Chile's Silicon Valley

The information technology industry is constructing a new research and development hub for software: Santiago, Chile. The Latin American capital has the attributes that have made emerging markets attractive to outsourcers, such as cheap wages; dependable, state-of-the-art infrastructure; and government incentives. While Chile's small labor force will hinder its rise, the country also boasts an outsize pool of highly educated computer engineers and a time zone that's synchronous with the U.S. East Coast.

Equifax (EFX) is the latest U.S. company to open a software lab in Santiago, joining JPMorgan Chase (JPM), Yahoo! (YHOO), and others. The Atlanta-based company looked at adding a research center in a number of places that would be cheaper than Silicon Valley. After evaluating Argentina, Brazil, and Ireland, Equifax picked Chile because of the overall quality of its engineers, says Sandeep Gupta, a vice-president for research and development.

JOB CUTS HERE, HIRES THEREEquifax's 22 Chilean engineers are inventing algorithms to analyze financial data on corporations and consumers that will help them make smarter recommendations on lending and borrowing; their work complements more basic number-crunching by more than 500 programmers and software developers outsourced to Equifax in India. The company envisions doubling its Santiago staff by 2012, says Fernando Gomez, a Chilean-born and -educated engineer who heads the Santiago office.

Other U.S. giants are hiring software engineers in Santiago even as they cut jobs at home. Citigroup (C) did a test run with 40 employees in 2002. It recently expanded its workforce there to 125; most are developing new financial software tools. Oracle (ORCL) has a 200-person IT office, with 75 working on software development. It plans to double its staff in Chile before 2011.

The inflow isn't limited to U.S. companies. Tata Consultancy Services has increased its software application development in Chile by over 30% in the past three years. Another Indian company, Polaris Software Lab, which works with Hewlett-Packard (HPQ) and Microsoft (MSFT), among others, just opened a credit-card software development center in Santiago and expects to be up to 100 employees by yearend.

On average, IT salaries are even lower in Chile than they are in Mexico, another "nearshore" option for outsourced engineers, says market researcher Gartner (IT). Wages tend to be on a par with those in Brazil, but rent averages 40% less in Santiago than in São Paulo. And the Chilean government offers incentives, including grants for IT outsourcers. The World Economic Forum ranks Chile highest among all Latin American countries in its Global Competitiveness Index, citing such factors as the availability of scientists and engineers.

While Chile is rising, it isn't going to topple India or its Latin American neighbors as an IT hub. The software services sectors in Brazil, Mexico, and Argentina are much larger than Chile's $820 million sector, according to London researcher Business Monitor International. Tech centers elsewhere in Latin America are expanding rapidly because of their much larger labor forces—Chile's entire workforce of 7 million is smaller than the metropolitan populations of São Paulo or Buenos Aires.

But headcounts belie the importance of research labs, which tend to be smaller yet pay relatively high salaries to employees who focus on new products and services. "We think of Chile as the specialized neurosurgeon of IT outsourcing," says Douglas Gattuso, a managing director at Miami-based IT consultant Neoris USA, which has a 125-person office in Santiago. "Mexico, Argentina—they're the general practitioners."

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