The Egyptian Sourcing Implosion: Are Buyers More Risk-Averse Now?

When talking about risk management and risk diversification of global outsourcing portfolios, I cannot help but comment on the recent implosion of Egypt’s offshore market. For years the North African country billed itself as a modern Westernized business location, and attracted a lot of attention from large multinationals like Oracle, Verizon and IBM. But one revolution later, no one knows whether Egypt can regain its former sourcing reputation. That holds some key lessons for buy-side clients. I spoke with Stephen Bullas, Managing Partner of the European Centre for Offshore Development (eCODE) to get his take on the situation on the ground. He tells us about what the ongoing conflict means for the region, and whether those clients will now be considering new locations like Latin America.   

Egypt was a very strong outsourcing market, and had a good business climate in general. Do you see firms already invested there pulling out their operations? 

Bullas: Well there are some really big international companies in Egypt – Microsoft, Oracle, StephenBullas1 Vodafone. When you’re a multinational that size you have the contingency and disaster recovery plans that make it easy to support your clients even during times like this. Essentially with the flick of a switch they can change their operations to other locations, and bring them back when things calm down. But for smaller businesses it’s much more difficult to move operations. Third party providers in Egypt are the ones that are hardest hit. 

The internet was off just for a few days. Things have calmed down a lot, and some third party service providers have actually managed to retain their client base, so it could be looked at as a positive. I think Egypt will recover its sourcing market soon.   

Tunisia and Egypt were by and large peaceful revolutions, but the violence happening in Libya right now is really a civil war. How has this tense situation in North Africa affected foreign business interests in the region? 

Bullas: It’s affected them very gravely. European Union business has been affected both in Italy and in Malta, and the reason is that they’re both strong trade partners of Libya. But it’s not just a business problem; it’s also a migrations and logistics issue. A large proportion of people evacuated from Libya have ended up in Malta or in the Italian islands, but those areas cannot take hundreds or thousands of economic migrants. 

In terms of foreign investment, the North African situation is a big step backwards, because American and European businesses have lost confidence in the region. It does seem as though Libya is going through a civil war, and Europe and NATO have to decide clearly which side they’re on. Egypt and Tunisia have come out relatively unscathed, but the violence in Libya will have consequences for the entire North African area. 

So all these revolutions are making foreign buyers more cautious and more risk-averse? How is that being manifested in their decisions of which countries to invest in? 

Bullas: One of the problems is psychological. If you’re a sourcing buyer and you have a large list of location options, why would you choose one that’s in any way risky? People have traditionally tended to give a low importance to the riskiness of a country, but that has now changed. Geopolitical risk has never been given the weighting that it now has, thanks to the North African situation. 

It really is all about marketing. ITIDA, the Egyptian industrial development agency, has done a fantastic job until now in getting Egypt up in the top ten outsourcing locations in the world. It’s now going to be a big marketing task for them to get that reputation back. 

What does this situation tell us about Latin American investment? When we consider factors like the drug violence in Mexico, riots in Brazil, non-democratic regimes in Nicaragua and Venezuela – Will companies be staying away, or at least more cautious of the region? 

Bullas: It’s a little different for the Americas than for Europe. North Africa is right on Europe’s doorstep, but not like that for the US and Latin Ameirca. Drug violence and civil unrest are very bad news, but the fact is that they do not have the same anti-business stigma as the wars in North Africa. It’s not an issue so close to home for US companies. I think the Nearshore will continue to develop as a strong sourcing location.