General Market Overview:
Chile and the United States are about to open a new chapter in the history of their commercial relationship. Already the U.S. Congress has approved the recently negotiated U.S.-Chile Free Trade Agreement (FTA), and prospects are good that the Chilean legislature will follow suit over the next few months. If all goes as planned, the FTA will enter into force on January 1, 2004, ushering in new opportunities for U.S. exporters in one of Latin America’s most open and fastest growing markets.
U.S. firms will benefit from a phased elimination of Chile’s uniform 6% external tariff as well as from enhanced market access opportunities and safeguards against piracy and other commercial obstacles. U.S. service exporters will benefit from non-discriminatory treatment, stronger enforcement of intellectual property laws, transparency in public procurement, and provisions to permit the temporary entry of personnel as well as the establishment of business subsidiaries in Chile.
All of this comes in the context of a growing Chilean economy. In fact, by pursuing sound economic policies, Chile has achieved fifteen years of economic growth that has helped cut its poverty levels in half. Today, Chileans are demanding improvements in business productivity as well as in quality-of-life-enhancing products and services. Although Chilean domestic service providers are becoming increasingly sophisticated in a number of fields, they are not internationally competitive in all areas. The Chilean market is generally dynamic and open to foreign investment and trade. Chileans look to the U.S. as a model for technology, convenience and marketing know-how. U.S service exporters are well positioned, therefore, for entering or expanding their presence in Chile, especially in the following ten sectors:
Markets of Opportunity:
- 1. Express shipping and delivery services
- 2. Database development, data processing, and related services
- 3. Franchising
- 4. Internet services
- 5. Architectural services
- 6. Engineering, surveying
- 7. Environmental engineering and public utilities
- 8. Equipment and machinery leasing, installation, and maintenance
- 9. Maritime transportation services
- 10. Education and training
1. Express shipping and delivery services
(Including cargo handling, facilities development, logistics and planning, port development, warehousing, distribution and related business-to-business distribution services.)
Technology and logistics go hand-in-hand in trade. Chile is a country of international traders interested in applying the latest technology to enhance their competitiveness in the global marketplace. They understand the need to put in place creative and efficient logistics and planning regimes in order to meet the needs of their customers and ensure future growth opportunities.
The appearance of large warehouses and specialized storage centers in Chile is clear evidence of a market for outsourcing both storage and distribution operations. In fact, a number of new companies have popped up in Chile that provide importation services, reception, storage, transportation, distribution of merchandise, etc. Over the last fifteen years, but especially between 1995 and 2001, accumulated investment in this area has reached US$ 170 million, amounting to approximately 750,000 square meters of warehouse and storage facilities throughout the country, mostly concentrated (about 60%) in four areas of greater Santiago: Quilicura, Lampa, Renca and Colina.
There is still room for more companies like this to operate throughout Chile. As a result of electronic commerce and technological development, Chile’s more remote regions will become more integrated with the rest of the country. Clearly, the Chilean market still has room for more specialization, outsourcing and regional services in areas such as cargo handling, storage, distribution, and express shipping (within Chile and internationally).
U.S. Commercial Service contact in Santiago, Chile: mary.lou.lathrop@mail.doc.gov
2. Database development, data processing, and related services
(Including credit reporting, electronic data interchange, and transaction processing services).
Data centers and data outsourcing represent growth markets in Chile. In fact, Chile is strong in software development and data processing, and opportunities for joint ventures between U.S. and Chilean technology companies exist. Key areas include software localization, turnkey database systems and maintenance services. In terms of databases, credit reporting services are a commonly used tool for business decision making in Chile. Companies such as Equifax have entered the market by acquiring local credit reporting companies.
Electronic banking is becoming very popular in Chile, as banks seek to reduce their costs through the use of the Internet for regular transactions. Still, Chileans are concerned about perceived weakness in the security, reliability and speed of their electronic banking systems, presenting a very good market opportunity for U.S. technology and service providers in the field. Electronic signatures and invoicing are becoming more commonplace too, bringing opportunities in areas such as encryption and training on how to use these new technologies.
U.S. Commercial Service contact in Santiago, Chile: marcelo.orllana@mail.doc.gov
3. Franchising
(Including both fee and royalty-based services and other services provided incidentally to the development and operation of business networks based on a franchise system).
The economic crisis that affected Chile (from 1999 on) slowed the development of new businesses, including franchises. However, market analysts agree that Chile is back on track economically and ready for new franchises to open and operate in the country. Even though most of the franchises currently operating in Chile are in the fast food sector, there is plenty of space for other types of franchises, including service franchises. Most of the well-known fast food companies are already in the Chilean market. There are approximately 50 franchise businesses operating in Chile today, providing direct employment for about 12,500 people and with total sales of about US$ 200 million/annually.
Another area of opportunity in franchising is in education and training and other sub-sectors such as co-branding and multiple concept centers. For example, there are just a few training franchises and no pre-school chains operating in Chile. At the same time, there are many local Chilean companies that have done quite well through franchising their own business concepts, accounting for some 36% of the total franchise market. As a whole, the franchising industry in Chile is projected to grow by a modest 2% this year.
U.S. Commercial Service contact in Santiago, Chile: mary.lou.lathrop@mail.doc.gov
4. Internet services
(Not covered elsewhere, including web-based auction, advertising and related services, website design services, and website hosting services).
Demand for Internet services in Chile is growing rapidly. According to a recent study by the Santiago Chamber of Commerce, “digital economy” transactions will reach US$ 8.5 billion in Chile this year, representing 12% of the gross domestic product and a 27% increase compared to 2002. The digital economy in Chile, is made up of the following sub-sectors: e-commerce 46%, telecommunications 32%, infrastructure 12%, services 8%, and software and applications 2%. For 2003, e-commerce transactions - mainly B2B - are expected to surpass US$ 3.8 billion, telecommunications operations will reach some US$ 2.7 billion, infrastructure - mainly hardware and net access - US$ 1 billion, services US$ 700 million, and software and applications US$ 180 million. Business opportunities in this sector will only continue to grow as the private sector and government work to promote electronic commerce in Chile.
U.S. Commercial Service contact in Santiago, Chile: veronica.pinto@mail.doc.gov
5. Architectural services
(Including residential, commercial, landscape, and urban planning design services).
As a result of fifteen years of relative prosperity, Chilean tastes have become more sophisticated and the Chileans have adopted a number of design trends popular in the most developed countries. US and European architectural firms are thus finding a friendly environment for their services in connection with the development of new high rise office buildings, shopping malls, urban planning, golf courses, marinas, and other facilities related to the leisure industry. However, there are still only a few US architectural firms with some presence in the Chilean market.
There are also several international real estate firms operating in Chile and, as a result of the recently signed FTAs, more of these firms are expected to enter the market. This boom is the result of a growing interest in local real estate investment in Chile. The arrival of these international firms to Chile means that new expertise and eventually, additional foreign capital, will be available for new real estate projects. Some of the firms doing business in Chile include Cushman and Wakefield, Semco, Mackenzie Hill, Tramel Crow, and CB Richard Ellis.
With regard to home leasing, as of January 31, 1996, the superintendent of banks and financial institutions in Chile approved regulations governing the sector’s involvement in the residential leasing program, initiated by the Chilean government. Existing leasing firms are authorized to acquire housing for the purpose of leasing, at the request of clients. Banks and financial institutions are able to establish subsidiaries for the exclusive purpose of residential leasing operations, although there are required minimum assets these companies must have in order to be eligible.
U.S. Commercial Service contact in Santiago, Chile: carlos.capurro@mail.doc.gov
6. Engineering, surveying
(And related services, excluding energy-related services).
Especially when considering the recently negotiated FTA, the conditions in Chile for a US engineering service provider could not be more favorable. According to Chilean Law 12,851, Article N°6 (of 1958), any foreign engineer, subject to a temporary fob contract, may practice engineering after properly registering with "Colegio de Ingenieros de Chile." Prospective foreign engineers must simply submit accrediting documents and a valid license from their country of origin to be considered for registration.
Many U.S. and other foreign engineering firms already have a presence in Chile. It is customary that these local branches use the engineering services of their US-based headquarters. Actually, the most active engineering services companies and those with the largest market share in Chile are all either US-owned or US-based companies, such as Fluor Daniel, Bechtel, and Kvaerner.
U.S. Commercial Service contact in Santiago, Chile: carlos.capurro@mail.doc.gov
7. Environmental engineering and public utilities
(Excluding energy-related services, including reclamation and remediation services, solid waste and wastewater treatment and disposal facilities, and municipal water treatment plants and distribution facilities).
Chile has many different environmental problems, but is moving ahead with plans to achieve a cleaner environment. There is a great opportunity for U.S. companies to get involved in this process.
Demand for environmental services in Chile includes a full range of independent environmental consulting services, such as environmental impact assessments and permitting, base line studies, environmental audits and management, pollution prevention, and project design and construction of wastewater and sewage treatment plants.
The size of Chile’s environmental consulting market is estimated to be US$ 80 million, with a growth rate of 20 to 30 percent in the coming years, as environmental regulations and new standards come into force. It is estimated that U.S. firms hold about one third of this market, competing mostly with Canadian and European companies.
In many cases, the most effective way to enter the market is to work with an established local consulting firm until the potential for success of an independent branch office is determined. In Chile, it is important to have local knowledge and contacts to identify opportunities and navigate through the bidding and permitting systems. The main competitive advantage that a U.S. firm can offer is a long-term market presence, proven experience in the field, and effective solutions for local conditions at a competitive price.
Currently, Chile’s water sector offers excellent short-to-medium term opportunities for the construction of wastewater collection and treatment infrastructure, and in the rehabilitation and expansion of the water supply. U.S. consulting, design and engineering companies can team with other international and local companies to offer a full range of services and financial resources. It is estimated that Chile may invest US$ 10 billion on reduction of wastewater over the next five years.
U.S. Commercial Service contact in Santiago, Chile: isabel.valenzuela@mail.doc.gov
8. Equipment and machinery leasing, installation, and maintenance
(Or other services primarily produced by or for the agricultural, manufacturing, or mining sectors, excluding energy-related services).
Leasing is one of the service sectors that experienced a major expansion in Chile over the last five years. Leasing services available in Chile include leasing photocopiers, trucks, cars – even heavy equipment provided for the Chilean copper mining industry. However, leasing services in Chile are not as widespread as what can be found in the US. Most leasing services in Chile are only available to government, private corporations and individual firms. Individuals generally do not have access to leasing services, except to buy new or used homes.
An indication that leasing services is a hot issue can be derived from the fact that the Chilean Banking Association has expressed interest in having the government open up the local capital markets. The financial sector is also urging the new government to create specialized banks for different activities, such as leasing.
Leasing represents a business opportunity in the order of several billion U.S. dollars in Chile. European banks are quite active in funding syndicated leasing operations for large Chilean corporations. Some analysts have said the regional leasing market of Chile, Peru, and Bolivia could exceed $250 million, whether leasing machinery, providing credit card administration, or for financing infrastructure projects.
U.S. Commercial Service contact in Santiago, Chile: carlos.capurro@mail.doc.gov
9. Maritime transportation services
(Including cargo handling, equipment fueling and maintenance, facilities development, logistics and planning, port management, and similar services).
The volume of international transactions and cargo transfer should grow significantly during the next few years as a result of Chile’s recently signed free trade agreements with the U.S. and the European Union. Approximately 90% of international trade cargo is transferred through maritime transportation. The rise in oil prices has reduced profit margins for the maritime transportation industry, which diversified its activities by participating in consortia. A consortium formed by Stevedoring Services of America, SSA (U.S.) and Sud Americana Agencias Maritimas, SAAM (Claro Group shipping company) was awarded concessions to operate two of the largest Chilean ports: San Antonio and San Vicente. Ultramar Agencias Maritimas (Von Appen economic group) participates in the consortium that operates the Valparaiso port. Coinciding with the international trend, the Chilean maritime transportation market is highly concentrated, with the two mentioned companies plus Maersk/Sealand and P&O Nedlloyd accounting for approximately 70% of the market share. Local shipping companies cover the remaining 30% of the market.
The reactivation of Chile's economy is slowly taking place, even though immersed in the international current economic situation; it has been slower than projected. The development of information technology and the telecommunication industry call for electronic communication between the key elements in maritime transportation. The electronic infrastructure would make all process steps more agile and efficient. Port facilities, customs, shipping companies, and forwarders should all be connected electronically to facilitate operations. This is slowly but surely beginning to become a reality.
There is a potential market for companies involved in the mentioned operations, especially given the potential future growth of international trade. In view of the future tremendous increase in trade as a result of the different free trade agreements, a growing market for maritime transportation and logistic operations is foreseen. There is a growing need for more efficient maritime transportation service, including fast and less expensive port operation, cargo handling, storage services, and all other services required for the logistic chain connecting the exporters' warehouse and the end-user/consumer facilities.
The three main potential market niches are:
1) Local maritime transportation or coastal sailing:
Several factors make coastal sailing a good alternative for cargo transfer. Transfer costs of maritime shipping services are at a competitive advantage when compared to those of surface or air transportation of cargo. The railroad infrastructure and operative system is inadequate, insufficient and inefficient. However, there are plans to reactivate this important transportation media. Chile's geographic characteristics and still insufficient road infrastructure make it expensive to operate surface transportation services.
2) International trade between Chile and other countries:
There is a potential opportunity for usage of a Chilean port facility, and maritime transportation of natural gas brought through a pipeline from Bolivia to be shipped to the United States. Even though this issue has been in the headlines and has become a matter of foreign policy and internal political debate in Bolivia for a long time, no final decision has been made. Bolivians will vote in a plebiscite in September, to determine the matter and deciding whether or not the Bolivian natural gas can be transferred to Chile through a pipeline, and shipped from a Chilean port to the U.S. The alternative ports would be in Peru, instead of the most probable Chilean ports of Mejillones or Iquique in northern Chile. The internal Bolivian controversy is related to the Pacific War between Chile and Bolivia, which resulted in Chile obtaining a large territory that denied Bolivia its own coastal access.
Chile’s previously state-owned and state-administrated ports (Emporchi), including some of the most important ones (Valparaiso, San Antonio, San Vicente etc.), were converted into autonomous and independent companies (still state-owned) during the late 90s. This conversion process allowed private companies to be granted concessions, improving port operations and infrastructure, and lowering user fees.
3) Chilean ports for transit merchandise (bi-oceanic corridors):
Chile's neighboring countries (Argentina, Bolivia, Brazil, and Paraguay) have increased their trade with Asia Pacific and North America. As a result, there is a great potential for bi-oceanic corridors to be developed, allowing cargo from those countries on the Atlantic Ocean to ship cargo through Chile in the Pacific Ocean. For example, merchandise from southern Brazil --originating in the industrial area of Sao Paulo-- or transferring from Santos, can be transported by surface to the Chilean ports of Arica or Antofagasta. Cargo originating in, or in transit from Montevideo and Buenos Aires, can be transferred through the central area ports of Valparaiso or San Antonio. Cargo from southern Argentina can cross by surface through the Neuquen area and be transferred at the ports of San Vicente Talcahuano or other private ports in southern Chile.
U.S. Commercial Service contact in Santiago, Chile: mary.lou.lathrop@mail.doc.gov
10. Education and training
(Including examination preparation, language, management, and technical training services).
Chile is upgrading its education system, especially public education. To do so, the Ministry of Education (Mineduc) has initiated an innovative program to improve the current level of public education. The school day has been increased, although the change is not mandatory where the necessary infrastructure is not in place. Information technology is being made more widely available at schools, with a particular emphasis on increasing the number of technical schools. The needs and requirements for educational services fall primarily in four areas:
a) Pre-school, elementary, and secondary education (K-12):
- Pre-School Education: There is an opportunity for innovative pre-school and nursery schools, since the existing ones are small and basic. There are no large chains or franchises that cover the pre-school curriculum. There are very few security standards in pre-schools and the ones that have them are basic.
- School/High-school (1-12): To operate a school, it must be approved/authorized by the Ministry of Education. Most Chilean students attend public schools, but students belonging to the high-end socio-economic levels usually attend private schools. However, the quality of public education is generally poor. The existing private schools are mainly traditional schools, even though as a result of the increase in population, new schools have also opened.
b) Technical Schools and Institutes:
- High School: The trend is to increase the number of schools that can train students so they can graduate from high school with a technical degree. This is a good option for students who must graduate from high school and immediately enter the labor force.
- Labor force: This is one of the market niches in which foreign companies can participate. Chile features low investment in training for its labor force; the average training hours per year per worker is 32. The ongoing modernization of the industrial processes, the increase of international trade, and the export-oriented economy of Chile urgently call for better-trained and qualified personnel. A government program allows for funds invested in personnel training and educational services, to be deducted from taxes (franquicia sence). However, Chilean companies do not take advantage of this opportunity, and view training as an expenditure instead of investment. This attitude, however, is bound to change in order to improve competitiveness and cost reduction. There is an excellent opportunity for training services as long as the right marketing strategy and price rates are met.
- Chilean executives: Several post-graduate and master degrees are currently available in Chile. Many universities, both private and traditional, hold agreements with foreign universities and educational institutions from the U.S., England, Spain and other countries. Many executives or graduates go abroad (mainly the U.S.) to obtain their master or doctoral degrees.
c) University Education: Until 1980, 8 universities operated in Chile: two private and six state-owned. Some of these universities had branches throughout the country. During the 1980s the system was liberalized, authorizing branches of the existing universities to become autonomous, and promoting the opening of new private universities. Twenty-five "traditional universities" developed from the initial 8, and between 1981 and 1992, a total of 43 private universities also initiated operations, being accredited by the Consejo de Educacion Superior, affiliates with the Ministry of Economy. This entity regulates the establishment and operation of all universities in Chile.
d) Language Education: English is undoubtedly the international language for business, technical and professional studies in almost all sectors. In Chile, being fluent in English is a huge advantage when it comes to studying, applying for a job or social activity related to business. Very recently (July 2003), President Lagos and the Minister of Education publicly announced the Government’s commitment to make Chile a bilingual country by 2010. In view of the almost certain free trade agreement between Chile and the U.S., as well as other free trade agreements already in place (Canada, Mexico, EU, South Korea), coupled with the fact that English is “the” language of trade, there is an opportunity for training and education in English. There are many language institutes operating in Chile, some of them from the U.S. However, there is still a good market in Chile for serious, professional programs for effective English language training courses, offering creative, attractive techniques and reasonable fees.
U.S. Commercial Service contact in Santiago, Chile: mary.lou.lathrop@mail.doc.gov