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Now Is A Great Time For BPO Investment In Honduras

by Jeff Pappas, Executive VP - Arledge Partners Real Estate Group - May 24, 2010

Now is a Great Time for BPO Investment in Honduras
 by Jeff Pappas, Executive VP – Arledge Partners Real Estate Group

When our clients request advice from Arledge Partners Real Estate on what markets in Central America would be ideal for Business Process Outsourcing (BPO) and call center investment, the markets that first come to mind are Costa Rica, El Salvador, Nicaragua and most recently Guatemala. Within the last few years, many BPOs have moved into these markets and have achieved different levels of success. As always, cost competitiveness is the number one reason many BPOs have moved to these markets, but what happens when the market gets too crowded and you have to overpay to find the labor you want, which has become the case in Costa Rica? That is where Honduras comes in.

BPO investment has been limited in Honduras. Why does a country the size of Honduras lag behind smaller countries in Central America? I decided to travel there at the request of the Honduran government to find out. I decided to go to where all Honduran investment decisions usually begin and end – Government – so I started at the top. Newly elected Honduran President, Porfirio Lobo, decided that in order to promote the country as BPO friendly, he needed to meet with call center experts to explain why Honduras is “open for business”.

Lobo stated, “Honduras has always been comfortable in dealings with the United States so I do not want to change this comfort level, but enhance it. I see that the BPO industry is one of the fastest growing industry sectors and Honduras needs a piece of the pie.” But he has the same question that I have, why hasn’t Honduras been as successful as neighboring countries such as Nicaragua and Guatemala?

The United States has historically been, and remains today, Honduras's largest investor, accounting for at least three-quarters FDI in Honduras. More than 100 American companies operate there. About 75% of those companies produce apparel, but the largest US investments in Honduras have been in the agribusiness sector, petroleum products marketing, electric power generation, banking, insurance, and tobacco.

US franchises have substantially increased their presence in recent years, mostly in the fast food sector. For example, when you fly into Tegucigalpa, the capital of Honduras, you find three of the largest US fast food chicken restaurants within one block (Church’s, Kentucky Fried Chicken and Bojangles). Across the street from the Honduran Presidential Palace and you will find Dunkin Donuts, Office Max, Appleby’s, Pizza Hut, McDonalds, Chili’s and Baskin Robbins ice cream.

But why not BPO? According to Mario Canahuati, Honduran Chancellor of Foreign Investment, “Honduras decided early on to invest heavily in the textile and agricultural industry with US companies such as Chiquita Banana.” Honduras is the third-largest exporter of finished furniture to the United States. Most exported furniture is made from strong Honduran pine. Agricultural products in Honduras include not only bananas, pineapples, and sugar cane, but also cantaloupe and many vegetables. The country has the largest cultivated shrimp farm in Central or North America.

Telecommunications was the next top investment for the Honduran government. Currently, Honduras has one of the largest and most up-to-date telecommunications infrastructures. As of 2010, three (3) fiber cable providers serve the country, providing Honduras with over 99% redundancy and minimal brown or blackouts. Honduras has the lowest power costs in Central America at $200 per megabyte per month, compared to Nicaragua which is currently at $650 per month for similar service.

But why would a BPO invest the millions that it will eventually cost you, especially in a market in which there is uncertainly? Usually, you'd want to invest in a country for one of two reasons: Either there's a market for your service, or there are affordable resources. In Honduras, there are reasons on both counts.

The bigger issue is labor sustainability in the BPO industry. The country is facing an outmigration to the United States due to the fact that Hondurans visit family members that live in the United States and often never return to the country. In fact, currently 1.3 million Honduran citizens live in the United States, which would make it the largest city in Honduras.

I visited a bilingual school during my visit and asked the graduating students where they would prefer to go to college. Not surprisingly, many stated that they would prefer to attend any college located the United States. Less surprisingly, with the country facing the fact that 64% of the population lives in poverty, many will not be able to accomplish this goal. So the next natural step will be enrolling in a local university and the need for a job to pay for this education.

With BPOs typically hiring at above average numbers, this should lead to a continued growth of potential employees. Also, with no other major BPO currently operating in the country, a BPO could attract an untapped market. This is considered a double-edge sword for call center operators - a home run due to a lack of competition for candidates, but a potential increase in both training time and the cost to hire “green” agents. The average characteristic of the “call center agent” is 22 – 25 years old and a college student or college graduate looking for employment. Considering that Honduras has 65% of its 7 million in its population between 18 and 35 years old, the largest number of bilingual schools in Central America (currently numbered at 410) and 64% of its population living in poverty – the country is well placed to meet this characteristic.

Another key reason any BPO looks at Central America is low labor cost. Honduras, with a per capita gross national income of $1,845 USD, is one of the poorest countries in the Americas. Also, the country has an unemployment rate of nearly 30% and within that 30%, approximately 60% are considered middle class.

Middle class in Honduras is best defined by economic factors, occupation and the completion of a higher education. Included among middle class ranks are professionals, students, farmers, merchants, business employees, and civil servants. Although a well-paying occupation is vital for movement up to the middle sector, incomes for this group are still relatively low. With wages consistently among the lowest in Central America, Honduras seems poised to offer an incoming BPO a cost competitive option in the already cost competitive world of outsourcing. Currently, wages for a customer support agent in Honduras will average between $500 - $600 USD per month. While this is similar to wages offered in the surrounding countries of Nicaragua and Guatemala, the lack of direct competition should keep the cost increases to a minimum for the near future. Also, economic growth was 6.3% in 2007 and 4% in 2008. The decreased growth rate is mainly due to the global economic crisis but also the reduced internal investment from the public sector. Remittances from Hondurans living abroad, particularly the U.S, totaled $2.7 billion in 2008, but it is expected to be negative in 2009 and in 2010. This, in turn, will increase the pressure for the local workforce to locate employment at a wage equal or below what they may deem as acceptable.

While labor sustainability and low wages are key reasons why a BPO could be successful in Honduras, government stability could be one of the main reasons a BPO has hesitated in making the decision to locate with the country. In June of 2009, the previous Honduran president, Manual Zelaya, was forced out of office. Army soldiers entered Zelaya’s residence, seized Zelaya and expelled him to Costa Rica. The National Congress met in an emergency session that same day, declared Zelaya was no longer president, and swore in President of Congress Roberto Micheletti as the new President of the Republic; what the United Nations would consider a “coup d’état” against a democratically elected government official.

In a democratically held election in January, 2010, Lobo was elected president by over 70% of the vote. While on the outside, this may look like instability, this event created two key reasons why a US BPO should consider Honduras as a potential location. The first reason was Zelaya was, by all accounts, trying to extend his rule by lifting a ban on presidential re-election terms, as his ally Hugo Chavez has done in Venezuela. The mere thought of a government with relations to the US similar that those of Venezuela, would sound a death knell to any new US investment. Six of the last seven Honduran presidents graduated from US universities such as: Stanford, LSU, Mississippi State and Miami. The only Honduran president since 1990 not to graduate or attend a US university was ousted president, Zelaya.

As you can clearly see, much of the Honduran way of life is tied very closely to the United States. This is clearly seen in a revealing statement offered by President Lobo, “When the US coughs – Honduras gets pneumonia”. Well, Honduras is betting (and praying) that international BPO investment is the country’s cure-all.

 
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