The purpose of this report is to provide an overview of the major developments in the information technology (IT) industry in Colombia. The report also makes special reference to certain business areas such as software sales, IT services, and Internet based services. These sectors have seen particularly high growth in recent years, with companies continually investing in new technologies and offering new services to clients. The IT industry in general in Colombia has enjoyed rapid growth in recent years on the back of new technologies and value added services. Despite the economic downturn suffered in 2009, which affected developed economies and emerging markets such as Colombia, the IT sector has not suffered as much as other sectors of the economy. While GDP growth for the Colombian economy declined from 7.5% in 2007 to 2.5% in 2008, and 0.4% in 2009, the IT sector, maintained a healthy growth rate of 7.5 percent in 2009 (according to a report by Fedesoft), and is expected to present growth of 3.5% in 2010.Overall investment in Information Technology and Communications (ICT) is expected to reach US$10,870.6 million in 2010, slightly up from US$10,521.7 million in 2009. It is estimated that this figure will reach US$11,119 million dollars in 2011. In general, in recent years, the market has been moving towards increased competition and increased efficiency, which has resulted in price reductions to consumers. Indeed, the key to remaining competitive in this market is continual investment in infrastructure, new technologies and improved services.According to the World Economic Forum report on ICT, Colombia ranks above the world average in the connectivity index.
Market Demand Colombia represents the third largest IT market in South America. The size of the IT sector (computers, software, components, and related services) in Colombia is estimated at USD $2,468 million, representing a small proportion of the global economy (currently less than 0.5% of GDP), but it is a sector which has been growing well above GDP rates in recent years. Local production in the IT sector consists basically of computer hardware assembly and repair. There is also a growing software development industry in Colombia, and IT related services have grown significantly over the past two decades. These developments have helped the IT sector in Colombia become the second largest in Latin America, in proportion to GDP. There are approximately 3,000 companies operating in the sector (mostly retailers, distributors, value added resellers and systems integrators), employing more than 32,000 people and generating around USD $158 million in taxes. According to BMI, Colombian IT spending is projected to grow at 13% over the 2010-2014 period and per capita IT spending is projected to rise by 43% from US$48 in 2010 to US$74 by 2014. The retail PC market surged in 2010, with sales of computers up 34.6% in June 2010, based on data from Colombia's statistics bureau, compared with the same period of the previous year. Regulatory measures can often drive production, investment and sales in the IT sector. In Colombia, the Government has declared the IT sector as a focus for policy initiatives and incentives. For example the Government has put incentives for the purchase of PCs by excluding VAT on products whose value is less than US$1,000. The IT services market is estimated at around US$500,000 million, and revenues are expected to double in five years. Seventy-five percent of the demand for services is accounted for by large companies. In the last two years, there has been a trend towards bigger managed services and outsourcing deals, mainly in utilities, telecom and financial services. For SAP and Oracle, Colombia ranks as the 3rd largest market in the region after Brazil & Mexico. SAP is currently the leader for IT consulting services. A notable trend in recent years is the formation of companies to cater specifically to the needs of companies or institutions with customized software and network solutions. For the supply of software, U.S. companies now have to compete not only with foreign competitors, but also with local software developers. Revenue for the software industry is estimated at US$885 million in 2009, and software sales are estimated to have been $452 million in the same year. However, according to BSA, counterfeit products account for 55% of the market. A weakness in this sector is in the size of firms, 92 percent of companies are small, seven percent are medium, and only one percent are large. However, this key weakness in local companies may represent an opportunity for foreign multinationals. The latter are better positioned in order to win government contracts and technology related business. These multinationals are better able to provide support and servicing for technology related services. In terms of employment, in 2009, 16,000 jobs were directly related to the IT industry while 18,100 jobs were indirectly related. The Internet access penetration rate in Colombia remains low (compared to Brazil, Argentina and Mexico) but growth has been impressive in recent years, positioning the country among the top ten growth markets during 2007-2008. Internet subscription has seen a spectacular increase in recent years, and currently stands at 3,181,000 subscribers (mobile and fixed line), according to figures from the telecommunications regulator. Also, dedicated fixed line subscriptions (broadband) have increased to 86.9 percent as of June 2009. Mobile Internet services have only recently been introduced in Colombia, yet revenue from this has been increasing significantly, currently standing at US$46 million. XDSL access prevails over other technologies, representing 61.8 percent of subscribers. Cable connection amounts to 32.7 percent, while WiMAX and other wireless only, holds a share of 3.6 percent, with other technologies making up the remaining 1.9 percent. Studies by the Telecommunications Regulatory Commission (CRT) highlight an increasing use of mobile telephony in the provision of Internet access, combined with voice services. For mobile phone operators the current trend is to offer Internet mobile services. Colombia is one of the principal markets in which social networks (especially Facebook) are used. This drive for instant communication based on social networks could make Colombia one of the fast adopting markets of the "pervasive video" trend envisaged by Cisco according to the company’s Southern Cone sales business development manager for data centers.
Market Data Total imports of computers, software and components into Colombia suffered a dramatic reduction in 2009 (15.26%), mainly as a result of the economic downturn, and especially affecting imports from the U.S. However, U.S. market share within this industry has been diminishing well before the economic downturn. The U.S. held the lead in exports of computers and components to Colombia until 2006, but since then Chinese exports to Colombia have taken the lead, and currently hold almost 50% of market share while the U.S. is struggling to maintain a 15% share. However, statistics can sometimes be misleading. For example, a great proportion of products manufactured by IBM, HP, Dell and others are actually assembled in other countries such as China and Mexico; as such the imports are classified as originating from those countries, although this is actually U.S. technology. In fact the traditional U.S. brands have been performing well in the Colombian market. For example, Hewlett Packard holds a 62% market share in portable computers. In general, the U.S. still holds the lead in state of the art technology products. The eventual ratification of the U.S.-Colombia Free Trade Agreement (US-CTPA) by the United States Congress should have a positive impact for U.S. suppliers, as import duties would be eliminated on U.S. products entering Colombia, while Chinese products will continue to be imposed tariffs ranging from between 5-15%.
Best Prospects Colombia, although a declining market for U.S. IT exports, continues to offer good opportunities for companies in specific sub sectors. Niches may be found for companies providing state of the art technology and know-how, especially in the following business areas: • Provision of service fulfillment software platforms for the automated creation and delivery of managed IP services and applications. • Wireless infrastructure for broadband wireless networking solutions built around Wi-Fi and cellular technologies, and that are able to optimize high-density hot zone and metro deployments. • Flexible, easy to operate and more economical broadband telecommunications networks. • Multi-service wireless LAN (WLAN) systems for enterprises and service providers, delivering highly scalable, flexible solutions for wireless voice, data and video networking. • Provision of platforms for New Generation Access Networks. • Technologies to optimize scarce bandwidth. • IP-enabling devices and improvement of overall wireless network performance by increasing capacity, improving and maintaining network quality, reducing network operating costs and better managing network infrastructure. • Cloud computing services Increased broadband services should also stimulate the requirement for continual high volumes of computer sales in the Colombian market. Among the broadband services, IPTV has recently been introduced. UNE (EPM) introduced the first IPTV service in 2008, and reached around 150,000 subscribers by the end of 2009. Empresa de Telecomunicaciones de Bogotá (ETB) is the other major competitor for this service. Triple play services were first introduced in Colombia in 2004, and now have become the main marketing strategy, combining TV, voice, and data services over one broadband platform. Cable TV operators have a large broadband customer base, and have joined the telcos to provide triple play services. It should also be pointed out, however, that certain technologies have encountered difficulties in implementation in Colombia. In particular, Wi-Max services have been developing slowly in Colombia. In fact one or two operators who had acquired a license to provide the service have either returned the license or made no use of it. The Colombian Government has been implementing strategies in order to boost economic recovery, based upon among others, investment in infrastructure incorporating new technologies. For example, it has identified call centers and contact centers as one of eight best prospect growth industries or “clusters”, and has been strongly promoting Colombia as a base for the operation of call centers. In recent years there have been huge investments by foreign multinationals in new facilities and technology, and revenue in this sector has been steadily rising. In 2006 call center industry revenue stood at US$270 million and in 2009 reached US$420 million. Local businesses in Colombia have also decided to outsource their call center operations rather than to keep this activity in-house, in order to boost efficiency and increase their competitiveness. Broadband deployment is another priority for the Colombian Government, which has implemented programs for increased access. Colombia has implemented a competitive bidding scheme for the deployment of tele-centers by private companies and has allowed bidders to benefit from economies of scale by bundling together hundreds of tele-centers. This enables the operators to establish tele-centers run by local entrepreneurs, but backed with the support and resources of a larger regional network and a professional management organization. The program has evolved so that it now includes rural broadband strategies for public institutions and access points. Colombia stands out in Latin America due to its rapid expansion of corporate network communications infrastructure. The country's geographic size, together with the presence of several business centers, drives this growth. However, only the large companies make full use of new technologies. For SMEs, investment in new technologies has been slow. According to a study carried out by RGX Red Global de Exportación, Proexport and Oracle Colombia, only 35 percent of growing companies are investing 5 percent of their global budget in new technologies. The government, recognizing the need to promote the use of new technologies among SMEs, has implemented several programs, including financing, in order to stimulate investment. Also for public institutions (schools, government entities etc.) the Communications Ministry, through its Compartel Program, has been providing Internet access services.
Key Suppliers Most of the major worldwide hardware manufacturers and software developers have either a sales office or are otherwise represented in the Colombian market. There are also many international IT service providers that operate in Colombia. U.S. companies hold the lead in the provision of software platforms, especially from Microsoft, Oracle and Symantec; these companies enjoy an excellent reputation in Colombia. The IT industry has been a leading sector in terms of foreign direct investment in Colombia. Companies such as IBM, Unisys and Hewlett Packard have been investing in new facilities, in order to broaden the services which they offer in this market. U.S. suppliers of software should keep in mind that local companies expect foreign software companies to be able to work with their specific needs and requirements in a solution-driven rather than product-driven environment. Many Colombian manufacturing companies, which have not already implemented computerized operating and management systems, will without doubt need to search for software solutions to improve their existing procedures, leading to higher efficiency. Latin American firms are becoming increasingly aware of cloud computing benefits, but decision-makers are not reading the fine print in areas such as service level agreements. Many Latin American companies are dropping the ball with their first cloud computing roll-outs, as cursory planning is leading to implementations that are out of line with business needs, the Latin America director of Canadian IT service management consulting firm Pink Elephant, Gerardo Reyes-Retana, told BNamericas. In November 2010, Cisco unveiled a series of products designed to make Telepresence and video collaboration more affordable, simpler to manage under a common architecture and more available through cloud services.
Prospective Buyers The IT market in Colombia is very competitive. In the past the U.S. has been one of the main suppliers of IT products to this market, but as indicated above, in recent years strong competition has come from China. However, good opportunities may still be found by targeting key government and private sector procurement contracts. Government entities are continually putting out public procurement requests. Large companies in Colombia also usually publically announce their plans for the acquisition of IT equipment and services. Current major projects in Colombia include the acquisition of a telecommunications satellite by the Communications Ministry, and an earth observation satellite by the Geographic Institute (IGAC). The Colombian government has budgeted $200-250 million for each project. The Communications Ministry has also launched a program called “Vive Digital”, which intends to multiply internet usage throughout the country. A diverse range of specific investment projects should stem from this initiative. In the private sector, Colombian industry continually seeks to improve its efficiency and competitiveness to survive in the global marketplace, and this involves the acquisition of state of the art technology. For example, the implementation of innovative software has been identified as one of the key drivers for the improvement of Colombian industries. Local and foreign software suppliers are focused mainly on financial, billing, business resource planning, inventory and human resources management applications. Colombia has a well-developed communications and banking system in urban areas but there is still plenty of room to implement new software development in most rural areas. Investment in new technology in Colombia was above $USD 1.6 billion dollars in 2009, 4.6% more than the previous year, according to IDC International Data Corporation. The segment of highest growth was services, 12.6%, whose global participation within the IT sector evolved from 38.1% to 41.9%. The current outsourcing tendency requires that the service providers also supply the hardware, so now many companies invest in services rather than infrastructure.
Market Entry Accessing this market is not easy for newcomers, especially for internationally inexperienced SMEs. The market is very competitive, and there are many distributors and resellers operating in Colombia who represent worldwide brands. Chinese brands especially have been gaining market share. The main competitive advantage lies in the lower price, and although quality and reliability have been an issue in the past, nowadays these no longer constitute a disadvantage in gaining access into the Colombian market. Companies are advised to work through a local representative in order to further explore the market’s possibilities. Colombian law does not require foreign firms to secure local representation for private sector sales. However, Colombians prefer to deal with companies that have local representation to ensure access to after-sales services. The one exception to this rule is for sales to the government, which requires legal representation in Colombia for foreign bidders. To secure an agent, representative, or distributor, the foreign company must execute a contract that meets the provisions of the Colombian Commercial Code. This contract must be registered with the chamber of commerce, where the agent or representative is located. Agency or representation agreements do not require government approval. An agent or representative differs from an appointed distributor. The former is legally associated with the principal and may enter into legal agreements on the principal's behalf, while the latter may act totally independently from the principal. Distributors may purchase items from a foreign supplier, wholesaler, or jobber, and then sell them locally at their own discretion and risk. The best approach for marketing the product in Colombia would be to search for a partner/reseller, with whom the U.S. company could take a long term approach in developing the market. Products often need to be marketed through direct on site demos; this can only be achieved by working with a local dealer. A local representative or distributor can establish personal contacts that tend to foster confidence in a firm's ability to supply the needed inventory, warranty, and after-sales servicing. U.S. companies bidding on major government, or even private sector projects/procurement and those entering into joint ventures or other long-term contractual arrangements, are also advised to seek legal counsel. The cost of the products would also be a major marketing factor to take into account, since end users would not be willing to pay more for products that they can easily obtain from competitors in China and elsewhere. Companies are also advised to participate in local specialized trade shows, and keep close ties with local professional associations that maintain directories with names and addresses of their members. For transactions, payment terms are negotiable between vendor and purchaser. Most imports of equipment and materials are paid via irrevocable letters of credit (L/C), payable on sight against shipping documents. The normal payment term for local purchases is 30 calendar days.
Market Issues & Obstacles Foreign companies have often had issues with market access and licensing Colombia. The Colombian government does not award universal licenses, making it difficult for the market to converge completely. Licenses can be obtained depending upon availability, and prices differ depending on the specific service that incumbents would like to offer. The new ICT law, approved by the Colombian Congress in June 2009, attempts to promote market access and stimulate greater competition. It regulates service quality, investment in the sector, as well as the efficient use of networks and the radio spectrum. The importation of most products into Colombia is approved automatically upon presentation of a form known as "Registro de Importación”. Colombian import duties are divided into three categories: (1) zero percent for primary goods and capital goods not produced in the country; (2) five and ten percent for the same categories of products manufactured in the country; (3) fifteen and twenty percent for final consumer goods. This tariff protection is granted based on the existence of production of similar products in Colombia or in other Andean Community Nations (Comunidad Andina de Naciones – CAN). Most imports and sales within Colombian territory are also subject to a 16 percent value added tax (VAT). This tax is assessed on the CIF value plus the import tariff, when applicable. As a general rule, imports conducted by government entities do not pay import duties but are subject to the sales tax. Colombia has negotiated comprehensive trade agreements with other Latin American and Caribbean countries that seek a gradual reduction of tariffs and trade barriers among member countries. Some of these agreements are: The Andean Community Nations (Comunidad Andina de Naciones – CAN) with Bolivia, Ecuador and Peru; CARICOM with several Central American and Caribbean countries; and the Latin American Integration Agreement, under which Colombia has negotiated bilateral agreements with other countries not included in CAN (Uruguay, Brazil, Paraguay, Argentina). Colombia also has partial free trade agreements with Chile and Mexico. Different duties may apply to a given product depending on whether it comes from the above-mentioned markets. Colombia has also negotiated a Free Trade Agreement (FTA) with the United States which has yet to be approved by the U.S. Congress. The eventual approval of this agreement is expected to have a significant impact on this sector. Virtually all IT products will become duty free upon entry into force of the Agreement, thus stimulating U.S. exports to Colombia. Currently tariffs range between 5 to 15 percent. Products within this sector account for over 15 percent of total U.S. industrial exports to Colombia. The FTA would also favor US products over Chinese exports to Colombia, as import duties for Chinese products would remain in place, while those for US products would be eliminated. Colombia is currently not a signatory to the Information Technology Agreement (ITA) of the WTO, which calls for elimination/reduction in tariffs on IT products. The sale of illegal software has been a major problem in Colombia, affecting companies such as Microsoft. Estimates indicate that the piracy level may be around 56 percent, and trade losses due to software piracy are calculated at around USD 136 million. However, the government has been stepping up efforts in recent years, in order to tackle the problem, and thus defend legal manufacturers. Such efforts have helped to reduce somewhat the piracy level in Colombia and maintain the ranking of the country among those with the lowest piracy rates in the region. U.S. companies operating in Colombia have acknowledged such efforts. However, Colombia has remained on the Special 301 Watch List during 2009. The U.S.-Colombia Trade Promotion Agreement (TPA) contains a comprehensive chapter on intellectual property rights that will raise the level of copyright law and enforcement obligations in Colombia to the benefit of both Colombian and U.S. creators. Companies should register their patented technology in Colombia.
COMPUTERS AND COMPONENTS
Total Market Size
Total Local Production
Imports from the U.S.
Source: DANE, World Trade Atlas, Author’s calculations, in millions of USD
Colombia offers significant opportunities for U.S. suppliers of computers and components, and of related services. Since 2004, imports of computers and components from the U.S. have grown dramatically. In 2005, imports increased by 30.29 percent ($246 billion US), in 2006 by 16.23 percent ($286 billion US), and the projection for 2007 is expected to reach 37 percent (approximately $350 billion US), making this the highest year of growth during the past ten years.
There is also growing demand for software products and network solutions. Although there is practically no local production of computers and components, there is a growing software development industry. A notable trend is that a few new companies have been formed in recent years to cater specifically to the needs of companies or institutions with customized software and network solutions.
It is important to note that software piracy is a major problem in Colombia, as is the case in all Latin American countries. Estimates indicate that the piracy level may be above 50 percent, and trade losses due to software piracy are calculated at over $100 million US. However, the government has been stepping up efforts, in recent years, in order to tackle the problem, and thus defend legal manufactures. American companies operating in Colombia have acknowledged such efforts.
Colombian industry is seeking to improve its efficiency and competitiveness to survive in the global marketplace. The IDB recently approved a $300 million US loan to help Colombia achieve these types of improvements. Innovative software developments have been identified as one of the key drivers for the improvement of Colombian industries. Furthermore, local and foreign software companies are focused mainly on financial, billing, business resource planning, inventory, and human resources applications. Colombia has a well-developed communications and banking system in urban areas but there is still plenty of room to implement new software development in most rural areas.
U.S. suppliers of software should keep in mind that local companies expect foreign software companies to be able to work with their specific needs and requirements in a solution-driven rather than product-driven environment. Many Colombian manufacturing companies, which have not already implemented computerized operating and management systems, will without doubt need to search for software solutions to improve their existing procedures, leading to higher efficiency.
The computer and components industry in Colombia is extremely competitive. However, good opportunities may exist by targeting key accounts with government bids and the big local companies. American companies hold the lead in the provision of software products, especially Microsoft, which enjoys an excellent reputation in Colombia.
The Colombian computer market offers a diverse range of opportunities for U.S. exporters. Computing devices and applications are used in a great number of industries as well as households. Also there is continual interest in keeping up-to-date with technical developments.
The most dynamic sectors for U.S. exports in recent years have been:
• Computers (desk tops, laptops, and hand-held computers)
• Data processing machines
• Components and accessories for the above
Also, opportunities have been increasing in Colombia for the sale of software. The sale of illegal software has been a major problem in Colombia, affecting companies such as Microsoft, but recent efforts by the government to enforce software copyright laws has stimulated sales of legally acquired products. CS Bogotá strongly recommends that companies register their patented technology in Colombia. Software opportunities exist in the following areas:
• Data security solutions for transactions over the Internet
• Improvements in internal communications throughout company’s networks
• Tailor-made programs for communicating different platform languages
• Programs for data mining and data conversion
• Programs for financial and management solutions and
• Software for transportation logistics.
Also the approval of the U.S. - CTPA would have a significant impact on this sector. Information technology products, which include computers and components, account for over 15 percent of total U.S. industrial exports to Colombia. Virtually all products within this grouping would become duty free upon entry into force of the Agreement, thus stimulating U.S. exports to Colombia. Currently tariffs average over eight percent and range up to 15 percent.
Colombia would also be obliged to eliminate its prohibition on the importation of remanufactured Information Technology (IT) goods, on entry into force of the Agreement. Colombia would be committed to eliminating tariffs on most remanufactured IT goods immediately and would have to phase out tariffs on a small number of remanufactured goods over ten years.
The U.S. - CTPA would also favor U.S. products over Chinese exports to Colombia, as import duties for Chinese products would remain in force, while those for U.S. products would be eliminated.
Colombia has also agreed to join the multilateral Information Technology Agreement (ITA) by December 31, 2007. U.S. exporters of information technology products will all benefit from this provision.