Can Latin America Challenge India?
With proximity to the U.S. and free trade agreements in place, many countries south of the border are building up their outsourcing infrastructure
ELMAT: If they only dropped the anti-American rhethoric!!
In a spurt of inspiration, Softtek trademarked the term NearShore. And over the past eight years, it has fine-tuned the concept, says 46-year-old CEO Blanca Trevino. "The U.S. was right next door, but we had to offer a differentiated product in order to get their business," she says. "We were the biggest in Mexico, but we were very small in comparison to India. If we hadn't come up with something to set us apart, we wouldn't have gone anywhere."
CLOSER TO HOME. Three years ago, Softtek bought General Electric's (GE) Mexico-based IT operations, absorbing nearly 1,000 engineers. As a result, Softtek became the multinational's main nearshore solution for IT work in Latin America, performing support and maintenance for GE's commercial finance and energy groups. Since then, Softtek's revenues have been growing 40% annually and hit $146 million in 2005, with more than half of the business from U.S. clients.
Now, Softtek has 3,500 employees, mostly engineers, making it the largest IT outsourcer in Latin America. Softtek, based in Monterrey, Mexico, has offices in the U.S., Argentina, Brazil, Colombia, Peru, Puerto Rico, Venezuela, and Spain.
Why go to Mexico, where labor costs are higher than in India? Because the efficiency gains from working close to the U.S. and in the same time zone mean nearshoring in Mexico costs about the same as offshoring in India, says Trevino. Up to 95% of work can be performed off-site, in Mexico, compared to just 60% to 65% for clients working with Indian providers, she adds.
NONNUCLEAR NEIGHBOR. GE still outsources 90% of its IT work to India, sending just 6% to Mexico, says Steve Morrison, GE's London-based head of Global IT outsourcing. But, he notes, as India's costs rise, Mexico will look better and better. "If things continue as they are, India eventually will be charging the same unit cost as Mexico," he says. That's why Indian companies have been hustling to find ways to perform a higher percentage of the work off-site in India, he says.
Morrison points to another advantage Mexico has over India: Due to U.S. legislative restrictions, certain kinds of projects involving sensitive aviation and energy technology are more likely to go to Mexico than to India, a nuclear-power nation.
Argentina, which boasts one of the best-educated workforces in Latin America, also is aggressively promoting software development centers. That effort was helped by a major 2002 currency devaluation that made Argentina super-cost-competitive and drove down the cost of engineers to less than $12,000 a year. The industry has been growing two to three times as fast as the overall economy and this year will have revenues of about $1.6 billion.
"Economies in acute crisis have one major advantage: You can start a new company with a smaller investment and find highly skilled and motivated people very easily," says Carlos Pallotti, Datastream Systems' managing director for Latin America and president of Argentina's Association of Information Technology Companies.
DEVELOPING ARGENTINA. A software industry promotion law introduced in 2004 also gives companies big tax breaks and helped create high-tech clusters in four Argentine cities. That has attracted such companies as Walt Disney (DIS), Microsoft (MSFT), Peugeot, and Repsol (REP) seeking Web-site design and software developers. In addition, IT players including Hewlett-Packard (HPQ), Oracle (ORCL), Cisco (CSCO), IBM (IBM), America Online (TWX), and palmOne (PALM) have consolidated their regional back-office and customer-service operations in Argentina.
In 2000, Cordoba province persuaded Motorola (MOT) to build a $40 million software development center there, 1 of only 14 in the world, and in 2005 it scored another coup when microchip giant Intel (INTC) agreed to set up a software research center at a local university -- just its third such facility worldwide.
"The Argentine authorities understand that technology is an engine of growth, which generates competitiveness in the global marketplace," says Esteban Galuzzi, Intel's general manager for the Southern Cone region that includes Argentina, Bolivia, Brazil, Chile, Paraguay, and Uruguay.
WARMING UP TO CHILE. Thanks to its economic and political stability, as well as its state-of-the-art telecom infrastructure, neighboring Chile also has attracted considerable attention as an outsourcing center. Its network of free trade agreements with a number of countries, from the U.S. to China, is another draw. Multinationals that have set up in-house outsourcing centers for software development, back-office services, and call centers include Citigroup (C), Unilever (UN), Eastman Kodak (EK), and Delta Air Lines (DALRQ).
GE outsourced all its tech support manuals for aircraft engines to a Chilean company. Hewlett-Packard found a local outfit to provide regional tech support for its imaging and printing division. And global outsourcing companies such as IBM, Accenture (ACN), and Tata Consultancy Services provide services from Chile.
Costa Rica is the Central American country best known for the software development industry that was spawned by the 1997 arrival of Intel, which built a chip-testing facility in San Jose, the capital. A number of software development companies provide custom programming, mostly to Latin American clients, many of them in the financial industry.
WAITING FOR THE CALL. But if there's a Central American country that's coming on strong -- albeit from a minuscule base -- it's Nicaragua. After suffering through political instability in the 1970s and 1980s, its investment-promotion agency, ProNicaragua, is convinced that offshoring is the country's best bet for development.
The agency recruited Juan Carlos Pereira, a Nicaraguan-born Harvard MBA and former telecom executive who was educated in the U.S., where his family fled Nicaragua's political turmoil. "We're trying to jump-start the industry," says Pereira. The government invested $3 million to build a 500-workstation call center in downtown Managua, the capital, and is putting together a training program to improve the English skills of 7,500 people, "so that when companies come, we will be ready."
They're pitching the project to potential anchor clients, such as multinationals that may already have operations somewhere like Costa Rica but that need a lower-cost destination. And they're talking to some of the big Indian outsourcing companies that may need Spanish-speaking operators for the 38 million Hispanics living in the U.S.
POLITICAL HELP. Nicaragua may have a real chance. Ben Schneider, president of Consulting Outsourcing Management in Lima, Peru, says countries that have a free trade agreement with the U.S., such as Mexico and Chile, and more recently, the countries that signed the Central American Free Trade Agreement, including Nicaragua, will have an advantage when seeking outsourcing clients.
"It's not just a matter of tariffs, but of policies on intellectual property protection and labor rules," he says. "American companies that want to sign an outsourcing contract prefer to sign it with companies whose countries have a free trade agreement with the U.S."
Latin American outsourcing still pales in comparison to India. But Schneider says the balance could shift. International companies, he says, can't afford to do all their outsourcing in India. "There's a big time difference with the U.S., it's closer to the trouble spots in the Middle East, and India is a nuclear power."
BUILDING UP. Mexico, Brazil and Chile are the main countries to watch for offshoring in Latin America -- the first two because they have the critical mass, big company clients, and enough students graduating, and Chile because it's savvy as far as globalization goes and has been working hard on bilingual education. The rest of the region's countries, he says, occupy small niches -- for now.
That could change, though, if some of India's bigger players strategically choose to forge alliances with some of those niche operators to target U.S. and European markets.
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