Private and public investment are improving competitiveness

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Moving hand-in-hand with a burgeoning economy, Peru’s IT sector has been able to sustain a healthy level of growth. A growing number of companies are investing in IT services as well as in the established domestic hardware sector. Furthermore, rising standards of living are allowing more and more Peruvians to invest in IT equipment and take advantage of the offers provided by mobile internet.

An element that is set to continue to drive the growth of the IT sector is the development of infrastructure, which is being aided by government efforts to establish a country-wide fibre-optic network. This will be essential to bridge accessibility gaps currently separating urban Peruvians from those living in the regions.

Although local companies traditionally put IT spending below other business activities, such as production or distribution, technology is helping small and medium-sized enterprises (SMEs) to better compete with more established market leaders. The financial services industry has been an early adopter of IT, but other sectors are joining in. “Compared to the region, Peru is still behind in terms of IT investment as a percentage of GDP. As our companies need to compete and win in an increasingly globalised and connected market, they will have no choice but to increase and accelerate their investments in IT to become more productive, efficient, innovative and ultimately competitive,” Luis Torres Mariscal, executive director at Cosapi Data, a Lima-based IT services firm, told OBG.

Sector Data

Increasing IT adoption has allowed the sector to grow steadily in recent years. Put together, the IT and telecoms sectors are currently worth around $8bn, according to figures by Dominio Consultores, a computer and telecoms consultancy. Of that value, the IT sector represents a $3.3bn market, which has been benefitting from a favourable environment. Since the third quarter of 2013 and during much of 2014, an economic slowdown has put a dent on growth predictions. Although this has had an impact on the IT sector, because slower internal demand affects businesses’ capacity to make investments, the sector was still able to grow, led by cyclic patterns of hardware acquisition.

Fernando Grados, general manager at Dominio Consultores, said that the IT sector in Peru has been growing at an annual average rate of 10-12% over the past decade. For 2014, the sector is expected to expand by 14.8%, according to Dominio Consultores. Downturn years can affect the sector but there is a side of the IT industry that moves independently of general economic performance, especially when it comes to hardware acquisition. “The IT industry doesn’t necessarily follow the economy. Because the bigger companies, which are the referential consumers of IT equipment, buy their equipment on their specific cycles, so this creates highs and lows across the market, and some years IT growth diverges greatly from the general behaviour of the economy,” Grados told OBG.

Despite the positive impetus that certain segments impose on the market, the main challenge remains linked to the low level of adoption of IT services by Peruvian companies. A study published in 2013 by the Association of Peruvian Exporters found that 63% of SMEs in the country were not connected to the internet.

Another example showing the limited level of IT penetration in Peruvian businesses is the low value of e-commerce transactions in the country, relative to the region. Figures by the Peruvian Chamber for Electronic Commerce show that electronic sales reached $800m in 2013, compared to $611m in 2012. Despite an average annual growth rate of 20%, Peru still represents just 1.4% of the total e-commerce sales for the entire region, compared to 3.6% in neighbouring Chile.

Governmental Role

Contrary to other countries in the region, such as Mexico or Colombia, where robust public policy is impacting the IT sector positively, the government’s role in encouraging the development of the industry has typically fallen below the private sector’s expectations. Even as a consumer of IT, the government remains a small participant, accounting for 19% of the market in 2013, Dominio Consultores figures show. Although some measures to encourage sector development have been implemented, they have generally lacked a holistic perspective. Some normative steps were taken in 2011 through the establishment of the Peruvian Digital Agenda 2.0, which creates a framework for government policy. The agenda was focused on developing the use of IT, not only for the delivery of public services but also to reduce the gaps in IT use for Peruvian citizens and businesses. Over recent years, several governmental instruments to promote innovation and the development of an IT industry have gained traction. One important change came with the Technology, Science and Innovation Fund ( Fondo para la Innovación, Ciencia y Tecnologia, FINCYT), established in 2007 with a $25m loan from the InterAmerican Development Bank. The fund supports Peruvian businesses through the funding of innovation and IT adoption and has an annual budget of $100m.

Additional governmental funding, managed through the Ministry of Production (Ministerio de la Producción, PRODUCE), has helped develop several instruments catering not only to start-ups in several sectors of the economy, but also targeted at existing companies that want to upgrade their technology or develop innovative projects based on IT use.

These instruments are now under Innovate Peru, and have been segmented through different grants and programmes targeting specific needs. Included in these are instruments such as a $30,000 co-financing maximum for Peruvian companies that wish to go on technological missions abroad, allowing two members of staff to visit foreign technology clusters, or technology trade shows. Another co-financed programme grants $15,000 for Peruvian companies to position technical staff on internships with other technology-based companies, either abroad or within Peru.

Also under PRODUCE, in conjunction with the FINCYT, is the Startup Peru programme, which had its inaugural run in 2013. With an overall budget of $20m, the programme was inspired by the success of Startup Chile, and has grants $20,000 for individual entrepreneurs and as much as $50,000 for innovative IT firms which have been less than five years in the market.

Internet Access

Although some government measures have targeted the environment surrounding IT businesses and technology-based start-ups, other aspects of the IT mix have also become a priority. Internet access has been rising in Peru, both through the expansion of fixed-line offers, as well as the recent growth in mobile internet connections. Still, according to the Iberoamerican Association of Research Centres and Telecommunications Companies, 60% of Peruvians remain unconnected. Internet penetration in the country reached 39.2% of the population in 2013, according to the National Statistics Institute.

The mobile internet segment has been showing dynamism as of late, and competition is sure to increase as the deployment of 4G access across the country accelerates. The Supervising Organisation for Private Investment in Telecommunications, the sector’s regulator, says that as of December 2013 the number of mobile internet subscriptions had reached 4.2m. These are divided into three different connection types, with combined subscriptions (those that combine voice communications and internet access) having the biggest part of the market at 2.9m users. The second type of mobile internet access is through mobile phone data plans, paid separately from the voice services and accounting for 686,000 users. A third mode of mobile internet access, through mobile devices such as USB drives or tablets, accounted for 601,000 subscriptions. These distinctions are also clearly linked to the type of consumer, with 99.8% of clients that use a combined subscription of voice services and mobile internet access being post-paid mobile users, whilst 79% of mobile internet users that chose a plan separately from their voice services, are pre-paid mobile phone users. Mobile internet connections are expected to continue to increase as the number of smart phones rises.

Hardware

Despite the rise in mobile phones to access the internet, other types of IT equipment have traditionally been a driving force in the sector. More so than in other markets, hardware has a significant weight on how the industry performs in Peru. According to Dominio Consultores, of the $3.3bn that the IT sector is currently worth in Peru $2.5bn is represented by hardware sales. A lot of this has to do with the strength of local assembly clusters. “In Peru, 70% of desktop computers sold are assembled in the country,” Grados told OBG. However, as world trends suggest a move away from desktop and laptop computers, the composition of hardware sales in the Peruvian market is set to change. By 2014, laptop sales are expected to reach 820,000, say Dominio Consultores, but other segments are becoming more prevalent.

Changing hardware sales volumes have become visible in the sale of tablets, which are imported and locally branded, but not assembled in the country. In 2013 the number of tablets sold surpassed 800,000 and this is expected to double to 1.6m by the end of 2014. This will impact local hardware sellers. “Tablets are cheaper, and the best sellers are the lower-end ones, costing about $100-150,” Grados told OBG.

IT Services

Although the market is severely skewed towards the commercialisation of hardware, IT service provision has been growing steadily, and represented $630m in 2013, compared with $442m in 2010, say Dominio Consultores. Growing demand for IT services has attracted international heavy weights, with big names now competing with Peruvian IT companies.

In 2013, Américatel Perú announced a $6m expansion of its first data centre in the country from 300 sq metres to 750 sq metres. The company also announced the construction of a second data centre, which is expected to cover an area of 4000 sq metres and cost $90m, local media reported. Construction is expected to be completed by 2018. Tata Consultancy already runs a global IT service centre in Lima, employing 600 people, and is planning to double capacity in two years.

Software

Considerably smaller than its hardware counterpart, the expansion of the software segment still lags behind the remainder of the sector. Dominio Consultores figures show the software market was worth $184m at the end of 2013. This figure represents licensed software that is acquired, but the sector also includes an additional $90m of ad-hoc developed software, which is normally accounted under IT services. The software sector in Peru lacks the size or recognition that some other countries in the region have been able to garner in the software segment, with software companies typically focusing on specific niches such as finance and health. However, a continued growth of the country’s economy will positively impact software manufacturers, as an increasing number of Peruvian companies demand specific IT solutions to expand their businesses. “By 2020, about a thousand companies operating in Peru will cross the $1bn mark in revenues; for them to reach this threshold and continue growing sustainably, they will have to become “digital businesses” relying on technologies such as cloud-based services, mobility and advanced analytics to penetrate new markets, better serve customers and reduce costs by leveraging on economies of scale in infrastructure and knowledge,” Torres Mariscal told OBG.

E-Government

E-government has progressed slowly although 748 services are now available online and are being improved regularly. E-government efforts in Peru remain, however, limited to specific interventions by a number of ministries and government institutions, lacking a structured plan. The government has made it a policy to continually list new services and register their improvements through the National Office for Electronic Government established in 2004, which links directly to the services portal for citizens and businesses, where online services are centred.

For Grados, e-government in Peru has much room for improvement. “There are still a lot of opportunities for the public sector to use IT to gain efficiencies in terms of transparency and improvement of services. There are good practices in many places, but there is no global strategy,” Grados told OBG. E-government is expected to become more of a priority once the necessary infrastructure is in place, especially in rural areas. The establishment of a fibre-optic network throughout Peru will allow consumers easier access to the internet and telecoms services (see analysis), and will also link up government branches and facilitate service delivery.

Outlook

The fact that hardware takes such a big proportion of the market is a sign that the IT environment is still progressing. As the market grows, a switch towards high-value IT services will become visible. Furthermore, Colombia and Mexico, for example, have shown that state policy is essential for encouraging the use of IT in businesses and promoting citizens’ use of technology. A government strategy for the IT sector needs to be adopted. Mexico has proved a good example in this, enlarging digital business use through pushing the payment of taxes online and electronic invoicing for businesses. Colombia has also had success in expanding internet use in rural areas through a policy that combines investment in infrastructure with measures to encourage equipment accessibility by users. Similarly, these types of encompassing measures would do much to push the sector to grow even more rapidly in Peru.

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The Report: Peru 2015

Telecoms & IT chapter from The Report: Peru 2015

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