Where does Pakistan stand as India chases digital dreams?

Updated October 01, 2015

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Indian Prime Minister Narendra Modi (L) is seen in this picture with Facebook CEO Mark Zuckerberg (R) at Facebook HQ in Menlo Park, California. — AP
Indian Prime Minister Narendra Modi (L) is seen in this picture with Facebook CEO Mark Zuckerberg (R) at Facebook HQ in Menlo Park, California. — AP

Dubbed as the hub of startups, India has done immensely well for itself over the past few decades in the IT sector, and has a number of things going for it that Pakistan has yet to catch up on. Most of these are top-down investments. The biggest is the raw engineering talent that is coming out of India each year.

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For example, 1.3 million students sit in for Indian Institute of Technology (IITs) admission tests. This doesn't factor in the national and regional institutes which further add to the engineering talent base. Pakistan needs far more engineering institutes than it currently has.

Following the swelling of the engineering talent pool, India has also seen a large uptake in Venture Capital (VC), driven largely by healthy returns in technology. A lot of this is fuelled by Indian alumni working overseas and having established themselves in enviable executive positions — the CEOs of Google, Microsoft and Adobe are all of Indian origin. Bollywood has also jumped on the bandwagon with most actors going beyond just endorsements and actually taking partnerships in tech startups.

Pakistan's 'nascent' call centre industry

Pakistan is on the same trajectory that India was some years ago, focusing primarily on offshoring but unfortunately this has been stunted due to a number of factors.

Nearly a decade back, the call centre business was looking to pick up until a 10-day country-wide Internet outage put a dampener on the offshoring call centre business which has never really recovered since. This sector has not seen the same pace as India which seats over half a million agents. Philippines took a late start and has overtaken even India.

While Pakistan's Internet backbone has strengthened considerably in the past decade, vocational training and English language fluidity are still lacking. The call centre business is an easy win that would allow young adolescents to earn up over Rs200,000 per annum with the lowest barriers to entry: vocational training and English fluency.

This influx of disposable income was largely how India was able to catapult itself into a virtuous technology cycle. More disposable income led to greater consumer spending, more ​technical orientation and more talent competing to move up the corporate ladder.

Pakistan's VC funding is presently limited to micro-investments. These micro-investments are usually on the order of tens of thousand of dollars. This is a culmination of investor confidence as well as orientation.

The confidence in IT investments will pick up once we see more success stories and local case-studies in the tech sector. The success stories will also help change the orientation of existing leaders in commerce.

A simple example: Dolmen Mall Clifton cost billions of rupees to build but still generates traffic on the order of thousands of daily consumers. Online business can easily trump that with far less investment and broader reach.

An empty field

Lack of local competition is also stifling growth. A good example is rozee.pk, which is a wonderful success story and one of the earliest. It is the leading job portal in Pakistan, however, it is still operating on dated technology and workflows and is ripe for disruption but the lack of investment by competitors has left it unchallenged.

Such an investment will require 3-4 years of funding to account for engineering manpower, marketing costs and business development costs along with other operational and infrastructure costs. This would easily amount to a few million dollars, which seems like a sizeable sum for most investors but is a paltry investment by global technology investment climate.

Other local startups such as Karachi Snob, Pak Wheels, Home Shopping have fared quite well, operating in the true spirit of startups albeit with limited reach.

The bigger winners though are still the international players who have realised the potential of the size and growth of the local market.

Rocket Internet, a German VC of sorts that partners in startups, has invested heavily in Pakistan's e-commerce space, is rolling out products in the food, retail and marketplace categories in quick succession. Eat Oye — its only formidable competitor for Food Panda — has since been acquired. Eat Oye may have been an even bigger success story, had it been anywhere close to deeper pockets of Rocket Internet.

Similarly, OLX has landed on the scene only recently and spent its way into user acquisition, becoming the leader in C2C transactions — consumers buying and selling with each other. OLX has fared extremely well in developing markets such as India and it is likely that the parent company's other offerings such as FlipKart for e-commerce will find their way into the local market soon.

In a way, this should create a sense of urgency for local startups to take further initiative or risk losing considerable ground to international companies operating locally. Startups can win over users more easily right now than they ever will in the future, once the competition picks up.

Mobile phone penetration is very high in Pakistan, actually the highest in South Asia with over 90 per cent geographical coverage and over 140 million subscribers in 2014. This makes Pakistan an extremely lucrative market once you factor in that the cost of ownership of an Internet connection on certain mobile carriers is as low as Rs100 per month, and that an Android-based smart phone can cost as low as Rs2,000. In fact, zero-rating deals with mobile carriers mean that a lot of websites (such as Facebook) can be accessed free of cost using any smart phone.

Currently Pakistan's tech startups are fragmented and operating in the periphery. A lot of these companies are doing out-sourcing but not local product development. ​Outsourcing is a quick win in the sense that local outfits take on contractual projects for International clients. This space is hotly contested but also one that is easy to tap into because it requires lesser engineering depth. Outsourcing firms will typically build shopping carts, corporate sites, Facebook pages and similar projects.

Mobile app development is part of outsourcing and comes as another another segment. There haven't been any mobile apps of note locally and the ones that do exist complement existing products, for example apps based around news websites.

Others still are off the radar, having incorporated off-shore or operating exclusively with international clients, hence it's rare to hear about them locally. However, this is a good thing as fragmentation will lead consolidation down the line, especially as private equity finds its way into technology.

Product companies, on the other hand, align all their resources on building a single product, such as Amazon, Facebook or Rozee.pk. These are the companies that require constant innovation in technology to stay competitive and attract top talent. This is what Silicon Valley is all about and moving anywhere in this direction would be a long-term win for Pakistan.

For example, a Canadian company called Shopify makes it easy enough for anyone who can operate Facebook, to operate an online store for less than $10 per month and comes with more features than any outsourcing firm can offer. It is a clear threat to outsourcing firms in the e-commerce space.

If operating an e-commerce store can be as cheap and easy as managing your social life on Facebook, there is little need to outsource it to software developers. Shopify is a clear example of how product companies can win over outsourcing firms in the long run. The company had an IPO earlier this year and is valued at over $2 billion.

Pakistan also has the advantage of some of the lowest salaries in tech in South Asia, which offers it the same lure India had years back, but doesn't anymore. While the tech upsurge is inevitable, government and private sector investments would certainly help catalyse this growth to the much needed pace. For now e-commerce, digital media and C2C marketplaces (such as OLX) are poised for short-term growth spurts.

This upsurge will likely play out on the parallel fronts including the aforementioned software outsourcing and software product development. However, given Pakistan's industrial mindset, the inevitable win ought to come via Business Process Outsourcing or BPO, which is primarily an IT-enabled sector.

This sector operates on the fundamental principle of arbitrage: a small business in London could have its taxes filed by an accountant in Karachi far more cost effectively than going local.

Small BPO opportunities can pave the way for much larger opportunities. The same opportunities India realised during the 90s when it took on BPO for global banks, airlines and other corporates through joint-venture arrangements. These joint ventures allowed international businesses to retain control over the quality of operations in India, while at the same time developing and training local talent.

Pakistan has a growing talent pool in all functions of a conventional business, from accounting to management, this talent pool is more cost effective and the Pakistani rupee has a favourable exchange rate for foreign exporters. With economic globalisation, this arbitrage opportunity will increasingly be exploited for the benefit of Pakistan.