After sales service  Quality  Price

To be successful in the Peruvian market, it is important that foreign products offer reliable after sales service and develop strong distribution channels. Peruvians consider service and support a critical factor in making the final purchasing decision, especially for products that require periodic servicing. The buyer must know and feel that it has guaranteed service. It is important for the product to be sold through a reliable distributor that offers the quality and services that the client requires for its product. One of the few local trade associations in the computer industry, Camara Peruana de Software (Peruvian Chamber of Software) is comprised of 25 companies, that together account for 70% of the local software. These companies offer specific software applications and ERP (Enterprise Resource Planning) software for corporate and non- corporate users. Companies producing local software offer both specific application and software (accounting, taxation, sales) for small businesses such as drugstores and hotels, and sophisticated software for banking, financial and telecommunications sectors. Local production is aimed primarily at specific application software mainly for the local market. Local software producers are competing with foreign companies for the market niches of small to medium sized companies. One example of such a partnership is that of Gessa Data, a local company that, teamed with a Windows client-server solution, has produced Softotal an ERP software that competes with light versions of SAP, Baan, and Peoplesoft.

4. Distributors The population of Peru is extremely centralized, with 30% of all inhabitants living in the capital city of Lima. Therefore, most sales occur in Lima, but opportunities exist in other major population centers, which should be part of an overall marketing strategy. Representatives in Lima will have sales agents in these cities, providing sales opportunities in the provinces. The most common method of distribution is the appointment of a strong and qualified representative. Appointing an agent or distributor is advisable if your company is seriously considering entering the market. Customarily, suppliers enter the Peruvian market by appointing an agent, distributor, or wholesaler. Most are located in Lima with branch offices in the other main cities such as Arequipa, Trujillo, and Tacna. Peruvian law does not require the use of local distributors for private sector commercial sales. However, for sales to the government, you should contract and register a local agent. It is advisable to have a representative "on the ground" to keep up with the latest opportunities and developments. Direct marketing is fairly well established in Peru in the service sector, especially among financial institutions and seminar organizers. One common practice is to hire personnel for telemarketing and mailing campaigns or to contract these services from specialized firms. Databases for direct marketing arezealously guarded and thus are not readily available. Nevertheless, commercial information can be obtained through the chambers of commerce and trade associations.

4.1 Top three distributors: While several distributors in Peru were contacted and requested to provide information regarding their services for clients, none responded to the inquiry. The names of the organizations contacted are provided below, as they may be useful at some point in the future. Given the lack of response, it is not possible to provide any definitive information on any of these organizations at this time.

Distributors MRL Importaciones & Representaciones Jr Collasuyo No 478 Lima 36 Peru Phone: 51-1-489-0375 Fax: 51-1-489-0375 E-mail: [email protected] Web Site: WWW.telematic.edu.pe/users/mri

Mulitservicios Electronicos Av. Pablo Fernandíni 1405 – Pueblo Libre Phone: 51- 01-431-5500 Fax: 51-01-423-6868

HappySoft Av. Arequipa 3261 San Isidro Peru Fax : 51-421 - 1644

4.2 Trade Promotion Opportunities The only local trade promotion shows in Peru that specifically focus on the software market are Common Peru and Tecnotron. Local business people usually attend international events worldwide. U.S. Department of Commerce's Commercial Service in Lima put together delegations of foreign buyers for USDOC-sponsored trade shows in the U.S every year including Comdex Fall, Internet World, PC Expo, and Supercomm.

5. Competition Research was conducted to determine any competitive information regarding payroll software in the Peruvian market. However, no significant information was found. Additionally, those entities contacted including embassies, government resources, and distributors did not respond to inquiries. While it does appear that some software is being customized for small to medium sized businesses, no statistics were found on the internet or in government publications. It is therefore, impossible to describe the competitive situation of the payroll software market in Peru.

6. Taxation Issues The taxation authority in Peru, the National Tax office (Http://sunat.gob.pe/) was contacted for information regarding Peruvian tax issues. No response was received.

7. Barriers to Entry In general, Peru enjoys a very open market, with trade restrictions held to a minimum. Tariff rates on 95% of products are 12% ad-valorem. Distributor mark-up varies according to type of product, but usually ranges between 12% and 25%. All imports are subject to an 18% value-added local sales tax. Imports of U.S. $5,000 or more are also subject to pre-shipment inspection (PSI), which must be performed by one of the three selected PSI companiesAlmost all non-tariff barriers to U.S. exports and obstacles to direct investment have been eliminated over the past eight years. Peru became a founding member of the World Trade Organization in January 1995.

Import licenses have been abolished for all products except firearms, munitions and explosives; chemical precursors; ammonium nitrate fertilizer, wild plant and animal species, and some radio and communication equipment. Tariffs apply to virtually all goods exported from the U.S. to Peru, although rates have been lowered over the past few years. A new tariff structure that went into effect in April 1997, for example, lowered the average tariff rate from 16 to 13 percent. At the same time, the government did raise some tariffs on agricultural products and imposed an additional "temporary" tariff on agricultural goods, in a move to try to promote domestic investment in the sector. Under the new system, a 12

226 International Market Planning Program PenSoft percent tariff applies to more than 95 percent by value of the products imported into Peru; a 20 percent tariff applies to most of the rest, while a few products are assessed rates of up to 25 percent, primarily due to the additional temporary tariffs. Some non-U.S. exporters have preferential access to the Peruvian market because of Peru's bilateral and multilateral tariff reduction agreements.

7. 1 Protection of Intellectual Property Rights

Peru belongs to the World Trade Organization (WTO) and the World Intellectual Property Organization (WIPO). It is also a signatory to the Paris Convention, Berne Convention, Rome Convention, Phonograms Convention, Satellites Convention, Universal Copyright Convention, and the Film Register Treaty.

However, Peru does not yet provide adequate and effective protection of intellectual property rights (IPR). While protection of intellectual property in Peru has improved significantly in recent years, but still falls short of U.S. and international standards in several areas. Peru has been on the United States government's "Watch List" under the Special 301 provisions of the 1988 Trade Act since 1992. The Peruvian government agency charged with promoting and defending intellectual property rights is the Institute for the Defense of Competition and Protection of Intellectual Property (INDECOPI), established in 1992. Patents, trademarks, and industrial designs are protected by Legislative Decree 822 of 1996 and by Andean Community Decisions 344 and 345. Copyrights are protected by Legislative Decree No. 822 of 1996 and by Andean Community Decision 351. There is currently some dispute within the Andean Community about whether national law or the Community Decisions on IPR would prevail in the case of conflict between them. Generally, it is thought, however, that the higher standard would prevail. In any case, there are few differences between Peru s domestic IPR legislation and the Community Decisions. Peru is a signatory to the Berne Convention for the Protection of Literary and Artistic Works, the Universal Copyright Convention, the Geneva Convention for the Protection of Sound Recordings, the Brussels Convention on the Distribution of Satellite Signals, and the Paris Convention on Industrial Property. In December 1994, the Peruvian Congress ratified the World Trade Organization's Agreement on Trade-Related Aspects of

Intellectual Property (TRIPs). Peru must bring its laws into compliance with TRIPs by January 1, 2000, to be in compliance with its WTO commitments.

Legitimate owners of intellectual property rights (patents, trademarks, copyrights) have had increasing success in protecting their rights in the past few years. Peru s legal framework provides for easy registration of trademarks, for example, and inventors have been able to patent their inventions since 1994. Still, counterfeiting of trademarks, books, cassettes, software, and videos is widespread. Enforcement by INDECOPI and the judicial branch does exist, but many believe that it could be improved. As a practical matter, importers and distributors should hire a local counsel who specializes in IPR issues if they are concerned about piracy of their products in Peru.

7.2 Governments and regulations It is interesting to note that the Peruvian government passed a law in 1997 that requires its Customs Service, the Superintendencia Nacional de Aduanas (Sunad) to process goods electronically. Customs agents and shippers are now linked to the Sunad via the Internet. The clearing of goods is completely electronic and can be followed on the World Wide Web by any individual with the proper authorization. Collections are done through the 12 interconnected banks with which Sunad has formal agreements. Manifests are beamed electronically to officials who clear the shipments or tag them for inspection. The new system has speeded the import-export process considerably for all parties involved. Presently, only New Zealand, Australia and South Korea are the only other customs authorities in the world that has taken advantage of the electronic age. Customs legislation for software imports has been developed during the last three years. The current legislation requires payment of duties on imported software based on its tangible value (disks, tapes, CD roms, floppy diskettes) in all cases, and on its intangible value (license, copyright) in certain cases. Duties on the intangible value of software apply for: 1. Packaged software that is commercialized as a common good. 2. Special software designed to operate with specific hardware or equipment.

3. "Upgrade" software when not covered by specific upgrade rights.

7.3 Customs Entry Forms. - Bill of Lading, Air Waybill or Road Consignment Note according to the mode of transportation used. - Commercial invoice. - Certificate of Pre-shipment Inspection, when the consignment FOB value exceeds $2,000 (used merchandise) or $5,000 (new merchandise). The companies authorized to issue this certificate are: SGS-Societe Generale de Surveillance (U.S.:(305)592-0410), Cotecna Inspection (U.S.:(305)828-8141), Bureau Veritas (U.S.:(305)593-7878) and Intertec Testing Services (U.S.:(305)513-3000). All of them have offices in Peru, where the request for the service should be made. The cost for this service is 1 percent of the FOB value. - Certificate of Origin, necessary when products benefit from lower tariffs from trade agreements. - Warehouse receipt. - Certificate of Insurance. - Special certificates or authorizations for restricted goods. - Inventory Bill (for damaged packages). Consignments whose FOB value is over $2,000 must be cleared by a private Customs Broker.

8. Entrance Strategies Based on the market research conducted for this project, Peru is not a good candidate for PenSoft expansion at this time. First, the Peruvian market is attractive and shows signs of growth, it is small compared to those of the other countries researched. Secondly, while many of the larger software company representatives have small regional offices in two or three additional cities outside of Lima. The rest of Peru is largely under- populated, underdeveloped and does not offer an attractive market for technical equipment. Finally, the lack of specific information regarding pricing and competition is a drawback for any organization considering this market. Finally, the possible use of Application Service Providers (ASP) was examined. The section at the end of the country reports (Section VI) is dedicated to this.

9. Appendices and Contacts for Peru

American Chamber of Commerce in Peru Av. Ricardo Plam 836, Miraflores Lima 18 Peru Phone: 51-14-479-349 Fax: 51-14-479-352

Trade Office of Peru 215 Lexington Avenue 21st Floor New York, New York 10016

U.S. Department of Commerce (U.S. Embassy Lima, Peru) Unit 3780 APO AA 34031 Ursula Odiaga Iannone, Senior Commercial Officer Cesar Jochamowitz, Senior Commercial Specialist Flora Muroi, Commercial Specialist Carlos Robles, Commercial Specialist Tel: (511) 434-3040 Fax: (511) 434-3041 E-mail: [email protected]

U.S. Department of Commerce (Washington, D.C.) 14th & Constitution Avenue, N.W. Washington, D.C. 20230 Tom Welch, Desk Officer Tel: (202) 482-2375 Fax: (202) 482-0464

Trade Information Center in Washington: 1-800-USA-TRADE

U.S. Trade and Development Agency (TDA) 1621 North Kent Street, Suite 300 Arlington, VA 22209-2131 Tel: (703) 875-4357 Fax: (703) 875-4009 Internet address: http://www.tda.gov Al Angulo, Regional Director Gabriela Rigg, Country Manager Tel: (703) 875-4357 Fax: (703) 875-4009

U.S Department of State (U.S. Embassy Lima, Peru) Unit 3730 APO AA 34031 Krishna Urs, Economic Counselor Tel: (511) 434-3000 Fax: (511) 954-3221

The National Tax Office Superintendencia Nacional de Administration Tributaria-Sunat Av. Inca Garcilazo de la Vega 1472 Lima Phone: 51-1-264-1440 Fax: 51-1-264-4020 E-mail: [email protected] Web Site: Http://sunat.gob.pe/

Trade Associations

CAMARA PERUANA DE SOFTWARE (Peruvian Chamber of Software) Address: Bacaflor 140 Magdalena, Lima 17 PERU

Phone: (51 1) 264-1496 Fax: (51 1) 264-0620 Contact: Mr. Eduardo Toledo, President

BUSINESS SOFTWARE ALLIANCE Address: Juan Manuel Polar 129, Orrantia del Mar San Isidro, Lima 27 PERU Phone: (51 1) 461-5270 Fax: (51 1) 261-6022 Contact: Mr. Gustavo Leon y Leon, Legal Representative

SOCIEDAD NACIONAL DE INFORMATICA (National Society of Information Technologies) Address: Jose Gonzales 660 Miraflores, Lima 18 PERU Phone: (51 1) 241-8326; 446-8591 Fax: (51 1) 446-8591 Contact: Mr. Cesar Vargas, President E-mail: [email protected]

CAMARA DE COMERCIO DE LIMA, COMITE DE EQUIPOS DE COMPUTO (Lima Chamber of Commerce, Computer Hardware Committee) Address: Av. Gregorio Escobedo 396 Jesus Maria, Lima 11 PERU Phone: (51 1) 463-3434 Fax: (51 1) 463-2941 Contact: Mr. Carlos Durand, President URL: http://www.camaralima.org.pe

ASOCIACION PERUANA DE COMPUTACION E INFORMATICA (APCI) (Peruvian Association of Computer and Information Technologies) Phone: (51 1)433-6691

Fax: (51 1)433-7735 Contact: Mr. Fermin Torrejon, President E-mail: [email protected]

CONSORCIO PERUANO DE INFORMATICA (Peruvian Consortium of Information Technologies) Address: Maximo Abril 541 Jesus Maria, Lima 11 PERU Phone: (51 1)424-8270 Contact: Mr. Orlando Vargas, President

Trade shows

1st OFFITECH Lima, Peru (Office Equipment) Thais Corporation S.A. Laredo 443 Monterrico, Lima 33 Peru Tel: (511) 435-2178, 435-2643 Fax: (511) 434-0495 Guillermo Thais, President E-mail: [email protected]

COMMON PERU Bajada Balta 131, Oficina 10 Miraflores, Lima 27 PERU Phone: (51 1)445-0789 Fax: (51 1)446-3132 Contact: Mrs. Giuliana Arbocco, Operations Manager E-mail: [email protected]

TECNOTRON - Feria Internacional de Telematica y Equipos de Oficina (International Fair on Information Technologies and Office Equipment) Organized by FERIA INTERNACIONAL DEL PACIFICO P.O. Box 4404 Lima 100, PERU Phone: (51 1)566-0775 Fax: (51 1)566-0320 Contact: Mr. Rafael Talavera, General Manager Tecnotron takes place in Lima every year. In 1998, total exhibition area was 64,747 square meters. With ten countries represented, Tecnotron featured 234 exhibitors and received 55,463 visitors. The next show will be held in April 2000.

VI. Possible Competition for PenSoft: Application Service Providers Web-based computing offers a low-cost way to access corporate files and applications from across town or across the globe. Stateless computing goes by many names Web-enabled, server-based, Internet-enabled, and WebTop computing, just to name a few. But regardless of its moniker, its purpose is the same: to allow workers access to corporate resources through any device connected to the Internet. The idea of stateless computing has been around for a while, but viable solutions are just now making it to market. These systems allow users to access their corporate e- mail accounts, local files, and even corporate applications from any Web browser. And it isn't just large enterprises that are trying out these packages. Small and medium-size businesses are discovering that stateless computing can cut costs and keep employees connected. Stateless computing has a number of advantages over traditional client- server architectures. Because it's platform-independent and access- independent, users gain the ability to access corporate resources from any Web-connected device, whether a PC at a remote office or a kiosk in an airport. Network managers can deploy remote access for users without the cost and hassle of modem pools and multiple client configurations. Soon, stateless computing will also provide the tools for distributing software applications over the Web in real time. Instead of buying software and installing it on your PC, you'll access the Web and "rent" the software whenever you need it. Companies that rent software online are called application service providers (ASPs). In addition to being cheaper to deploy, stateless computing solutions are also a lot easier to manage. In some ways, thismethod of computing is akin to the thin-client model. The processing takes place on the server, and the easily managed clients act as dumb terminals. The difference is, stateless computing is hardware-independent. "There are no upgrades, and there are no worries about maintaining a server, because their information is backed up regularly," says one user. "All users need to manage is their mouse and keyboard." Though the keys to stateless computing solutions are the cost savings and manageability, such economy and flexibility comes at a price questionable performance.

Because the software relies on the Internet, even if you use a fast, dedicated connection, traffic can still be a problem at the server level. The inherent slowness of Java, which almost all stateless computing solutions use, adds a second bottleneck. But there are a lot of recent improvements on both fronts. Stateless computing solutions appeal to businesses of all sizes. HotOffice has been well received in the small- business marketplace because these customers typically do not have the financial or technical infrastructure to maintain complex in-house IT systems. Using an ASP like HotOffice allows small businesses to outsource their networking operations, thereby eliminating both the maintenance responsibilities and costs of a traditional client-server environment. Instead, they can use existing PCs and Internet connections to connect instantly to a WebTop intranet. The ASP business definitely is real. In fact, most industry watchers see ASPs becoming a big business. International Data Corp. predicts that the compound annual growth rate of ASPs will be 91%, going from zero in 1998 to $2 billion by 2003. This estimate is low in comparison with the predictions of some investment banking firms. Research indicates that ASP market estimates on a worldwide basis are accurate in the short term but inaccurate for the long term. The midtier market - the target market for ASPs - is much larger overseas than in the U.S. As with all Web-based technological evolutions, the ASP business has started in the U.S., but it will become a booming business in Europe by 2001 and in Asia by 2003. Corporate conservatism will dictate the rate of adoption throughout the world, but economic conditions and competitive market pressure are likely to accelerate adoption. The worse the economic conditions or the greater the competitive environment, the greater the adoption rate. Industry analysts remain uncertain of the impact that application service providers will have on the MIS landscape, but agree that ASPs have emerged in the past year as a means of fulfilling the IT services requirements of small and medium-sized businesses. The ASP model is appealing to such companies because they lack the IT resources to handle the complexities of software distribution and systems management with in-house resources. Dataquest predicts the ASP market will total $2.7 billion by year's end and reach $22.7 billion by 2003. With such opportunity in sight, the traditional IT services and software

237 International Market Planning Program PenSoft companies, including EDS, IBM, and Oracle, are rapidly expanding their newly opened ASP divisions.

Connectivity may also prove to be an issue for companies considering ASPs. While most ASPs guarantee application performance and availability, some vendors, such as Oracle Business Online, won't guarantee service levels for connectivity. Those vendors direct customers to their telecommunications company for such guarantees, and the customer may need to pay additional fees for a telco service agreement. At Hoyts Cinema, Barry is paying Bell Atlantic for a redundant telco line to help avoid any problems connecting to Corio's services. Some vendors are addressing that issue as well. IBM has partnered with AT&T to provide telco connectivity for its ASP customers, along with a service-level agreement that covers connectivity. But the choice is left up to the customer. "If a customer would rather go with a local carrier, we will not provide an end-to-end service agreement," says Kathy Dodsworth-Rugani, VP of IBM Global Services' Direct Hosting Applications division. Analysts expect more infrastructure vendors to offer their wares to ASPs, which, in turn, should improve ASPs' ability to offer value-added software services to customers. "There will be two players in this market-the actual ASPs that deal with the customer and the commodity provider that concentrates on the data center, infrastructure, and metering and monitoring services," says Reda Terdiman, VP and research director for Gartner Group. "The latter providers, such as HP, will be seamless to the end user, but will allow the ASP to concentrate on developing more and better solutions for their customers."

Bundled Payroll Solution Enterprise resource planning vendor Lawson Software's new product, Fast HR/Payroll Solution, is available though ASPs USinternetworking Inc. and Shared Medical Systems Corp. or as a standalone application for internal use. The HR and payroll automation package for midmarket companies includes the Lawson Insight Human Resources Suite, which lets employees update their own records and query payroll information, and offers answers to commonly asked questions on benefits, vacation accrual, and company policy.

Through a deal with IBM Global Services, Lawson is incorporating IBM's Project Office project-management tool to track the software implementation from start to finish in an effort to decrease costs, improve communication and workflow, and provide real-time confirmation of project progress. The package also includes BSI Payroll Tax software, an option for classroom or computer-based training for HR employees using the applications, and post implementation support from Lawson. "Our smaller customers have a need for a strong integrated payroll solution, but they don't have the resources to spend a lot of time on the implementation," says Ro Sakmann, Lawson's director of product marketing for HR products. "Providing them with a bundled package and implementation services is answering their demands." The midtier businesses, though outsourcing to an ASP, will change its operational characteristics, placing less emphasis on IT operations and development, and more on business growth through the productive use of IT. Managing and monitoring the ASP's performance will replace operations and applications development. The large enterprise will flourish, with demands for increased bandwidth, reduced response time and new Web- based transaction/database applications driving the upgrade of the desktop, LAN/WAN and servers. The emergence of large vendors in the ASP space could have a dramatic impact on how the market shakes out, analysts say. Vendors of outsourcing services, including IBM and EDS, are tailoring their new ASP services for the budgets and IT needs of small to midsize companies.

References for ASP

Internet Resources WWW.WORLDLINKINTERNATIONAL.COM/EXPORT.HTML WWW.NIRVANA.INTERATWORLD.COM/HTML/LATINA/ECON15.HTML WWW.LCWEB2.LOC.GOV/CGI.BIN/

Government Resources Office of Computers and Business Equipment Foreign Market Information, Peru Computer Software Report

State Department Country Commercial Guides

CIA World Fact Book – 1999- Peru

Articles “New Peruvian Customs” by Sally Bowen in the May 1999 issue of Latin Trade

“Leave The Apps To Us! -- ASPs Offer Benefits Through Economies Of Scale. (Industry Trend or Event)” by Jennifer Mateyaschuk. InformationWeek, Oct 11, 1999 p55

“Better HR Apps -- Resource Partner Expands Peoplesoft Program; Lawson Ships New Software.” by Eileen Colkin. InformationWeek, Sept 6, 1999 p101

“Software for hire--Application service providers are creating more options that let IT rent, rather thanbuy, software.” Ted Smalley Bowen. InfoWorld, June 28, 1999 v21 i26 p1

VII. Conclusions Having completed the objectives stated in the introduction section of this project for each of the five countries, the group was well equipped with the necessary information to make a decision on whether PenSoft should venture into these countries. All group members faced similar problems in their research of each country. Even though general information was available for each country, including statistics and outlook of each country’s Information Technology industry, it proved extremely difficult to zero in on the required specific data concerning the prosperity of the small to medium sized small business sectors of each country, which would comprise the greatest potential market for PenSoft products. The problem was much greater in the case of Mexico and Peru, where the language barrier (Mexican language) was also a barrier to obtaining the information. Looking at the group’s results, the following recommendations can be made concerning each of the countries:

1. Australia The outlook for this country was particularly positive; based on the group’s findings, it is highly recommended that PenSoft seriously considers entering this market. The economy is stable, and there is a large market of small businesses who are eager to advance their software capacities. Although competition is present in this specialized market of Payroll software, Australians are very price sensitive, and will try a new product with similar features if the price is right. Once PenSoft establishes a loyal following, they can adjust their prices.

2. United Kingdom Bearing many similarities to Australia, this country also has the potential market for PenSoft’s international expansion. The payroll software market is highly developed and competitive. The small businesses requiring payroll software services make up a large part of the population. The main issue is still the price sensitivity and fiercely competitive market, which like all other product and services markets in the U.K, is driven by market forces and the desire to please the customer. From the information gathered on the small businesses, it was determined that they do possess the necessary hardware and software

241 International Market Planning Program PenSoft and most enjoy high degrees of computer literacy; however, their limited budgets for IT investment will most likely be a sticky point for PenSoft’s penetration, along with the traditional low brand loyalty typically associated with British companies. Most interesting in this country, is a current, on-going study conducted by the government’s Inland Revenue and the Business Link Directorate in the U.K. to determine whether the average small to medium business in the U.K. would greatly benefit by implementing a payroll software solution. The result is encouraging for both the payroll software industry and PenSoft in particular. As a result, the group recommends that PenSoft seriouslt considers entering the British market.

3. Ireland The case of Ireland, a country whose software industry is one of Ireland's fastest growing business sectors with growth being about 15% every two years, also deserves a closer look by PenSoft. The Irish software industry consists of over 620 firms that employ almost 22,000 people in a broad range of activities including technical support, development and customization, and production and distribution. The industry is comprised of three categories of companies: multinational corporations (MNCs) exporting to the EU and beyond, indigenous companies engaged in exporting, and indigenous firms servicing the local Irish market. The group recommends the distribution of PenSoft payroll software to Ireland. Primary concerns for PenSoft Inc. once again are the cost of its products and exisitng local competition. In fact, all three aforementioned countries look very promising to PenSoft. Communication between a selected local distributor and representatives would be uncomplicated because English is the primary language of all countries. All three countries enjoy high computer literacy rates, relatively low piracy rates and future forecasts for both the software industries in general, and the payroll software industry in particular, expect significant growth. The general economies of Australia, the United Kingdom and Ireland are in good shape. The main point is the pricing and marketing issue which PenSoft must develop with great care. In the case of the U.K and Ireland, successful introduction of PenSoft products in these two countries, could pave the way for launching the company into the ludicrous European Union market.

4. Mexico In considering the other two countries, Mexico and Peru, the group came to significantly different conclusions. In both countries, the language barrier exists, making both product development, information retrieval and marketing strategy more difficult for PenSoft. Aside from the obvious difficulty of developing the software and documentation in Spanish (bilingual version), the prospective markets for both these countries are not encouraging, with both countries economies not showing a lot of promise. In the case of Mexico, the situation is better, with the major software companies well established (e.g. Microsoft, Novell) and some evidence of local competition. Pricing will be an issue, but it appears that prior to taking any drastic steps, PenSoft will have to search long and hard to find a capable distributor. Even then, the company must bear in mind the limited computer literacy rates in small businesses, the usually below standard hardware equipment and the major hurdle of high piracy rates. On the positive side, taxation regulations are not very complicated and the group have received some evidence of interest for the PenSoft product. Research was conducted through use of the internet and the various government resources available. The individual country candidates were researched and then compared to determine which might produce the best option for export growth.

5. Peru Based on the information gathered during the course of this project, it is not recommended that PenSoft consider Peru for export growth at this time. Certainly, the market size and potential is promising, and U.S. software firms have a good reputation in Peru. The research also shows some major concerns when considering Peru. For instance, it does not appear that the small to medium size business that PenSoft would target have a sufficiently developed infrastructure that would allow them to utilize PenSoft. Although the situation does have the potential for improvement, overall data and voice transmission is not entirely reliable in Peru, at this time. Since there are two languages predominantly used in Peru, translation could become another issue when considering Peru. Finally, there was not enough substantive information with respect to computer usage, competition, and entrance strategies to suggest entering the Peruvian market.

Therefore, it is recommended that Peru not be considered as a candidate for the PenSoft export marketing plan. If PenSoft should choose to enter the Latin American market at a later date, another country such as Chile, might provide a better gateway.