Chile's Outsourcing Challenge
The list of challengers to U.S. tech supremacy may be getting longer. Many pundits say the greatest threats to the nation's status as a tech superpower are China and India. Those people would do well to look south.
Aside from notable exceptions such as Venezuela, South America is a growth dynamo with a young population and rapidly maturing economies. Much recent growth has come from rich natural resources and a commodity bubble that rained cash on farmers, miners, and drillers alike.
Many of the region's countries want to break their dependence on commodity cycles. And, increasingly, they see tech as a way to create sustained, long-term economic development. Chief among them is Chile. Flush with cash from the recent copper boom, Chile aims to attract Northern entrepreneurs who seek a lower burn rate. Business leaders in Chile are closely studying ways to lure the highly skilled H-1B holders trapped in limbo by antiquated and economically backward U.S. immigration rules. With deep pockets and generous incentives, Chile has advantages that may let it join India as a global R&D center.
Entrepreneurs Are Key
To do that, however, Chile needs to take some important lessons from India and China. In particular, Chile must focus on ways to attract entrepreneurs and cultivate innovation—not just become a hub of commodity outsourced services such as handling customer service calls.
Chile's aspirations became more focused after 1996, when it lost to Costa Rica in a bid to become the site of a $300 million semiconductor assembly and testing plant for chipmaker Intel (INTC). Stung by the setback, the Chilean business community and government developed a national plan to encourage foreign investment. In 2000, the Chilean Economic Development Agency (CORFO) set about marketing the country's advantages as an IT outsourcing center. The agency offered financial incentives for companies to locate there. By 2006, Chile's outsourcing industry was generating $200 million in revenue and employed 6,700 workers.
Buoyed by these successes, the Chilean government got more ambitious and moved up the IT ladder. While lower-level service providers were still welcome, the focus shifted to higher-value services, including applications development and management, systems integration, and the handling of more sophisticated tasks, such as human resources, finance, and supply chain management—known in industry circles as business process outsourcing (BPO).
Ramping Up Education
The result? In 2008, Chile's outsourcing industry booked $840 million in revenue, employed more than 20,000 people, and attracted companies like Equifax (EFX), JPMorgan Chase (JPM), Yahoo! (YHOO), and Oracle (ORCL). Raúl Rivera, chairman of Chile's Foro Innovación (Innovation Forum) and one of the original architects of Chile's outsourcing strategy, confidently predicts the country can export $5 billion in services by 2015.
Here's the rub. Chile simply doesn't have the population and educated workers to support such lofty ambitions. Chile's universities produce 1,400 graduates a year in computer science and IT. Chilean vocational schools produce another 4,500. Most don't speak English.
Rivera recognizes the challenge and argues that the country is rapidly ramping up its education system. Part of his solution is to ramp up language training for skilled but underutilized workers who are interested in higher-level IT services. But as the country draws more engineers into IT, other parts of Chile's economy stand to suffer. Who runs the mines when mining engineers toss off their hard hats for higher-paying jobs coding software? The same question applies to civil engineers or professors who abandon their posts for higher pay in IT services.
Limited English Hurts Chinese
India faced similar challenges a few years ago, but its private industry was able to avert disaster. Faced with severe talent shortages, escalating salaries, and a lagging education system, Indian industry had to rethink how it recruited, trained, developed, and retained its workforce. India started by adapting what worked best for companies that were outsourcing R&D to India. Then Indian companies in diverse industries started improving on these techniques and methods; they refined and integrated them into a unified system.
By 2008, the outsourcing industry achieved attrition rates American employers would envy, and it grew to $60 billion. (At the same time, China struggled to gain traction in outsourcing. Despite massive investments, its outsourcing revenue for 2008 was a meager $1.6 billion. The Chinese just could not overcome the handicap imposed by their lack of English skills.)
The real gold mine for Chile, however, lies in attracting entrepreneurs. The country's population of 16 million severely limits its outsourcing ambitions. Outsourcing requires lots of people. Innovation, on the other hand, requires fewer people and adds much more economic value to a country's economy and a company's bottom line. The large Indian outsourcing firms have learned this and are now focused on expanding outsourced research and development services for global multinationals.
A Lesson from India
In areas such as aerospace, automotive, and semiconductors, R&D was once considered sacrosanct and never to be shipped offshore. But Indian firms such as Infosys (INFY), TCS (TCS.NS), and HCL (HCLT.NS) have cracked the code and are drawing contracts for work that adds core intellectual property value. This shift to focusing on core innovation brings with it a mental shift in how to create value and, ultimately, a shift to an economy where intellectual property creation is valued over service provision.
The lesson from India, then, is that Chile can continue to support modest IT services growth but should refocus on innovation with an aim to attract entrepreneurial talent from the U.S. Chile has huge advantages over China and India, themselves attracting talented expats. Chile's economy and markets are among the most free in the world. Chile enjoys low levels of corruption, a pristine environment (with the exception of some timber and copper regions), and beautiful weather. The country is safe and secure for foreigners with weather like that of California.
With pockets lined in copper riches, Chile has rolled out extremely tempting incentives. Want to relocate to launch a business? No problem. Bring $500,000 to invest over five years and you can launch in Chile with legal residency status. Not sure you'll like it down there and want to check it out first? The Chilean government will cover 60% of your due diligence costs, or up to $30,000, to visit and explore Chile. And it will consider granting another $30,000 to foreign founders of tech companies seeking to launch in Chile. If a founder locates the company in one of the country's tech centers, the government will pay for five years of rent (up to $1 million).
Going for the Brass Ring
The Chilean government also offers big bucks to cover training costs for hiring locals and will subsidize efforts to import high-skilled workers from anywhere else in the world. A company that wants to purchase or build a lab or a facility can expect a 40% subsidy from the government on any purchases or projects totaling $2 million or less.
Chile is now hatching plans to come to the U.S. to talk to talented techies seeking greener pastures. I encourage the country to step up these efforts.
This South American gem has the potential to bring Silicon Valley south. Why bother to be another Bangalore when you can grab the brass ring on the first try and build an innovation economy without the baggage?