sourcing in argentina – story of a struggling empire.ebook

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SOURCING IN ARGENTINA

STORY OF A STRUGGLING EMPIRE

SOURCING IN ARGENTINA- STORY OF A STRUGGLING EMPIRE


INTRODUCTION

Argentina is the 2nd largest South American country

in terms of area and 3rd largest by population. The

country’s capital Buenos Aires, is the fourth biggest

city in the world and is one of the three Latin

American cities that are considered as ‘Alpha City’

or ‘Global City’. While soccer is the unofficial

religion, it is a little known fact that the country has

close to 1,800 wineries and is the leading producer

of wines since 16th century. Argentina also claims

inventing the world famous dance ‘Tango’.

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A high-income economy, Argentina benefits from its export oriented agricultural sector, varied

industries and rich natural resources. The country represents 0.86% of the world’s economy and

has one of the highest GDP per capita of ~$13,179.71 (2014). Service sector accounts for 64% of

the economy and includes well developed transport, real estate, banking & insurance and tourism

verticals. Several segments such as telecommunications and financial services have seen rapid

growth during the last decade due to increase in consumer demand and increased interests from

foreign investors.

Technology gained popularity 20 years ago, and the country started developing its IT talent during

the dot com boom. In the mid 2000s and for the next five years, similar to other LatAm countries,

nearshoring gained popularity and Argentina became a favorite hub for offshoring and sourcing

destination for software development, contact centers, back-office operations as well as creative

services. Yet, over a period of time, the country lost its charm as its contact centers became too

expensive and political instability set in. Companies, which once preferred the country, started

looking towards its peers.

3

INTRODUCTION


Copyright © 2016 Neo Group, Inc. All Rights Reserved. 4

Was all well with the industry? Is sourcing to Argentina still a best option? This Supply WisdomSM

Insights Whitepaper attempts to assess the country’s risks and opportunities with respect to

sourcing industry and doing business.

Economic Turbulences - Effect of the Austerity Measures

Despite being a high income economy, Argentina has a history of unstable economy, alternating

between periods of high income growth and disturbing recessions. The much awaited Presidential

elections in October 2015 saw Mauricio Macri being elected as the new President of the country.

Macri was considered to be more liberal in his thoughts, in contrast to his predecessor Cristina

Fernández de Kirchner who preferred tight currency control. As expected, in first few days of his

Presidential term, Mauricio Macri and his team announced series of reforms aiming to turn around

the economy. Throughout the next six months, the government lifted export taxes, cut subsidies

provided for electricity and transportation, increased interest rates to record 38% to boost savings,

sold $16.5 billion in bonds to international investors and ended a 15 year old battle with Aurelius,

NML and the other two hedge funds that were holding the defaulted bonds by agreeing to settle all

claims for $4.65 billion.



0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Performance of Economic Indicators

GDP Growth Rate (YoY)

Inflation

Interest Rates

*Q2 2016 GDP growth rate is yet to be released

Source: Supply WisdomSM



In December 2015, the president devalued peso by 30%, in-order to free float currency and to

attract investments. Consequently the government announced that a $20 million investment is

expected by the end of 2016 - $1 billion from coca cola (to be invested in the next four years), and

an undisclosed sum of investments (assumed to be $100 million each) from Dow Chemical, Royal

Dutch Shell and Total SA. However, the measures, especially the devaluation of peso backfired, as

inflation rates surged from 15% in April 2015 to 40.5% in April 2016, triggering the prices of gas, food, rent

and electricity to soar high in H2 2016. The shift from a highly-regulated economy to a more market-

oriented economy seems to be costly for the country as Argentina recorded third consecutive QoQ

(Quarter-on-Quarter) decline in GDP growth rate during Q1 2016.

BREXIT’s Impact?

At a global level, Argentinean officials are confident that BREXIT would have minimal impact on

the economy. Though the currency devalued by ~5.6% during

the period, it seemed to be a blessing in disguise as the policy makers were worried about the

13% surge in Peso since February 2016 which had a significant impact on the country’s trade

balance.



0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

0

2

4

6

8

10

12

14

16

Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

% o

f V

ola

tity

US

D/A

SR

Currency Exchange Rate USD / ASR

Currency Fluctuation

Linear (Currency Exchange Rate USD / ASR)Source: Supply WisdomSM



Nevertheless, no immediate growth is seen and it is feared that economy might move towards recession in

2016. As per Supply Wisdom’s “Location Risk Assessment” framework, Argentina’s Macro-Economic

Indicators are treading on a High Risk factor, owning to currency volatility, high fiscal deficit, high inflation

rates and poor Forex reserves.

High Crime Rates, Higher Natural Disaster Risks

Similar to other LatAm countries, crime rates in Argentina are high and are recorded frequently in urban

areas especially Greater Buenos Aires, Cordoba, Rosario and Mendoza. Violent crime, drug trafficking and

robbery is common. The country is also risk prone to earthquakes, floods and disease outbreaks;

nevertheless, no large scale events were recorded since last two years, apart from the spread of Zika

virus that affected Argentina along with other Latin American countries.

As such, Supply Wisdom advises its clients to have robust Disaster Recovery and Business Continuity

plans and programs in place and periodically test to ensure that business operations are not affected.



As per the Doing Business 2015 report by World Bank, Argentina ranks 124th out of 189 countries in the

world, with the business environment not too conducive. Ease of starting a business in Argentina is much

lower compared to many other countries in the region including Chile, Uruguay, Mexico, Colombia and

Peru. While the procedures and time involved in getting construction permits have come down, it should

be noted that the process is more costly due to increase in several fees. Starting a business has also

become difficult due to increase in incorporation fees. Doing business is further made tough by the burning

corruption and bribery issues, with many public officials charged and tried for crimes related to illegal

payments. In 2015, Argentina ranked 107th of 175 countries in Transparency International’s Corruption

Perception Index (CPI). It was found to rank behind Mexico (95), behind Chile (23) and Brazil (76), yet

ahead of Paraguay (130) and Venezuela (158).

Doing Business Is Not Getting Easier

Privacy & Data Protected Well; Intellectual Property Is Not

Argentina has very strong ICT protection policies, data protection and cybercrime policies. The country is

currently updating its ICT policy to include cloud computing. The National Commission for the Protection of

Personal Data establishes stringent data protection and privacy laws.



The Law and its Acts clearly outlines the set of practices and protocols for data protection including

collection, sharing, transfer and breach notification. However, the country’s Intellectual Property Law is not

comprehensive and it also has been criticized for poorly enforcing copy right laws. Argentina continues to

feature on the ‘Priority Watch List’ in Special 301 Report that is released by prepared annually by the

Office of the United States Trade Representative (USTR). The list features countries that do not provide

“Adequate and effective protection of intellectual property rights or fair and equitable market access to

United States persons that rely upon intellectual property rights”.

Cost Arbitrage – A fact or a fiction?

With regard to the cost, the arbitrage offered by the country is at par with other Latam countries- a

software engineer in Argentina would draw between $23,000 to $52,500 (depending on his experience

and skill sets), 10% higher than their peer in Brazil, but 22% lesser than Chile. While average salary

increments in LatAm range from 4% to 6%, employers in Argentina offer a whopping 32% hike. However,

the real increment, after accounting for inflation stands at 3.6% only. In terms of other operating costs,

Argentina’s rents vary from $2 to $3 (per square feet / month) and are similar to that quoted by other Latin

American countries.



Real estate rates are higher than most other South American countries, despite witnessing largest

downgrade in South America in last few years. Fuel costs are high, while power costs are comparatively

lower than Mexico, Brazil, Colombia and other LatAm countries. During January, after the subsidy cut, the

prices escalated by 500%; however, currently there is a short respite, after an Argentine court ruled that

the price increases were invalid. The court suspended the price increases in Buenos Aires for three

months. As per Supply Wisdom’s “Location Risk Assessment” framework, the country has been rated

High in Financial Risk Category.

Cost Factors Argentina Brazil Mexico Chile Colombia

Salary (IT ) (In US$ / month) $23000 to

$52000

$21000 to

$54500

$16000 to

$33000

$29000

to$59000

$8000 to

$21000

Rent (Per Square Feet / Month ) for

Grade A

buildings (approx.) $2.60 $3.27 $2.11 $1.92 $3.34

Power Cost (Kw/Hr) (Commercial)* $0.07 $0.17 $0.12 $0.11 $0.18

Corporate Tax 35.00% 25.00% 30.00% 24.00% 25.00%

* As of December 2015 – as the current tariff is impending court decisionSource: Supply Wisdom



As per Argentina’s IT industry association Cessi, the country’s software and services (SSI) sales was

estimated at $3.479 billion, out of which exports account for $1 billion. Argentina’s SSI has grown at a CAGR

of 26% since 2010 to 2016 and it is estimated to grow at a CAGR of 10.3% over 2014-2019. Meanwhile, the

country’s contact center market is estimated to be at around $0.992 billion, with revenues declining by 1.7%

in 2013. Compared to SSI segment, the contact center industry in Argentina has matured and is estimated to

have a CAGR rate of a meagre 2.3% from 2013 to 2020.

Buenos Aires is the most sought after location as it contributes for 85% of the software talent pool in

Argentina. About 60% of Argentina's IT firms are located in Buenos Aires which is the central hub of all IT

operations in the country. Apart from the capital city, several other technology clusters exist throughout the

nation, such as in Santa Fe, Córdoba, Río Negro, Mendoza, San Luis, Salta, Jujuy, San Juan, Tucumán,

Chaco, Corrientes, Entre Ríos, and Neuquén.

Sourcing Industry

Once a star of the region



This Apart from major players such as IBM, Sabre, Globant, HP, and TeleTech, companies such as America

Online, Chevron AR, Coca-Cola GBS, and Disney too have their Global Business Service Centers in

Argentina. These centers provides services in facilities & administration, application development and

maintenance, contact centers, back-office operations and creative services, along with call center services.

With regard to the workforce, the country adds 98,000 graduates and 11,000 graduates annually to the work

stream and its labor pool in IT and BPO sector stands at ~ 0.22 million. The number, however, is lesser than

Mexico (0.6 million), and Brazil (1.7 million). What makes the country stand out is its multilingual capabilities

especially English Proficiency. A large part of the Argentinean population speaks Spanish, Portuguese,

Italian, English, German and French. It should be noted that as per the Education First's English Proficiency

Index 2015, Argentina leads in the Latin American region with a score of 60.26 and is in the band of “High

Proficiency”. While Colombia is placed under “Very Low Proficiency”, Mexico and Brazil are in the “Low

Proficiency” band.

As per Supply Wisdom’s “Location Risk Assessment” framework, Argentina has high risk with respect to its

scalability of sourcing operations primarily because of shortage of employable talent.

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The biggest challenge so far is the availability of people with required

technical knowledge as the demand far exceeds the supply of graduates

in the country. To address these issues, the government has implemented

various programs to promote IT learning in universities via scholarships

and life-long learning programs. The Argentine Ministry of Education

recently announced the introduction of IT courses in majority of colleges in

the country to cope up with the future need for research and innovation in

this field. Apart from limited talent pool, businesses in Argentina also have

to deal with attrition. As per Cessi, SSI attrition for 2015 was 27% due to

high demand for skilled staff. Attrition in BPO ranges from 10% to 15%.

Supply Wisdom forecasts the demand-supply gap to widen further by

2017. We advise our clients to study the human resource policies and

come up with innovative methods of employee retention of their best

workers.

For example, software firms in Buenos Aires rolled out the annual

bonuses at the beginning of 2016 rather than at the end of the year. These

companies believed that the practice not only helped them to retain staff,

but also beat inflationary pressure in prices. Businesses operating in

Argentina should constantly encourage their employees to upgrade their

skills and domain expertise in order to stay competitive. Offering

incentives to people who complete new certifications, providing training

programs, giving scholarships etc. are some ways to do so. While this

activity will improvise the skill sets of the staff, it would also create a sense

of achievement within the employees, preventing them to look for new

opportunities outside the organization.

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Government to Support SourcingSimilar to other emerging destinations, Argentina too offers several

incentives to promote the sourcing industry. Software production has

been recognized as a productive transformational activity under the

Software Promotion Law. The country provides a preferential regime for

all software entities incorporated in Argentina. Under this regime, all

such companies;

a) Will be exempted from VAT

b) Can claim a tax relief of up to 60%

c) Can enjoy incentives offered to industrial companies as

software is being recognized as industrial activity

d) Avail fiscal stability for six years starting from 2013

The country also provides two kinds of tax-exemption regions: Free

Trade Zones (FTZ) and Special Customs Area (SCA). These regions

provide varied incentives and increments and extend their benefits to

already established corporations too. The industry is also supported by

various associations and programs such as the Chamber of Software

and Computer Services (CESSI), the MERCOSUR (a customs union to

promote free trade), and the Trust Fund for the Promotion of Software

Industry (FONSOFT).

These agencies aim at promoting employment and entrepreneurship

within the IT & outsourcing industry as well as the overall growth of the

services sector.



Internet Penetration High,

Power Supply Low

The country boasts good availability of telecom infrastructure with increasing internet

penetration and mobile-based technologies. Availability of faster internet speeds, better

connectivity and competitive rates are attractive factors.

However, despite being the third largest power market in Latin America, the country struggles

with increasing electricity demand and declining reserve margins. Long duration power outages

continued to irk the residents of Buenos Aires and other major cities, prompting people to take

to the streets against the government.

The government is in the process of commissioning large projects to improve the scenario.

Nevertheless, as most of the finance would be through trust funds, the effectiveness of the

financing and implementation is questionable, considering the current economic situation.

High inflation leading to higher wages, unstable political environment, difficulty in doing

business and high corruption levels, have darkened the sourcing industry in Argentina driving its

contact center market, once the most revenue generating services in the sourcing industry for

the country, to lose its cost competitiveness.



Nevertheless, despite the challenges being greater than

the opportunities present, the country still competes with

other countries such as Brazil and Mexico for providing

sourcing services. With its time zone advantage,

Argentina has been able to secure work from North

America, while its cultural affinity helped the country to

secure work from Europe.

Also, though the current term of the new President

commenced in an adverse mode, economists are

optimistic that such short term economic troubles will

eventually lead into long term gains. President Macri

appointed Carlos Gabriel Pallotti as Undersecretary for

Technology and Production Services in Argentina’s

Ministry of Production, Science and Technology,

indicating the government’s seriousness in developing

IT/BPO as a major source of revenue for the economy.

Pallotti aims to leverage the country’s tech talent to

attract national and international companies.



Programs to train 100,000 coders and programmers in the

next four years are put in place. The government and the

Ministry are confident that a little grooming will take

Argentina to being the most sought after place for IT

sourcing services. Wages for system administrators,

software developers and designers are more or less at par

with other South American nations and the primary talent

pool can support the industry growth. Emergence of new

verticals such as cloud computing, big data analytics and

media services, if tapped well, could be a bigger

opportunity for the country’s sourcing market.

There is also immense potential in areas such as web

development, digital content, e-learning, auditing, taxation,

and supply chain functions.

Having said that, such developments cannot happen

overnight and it would take at least a couple of years or

more for the economic ripples to settle down and the

policies to take effect.

Till then, sip your wine, enjoy the tango while watching the

sourcing market through Supply Wisdom



Neo Group Can Help

The global sourcing landscape is constantly evolving. For a deeper discussion on planning and executing

a successful globalization strategy, contact one of our lead advisors.

Atul Vashistha Brad Pickar Hemant Puthli

CEO & Founder Partner & SVP Partner & SVP

[email protected] [email protected] [email protected]

Kevin English Pankaj Sharma Vikram Naaidu

Partner & SVP Partner & SVP Partner & SVP

[email protected] [email protected] [email protected]

About the Author

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Sandeep Suresh heads the Research and Supplier Relations division in Neo Group. He has been working

in the market research industry for the last 10 years. He has not only worked with several domestic and

international market research companies, but has also worked with leading ITO/BPO/KPO organizations,

managing their global research operations.

Meena Bose is a Team Lead of the Locations Division for the Supply Wisdom & is responsible for seamless

delivery of the location risk reports and ensures that actionable guidance and insights are provided to

enable clients to take strategic decisions about operating in locations. With overall 9 years of experience in

business research domain, Meena has expertise in providing business solutions by interpreting independent

data, analyzing and identifying patterns.

.

mailto:[email protected]








About Neo Group

Founded in 1999, Neo Group helps organizations meet business objectives and address business

challenges by leveraging global services and sourcing. To learn more about Neo Group, please visit

www.NeoGroup.com.

About Supply WisdomSM

Supply WisdomSM is a unique cloud-based service that provides data and intelligence for sourcing risk

and opportunity monitoring of global countries, cities and suppliers. To learn more about Supply

WisdomSM, please visit www.SupplyWisdom.com.

No part of this report may be reprinted/reproduced without prior permission from Neo Group.

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