Latin America creates rival to Silicon Valley

Silicon Valley should watch its back. Latin American countries are creating well-funded, technologically adept competition who are seeking success instantly

Author: James Essinger
April 23, 2012

Chinese takeaways, famously beloved of Silicon Valley computer wizards, may soon need to add nachos and burritos to the menu. Latin America’s high-tech industries are starting to come of age, and seriously talented, digitally educated Latin Americans are visiting Silicon Valley far more, forging alliances and gathering know-how for their own national high-tech booms.

The competition is getting tough, but it’s friendlier then other nations. There should be plenty of demand for high-tech expertise to go round in a world where the frenetic rush to buy the latest consumer gizmo makes the old-style dashes to the gold fields that helped to populate Latin America look like snail races.

What’s certain is that a major shift is taking place in the world’s high-tech business, and entrepreneurs, hungry for their first billion, no longer only trek to California’s Silicon Valley to establish their budding ventures. Latin America is beginning to catch up.

It’s not just the giant economy of Brazil that’s earning more and more from the high-tech industry. Other nations including Chile and Argentina are also eager for their share of the swath of opportunities offered by computing and digital data businesses. One of many reasons why the inaugural December 2011 meeting of the Community of Latin American and Caribbean States (CELAC) was so exciting is that Latin America is heading for unprecedented economic growth. The formation of CELAC isn’t diplomatic hot air, but an event of practical and symbolic importance. And the booming high-tech industries of Latin America are playing a key role in building that new wealth.

While parts of Europe have slashed their R&D budgets considerably, countries such as Chile and Brazil are investing heavily in technology and have attracted a slew of high-profile companies to set up shop in their respective techno hubs.

Booming Brazil
The ever-increasing emphasis on tech in Brazil’s economy stems from fundamental economic sense; there’s a need to rectify the prevailing economic imbalance that stems from a dramatic trade deficit with countries such as China and India.

Yet despite the common sense approach of the tech initiative, there’s a strong sense that it is bound together with idealism and a firm belief that improving educational facilities and basic entrepreneurial know-how in Brazilian minds is a sure way to climb the economic ladder a dozen rungs at a time.

To up its game, and rival other growing tech nations such as Russia, the Brazilian government is injecting funds and energy into the technology sector. In August last year, the then minister of science, technology and innovation in Brazil (and now minister of education) Aloízo Mercadente announced a $2.2bn initiative to invest in 75,000 science and technology scholarships by the end of 2014. The initiative will send students abroad as part of the government’s “Science Without Borders” campaign, which provides scholarships to Brazilian students primarily in the areas of science, technology, engineering and mathematics.

At the same time, Brazil has introduced a string of incentives to lure in businesses from across the world, including those already established in the US. International interest in setting up base in Brazil is healthy, a fact which in part owes to the implementation of the ‘Lei do Bem’ (Good Law), as it’s become known, which offers tax incentives to companies focusing on technological innovation.

In a bid to create a Brazilian Silicon Valley – or ideally several of them – a surging number of tech parks have sprung up across the country since 2006. Contributing significantly to the country’s economy, these technology parks are leveraged by innovation and spurred on by many governmental facets, including municipal, state, and federal departments – all of which contribute to the widely-available offer of incentives and increased funding for R&D.

A notable project is ‘Primeira Empresa Inovadora’ (First Innovative Enterprise), a venture which was conceived and implemented by FINEP, the financing agency for the Ministry of Science and Technology in 2009. To date, it has already supported 1,381 companies with resources that added up to approximately $100m.

In March this year, FINEP was visited by Greg Becker, President and Chief Executive of Silicon Valley Bank, which has 26 branches in the US and various branches around the world, and is reckoned to have particular expertise in advising and assisting high-tech organisations with financial matters. Becker is understood to have discussed a range of matters relating to funding high-tech investment in Brazil.

More recent advances, and significant ones at that, include Brazil’s tech landscape being given a generous boost in 2011 in the shape of a $12bn investment courtesy of Foxconn Technology Group – the maker of the iPhone. Headquartered in Taiwan, Foxconn is the world’s largest manufacturer of electronic components, including printed circuit boards.

The company established a new $12bn factory in Jundiaí, a city in the state of São Paulo.

The enormous injection is said be the biggest foreign direct investment in Brazilian history. As well as Apple, Foxconn’s clients’ line-up consists of household names including Hewlett Packard, Sony and Dell.

Speaking to Reuters last year, government officials revealed that they are to use the Foxconn opportunity to nurture a home-grown industry centered on the production of LCD screens used across a plethora of products, ranging from televisions to tablet devices.

Until now, global LCD production has been dominated by Taiwan, Korea and Japan, while China is coming strong too. Some believe that the arrival of Foxconn will allow Brazil to catch up with the competition.

But to have a chance of this happening, the government has had to carefully rethink its industrial policy in order to successfully foster its high-tech industry to make it strong enough to minimise the country’s expensive dependence on tech imports. Brazil’s idea is to create a comprehensive manufacturing production supply-chain that will cater to the growing demand of products such as smartphones and tablet computers. The Brazilian labour market is inevitably attractive to US and European computer corporations due to the relatively lower cost of labour. While comparisons are not easy, especially for skilled high-tech workers, generally wages in Brazil are on average about half of those in the US.

However, things are not all rosy at Foxconn’s new $12bn factory in Jundiaí. In September 2011, Reuters reported that Foxconn’s new Jundiaí plant found itself on shaky ground due to grueling negotiations over tax breaks. Another worrying element that has caught the media’s attention is the lack of skilled labour. Rumours have circulated that Foxconn is only able to assemble iPads in Brazil using parts made elsewhere, instead of utilising components produced onsite. Further mutterings in February suggested that production at the factory was about to be halted.

Jundiaí might have occupied the prime spot in the headlines lately, but Belo Horizonte (the name means ‘beautiful horizon’) – a city of about 2.5 million and the state capital of Minas Gerais – is also proving a viable option for start-ups. The city has attracted companies of an impressive ilk, including SambaTech, Deskmetrics and the Google owned outfit, Akwan. In addition, DFJ Fir Capital’s headquarters are also located in the city.

Chile begins to warm up
Chile’s reputation as a bastion of drugs and gun trade is fading somewhat. To replace seedy associations, the country has upped its game and boasts a sound credit rating, namely a Standard & Poor’s A+ rating, which is one of the most reputable credit ratings of any Latin American country.

One of Chile’s most promising areas of growth is the technology field. Recently, the BBC introduced its online readers to the entrepreneur George Cadena from Los Angeles, California. The pivotal part of the story was the fact that Cadena had waved goodbye to Silicon Valley to set up his solar panel start-up in Chile instead.

To attract further entrepreneurs to follow in the footsteps of Cadena, a number of practical initiatives have sprung up. An organisation at the forefront of the drive to establish Chile as a new Silicon Valley is ‘Start-Up Chile’ (SUP) and its offers different types of grants to promising start-ups. Cadena, for instance, received a $40,000 grant from SUP. Additional forms of assistance include steps to bypass any government hurdles; SUP has been known to assist hand-picked entrepreneurs to obtain one-year visas in order to allow them to stay put in Chile for a six month period.

Argentinean magic
‘Buenos Aires, big apple,’ sings Evita Peron in the musical Evita, and many who visit the ultra-energetic Argentinean capital would find a comparison with New York by no means far-fetched. When you’re talking technology, though, the comparison is more likely to be with California than Manhattan.

Argentina has cultivated a mixed image with the world’s media; it’s often seen as a politically unstable nation. Yet Argentina has a long pedigree as a country with a technological focus and a track record of innovation and achievement in the fields of medicine, nuclear physics, biotechnology, nanotechnology and even space science.

Argentine Bernardo Houssay was, in 1947, the first Latin American Nobel laureate: he shared the prize that year for medicine. Houssay went on to establish Argentina’s National Research Council.

In the 1990s Argentina was an affluent participant in the internet revolution, with many web start-ups and a highly educated, high-tech workforce. But the 2001 devaluation of the peso damaged the labour market and radically reduced opportunities for skilled workers. However, in the longer term this proved to be something of a blessing in disguise for Argentina, with the lower labour cost attracting high-tech investment; it made the country a popular venue for manufacturing and customer contact centres.

Argentina already hosts large, global high-tech corporations, including Motorola, Microsoft, Hewlett-Packard, IBM, Sony and Google. A Buenos Aires organisation, Palermo Valley – founded via Twitter by a group of Argentine entrepreneurs – is a non-profit organisation that connects the Argentine community with the high-tech business community, both within Latin America and beyond. Palermo Valley has, for example, arranged for Argentinean start-ups to carry out pitches in California’s Silicon Valley.

Today, Buenos Aires is bubbling away with activity, with many interesting tech start-ups and established companies, and a top notch talent pool. Furthermore, Buenos Aires is providing help in the form of subsidies and business coaching.

Argentinean-based firms are also turning to data centres to comply with international IT standards, according to study findings. International tech consultancy IDC said data centre service providers will focus on value-added services, noting that technologies such as virtualisation and green IT are expected to help drive data centre investments in the future. It’s expected that Argentine data centre service providers will adapt offerings for smaller firms due to saturation in the large enterprise segment.

In terms of specific cities, Córdoba – the second-largest Argentine city, and located near the geographical centre of the nation – has an especially fast-growing software industry but there is a lack of qualified personnel (the local university cannot satisfy the demand anymore). Sources in the high-tech industry say that software engineers will find work easily. High-tech organisations with presence in the city include: Nimbuzz, Intel, EA, Dreamworks, Zynga, IBM, Hewlett-Packard and LinkedIn.

Spanish IT company Indra has opened a new software factory in the Córdoba province, according to a recent government press release. After conversations with local government and business officials, Indra decided to build the facility around two focus areas: software and aerospace technologies. Provincial governor Juan Schiaretti, who helped inaugurate the factory, said the complex will make Córdoba one of Argentina’s top centres of technological development, along with the provinces of San Luis and Buenos Aires.

Córdoba provincial government officials also recently cut the ribbon on a new technology park in the provincial capital, ‘Córdoba city’. A total of 33 companies have thus far agreed to open offices in the complex, which will occupy 80,000m2 when fully completed. Schiaretti said the government’s plans to turn Córdoba into an IT hub are continuing in spite of global economic uncertainty.  For its part, Indra saw sales in Latin America reach €164m ($209m) in the first three quarters of 2008, a 19 percent increase over €138m in the period a year before. The company has particularly seen positive growth in Mexico, Argentina, Colombia and Chile.

Boosting internal markets
Going south, Argentina’s startup culture is more business-oriented and mature, with early success cases such as auction site MercadoLibre, which counts eBay as a shareholder and went public on the Nasdaq with a $400m IPO in 2007. The main hub for local entrepreneurs is Palermo Valley, named after the Buenos Aires’ neighbourhood where many Argentinean companies are based. On the downside, capital is still scarce in a country that is still recovering from its 2001 crisis and its internal market is still relatively small.

The truth is that the high-tech boom is having hugely positive effects throughout Latin America. Even Colombia, a Latin American country with one of the worst reputations in the global press, is being seen as a bright prospect on the high-tech front. Numerous fact-finding visits to California’s Silicon Valley by Colombian entrepreneurs have taken place, and the UK’s Ambassador to Colombia, John Drew, has said that an increasing number of UK high-tech companies are interested in having a presence in Colombia.

Edward Dallas, the head of section for the British Embassy in Bogota, says he has “seen a rise in the number of companies coming to Colombia that are offering technological solutions.” As he says, “the rise is not just IT itself but high-tech products in areas such as security, construction and so on. In the narrower IT sector we have companies like BT and Aveva, which is specifically involved with software for production plants. We also have companies like Smartwater, which offer a high-tech product for forensic security… and Experian, which provides solutions for managing credit risk in the financial sector.

Looking ahead, I would like to think that we can bring UK companies in other sectors with technology solutions, such as construction, the environment and so on.”

In fact, there is considerable evidence to suggest that technology is helping to spearhead the current Latin American growth boom which may well make a significant dent in the next few years on the traditional poverty with which large parts of the populations of Latin American countries are afflicted.

After all, in a world where Apple’s brand has recently been estimated as being worth $153bn, making it the most valuable brand in the world, with Google second at $111bn and IBM third at $100bn, it’s clear that the effective, structured infrastructure in the US has allowed those companies to flourish.

Hopefully, with the new emphasis on replicating the Silicon Valley model, booming Latin American firms can make millions and help lift large sections of their populations out of poverty.