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Why Chile Is Chasing Tech Over Copper

6 MINS READAug 3, 2018 | 09:30 GMT
An electric substation in Santiago, Chile.

An electric substation in Santiago, Chile. Its power infrastructure will pose a formidable obstacle to Chile's push to attract technology investments.

(JOSE LUIS STEPHENS/Shutterstock)
Highlights
  • Chile will seek to diversify its economy away from a dependence on copper by becoming a technology hub in South America.
  • Chile’s new visa system for technology workers and entrepreneurs will make the country more attractive to tech giants like Amazon, which are seeking to make large-scale investments.
  • Large technology investments require massive upgrades to Chile’s power grid, but the country is likely to succeed in making such improvements in concert with other South American countries.

Copper is big business in Chile, which exports more of the metal than any other country in the world. The commodity's importance to Chile is unlikely to change anytime soon, but if Santiago has its way, something else will soon help propel the nation forward: technology. Chile's dependence on the mining sector, especially copper, has convinced the government to push forward with plans to transform the country into a tech hub in South America. And although two issues — education and electricity — stand in the way of Chile's tech dreams, even they are unlikely to obstruct the country's plans for long.

The Big Picture

Although global copper demand is expected to grow in the coming years, Chile — the world’s largest copper exporter — wants to diversify its economy away from the metal. As a result, Santiago is seeking to attract investments that would transform it into a South American tech hub.

In Search of Alternatives to Mining

Chile is the world’s largest exporter of copper and lithium. Copper production alone represents roughly a quarter of the government's revenue. But as with any commodity, the price of copper is extremely vulnerable to external demand, meaning the volatility of copper prices often significantly affects Chile’s economic growth. From 2010 to 2014, Chile's economy grew at an average of 5 percent thanks to high copper prices, only for the country's growth rate to drop to below 2 percent per year when commodity prices plunged between 2015 and 2017. Faced with such uncertainty, Chile is hoping to hedge its bets by diversifying its economy — even if demand for copper is projected to steadily rise in the coming years thanks to global economic growth and increased consumption in the transportation sector.

Previous Chilean governments have promoted investments in some sectors of the national economy with an eye to making them competitive internationally, including wine, salmon and fruits. Despite such development in the food industry, the Chilean economy continues to be highly dependent on the mining sector. That’s why Chile decided to implement a plan in 2010 to transform the country into South America's technology hub. The program — dubbed Start-Up Chile — began timidly, but the project has gained increased traction since 2017, when the government implemented a new express visa for workers and investors in the technology industry.

A table showing the valuations of startup companies in Chile.

Tech entrepreneurs and workers can now obtain the visa in as little as 15 days — a vast improvement over the previous wait of at least two years. Additionally, Santiago provides at least $40,000 in free equity capital (for companies that demonstrate success, the figure can reach up to $140,000), bank accounts and offices to technology workers and entrepreneurs who choose to move to Chile. As a result, more than 1,300 startups from different fields have launched operations in Chile in the past eight years. In total, around 40 percent of the employees at such companies are foreigners who benefited from Chile’s flexible immigration policies for technology professionals.

Chile’s aim, however, is not limited to small and medium-sized technology companies. Last month, President Sebastian Pinera met the CEOs of giant U.S. technology companies such as Apple, Amazon, Facebook and Google — all firms that Chile hopes to entice into the country. The first one to do so may be Amazon, which could decide in the coming months whether to invest $1 billion in a new computer data processing center in either Argentina or Chile. But Argentina's financial difficulties, as well as political uncertainty over whether it will maintain economic and trade liberalization policies after presidential elections in November 2019, may help swing Amazon's decision in Chile's favor.

A graph showing the number of jobs that startups have created in Chile and elsewhere.

Powering a Tech Revolution

Nonetheless, power infrastructure will pose a formidable obstacle to Chile’s push to attract technology investments, particularly Amazon's possible data center, as such facilities consume massive amounts of electricity. For example, a government study in Denmark, another country that is attracting data centers, showed that just one data center could raise the country’s electricity consumption by 4 percent. In response to this massive drain on electricity, some tech companies, such as Microsoft, are building alternatives in the United States to produce their own electricity-generation systems to ease the pressure on the country’s power grid. Unsurprisingly, such a facility would be most welcome in Chile, a country that is dependent on energy imports and which is preparing to phase out several coal plants that account for over 30 percent of national power generation.

Chile’s electricity demand, however, will rise not only because of possible data centers but also because the country’s mining sector is expanding. Copper is Chile's main mining export product, but the country is also expanding its cobalt and lithium production, launching talks with Tesla to build a lithium-processing plant in the country.

The expansion of these mining activities will require a power grid system (not to mention more water sources given Chile's dry climate) that succeeds in meeting the country’s rising demand. After settling a territorial dispute with Peru, Santiago drafted plans to construct an electricity transmission line connecting Chile and southern Peru. Chile's government views electricity integration with Peru, which wants to become a major electricity exporter in the coming decade, as a necessary move to guarantee the country a more reliable power grid system.

The successes of Santiago's tech project so far give Chileans every reason to entertain hopes of a future based on tech, rather than on oscillations in the price of copper.

Chile has been attracting investments in its renewable energy sector, especially solar and wind, but the country’s energy matrix is still highly dependent on thermoelectric plants that use coal, oil and natural gas. All together, about 60 percent of Chile’s energy matrix is dependent on fossil fuels — most of which Santiago must import. In fact, Chile is burdened by the second-highest electricity prices in South America, trailing only Uruguay. The price of industrial electricity in Chile averages $139 per megawatt-hour — 40 percent more than in its neighbor and competitor for the Amazon data center, Argentina.

Since setting its mind to establishing a tech hub in South America in 2010, Chile has done due diligence by attracting foreign technology entrepreneurs and professionals — despite changes of government that might have derailed such efforts elsewhere. Figuring out just how to power its ambitious tech plans remains a challenge to the government in Santiago, but the successes of the project so far give Chileans every reason to entertain hopes of a future based on tech, rather than on oscillations in the price of copper.

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