One of the country’s biggest magnets for foreign investment, Egypt’s ICT sector has weathered recent storms well, and is well positioned to enjoy long-term growth. Internet penetration has been growing steadily, thanks to increasing accessibility, rising demand and more diverse content. The development of broadband infrastructure, a long-term government goal, should help boost internet use in households, businesses and public services.
Similarly, demand for IT products and services should continue to rise from the government and private sector alike, though the pace of growth will be linked to economic recovery. “The speed of recovery in different market segments varies. For example, consumer spending is not as badly affected as small businesses or larger corporates,” Ashraf El Arman, the managing director of Xerox, told OBG.
Thanks in part to low costs, the export-oriented ICT sector, with business process outsourcing (BPO) at its heart, has become one of the world’s most competitive over the past decade, though Egypt’s security situation has slowed investment in recent years.
INDICATORS: As of May 2013, there were 5372 registered ICT companies in Egypt, employing 218,450 people. The sector’s total issued capital came to LE46.6bn ($6.63bn), according to the Ministry of Communications and Information Technology’s (MCIT) “ICT Indicators in Brief” publication. The sector has continued to grow despite political uncertainty and lower economic growth; the number of firms rose 13.17% from 4747 in May 2012, sector employment was up 1.5% and issued capital 1.4%.
According to a 2012 report by Google and the Boston Consulting Group, internet-based services contributed 1.5% to GDP, a proportion that could rise to 4% by 2017. “ICT companies are betting on the consumer,” Wael Fakhrany, the regional manager at Google Middle East, told OBG. “And there will always be demand. If you have the right product, you can still achieve phenomenal year-on-year growth,” he added.
GETTING ONLINE: Egypt had 33.26m internet users as of May 2013, according to the MCIT. The number of users rose 7.92% from 30.82m in May 2012, indicating continued demand for internet and increasing availability of access – crucially, this comes despite political turbulence and slow economic growth. The vast majority of Egypt’s internet connections are broadband, at 90.76%, up from 90% in May 2012.
These figures suggest that penetration rose from 37.65% to 39.86%, up 2.21 percentage points. The UN’s International Telecommunication Union (ITU) puts penetration slightly higher, at 44.07%, not dissimilar from the levels seen in Turkey and Tunisia, but substantially below ratios in the Gulf and the developed world. With more than half of Egypt’s population not using the internet regularly, the scope for growth is considerable, particularly given the young population – more than 50% of Egyptians are under 25 and growing up in a society where internet use is more widespread. It seems likely that penetration will continue to grow as the young reach ages at which they desire and can afford internet access. Nearly half of Egyptian households have internet access – 46.11% as of May 2013, up 6.36 percentage points from 39.75% a year previously.
MODES OF ACCESS: In the year to May 2013, ADSL subscriptions grew strongly (20.37% from 19.96m to 23.6m), while mobile internet users as a proportion of all mobile subscribers fell (from 12.23% to 11.78%) due to an increase in mobile subscriptions rather than a drop in absolute usage. The proportion of internet users going online via mobile connections fell 2.74 percentage points from 36.24% to 33.50%.
This suggests that there is still strong demand for home and office connectivity, although mobile internet expansion may be held back by factors such as cost. Nonetheless, more internet users get online using mobile devices (handsets and USB modems or “dongles”), at 43%, than ADSL (39%), leased line (9%) and IDSL and dial-up (9%). With the cost of data packages and smartphones dropping, mobile internet is likely to grow in prominence, but ADSL still holds appeal for Egyptian households and businesses.
GOVERNMENT OVERSIGHT: The MCIT and the National Telecommunication Regulatory Authority (NTRA) under its remit both focus on creating the right environment for ICT investment, which is a central goal of the country’s technology strategy, including its broadband plan. In 2003 the MCIT established the Information Technology Industry Development Agency (ITIDA), which works with foreign and local investors and is a first point of contact for those looking to set up or expand ICT businesses in Egypt. ITIDA also oversees the Education Development in Universities of Egypt (EDUE gypt) scheme, which aims to equip third- and fourth-year university students with the skills needed to work in the sector, with a particular emphasis on BPO. The courses are designed in conjunction with the private sector, including both local and foreign technology firms.
PLANNING FOR BROADBAND: Egypt has an official National Broadband Plan, published in 2011, which is expected to bring a number of benefits: boosting connectivity within the country to support growing data volumes; enhancing public services, particularly schools and hospitals; strengthening the competitive advantages of the export-oriented ICT sector; and underpinning broader, longer-term economic growth by providing the technological infrastructure that businesses, government and individuals will harness for some time to come (see analysis).
OUTSOURCING & OFFSHORING: Since the turn of the century, Egypt has built a growing reputation as a centre for export-oriented ICT services, particularly BPO and knowledge process outsourcing (KPO). The sector has kept ticking over the past two years, though the unstable security situation has slowed expansion. Egypt’s competitive advantages as a global centre for ICT-intensive industries, including BPO and KPO, are manifold. Cost is an important factor to Egypt’s success: labour, land and power are all affordable by international standards.
But while workers’ wages are relatively low, the skills base is strong. As well as native Arabic – spoken by nearly 300m people across the Middle East and North Africa (MENA) region, largely in fast-growing emerging markets – English is widespread and there is a substantial pool of speakers of other languages. ITIDA estimates that each year around 273,000 students graduate from Egyptian universities with degrees in fields suited to outsourcing, including technology and commerce, alongside 31,000 students fluent in a Western European language.
The country’s location means its time zone is similar to that of all of Europe and Africa, as well as the Middle East, and not greatly different from South Asia. This means that Egyptian contact centres can serve a wide geographical area without operating anti-social hours; it also makes flying visits from clients and investors from Europe, MENA and South Asia easier. According to ITIDA, costs for voice-based BPO services in Egypt are comparable to those in India and the Philippines, two global sector leaders that have successfully capitalised on their low-cost bases. In 2010 ITIDA estimated that fully loaded operating costs for call centres stood at $15,830 per employee, compared to $16,360 in the Philippines and $15,010 in India. Of this, personnel costs accounted for $9430 and non-personnel costs (such as technology, telecoms, rent and maintenance) $6400.
STATE SUPPORT: Successive governments have also been active in supporting the industry, offering incentives such as cheap land and rents, discounted international connectivity rates, and ICT training and education. As it has developed and capitalised on these competitive advantages, Egypt has received a range of international plaudits for its success in developing as an outsourcing destination. Egypt ranked fourth in the world on the 2011 Global Services Location Index for “Offshoring Opportunities Amid Economic Turbulence”, which listed offshoring destinations published by AT Kearney, a global consultancy; it had ranked 13th in 2007. In 2010 Egypt was named “Offshoring Destination of the Year” by the European Outsourcing Association (EOA). At the same time, according to Mohamed Nofal, the CEO of HitekNOFAL, a technology systems manufacturer, while there is clear plan for development which provides clarity for investors, “the government is able to offer little financial support,” he told OBG.
OPPORTUNITIES FOR GROWTH: Even amidst the turbulence that has affected the country over the past two years, investment has continued. In 2011 several global companies expanded their presence in Egypt, including Motorola, Sutherland, HSBC and Stream International. And in 2012 IBM established a new call centre to provide support to some of its developedmarket operations, starting with the US and Canada and then rolling out to major European countries. The company has “continuous plans to expand and export services out of Egypt and to increase the number of support centres”, Amr S Talaat, general manager of IBM Egypt, told OBG. As well as lower-value centres with simple voice operations, IBM is looking to increase its high-value outsourcing presence in Egypt. IBM argues that the country needs to leverage its competitive advantages, particularly its skills base, to develop these sort of higher-margin, export-oriented ICT segments. “In the past five years Egypt has done well in establishing itself as top destination for low-value call centres,” said Talaat. “We now however need to build on our success and grow in variety of ways, such as software programming and development, project implementation, management and delivery. The human resources and capacity is there.”
Driving the development of higher-value ICT is part of ITIDA’s strategy for the sector, and projects like EDUE gypt are designed to encourage greater entrepreneurship and innovation at the domestic level. The global outsourcing market is very competitive, from established leaders such as India to rising markets in Eastern Europe and Latin America, as well as sophisticated service centres in the developed world. “We advise companies to differentiate and specialise,” Olaf Krahmer, president and general manager of Cisco Systems Egypt, told OBG. “It’s very difficult to compete on cost alone.” Strengthening ICT infrastructure, including international connections and domestic broadband network, should help bolster the country’s competitiveness as a technology centre. Both are priorities for the MCIT and its subsidiary agencies, though ambitious development plans have been held back by political and economic factors (see analysis).
“We need a better legal framework to encourage development,” Google’s Fakhrany told OBG. “This should cover business start-up and shut-down and tax, as well as technical aspects such as cloud computing, and how technology should be used in health care and education. The government also needs to strengthen vocational training. We need to promote a vibrant private sector, but this is taking time.”
Increasingly, multinationals are investing in local providers. For example, in 2011 Intel acquired SySDSoft, a local firm that had been working for Intel globally. The company purchased its partner with a view to utilising its skills base and competitive advantages, particularly in its specialised area of wireless networking software, using its resources to expand them.
DOMESTIC MARKET: With its youthful population of 85m people and currently moderate levels of computer usage, Egypt is a growth market for technology companies, whether they are selling hardware, software or other ICT services. Demand has taken a hit in recent years, but continues to grow, and once the country is back on a more even keel, should accelerate further. “Technology is regarded as a necessity by many people,” Karim El Fateh, the country director for Egypt at Intel, told OBG. “People still want to buy telephones, tablets and laptops, and still want to access the internet, despite the political situation. The demand is there. The market is still growing, but at a much lower rate than we expected – Egypt was positioned to be the fastest-growing ICT market in the Middle East, Turkey and Africa.”
The US-based International Data Corporation (IDC), a market intelligence firm, estimates that that sales of personal computers rose 30% in 2012 on 2011, thanks to greater stability; El Fateh asserts that the figure may be higher if it takes into account sales of illegally imported equipment, which are rife in Egypt.
“We could have seen volumes grow much faster,” he said. “One problem is the depreciation of the Egyptian pound. We were targeting price points for various segments, but now we cannot maintain them. Average selling prices have been affected. We could have seen much higher growth, but we have been living quarter to quarter, and it is hard to predict and plan given the current uncertainty in the country.”
Such has been the impact on technology prices that consumers get lower specifications for their money than they did a few years ago. Given the price sensitivity of the Egyptian market, rising costs are a real challenge for the sector; importers and retailers have to judge how much of the price increase they can pass on to the consumer. The low income level of much of the population has long been one of the biggest challenges that equipment manufacturers faced in Egypt, and this has been exacerbated by current economic difficulties and restrictions.
“We are still driving volumes as much as possible, and trying to bridge the affordability gap,” said El Fateh. One way of doing this is through hire-purchase agreements including internet access, which provide people with computers or other devices and broadband connectivity for a monthly payment. But even these packages can be costly for the lowest-income Egyptians. Over the medium to long term, the expansion of Egypt’s broadband infrastructure may help stimulate demand for computers and other devices like tablets and smartphones.
Whereas in developed markets, increasing usage of computers and the internet drove demand for broadband, the increasing availability of high-speed internet could make getting online (and acquiring the means to do so) more attractive to Egyptians. El Fateh argues that, as broadband infrastructure grows, more and more people will become aware of the benefits that the internet can bring. At the same time, equipment retailers and internet service providers will increasingly offer bundled packages, selling pre-paid or post-paid broadband access with equipment.
Connecting schools is a priority of Egypt’s broadband plan; if successfully implemented, this will mean a new generation of Egyptians growing up familiar with using computers and getting online. Having said that, installing the infrastructure alone will not be enough to catalyse demand. “Broadband development is not just about connectivity,” said Cisco’s Krahmer. “You need to have products that make people go online, from Arabic content through mobile applications to e-government services.”
CORPORATE & GOVERNMENT: The hardware and software market has also been affected by reduced corporate demand. Few technology-intensive companies (for example, those in the outsourcing and offshoring sectors) have been expanding significantly, though they have continued to buy technology needed to maintain their existing operations and projects.“ Company revenues are down so they are not investing,” said Krahmer. “Factories are idling due to power and fuel shortages. And it has become very difficult for companies to access the foreign reserves they need to pay international companies such as Cisco.” Krahmer told OBG that banks were still investing in IT, but that investment from the real estate sector was stagnating. Previously, property was an important driver of demand, as new offices, high-end residential projects and commercial developments required top-end ICT infrastructure.
Public sector IT purchases have also been affected by political instability, with several changes of government taking place, as well as severe pressure on the state budget and successive administrations’ pressing priorities in security and economic crisis management. “The country is behind in data management and digitising, but understandably the government is not spending on new IT contracts now,” Khalid Hammouda, the managing director of US-based IT firm Teradata, told OBG. Each government has reaffirmed its commitment to computerisation of public services, but none has yet been able to make a great deal of progress while in power. “On the government side, there have been few big tenders over the past two years,” said El Fateh. “Education used to be a big part of government IT spending, with equipment like notebooks and desktops for school computer labs.”
PARTNERSHIPS: Despite changes in government, some important public-private projects have been maintained, including in the education sector. Firms such as Google have continued to work with universities to strengthen their ICT programmes, as well as with local companies (particularly SMEs) to increase awareness and usage, demonstrating how the internet and online tools can benefit their businesses. As with so many other sectors in Egypt, much hinges on political stability and economic growth being restored. A government with the political scope and resources to implement long-term ICT strategy in the public sector would bolster the hardware and software market, both directly and indirectly.
“We are in an acute economic situation and IT projects should be initiated to help resolve our strategic national challenges,” Talaat told OBG. “IT is a very effective solution to many of the government’s issues as it allows for the automation of public services such as the shadow economy, tax implementation and reforms as well as subsidy management.”
CHALLENGES: The political and economic difficulties of recent years have seen the country slip from its leading international position as a BPO location. Cairo ranks only 58th in the 2013 “100 Top Outsourcing Destinations” report published in January by the consultancy Tholons, having falling nine places from 2012. Alexandria ranked 77th, down four places.
“Egypt is still ridden with protests, and political instability, disabling business operations in the country,” the report noted. “Moreover, Egypt is facing deteriorating negative perceptions from its tumultuous political and social environments.”
“Offshoring and outsourcing have been set back by the political situation,” Maria Samir, an analyst at Cairo-based Beltone Financial, told OBG. “There are few new investments and those companies that are already here are not putting much more money in. But once the country stabilises, it will make sense to invest again.” As well as enhanced security, Samir said that investors would expect the easing of capital controls; on both counts “they will not put in money without a guarantee that they can also take it out.” She added that two of the biggest issues for the industry not immediately connected to the economic and political crisis also need to be addressed: outages of power and cable connectivity. Electricity shortages are a major source of frustration for many industries, which have to rely on expensive generator power when the grid is not meeting demand. And theft of copper cables, as elsewhere in the world, damages network reliability and capacity – one of the reasons that many would like to see the replacement of copper with fibre optics stepped up. Further, the higher cost of hardware may also be having the unwelcome effect of boosting the black market for illegally imported, usually used, equipment. Illegal imports and pirated material undercut the prices offered by legitimate importers, manufacturers and retailers, a situation that is a major cause of frustration. The IDC estimates that around 50% of the hardware sold in Egypt is illegal; given other priorities, the capacity of the state and the police to tackle the problem is limited.
OUTLOOK: Across the board, the Egyptian ICT sector has proved fairly resilient to the country’s difficulties over the past two and a half years. Internet penetration has grown, as has demand for hardware, software and services. The outsourcing industry has continued working, and new investments have been made. Domestic and foreign investors have not held off to the extent that they have in many other sectors; demand for technology remains remarkably robust.
Nonetheless, growth has been lower than would have been the case in an optimal political and economic climate. Greater stability would further benefit the industry and encourage important developments, such as the implementation of nationwide broadband and an increased focus on value-added in outsourcing, to take place quickly and smoothly.
