SAMPLE IT MARKET REPORT
Key Findings
The IT services market in South America is witnessing rapid growth. After a brief pause due to the global economic crisis, the effects of which were mild on most countries in the region, the sector is back to double-digit growth rates. Initiatives taken by governments and steadily growing demand for IT services in the region spell more good news for the sector. Here are some of our key findings:
Economic and Geopolitical Overview – South America
The South American region has witnessed substantial growth in the last two decades. The economies of the major South American countries are driven by agriculture, mining and services sectors. The region comprises of several emerging markets, and hence expanding infrastructure and growing services like banking and telecommunications are characteristic of many South American nations. The largest economic cities of the region include Sao Paulo (Brazil), Buenos Aires (Argentina), Rio de Janeiro (Brazil), Santiago (Chile) and Bogota (Colombia), in that order.
Based on GDP (PPP), Brazil, Argentina, Colombia, Venezuela and Peru are the top five countries in South America. Argentina has the fastest growth in the region, about 8% in 2009, followed by Venezuela, Peru, Colombia, Costa Rica, Guatemala, Chile and Brazil, which have growth rates between 8% and 5%. South American economies rely heavily on exports, a large portion of them being natural resources and services.
Despite socialist leaders being elected to Brazil, Argentina, Chile, Uruguay, Bolivia, Paraguay, Ecuador and Venezuela, indicating a shift towards political left, most of South America still employs free market policies with initiatives towards continental integration. Recently, an intergovernmental entity called Union of South American Nations has been formed with the aim to merge the existing custom unions Mercosur and the Andean Community to form the world’s third largest trade bloc.
In spite of the significant regional economic development, the economic gap between rich and poor in South American countries remain high. In many countries, the richest 20 % own 60 % of the nation’s wealth while the poorest 20 % own less than 5 %. Inflation is another key economic problem that the region faces, because of which interest rates are in double digits in most countries.
Geographically and economically, Brazil is the largest country in South America. Even as the global financial crisis hit Brazil, it was one of the first emerging markets to recover with positive GDP growth. The country boasts of well-developed agriculture, manufacturing, mining and services sector.
Brazil is also the leader in IT services market of the region and accounts for more than 60% of the regional revenue for the sector. The Soccer World Cup in 2014 and the Summer Olympic games in 2016, which are to be held in Brazil, are likely to give the nation’s economy and infrastructure a big boost. This will reflect positively on the services sector too, including the IT services market.
IT Services Market Overview – South America
The South American IT services market was estimated at around $13 billion in 2009. The biggest contributor to this is Brazil, which has a lion’s share of about 68% of the market. Brazil is followed by Argentina and Chile, which command another 8% and 7% respectively.
Building on the already strong momentum, the IT services market in the region is likely to grow at a healthy rate of 7-10% in the near future. The South American industries with the highest demand for IT services are telecom and financial services, which account for more than half of IT services consumption. These are followed by manufacturing and retail sectors.
Growing economy and stable political situation in the region offer a conducive environment for growth of the IT services market. The presence of various multinationals like IBM, HP, TCS, BT, Siemens, Unisys and Wipro, as well as strong domestic players like CPM Braxis, Stefanini and Neoris have resulted in healthy, competitive market dynamics.
South American countries like Brazil and Argentina are fast becoming favored outsourcing destinations. Geographical proximity and similarity in time zones to the US offer an important advantage to these countries compared to Asian countries. In spite of the global financial crisis, with the exception of countries like Argentina that heavily depended on the US, the South American IT market has remained relatively unscathed.
Since 2009, there has been a significant shift in trends in the IT sector. The high demand for hardware is now accompanied by increasing demand for IT services, a sign of maturing IT market. Other regional market trends include efforts for adoption of cloud computing, and verticalization and virtualization of IT solutions. Significant growth has been noted in managed security services as well.
Brazil – The IT Services Leader in the Region
Brazil is the undisputed IT Services leader in the region. Since the implementation of liberalization policies that sparked the growth of the Brazilian IT industry in mid-1990, the sector has taken enormous strides forward. According to the Economist Intelligence Unit (EIU), the total IT spending in 2010 accounted for 1.7 % of the nation’s GDP. South American IT Services Market and the Growing Need of IT Consultants in the Region
The Brazilian IT services market is estimated at around $8.9 billion in 2010. The IT services market in Brazil has clocked highest growth rates in the South American region for the past five years and the forecast for the next 3-4 years is also positive. The market is expected to grow at a compound annual growth rate (CAGR) of 14.8 % during 2009 to 2014. Implementation and systems integration accounts for a major portion of this market.
Major IT Centers in Brazil Supported by World Class Infrastructure
The biggest clusters of Brazilian IT and software firms are located in the heavily industrialized south-east part of the nation. Cities of Sao Paulo, Campinas and Rio de Janeiro fall in this area. On the north east side, the area of Recife also has a growing cluster of offices of IT firms. All these areas are marked by availability of substantial labor pool, universities for technical training and excellent telecommunications infrastructure.
The Brazil IT Outsourcing Success Story
Brazil is among the top five outsourcing destinations in the world. The exports from this sector have grown at a tremendous pace – starting at US $100 million in 2002-03, they reached $1.4 billion in 2008. In 2009, the exports grew 114% in a single year to $3 billion. The figure reached US $5 billion in 2010. With several initiatives being taken by the Brazilian government to promote this sector, similar growth is expected over the next few years.
Multiple Drivers of Market Growth
Brazil has many things going in its favor, which are boosting the growth of the IT services market. These include many years of investments in IT, high domestic IT consumption (both by public and private sector), a large pool of IT experts, better cultural compatibility with countries like the US, a stable political system supporting free market policies, economic stability, and absence of terrorism and frequent natural disasters.
Rapidly increasing PC penetration a sign of technology savvy economy: With a computer penetration rate of about 25%, which is increasing at a rapid pace, Brazil is poised for high growth in all segments of the IT market (hardware, software and IT services). The PC penetration is expected to reach 40% by 2015. The recently announced national broadband plan is also likely facilitate the growth of the IT Services market.
Large and growing pool of skilled IT labor: The country boasts of a vast pool of IT professionals. There are 1.7 million people working in this sector, with an expected annual addition of 100,000 ICT graduates every year. Human expertise and infrastructure will be the key support for double-digit market growth. However, with the industry going at this pace, lack of skilled labor is a challenge Brazil will have to deal with to sustain this growth.
Rapidly growing economy: According to predictions by Economist Intelligence Unit (EIU), Brazil will be the third fastest growing economy in the world between 2010 and 2020. As GDP growth is known to drive IT demand, this only spells more good news for the Brazilian IT services market.
Government support, initiatives, incentives and consumption paving way to sector growth: The Brazilian government is also making serious efforts to aid the growth of IT services industry. SOFTEX, a government agency, was established in 1992 to promote software development and increase software exports. This has led to the creation of new software firms and growth of existing firms not just domestically but also internationally. The national IT program has also given good results.
Federal incentives like 3.1% reduction on contribution to the ‘S System’, 50% reduction in social security contribution of firms depending on exports and tax breaks on licenses, royalties and technology transfer are also conducive for the growth of the Brazilian IT services market.
While business demand lagged behind, government was the major driver of market growth in 2010. Business demand is also expected to pick up this year. The Soccer World Cup and the Summer Olympic Games will also result in significant investments in infrastructure, and increased spending on IT services.
Globally Competitive Industry – Presence of Both Local and International Players
Brazilian IT services market is quite competitive and includes many multinational as well as local players. The major players include HP, IBM, Accenture, Neoris, Capgemini, Tata Consultancy Services (TCS), Infosys, CPM Braxis, Politec, Atos Origin, BRQ, BT, Cast, Datasul, DTS, GFT, EDS, GPTI, HSBC GLT, Hughes, Microsoft, Promon, Seimens, Sun, Virtus, Ubik, Unisys, Totvs, Ci & T, Tivit, Itautec and Stefanini.
According to a report by Gartner, in 2009, local Brazilian service providers showed the strongest growth in the market, gaining market share lead over North American and European multinationals in the region. Domestic IT service providers like Ci & T, Stefanini and Politec have been expanding rapidly. International IT giants are also planning big investments in the country.
Capgemini, one of the world’s foremost consulting, technology and outsourcing service providers, recently announced plans to invest $298 million in CPM Braxis, which is one of the leading Brazilian IT companies, to acquire a 55 % stake in the company. In spite of the recent global financial slump, major U.S players like Accenture, HP and Unisys have been increasing their presence in Brazil. Indian IT companies like Infosys, TCS and Wipro are also investing aggressively in the region.
The Deficit and the Growing Need of IT Professionals and Consultants
Currently there are 1.7 million IT professionals employed in the sector. Brazil has the highest number of Java programmers and the largest Java User Group in the world with over 18,000 members, according to IDC. Brazil also has an experienced pool of COBOL professionals. However, the rapid growth rate in this sector has resulted in a shortage of IT professionals and consultants in Brazil. South American IT Services Market and the Growing Need of IT Consultants in the Region
Currently Brazil has a deficit of 70,000 qualified IT professionals. This is likely to grow to a deficit of 140,000 professionals by 2013. The demands of infrastructure projects related to the Soccer World Cup and the Summer Olympics could result in a further increase in this number.
The shortage of qualified IT professionals is not only on account of availability of candidates, but also because of specific skills shortage. A case being HSBC Global Technology Brazil, which wanted to fill 300 vacancies in October 2010, but in 3 months they were only able to fill out 65 of these.
There is a growing need of IT consultants, system analysts and programmers specializing in implementation and maintenance of software in both international as well as local companies. Unless overcome, this can be a hurdle to the growth of the sector.
Other Issues Facing the Brazilian IT Services Market
Lack of English language skills could be an impediment to the growth of Brazil’s IT offshore services market. Brazil, having focused principally on a booming domestic market, does not have a predominantly English language skilled IT workforce, like India. Many IT professionals at all levels are not well equipped to conduct business in English.
In spite of a large domestic IT sector, majority of the local firms are small in size to compete on a global scale. There is also a need for better industry standards, infrastructure and more aggressive marketing.
Argentina IT Services Market
The Argentine IT market is the second largest in the Latin American region. The total spending on IT products and services is expected to surpass US $4.0 billion in 2011 and reach US $5.9 billion in 2014. IT services contribute around 25% to the nation’s total IT revenue, which is typical of a developing market. Revenue from IT services is expected to grow faster in comparison to the IT market as a whole.
Poised for strong growth: After the low phase in 2009, the IT services market returned to double-digit growth in 2010. This year, the Argentine IT services market is expected to grow to US $1.2 billion. The largest contributor to this market in 2008 was implementation and systems integration segment, which accounted for 44% of the total market size. Public and private sector demand for cloud computing solutions is also a key area of opportunity for Argentine IT service providers. The revenue opportunity of the Argentine IT services market is forecasted to grow at a CAGR of 14.5% from 2009 to 2014.
The Argentine industries with highest demand for IT services include telecom, finance and public sector. Although traditional services like desktop support remain the mainstay, the trend is towards bigger managed services and outsourcing deals in key local sectors. Buenos Aires is the chief center for the Argentine IT services industry.
Competitive market landscape supported by skilled, low cost IT labor: International IT companies like TCS and IBM are expanding presence in the country. Software giant SAP recently formed an alliance with IBM, Red Hat (Linux systems integrator) and Metrotel (a domestic telecoms company) to offer hosted solutions in Argentina. The low labor cost and English as second language for many people are two important factors in favor of the IT offshoring industry here.
IT labor shortage in future likely: Argentina’s IT market consists of approximately 50,000 professionals employed in 1000 companies. According to the Chamber of Software and Informatics Services Companies (CESSI), the sector is expected to witness a growth of 90 % by 2016. This will create a minimum of 70,000 new jobs. The shortage of IT consultants and other professionals is often quoted as a possible limiting factor for this rapidly growing sector. Inflation, budget deficits, external debt and capital flight are other threats to the otherwise booming Argentine IT services market.
Chile IT Services Market
The Chilean IT market is growing rapidly. After moderate contraction in 2009, the market is back on track owing to the recent economic recovery. IT services account for 37 % of the total IT market revenue, which is high for a developing country, but similar to few other South American countries like Brazil.
Bright outlook for the market: The Chilean IT services market is estimated to grow to US $962 million in 2011. Although currently large companies account for 75% of the demand for IT services, demand from smaller companies is also rising. The IT services market is expected to grow at a CAGR of 13% during the 2011-2015 period. Telecom, healthcare, financial services, retail, distribution and mining are the key sectors driving the demand for IT services. Major IT services companies in the country include multinationals like HP, Microsoft and IBM.
Growth supported by Government initiatives: Chilean government’s Digital Action Plan for 2010 – 2014 is likely to result in increased opportunities from the public sector and advance wider utilization of ICT services. President Sebastian Pinera has put forth a number of proposals to promote the domestic IT market. These include tax breaks for IT companies investing in Chile as an IT services hub, increased digitalization of public entities and increased use of IT in classrooms. All these are expected to have a positive impact on the Chilean IT services market. Chile’s development as an off shoring location will also attract more investments in the IT services sector.
Chile likely to continue focus of value added and niche IT services rather than playing in the volume market: Although Chile has a pool of skilled IT professionals, who are also well trained in English, it is a small country with a population of only 16.6 million people. This is one reason why rather than competing with bigger countries for volume businesses like software development, Chile focuses on high value added services. However, shortage of skilled IT professionals remains a limiting factor for IT services market in the country, and presents a great opportunity for IT consultants from other countries.
Conclusion
The South American IT services market is growing rapidly and the trend is likely to continue at least over the next few years. Brazil is leading the way, followed by Argentina and Chile. With the rapid sector growth, a large number of opportunities for both IT businesses and professionals are opening up in the region, especially Brazil. The internal demand for IT services in the region is likely to grow at double digit rates as the infrastructure, telecommunications and financial sectors expand and grow. However, most countries in the region, including the market leader Brazil, are experiencing shortage of skilled IT labor, a challenge the industry will have to address soon to ride on smoothly the strong growth momentum.