Everyone in tech has spent a good deal of their life explaining to others the virtues of software – that it's globally scalable, doesn't require many resources to build, has high profit margins, etc. To question this wisdom was tantamount to blasphemy, just like in any other business if you wanted to raise venture funding.
But generative artificial intelligence (AI) took the world by storm and suddenly the hardware became popular again, so much so that Nvidia overtook companies like Microsoft in terms of market capitalization.
On the surface, these discussions may not seem relevant to Pakistan given the almost total lack of investment there, but the hardware issue is indeed important and needs to be taken seriously.
This isn't because we now need graphics processing units to train cutting-edge AI models, but for a more primitive reason: as a large, young country, we need physical and digital infrastructure to fuel our economic growth.
Unfortunately, current trends in Pakistan are heading in the opposite direction. While recent data is not available, surveys from a few years ago estimated that between 7 and 14 percent of households in the country own a computer. Even if the cap were doubled, just over a quarter of Pakistani households would have access to a computer.
Pakistan's digital transformation will require investment in the hardware sector and localization of production.
It is true that mobile phones are driving digitalisation in a developing country like Pakistan. But our apathy towards the hardware is worrying to say the least. According to an analysis by Data Darbar using trade information portal Pakistan, the country's imports of computer equipment show a mixed trend at best.
In terms of volume, Pakistan imported 972,590 laptops in FY24, up 40.9% from a low base but still lower than FY22 levels. Personal computers saw a much steeper decline with only 659,617 units purchased last fiscal year, less than half of recent years.
This isn't just about computers and laptops. The problem goes much deeper. Using preliminary Comtrade data, we analyzed Pakistan's trade in information and communications technology products identified by the United Nations Conference on Trade and Development and found that total imports under these Harmonized System (HS) codes fell sharply to $796.1 million in 2023. This is by far the lowest figure in the past decade and less than half of the next lowest figure.
Is this a good sign for developing countries looking to the technology sector as a driver of growth, especially considering that local production of information and computer technology (ICT) products is virtually non-existent, except for the emerging mobile manufacturing industry, which has been in decline for the past two consecutive years?
In this environment, imports can at least make up for hardware shortages, even if it means sacrificing time, money, and peace of mind. But government (mis)management of currency and the resulting trade restrictions make access to ICT products even more difficult.
Pakistan’s digital transformation requires investment in hardware and localization of production. This doesn’t mean it can build a global brand or become a supplier of semiconductor chips, as the government dreams, but it could at least manufacture and export components for simpler ICT products.
In this regard, Egypt is a great example, having successfully domesticated the production of ICT products and expecting export revenues to exceed $1 billion in 2022. Egypt is not just a fast-growing Southeast Asian country, but also a brother of Pakistan with twin deficits and a loyal client of the International Monetary Fund.
But the bigger question is: who's going to invest in it? Hardware is often demonized, but it actually boasts pretty good returns. According to Bain & Company's DealEdge, the average multiple of invested capital for hardware deals was 1.8x from 2010 to 2023, in line with the overall average.
In Pakistan, digital infrastructure can be a profitable business, as examples such as Transworld, Nayatel, and Rapid Compute show. Net profit margins are often in double digits and gross margins typically exceed 30%, according to credit rating reports and sources, but payback periods can be somewhat long.
Simply put, this market is available to anyone willing to jump at the opportunity. This isn't just a nice-to-have, it's a key driver of growth in the tech sector. And until manufacturing gets going, the least governments can do is not make imports more expensive than they are by imposing additional taxes and tariffs.
The author is co-founder of Data Darbar.
Published in the July 29, 2024 issue of Dawn, The Business and Finance Weekly
