Service exports: a crisis-resistant sector with room to grow

3rd October 2019

By Ignacio Pereyra

Service exports: a crisis-resistant sector with room to grow

Service exports are a growing industry worldwide, and Argentina has made efforts to not miss out. But a deep look at the sector suggests that it still has a lot of room for growth, with the country’s workforce ranking high in technical and language skills, as well as being close to the United States’ time zones.

Despite its promise, even this sector is not immune to the economic and political uncertainty the country faces, with a late-2018 emergency tax hike on exports and the return of exchange rate controls acting as deterrents on investment.

But currency devaluation and bi-partisan efforts to promote the sector such as the 2019 knowledge economy bill, which introduced multiple tax benefits, mean that there are renewed reasons for optimism in a business that has been moving upwards since the turn of the century.

</p> <h2><strong>Resistant to crises</strong></h2> <p>As <span style="color: #000000;">detailed by Argencon</span>, a business confederation gathering knowledge-based service (KBS) providers, the evolution of exports in the last two decades is marked by two distinct trends: first, constant growth up until 2011, at an average annual rate of 27 percent; after that, a flatter period, with a total of around US$6 billion exported annually, with a peak of US$6.18 billion in 2017 and one dip to US$5.05 billion in 2014.</p> <img class="wp-image-4197 aligncenter" src="" alt="Service exports took off since the 2002 devaluation, but have flattened somewhat from 2011 onwards" width="651" height="421" srcset=" 300w, 600w, 727w" sizes="(max-width: 651px) 100vw, 651px" /> <p>The second period, with slower growth, coincided with a decade in which the country became <a href="">more expensive</a>, and in which currency exchange restrictions appeared. Yet despite turbulences, the sector has remained strong and its members are foreseeing more upside.</p> <p>“The outlook is growth. Despite all its economic tribulations, Argentina continues to produce talent and generate companies and start-ups that are globalized. It is a path that does not seem to have a limit. Everything is such that the export of services continues to be a pillar of the Argentine economy,” Argencon executive director Luis Galeazzi told <em>The Essential</em>. “It is not that the uncertainty of the economy does not create problems, it is logical that stability would be much better. But other sectors are more affected by these problems,” he added.</p> <p>The KBSs, which include software, audio-visual content and advertising, among others, represent 8.4% of Argentina&#8217;s total exports, <a href="">according to official data</a>. This places the sector as the third exporter, after agricultural and automotive exports. Service exports, for example, triple meat exports. Argencon estimates that in 2030 exports will grow up to US$15 billion and will represent 15% of total sales abroad.</p> <h2><strong>Still playing catch-up</strong></h2> <p>“It is hard to determine what would represent the peak because it is a very dynamic economy. When the software industry began exporting 15 years ago, it didn’t even amount to US$50 million. Today it exports US$1.8 billion. What is the ceiling? It is not clear. Opportunities continue to appear and Argentina can continue to capture market share,” Galeazzi added. “Argentina must work hard not to miss the boat.&#8221;</p> <p>A notable issue is that exports in the region are not growing at the pace of the rest of the globe, which stood at <a href="">10% in 2019</a> according to data provided by Fabrizio Opertti, Manager of the Integration and Trade Sector at the Inter-American Development Bank (IDB).</p> <p>In recent years, exports of services from Latin America and the Caribbean towards global markets grew faster than those of products. Yet, companies from the region are still lagging compared to service exporters in India, China or other Asian countries. Likewise, the share of regional service exports only represents <a href="">3.5% of world services exports</a>.</p> <p>Opertti remarked that there are great opportunities for the outsourcing of business processes such as financial and marketing services; the outsourcing of information technology services, which includes the development of mobile applications and solutions for electronic commerce; and the outsourcing of knowledge processes, whereby services such as video games production and animation, or even the export of architectural and engineering design, are offered.</p> <h2><strong>Boom after 2001 </strong></h2> <p>The 2001 crisis left high unemployment in Argentina and a low-cost, skilled workforce. It was then, in the context of the globalization of labor markets, that the service export model truly took off in the country.</p> <p>The <a href="">Belatrix</a> story illustrates this. Luis Robbio and his children created the company in 1993 in Mendoza. The 2001 crisis and the competitive advantage offered by the 2002 currency devaluation led to a shift in the business model: it ceased to be focused on automation processes and shifted to software development with its best international clients.</p> <p>Since then, growth came in leaps and bounds. Belatrix added offices in Peru, Colombia, Spain and the United States, as well as taking on 800 employees and posting US$35 million in revenue during 2018. It was recently <a href="">purchased by Globant</a>, one of Argentina’s five unicorns, with more than 10,000 employees worldwide.</p> <h2><strong>Not just a matter of price</strong></h2> <p>Experts and businessmen agree that Argentina has several advantages for the expansion of service exports. They emphasize the widespread good level of English, the time zone and cultural proximity with the United States — a great advantage over Asian countries — and with Europe.</p> <p>They say that while the devaluation favors the sector, advantage in this area does not compare with India or China, which usually have a cheaper workforce: the strategy is not to compete for price but for quality of service, creativity, and innovation. But, above all, they emphasize talent and professional capacity.</p> <p>In fact, Argentina ranked first in technical skills in the <a href="">Global Skills Index</a> report prepared by the Coursera platform. “While many developing economies do not perform well on average, there are bright spots, including Argentina who shines in the technology domain. Argentina has developed a successful model that includes having its universities focus on teaching practical technology skills, and also has partnerships with governments to spur entrepreneurship,” said <a href="">Harvard Business Review</a> in a report based on the Coursera data.</p> <p>The Knowledge Economy Law represents another step forward. Approved last May, this law creates tax benefits for export companies. “Political support for the law, from the ruling party to the opposition, was unanimous. It gives a very strong advantage to the sector. This is a public policy that began under Kirchner, continued during the Macri government and was now voted in by the entire Congress,” said Galeazzi.</p> <h2><strong>Examples abound</strong></h2> <p>The evolution of service exports in Argentina can be seen in the expansion of the knowledge industry in Mendoza: with eight universities and three graduates for every 10 people, Argentina’s fourth largest city has become a hub for the knowledge industry to the point of being compared to <a href="">California</a>. Investment in education and research is essential, experts agree, which also highlights the importance of creating export clusters.</p> <p>Price Waterhouse Coopers (PwC), one of the world’s largest auditing and consulting firms, raised its commitment to service exports in Argentina in recent years, creating an additional revenue stream of US$40 million per year. The main partner and CEO of PwC Argentina, Santiago Mignone, told financial daily <a href="">Ámbito Financiero</a> that the export of services is a development that started from scratch in 2010 and currently employs 1,400 of the 3,500 people that PwC has in Argentina.</p> <p>“That business turned out better than we anticipated. And it has continued to grow at a rate of 30 or 40% in the last two or three years,” said Mignone. Regarding the export tax that the Macri government implemented this year, the PwC CEO said that “to a certain extent” these withholdings are made up for by the advantages of the Knowledge Economy Law, in addition to the devaluation. “These taxes create a disturbance but we trust they will be temporary,&#8221; he argued.</p> <h2><strong>SMEs</strong></h2> <p>Service exports are not just a business for corporate giants such as PwC, Accenture or Globant. Thousands of small and medium enterprises in recent years have focused on clients abroad. Hendercross started operating in 2013 as a business consultant but only in 2016 did it start exporting services, which represented 30% of its total sales. The following year it went on to export 50%, reaching 70% in 2018.</p> <p>Gustavo Girardi, Partner-COO of Hendercross, said Argentine professionals are competitive at a global level. “Our cost is above Asian countries, but below the first world. The cost per hour of a developer is US$50 in Argentina, US$35 in India and US$80 in the United States,” he told <em>The Essential</em>.</p> <p>Girardi valued the government’s collaboration with companies to export services through the Argentine Agency of Investments and International Trade (<a href="">AAICI</a>), but regretted that the country undergoes constant changes in currency exchange, trade and tax policies. “It is difficult to make projections for more than four years on a solid basis,” he said.</p> <p>With opportunities opening up in the sector, there are already more than 800,000 Argentines — designers, programmers, system administrators, lawyers, translators, accountants and publicists, among others — who signed up on digital platforms such as Freelancer (about 450,000) and Workana (300,000). Most seek to work for clients abroad, say the platforms, but not everyone manages to do so.</p> <p>“While conditions of uncertainty may cause a peak of new users, the growth rate of users in Argentina has been high and sustained in recent years,&#8221; Sebastián Siseles, International Vice President of, told <em>The Essential</em>. He explained that the countries that demand Argentines’ services the most are the United States, India, Spain and Australia.</p> <h2><strong>Trouble for freelancers</strong></h2> <p>Another group of professionals to add to these numbers are those that sell their work abroad via direct contact with Silicon Valley or through personal acquaintances, looking for earnings in hard currency while living in a cheaper country. This trend makes it difficult to retain talent in many companies, an issue that has become a priority in recent times.</p> <p>This is the case of Rodrigo, who has a degree in computer science and works as an Apple developer from Argentina. “Between 2010 and 2014 I worked for local companies that had clients abroad. After traveling a lot for different projects, I decided to break out on my own. I knew that the difference between what my employer received per hour and what I earned in pesos was astronomical,” he told <em>The Essential</em>.</p> <p>It is precisely this group of independent workers that were the least thrilled with the new foreign exchange restrictions on service exporters imposed last month. The new rules imposed similar regulations to a designer who sells a logo from his home than to a multinational that sells a consulting service to another firm in a foreign country.</p> <h2><strong>The return of black markets</strong></h2> <p>Starting on September 1, the Central Bank established that service export charges must be settled in Argentina within a period not exceeding five business days from the date of accreditation.</p> <p>This means that — on top of having to do more paperwork — exporters must convert the currency they received for their services into Argentine pesos, at the official exchange rate. Then they can convert those pesos back into dollars (with a limit of US$10,000 per month), which generates a big fee for the banks and a loss of about 8% for the worker due to the spread between the buying and selling price of the dollar in the retail market. The difference is even bigger in the <a href="">black market</a>. For Argentines, saving in dollars has become the preferred remedy against the <a href="">high inflation that has plagued the country for years</a>.</p> <p>Exporters have found some ways to bypass these restrictions. One company explained that the controls do not directly affect them, because they control two different firms: one in Argentina and one in Miami. They use the latter to invoice exports and then they periodically make transfers between the companies and the revenues are credited in dollars in Argentina.</p> <p>“The new measures promote tax evasion with all these obstacles,” says Siseles of “Argentine talent is increasingly pushed to leave the country or find mechanisms to avoid getting caught in the administrative and banking bureaucracy that current regulations impose and that remind us, unfortunately, of the final years of the previous administration.”</p> <p>

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Ignacio Pereyra

Ignacio Pereyra is a freelance reporter and photographer. For close to a decade, he was the Argentina correspondent for the Spanish-language service of dpa news agency. He also reported out of Buenos Aires for Río Negro, Patagonia's largest newspaper.