March 18, 2006

L.A. Times

Costa Rica Rides High-Tech Wave
U.S. firms are drawn by the country's lower costs, educated and bilingual workforce, political stability, tax breaks and proximity.
By Marla Dickerson, Times Staff Writer

SAN JOSE, Costa Rica — The crates that leave this Central American nation these days are more likely to be stuffed with microchips and telecom components than the bananas that once represented Costa Rica's plantation economy.

With little fanfare, Costa Rica has attracted hundreds of millions of dollars in investment from some of the best-known names in technology, including Intel Corp., Hewlett-Packard Co. and Microsoft Corp.

Seattle-based Washington Mutual Inc. recently announced it would cut 600 loan processing jobs in Chatsworth and move some of them to Costa Rica. Palo Alto-based HP plans to nearly triple its business service workforce here to 3,500 workers within two years. The lure: lower costs, an educated, bilingual workforce, political stability, fat tax incentives and its location.

"We're shooting to be the Irish," Roberto Leiton Garro, an executive at Art in Soft, a Costa Rican software company, said of his nation's ambitions to emulate the Celtic Tiger.

Indeed, like Ireland before it, this small nation is leveraging talent and technology to catapult an agrarian economy into the Digital Age. In the process, it is capitalizing on a trend known as "near-sourcing" that has American firms establishing facilities closer to home.

Although Mexico, Nicaragua and other Latin American nations have benefited as well, Costa Rica's focus on tech-related industries has helped it achieve Central America's highest standard of living and surprising stature in the tech world.

It ranks third behind powerhouses India and China as the most competitive offshore destination, according to a 2005 report on outsourcing by two consulting firms. Not bad for a country roughly the size of Vermont and New Hampshire combined, and whose population of just over 4 million is less than half the size of Los Angeles County's.

When medical device maker MedTech Group Inc. was looking for a low-cost location to put a plant, giants China and India loomed as obvious choices.

But the New Jersey-based manufacturer of surgical tools and other medical products chose Costa Rica, where health science firms such as Baxter International Inc. and Boston Scientific Corp. had already set up shop.

Now when MedTech President George Blank needs to call someone in the Costa Rican plant, he knows the facility is just an hour behind East Coast time. And instead of spending nearly a day traveling to Asia, he can be in the capital, San Jose, within 4 1/2 hours on a nonstop flight.

When he lands, he finds plenty of English speakers attuned to the needs of the U.S. market. He says he has never been asked to pay a bribe, a routine cost of doing business in many developing countries. And Blank says he doesn't lose sleep worrying that a competitor will swipe his company's designs, a risk in places such as China, where intellectual property rules aren't widely enforced.

"The actual going and doing and seeing and working is much easier than it is in China," said Blank, whose Costa Rica plant began production in early 2005. "Business conditions are a little easier."

Costa Rica exports more software per capita than any other country in Latin America. Computer components have supplanted bananas as the nation's largest export product. Combined, the information technology and medical clusters employ about 30,000 workers in more than 300 companies, with most of that business materializing in the last decade.A lot is riding on Costa Rica's ability to continue developing these sectors, which pay better than tourism and agriculture, the other pillars of its economy. With unemployment high, one-fifth of households mired in poverty and the economy growing more slowly than many would like, Costa Rican officials are banking on tech-related exports and services to keep the country climbing toward its goal of becoming the first developed nation in Central America.

Obstacles abound, the most obvious being Costa Rica's modest population, which can't produce the hoards of skilled workers needed to keep it among the top offshore destinations, said Mark Minevich, one of the authors of the outsourcing report.

He envisions Costa Rica following the path of Singapore, a small, tech-savvy nation that partners with bigger countries such as Malaysia and Indonesia, which provide much of the workforce for major projects.

"The strategy for [Costa Rica] is to do joint ventures," said Minevich, co-chair of the BTM Institute, a technology think tank based in Stamford, Conn. "And they're going to have to focus on niches."

Costa Rica's conversion from a largely farm-based economy to a tech-led one has its roots dating back more than a century. The nation made primary education free and compulsory in 1870, according to the Costa Rican Investment Board, a private entity.

But what really launched the nation on its upward trajectory was its decision to scrap its army in 1949. The resources that had gone to the military were reallocated to higher education, universal healthcare and other human development programs that have paid huge dividends over the decades.

Known as the "Switzerland of Central America" for being an oasis of peace in a region torn by conflict, Costa Rica boasts the region's oldest democracy, its highest per capita income and a 95% literacy rate on par with the United States.

"Costa Rica invested in its people," said Rosala Morales Acosta, executive director of the Costa Rican Chamber of Information Technology and Communication. "That set the stage" for everything that followed.

But as neighboring countries with lower wages began stealing those jobs, Costa Rica capitalized on its skilled labor pool by targeting industries such as electronics and telecommunications equipment. The strategy proved a sound one, said economist Andres Rodriguez-Clare, who has written extensively on Costa Rica's technology evolution.

Growing fast but under pressure to cut costs, U.S. electronics makers in the 1990s found in Costa Rica an abundance of low-cost, English-speaking technicians and engineers. Companies including telecom equipment makers DSC Communications Corp. — which was bought by France's Alcatel in 1998 — and Sawtek Inc., now part of TriQuint Semiconductor Inc., set up facilities.

Costa Rica's big prize, however, was Intel. The chip maker opened an assembly and testing plant in Costa Rica in 1998, after a huge recruitment effort that included then-president Jose Maria Figueres.

"It was a validation for the country," said Edna Camacho, general manager of the Costa Rican Investment Board, who said Intel's investment put Costa Rica on the radar of other firms.

Today, Intel has grown to be Costa Rica's largest high-tech employer, with 2,900 workers. English conversations float through the carpeted halls and uniform cubicles of the firm's gleaming campus outside the capital. Except for the rice-and-bean dish gallo pinto served in the company cafeteria, one would be hard-pressed to distinguish the facility from one in Silicon Valley.

That is also true about the caliber of the workforce, Intel public affairs manager Gabriela Llobet said. The Costa Rican facility last year beat out other Intel sites to land 150 new jobs in an area known as financial shared services, she said. The group performs tasks such as software development, circuit design, procurement and financial services for the rest of the company. That's proof the Costa Rican operation is globally competitive and capable of jobs beyond testing and assembly, Llobet said.

"This is a milestone," she said. "We have positioned ourselves as a place to provide services."

Costa Rica's talent also is on display in its software industry, which consists almost entirely of homegrown firms. One of the biggest is Art in Soft, which creates so-called migration software that allows companies to take their old software and convert it to new platforms.

Started by a Costa Rican computer science professor, Carlos Araya, the company's products are used worldwide. Microsoft became a minority investor in 2001.

Leiton, the company's project director, said Costa Rican universities were turning out top-notch technology workers. He said the problem was that there just weren't enough of them. He said his firm was already paying premiums for experienced programmers with English skills, who are in demand from a number of competitors.

"If we had a big contract that needed 200 people, we couldn't do it here, and that's nothing," Leiton said. "That's the biggest issue, whether the country itself is scalable."

Experts said Costa Rica faced other significant hurdles. Many complain that the government-owned telecommunications monopoly is slow and inefficient, and that a sector so critical to the growth of technology companies must be opened to private competitors. That's something that the nation's powerful public-sector unions have long resisted.

The World Trade Organization has declared the tax-free benefits offered to foreign companies in Costa Rica's free-trade zones an illegal export subsidy that must be phased out by 2009. Exporters such as Santa Clara, Calif.-based Intel say such incentives are crucial to keeping Costa Rica competitive. But lawmakers haven't come up with an alternative that would pass muster with the world trading body.

And Costa Rica has yet to ratify a Central American free-trade agreement that also is to include the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua and the United States.

The Costa Rican public is deeply divided, but the nation's technology firms are strong supporters of the pact, which they say is critical to cementing access to the U.S. market, the destination for half of Costa Rica's exports.

"This country is at an inflection point," Leiton said. "The potential is here. But if Costa Rica doesn't take some necessary steps, we're going to miss the next wave."

Feb. 6th, 2006

N.Y. Times

By JANELLE BROWN
Published: February 3, 2006
THE Liberia airport, Costa Rica's new international hub, is not precisely a beacon of modern transportation. The terminal consists of an open-air warehouse with a corrugated tin roof, cooled by an enormous fan whose main effect is to stir the grasshoppers into a frenzy. In the line for customs, visitors are kept company by butterflies and the occasional blas frog.

Jean and Tony Capezza of Massachusetts have a home at Reserva Conchal.
Before visitors even leave the tarmac, though, smiling representatives from the local Chamber of Tourism are there to greet their out-of-town guests, most of whom have just arrived on the new direct three-hour flights from Atlanta, Miami and Houston. They press the real estate guide "Costa Rica Traveler" into newcomers' hands. In its pages, American visitors can find ads for dozens of different developments that will happily sell them a villa with an ocean view.

For decades the remote Pacific Coast of northern Costa Rica — the Guanacaste province — was the domain of die-hard surfers and backpackers, with other visitors deterred by the grueling five-hour drive from the country's main airport in San Jos. But in the last few years, Guanacaste has been transformed by a collection of hotels and real estate developments aimed at America's affluent baby boomers.

All up and down the coast, bulldozers are at work. Three major developments, including a project anchored by a Four Seasons hotel, are already selling luxury condominiums for $500,000 and up, and hundreds of smaller, more speculative endeavors are also breaking ground. The airport in Liberia, the capital of Guanacaste, is at the center of the transformation. Three years ago, when the first direct flights from the United States landed, only 50,000 people a year arrived there. In 2005, 300,000 did.

In the airport lines, Americans talk in urgent tones about the money to be made, about "Wild West" opportunities. Never mind that Guanacaste is still a region of cattle ranchers and rutted roads. The new homesteaders envision a beach, golf and spa destination equal to the Puerto Vallarta corridor in Mexico or Wailea Beach on Maui — without, so far at least, the high-rise blight. The area's promoters have taken to calling it the new Gold Coast.

"It's hard for me to look at all this change — you're used to how uncluttered it was," said Chris Mailloux, a ReMax agent whose family has been selling real estate in the area for 13 years. In one abbreviated block near his office, in the tiny fishing village of Playa Hermosa, eight developments of at least 20 homes each are under construction: "Lots that were once $50,000 are now $500,000," he said. "There's not a lot left that hasn't quadrupled in value in the last three years."

Or, as Brad Schmidt, a local builder and an American expatriate in Costa Rica for 10 years, put it, "It's like fishing behind a tuna boat during a feeding frenzy."

HISTORICALLY, the smattering of vacation homes in Central America were mostly bargain-basement retirement houses built by older expats. A gradual identity shift began when the Central American peace accord of 1987 curbed regional political instabilities, and now it has accelerated. Vacation home developments, often financed by American investors, are going up not only in Costa Rica, which has led the trend, but in Panama, Honduras, Belize and Nicaragua. American buyers are drawn to the cheap prices for oceanfront real estate on previously undeveloped land.

"The image problem doesn't exist anymore," said Roger Gallo, founder of EscapeArtist.com, a newsletter for Americans that focuses on Central and South America. "There's more money to be made in foreign real estate because the prices are lower with more growth potential."

Costa Rica has the advantages of an active tourism board and a reputation as peaceful and environmentally friendly. It also has the longest tradition of democracy in Latin America.

Bill Royster, the developer behind the luxurious Sueos resort south of Guanacaste on the Pacific near the town of Jac, said that because foreigners are allowed to own land directly, rather than through the bank-trust leases required in some Mexican property deals. "No one is going to expropriate your property," he said.

And what about that property? In Guanacaste, the jungle runs straight from the volcanoes to the sea, where it overlooks a warm azure ocean from 200-foot bluffs. Armadillos, howler monkeys, small raccoon-like pizote, parrots and the occasional jaguar make their homes underneath the broad leaves of the mango and palm trees. The foliage grows up to 10 feet a year, though in the "gold season" — a flattering term for the dry months of December through April — most trees lose their leaves, leaving the landscape barren.

Until the developers began arriving with suitcases of cash, Guanacaste was mostly the domain of cowboys called sabaneros, whose legacy lingers at local rodeos. Roads must be shared with herds of ambling cattle and are often so potholed that local people drive on the ground along the side. Yet strung all along them are signs, all in English, advertising million-dollar villas.

"It's fairly easy to develop in Costa Rica; you have a good work force at extremely cheap prices," said William Knickman, a New Jersey developer who, with a group of friends, snapped up land in Guanacaste, formed a company called Costa Rica Lifestyle Development and is now selling lots for up to $300,000 apiece. "And it's hot, very hot, as a place for people to buy. It's booming right now."

The boom can be traced back to the 2,300-acre, $400 million Pennsula Papagayo project, indisputably the most luxurious development on the coast. It lies on land that was set aside for tourism by the Costa Rican government in the late 1970's but remained uninterrupted jungle until 1997, when Alan Kelso, a Costa Rican developer, got American financing and broke ground. Pennsula Papagayo has a Four Seasons resort and is expected to include three more hotels and more than 1,000 luxury homes, although, at the moment, only 44 houses and condos have been built. (They're selling for $2 million to $12 million.)

"We put the region on the map," Mr. Kelso said as he sat in Pennsula Papagayo's command center, a facility peppered with satellite dishes. He also plans a marina, a polo field and, of course, the requisite three brand-name golf courses. "The whole challenge is to create a luxury market in a country that doesn't have a culture of service," he said. "We're trying to make it a high-end happening."

To shield their patrons from pitted roads and electrical blackouts, developers have paid for their own infrastructure. Grupo Mapache, a Costa Rican developer that is building more than 20,000 low-priced condos in the Guanacaste area, has spent $2.5 million on roads and sewers. Pennsula Papagayo has not only paid for its roads, sewers, buses and electricity but has even set up its own paramedics and fire brigade.

"We sell 'Costa Rica Lite': all of the upside with none of the downside," said Jeff Klein, a sales agent for the Papagayo project. "We're our own municipality."

The owners of Pennsula Papagayo and two other high-end developments, Hacienda Pinilla and Reserva Conchal, even paid for that critical airport in Liberia, putting up $3 million of their own money in 2002 as a guarantee to persuade Delta to start direct flights. Continental and American followed.

EARLIER efforts to develop Guanacaste were mostly underfinanced. On a road near the town of Playa del Coco hulks the moldering 20-foot-tall concrete gate of Cacique del Mar, all that was built of a 500-acre development planned in the 1990's. Even this forlorn property has since had a change in fortune. Stephen M. Case, former chairman of AOL Time Warner, bought it in 2005, and Guanacaste is buzzing with rumors about what he plans to build on it.

At Hacienda Pinilla, hundreds of condominiums and villas are being built around 4,500 acres of nature preserve by the Atlanta-based owner, Hoover Gordon Pattillo, who bought the land as a family vacation homestead 30 years ago. Visitors to Mr. Pattillo's modest ranch, tucked inside a tree-lined grove, are greeted with a tequila-laced lemonade and a perch on a rocking chair overlooking the sunset.

"It was destiny," he said. "I had no idea what I was going to do with the land. We'd come down once a year and stay in the old farmhouse, which had no electricity or running water." In the late 1990's he began developing home sites. "We really had to work hard to sell those first villas," he said. Things have changed. Over two weeks last year, Hacienda Pinilla sold 43 Spanish colonial condomiums for $580,000 and up without any advertising.

The Costa Rica rush can carry hazards for the unwary. Jeff Hornberger, the international market development manager for the National Association of Realtors, cautioned that Americans buying in Costa Rica should be sure to buy title insurance and should be aware that real estate agents aren't required to be licensed there. "Ninety-five percent of the time we don't hear about people having problems," he said, but sometimes Americans "come on vacation and get overwhelmed and leave their brains at the border."

Many Americans who are buying now are looking for investments, eager to get in on the boom. But others simply love Costa Rica, with its warm seas and unspoiled jungle landscapes.

"This is my garden; look at this!" Jean Capezza, 59, said as she gazed down over the jungle to the sea from her perch at Reserva Conchal, an upscale golf-course-anchored development of 2,300 acres that will eventually have several hundred homes selling for $500,000 to $2 million each. Ms. Capezza, a retired administrator for Verizon in Boston, and her husband, Tony, 63, a retired public school administrator, bought a Mediterranean-style four bedroom condominium in early 2004 and spend seven months a year there.

Their house has already nearly doubled in value, but the downside of the real estate demand is the incessant grind of bulldozers nearby. The Capezzas fear more flights landing in Liberia, new condos up the hill, even the appearance of a Burger King in the nearby town of Tamarindo. "If we wanted the roads of Florida, we'd be in Florida," Ms. Capezza said. "We hope progress comes slowly. Very slowly."