Why Gartner Got it Wrong on Peru
By Tarun George
Why does Google think Peru is one of the most attractive markets for tech companies in the world?
Look at the facts: Peru’s economy has been growing at a rate of 7-9% every year, which is astounding in a region where most nations haven’t fully recovered from the recession. But while there are many advantages to this stellar growth, one negative is becoming clear – Peru’s services sector is being left behind. Usually accompanying a strong economy is a move into higher value, knowledge-based services. But in Peru, the tech services ecosystem is not keeping pace.
I’ve been keeping an eye on this Andean country every since our Country Profile last year asked the question “Will Peru be able to leverage the strong growth rate to move into higher value services?” The answer will truly determine whether or not the nation explodes as a sourcing destination.
Positive results of growth
The national brand: One of the first things a country does when it decides to really focus on the international market, is to create a country brand. The logo, the mission statement, the new organization and the website all present a consolidated image to foreign investors, and a one-stop shop for information on various sectors of the investment economy. Peru started this process in July 2009, and so in that sense has been moving in the right direction.
But in spite of the country brand creation, I don’t yet see a unified vision of Peru’s strategic offering to the international market. In particular, there is a lack of focus on the services export sector, and specifically higher-end IT. Peru is the fastest growing economy in Latin America, but that meteoric rise has created a divide in how services are viewed.
Most of the country is still mired in the old ways of doing business, providing localized and low value services to the internal market. Meanwhile, a few private tech companies and the national promotion agency ProInversión, are pushing for an IT-focused services sector.
As for the government, there have been positive signs lately. “Services exports were initially not on the list of businesses exempt from the VAT and other taxes,” says Conrado Falco, Head of Information and Economic Studies at ProInversión. “But slowly we started including the call center industry, and just recently there was a new law passed that exempts all services exports, including IT and BPO, from these taxes.” But by and large, the government’s attention remains fixed on Peru’s strong natural resources trade.
A new business park: There are rumors going around of a state-of-the-art technology park being planned in the north of Peru, very similar to Altia Business Park in Honduras. “They’ve been talking about building it for a while now, to give tech companies a place to center their activities,” says Gerardo Delgado, General Manager Peru for Avantica Technologies. “It’s intended to be the Silicon Valley of Latin America.” No one is very clear on the details or timeline of this project, but one thing is certain – if it goes ahead, it will be one of the best drivers for Peru to continue attracting top tier IT operations.
The high tech market comes running: The list of prominent IT companies operating in Peru is formidable – Oracle, TCS, HP, Microsoft, IBM, and of course, Google. The search giant in particular has big plans. “Peru has recorded constant economic growth, and, in the middle of elections, has positioned itself as one of the countries in the region with the most potential to develop its technology industry in 2011. These are Google’s bets for this year.” said Daniel Gertsacov, Director of New Markets in Latin America, in an interview last month.
An added attraction for Google and other tech companies, and a direct result of Peru’s economic expansion, is the continued growth of the internet presence (over 20%) and the number of cell phone users (75% of population).
Negative results of growth
Focus on the domestic market – Gartner recently included Peru in its Top 30 Countries for Offshore Services list, since the nation is becoming a “steady component of the IT value chain, catering to both internal and the export markets.” I disagree, at least in terms of exports. What I mentioned above about the high tech market arriving in Peru really applies only to foreign companies. When it comes to homegrown or even Latin American IT service providers, Peru is woefully limited. The rapid growth of the economy has led to a strong domestic market, which means most tech companies don’t have to focus outwards to make a profit – they all look internally.
“There are no more than five IT companies here targeting the offshore market and really going after the international sourcing contracts,” says David Muñoz, Corporate Marketing and Sales Director at Avantica, which is one of those five firms. “And if you count the call center companies, there are no more than ten.”
Currency appreciation: Since Peru’s economy continued growing during the 2009 recession, while the US slowed down, the Peruvian sol appreciated 9.4% against the dollar in one year. That was a shock for the already fragile export sector in Peru, whose clients suddenly found that the services they were buying got more expensive. However last year the government took strong measures to curb that appreciation, and balanced out the sol. But as Delgado says, “The exchange rate is a definite negative. The currency is gaining strength, and so companies exporting services and goods have taken a hit.”