The Econmist - USA (2021-10-09)

66 Business TheEconomistOctober9th 2021

Technology

The Mexican wave

K

avak,amexicanstartup,provides  an

elegant  solution  to  a  glaring  problem:

how to buy a used vehicle in a market that

is  both  one  of  the  world’s  biggest  and  its

most  informal  second­hand  car  markets.

Few  buyers  trust  a  seller’s  assessment  of

the  good’s  quality.  Few  sellers  trust  the

buyer to cough up the money. Transactions

often  involve  “meeting  someone  at  a  cor­

ner store and seeing how it goes”, says Ale­

jandro Guerra, Kavak’s general manager in

Mexico. On Kavak’s app people can buy and

sell  cars  with  the  company  acting  as  a

trusted middleman.

Kavak, which last month raised $700m

in a funding round that valued it at $8.7bn,

is  part  of  a  startup  explosion  in  Mexico.

Since  the  firm  became  the  first  Mexican

startup to be valued at more than $1bn last

year it has been joined by three more such

“unicorns”. So far this year unlisted Mexi­

can  tech  firms  have  raised  nearly  $3bn,

roughly  as  much  as  in  the  previous  nine

years combined (see chart). 

Mexico’s  126m  people  are  on  average

young and almost in the upper­middle­in­

come  bracket.  Some  54%  own  a  smart­

phone,  according  to  Newzoo,  a  research

firm,  a  slightly  higher  share  than  among

similarly  novelty­loving  Brazilians.  Mexi­

co  is  among  the  five  biggest  markets  for

tech stars like Uber in ride­hailing or Spot­

ify in music­streaming. It is a huge one for

Rappi, a Colombian food­delivery darling.

Until recently, though, domestic founders

struggled to make a name for themselves.

That is in large part because of a dearth

of  money.  Mexican  entrepreneurs  had  to

go cap in hand to local venture capitalists

with  comparatively  shallow  pockets.  This

began  to  change  in  2019,  when  SoftBank

launched a LatinAmerica fund. In Septem­

ber  the  free­spending  Japanese  technolo­

gy­investment group announced a second

fund  of  $3bn,  bringing  its  total  invest­

ments  in  the  region  to  $8bn,  a  lot  of  it  in

Mexico. Others have been piling in, includ­

ing Sea, a Singaporean tech conglomerate,

Founders Fund, a prominent Silicon Valley

venture­capital (vc) firm, and Tiger Global,

an  aggressive  New  York  hedge  fund  that

has recently been shaking up the vcworld.

This  money  has  been  pouring  into

home­grown  businesses  that,  like  Kavak,

solve what Philipp Haugwitz of McKinsey,

a consultancy, calls “pain points” in Mexi­

co—of which there are plenty, from horri­

ble  traffic  to  a  lumbering  financial  sector.

With just one in three Mexicans owning a

bank  account,  loans  hard  to  get  and  too

many  businesses  cash­only,  fintech  start­

ups  in  particular  are  thriving,  in  part

thankstoa fintechlawfrom2018.Accord­

ingtoFintechRadar, anindustrynewslet­

ter,Mexiconowboastsmorefintechsthan

Brazil,thehistorichubofLatinAmerican

enterprise.Albo,a digital­only“neobank”,

makesiteasytosetupanaccount.Clip

offerscredit­cardreadersforsmartphones.

gbmmakes loans to smaller businesses

withoutcredithistories.Kavakhelpstofi­

nancetransactionsonitsplatform.

Obstaclesremain.Likemanystartups,

Mexicanonesfaceahazypathtoprofit­

ability. Dealing with bureaucracy is a

nightmare;itcantakeKavakdaystopro­

cessa transactionin Mexico,compared

withunder 40 minutesinBrazil.Yetinves­

torsareupbeat.MarceloClaure,whoheads

SoftBank’sLatinAmericanfund,callsMex­

ico “the land of opportunity”. It has helped

his  fund’s  returns  exceed  those  in  every

other  region,  he  says.  And  what  works  in

Mexico may work in other emerging mar­

kets. Kavak, which expanded to Argentina

last year and Brazil this year, is now eyeing

those across the Pacific and the Atlantic.n

At long last, Mexico is enjoying a

startup bonanza

Fiesta

Mexico, venture-capital deals*

Source:PitchBook *Completedandpending †ToOctober 4th

150

125

100

75

50

25

0

3.0

2.5

2.0

1.5

1.0

0.5

0

21†20191817161514132012

Deal count Value, $bn

Party like it’s 1999

Chipmaking

A golden-ish age

I

t looks likethe  perfect  time  to  be  a

chipmaker. The market for semiconduc­

tors continues to grow rapidly. By the end

of  the  decade  it  will  exceed  $1trn  globally,

up  from  $500bn  this  year,  forecasts  vlsi

Research, a firm of analysts. Demand keeps

outstripping  supply;  the  chip  shortage  is

now  expected  to  last  well  into  2023,  para­

lysing  factories  of  everything  that  needs

processors—which  in  this  day  and  age  is

basically  everything.  Western  govern­

ments  have  earmarked  billions  to  build

chipmaking  capacity  within  their  borders

in  order  to  become  less  dependent  on

Asian suppliers. America alone is planning

to spend $52bn over the next five years. 

In  this  context  the  initial  public  offer­

ing  (ipo)  of  GlobalFoundries,  a  contract

manufacturer which makes chips for other

firms,  seems  a  safe  bet.  The  firm,  which

unveiled its prospectus on October 4th and

is  expected  to  list  soon,  is  the  world’s

fourth­biggest  chip  foundry  by  revenues.

The  typical  characteristics  of  an  ipo—a

lowish  offering  price  and  a  small  propor­

tion of shares available to public investors,

both  of  which  have  yet  to  be  decided—

should ensure a healthy “pop” in the share

price in the early days of trading. But GloFo,

as semiconductor aficionados endearingly

call  the  firm,  is  also  an  example  of  how

GlobalFoundries’ listing is perfectly

timed. It is also a risky bet