NUEVO LEON DEVELOPS A HIGH TECHNOLOGY SERVICE INDUSTRY;

UNCLAS SECTION 01 OF 04 MONTERREY 000306

SENSITIVE
SIPDIS

DEPARTMENT PLEASE PASS TO USTR

E.O. 12958: N/A
TAGS: ECON EFIN EIND EINT EINV PGOV MX
SUBJECT: NUEVO LEON DEVELOPS A HIGH TECHNOLOGY SERVICE INDUSTRY;
WORKING ON NEW PRODUCT INNOVATION

REF: A) 2007 MONTERREY 783 B) 2007 MEXICO 4451

MONTERREY 00000306 001.2 OF 004



1. (SBU) Summary. The state of Nuevo Leon continues to pursue
higher value added industries through a government led strategy,
highlighted by the Research and Technological Innovation Park.
The Research and Technological Innovation Park (PIIT for its
initials in Spanish) has made substantial strides, with five
completed buildings, and will include research centers operated
by the government, universities, major companies, and smaller
entrepreneurs. Nuevo Leon has had significant success
attracting high technology outsourcing work, based on an ample
supply of local engineers. It is less clear whether the Nuevo
Leon strategy, focused on government planning and promotion,
will succeed in its long term goal of developing a homegrown
innovation sector. End Summary.



Nuevo Leon's plan to Promote High Technology Innovation




2. (SBU) Nuevo Leon Governor Jose Natividad Gonzalez Paras has
a vision to move Nuevo Leon from manufacturing to a
knowledge-based economy. Nuevo Leon's plans are government
designed and led, initially focusing on bringing foreign
investment and offshore technology work to Nuevo Leon. Nuevo
Leon has also attempted to foster homegrown companies through
business incubator and accelerator programs. In addition, Nuevo
Leon is seeking to develop clusters with neighboring states, and
has organized a conference on clusters for early July. Overall,
Nuevo Leon hopes to leap frog to a technology industry through
foreign investment and the resulting technology transfer.
Meanwhile, Nuevo Leon has only made limited efforts on several
fundamental issues, such as protection of intellectual property
rights, venture capital financing, and rule of law. Nuevo
Leon's strategy has delivered immediate dividends in outsourcing
work and the landmark PIIT technology park. However, their hope
to generate an innovation cluster is a long-term project,
stretching well beyond the end of Governor Gonzalez's term in

2009.




3. (U) Nuevo Leon has identified several new strategic
industries such as software, biotechnology and nanotechnology to
complement old standbys like automotive and home appliances.
The cornerstone of Nuevo Leon's plan is the Research and
Technological Innovation Park (PIIT),which combines research
efforts by the government, academics and industry. Nuevo Leon
features the PIIT prominently in its promotion brochures for
foreign investors. After a slow start, the PIIT is beginning to
match up to the hype, with five completed buildings, and has
secured tenants for its entire area. Moreover, all of the PIIT
buildings are projected (perhaps optimistically) to be completed
by December 2008. There are further discussions to build a
second technology park next to the PIIT. The PIIT will include
state and federal government research facilities, in addition to
research centers operated by three top local universities
(including the prestigious Monterrey TEC) and the University of
Texas at Austin, Texas A& M University and Arizona State. In
addition, several large firms will have research facilities in
PIIT, including Motorola, PepsiCo, the Indian software company
Infosys, and local Mexican conglomerates such as Vitro, Xignux,
and Sigma (a division of Alfa),and 42 small firms as part of a
software cluster. The investigators in PIIT will work in areas
such as software, biotechnology, nanotechnology, electrical
design, food and logistics. The PIIT expects to employ 2,400
people with an investment of approximately $85 million USD.




4. (SBU) One of Nuevo Leon's key comparative advantages is
the availability of low cost engineers. According to Andres
Franco, Nuevo Leon Under-Secretary for Foreign Investment and
International Commerce, Nuevo Leon features 93 colleges with
150,000 students, 213 technical programs with 52,000 students,
and currently graduates 5,000 engineers each year. The
availability of low cost engineering talent has attracted
companies such as Technip, which provides engineering services
to American oil companies. When Technip found it difficult to
hire petroleum engineers in Houston, they chose Monterrey over
India as their backroom office due to the number of engineers
and geographical proximity. Technip established its Monterrey
office in 2008, and plans to expand from 29 to 120 employees.
Rene Mathieu, local head of Technip, sends the new hires to the
United States for six months of training. Kellogg, Brown and

MONTERREY 00000306 002.2 OF 004


Root also provides engineering services from Monterrey to the
Houston-based petroleum industry, following the same model as
Technip. In another area, Alvatrix offers IT services (server
maintenance) to U.S. based firms in Texas, and obtains cost
competitiveness through its location in Monterrey. In general,
the foreign companies appear pleased with the quality of Mexican
engineers. Rockwell and Technip consider Mexican engineers at
the same level as in the United States, although Siemens
disagreed, commenting that the Mexican engineers were less
productive.




5. (U) Monterrey TEC University has model business incubators
and accelerators to encourage new business formation, including
high technology companies. The business incubators (for new
start-ups) and business accelerators (to expand existing small
firms) provide coaching from business professors, networking
with other entrepreneurs, and technology transfer from existing
businesses. Monterrey TEC officials told Econoffs that the
primary obstacle to new business formation remains access to
financing, since the market for venture capital in Mexico is
still limited (see reftel B). Monterrey TEC plans to establish
'investor clubs,' so that once the Monterrey Tec professor deems
the companies to be ready, the entrepreneurs can present their
business plans to a committee of potential investors, which
could include some large Monterrey firms. Although the plan
could work, so far Monterrey TEC has not yet established
'investor clubs,' nor is it clear how much the Mexican investors
will pay for a minority share of a new start-up. Finally,
Monterrey TEC and the PIIT cooperate in a 'soft landing' program
to ease the placement of foreign companies in Nuevo Leon through
incentives, office space, and assistance with new hires. In
June Motorola established an office in Nuevo Leon under the soft
landing program, and will have an office with 100 employees
located in the PIIT developing software for transmitting
information and video on demand.




6. (SBU) Plans to protect intellectual property rights -- a
key prerequisite for true innovation -- are still in the
preliminary stages. Under an agreement with the state of Nuevo
Leon, the University of Monterrey (UDEM) leads the project of
protecting intellectual property rights at the PIIT. UDEM has
three planned phases: 1) promotion of the culture of legality
and an appreciation of the importance of intellectual property
rights protection; 2) advising small and medium enterprises how
to protect their trademarks and other intellectual property and
3) a center of legal studies to provide legal training on IPR
issues. UDEM has primarily focused on stage one, and has
hosted a series of conferences to emphasize the social utility
of IPR protection. In 2007 UDEM began limited work on phase
two, providing IPR advice to 14 small businesses in 2007, and
depending on funding plans to counsel 28 additional firms in

2008. The Consulate is also actively promoting IPR protection
through presentations and agreements with local governments. In
general, there is local interest, but IPR protection in Nuevo
Leon still has a long road to travel since it just starting to
address the educational aspect.



Success Capturing Outsourced Technology Work




7. (U) Nuevo Leon has made significant strides attracting high
technology work, primarily outsourcing technology jobs by
foreign companies. A number of important technology firms have
set up shop in Nuevo Leon in the last two years, including
Indian software powerhouse Infosys (which will hire up to 1,300
software engineers),Whirlpool (400 engineers),Lenovo ( 750
employees) which will begin building personal computers in Nuevo
Leon this summer for shipment throughout the Americas, and
Accenture (1,000 employees) which will provide technological
consulting services to the Americas. Econoff toured Whirlpool's
impressive state of the art facility, and learned that Whirlpool
plans to increase its technology staff from 380 now to 480 by

2012. Whirlpool exports one billion dollars of home appliance
goods each year. Whirlpool hires from local Mexican
universities, and six of their current employees have doctorates
and 50 to 60 have master's degrees in technical fields such as
mechanical, electrical and chemical engineering. Whirlpool has
worked with the local universities to develop two year seminars
that produce 10 highly qualified engineers per year. The

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Whirlpool technology center has three tasks, developing new
products (40%),improving existing products (40%) and quality
control (20%). As an example of its work on new products,
Whirlpool developed a new icemaker in Monterrey.




8. (SBU) Nuevo Leon has also had substantial success with
homegrown technology consulting providers. Local powerhouse
Softtek has grown since its establishment in 1982 to provide
technology services in over 20 countries and now employs 5,000
professionals. Moreover, Neoris, born as the technology arm of
Monterrey giant Cemex, also provides top quality technology
services rather than original research. A former Conoff with
prior experience in the software field interviewed numerous
Softtek and Neoris engineers for work visas, and found that they
were performing consulting services or putting the finishing
touches on software projects conceived elsewhere (see reftel A).
Similarly, homegrown Dextra with 170 engineers provides 'near
shore' technology consulting and applied solutions to clients
such as Texas Instruments and Nokia, but does not innovate
original software products.



PIIT's emphasis on Applied Research




9. (SBU) Despite all the talk of cutting edge software design,
there are indications that PIIT has initially focused on
technology transfer and applied research. Econoff met with
Ernesto Perez, head of Texas A& M's research facility at the
PIIT. Perez described his task as 'applied research' (which he
preferred to consulting) and said that Texas A&M plans to
transfer technology and research developed at Texas A&M to
Mexican companies. For example, Texas A&M has a number of
experts in materials, and they could bring expertise and
solutions to Mexican firms. Perez also works with Center of
Engineering and Industrial Design (Cidesi),the first
operational research facility built in the PIIT, and operated in
conjunction with the national Council of Science and Technology
(Conacyt). According to press materials, Cidesi will focus on
technology transfer for the automotive, home appliance, steel,
energy and food sectors, since they are the most developed in
Nuevo Leon. Perez commented that Cidesi's strength is
implementing turn key solutions, or transferring technology
developed elsewhere to Mexican firms. Cidesi plans to move into
pure research, and has done so in other Mexican states.
However, in the PIIT, Cidesi has not yet taken the preliminary
step of reaching an agreement with Texas A&M on profit sharing
for potential patents.




10. (SBU) Overall, the PIIT has advanced Nuevo Leon's
technological expertise, although the emphasis is on advanced
manufacturing rather than software design. Carlos Mortera,
general director of the Advanced Manufacturing Technology, a
trade association of 350 U.S. manufacturing companies, thought
that although some cutting edge research exists, Nuevo Leon's
focus has been to integrate and designs systems for advance
manufacturing. Mortera agreed that Nuevo Leon has a good pool
of highly educated engineers who can capably handle outsourced
technology work, but he was skeptical of the high goals for the
PIIT, and he thought that Nuevo Leon was correctly focusing on
higher manufacturing and not software.




11. (SBU) Comment. There is no doubt that Nuevo Leon's
strategy has been successful capturing attractive foreign
investment to establish a high technology consulting and service
outsourcing industry. The high technology sector will also
strengthen the higher value added manufacturing in Nuevo Leon by
helping companies such as Whirlpool develop new products.
However, it is not clear to what extent the foreign companies
will transfer technological know-how to Nuevo Leon, or if Nuevo
Leon will just be a low cost engineering center. The big
question remains if Nuevo Leon can move into true innovation of
developing and patenting its own products, admittedly a long
term goal. The PIIT has been a signature project of Nuevo Leon
Governor Gonzalez Paras, and it is impossible to know if the
next Governor, who will take office in late 2009, will extend
his full support. Nuevo Leon also needs more focus on
fundamental issues such as the financing for start-up companies

MONTERREY 00000306 004.2 OF 004


and reliable IPR protection to establish the foundation for true
innovation. End comment.
WILLIAMSON