Every tech bro has spent a good part of their life explaining to others the virtues of software: how it is globally scalable, doesn’t need as many resources to build, boasts high margins, etc. Questioning this wisdom was akin to blasphemy, as was doing any other business if you wanted to get venture funding.

That is until generative artificial intelligence (AI) took the world by storm and all of a sudden, hardware became cool again. So much so that for a brief moment, Nvidia even overtook the likes of Microsoft in terms of market capitalisation.

On the surface, such debates seem to hold little relevance to Pakistan, considering that there’s hardly any investment at all. However, the issue of hardware is actually critical and warrants serious attention.

This is not because we require graphics processing units to train cutting-edge AI models but because of much more primitive reasons. As a large and young country, we need the infrastructure, both physical and digital, to drive economic growth.

Unfortunately, Pakistan’s current trajectory is in the opposite direction. Though no recent data is available, surveys from a few years ago estimate that between seven per cent to 14pc of the country’s households own a computer. Even if you double the higher bound, it still means just over a quarter of Pakistani households have access to computers.

Digitalising Pakistan will require investments in the hardware space and localising production

It’s true that mobile phones drive digitalisation in developing countries like Pakistan. But our negligence of hardware is concerning, to say the least. According to an analysis by Data Darbar using the Trade Information Portal Pakistan, the country’s import of computing machines has shown a mixed trend at best.

By quantity, Pakistan imported 972,590 laptop units in FY24, up 40.9pc compared to the low base but still lower than FY22 levels. Personal computers witnessed a much sharper decline as we only purchased 659,617 units in the outgoing fiscal year, not even half of what they used to be in the recent past.

It’s not just about computers or laptops: the problem runs far deeper. Using Comtrade’s preliminary data, we analysed Pakistan’s trade in information and communication technology goods, as identified by the United Nations Conference on Trade and Development, and found that the total imports under these Harmonised Standardised (HS) codes plunged to $796.1 million in 2023. This was by far the lowest value in the last decade and not even half of the second-lowest figure.

Does this bode well for a developing country that is banking on the tech sector to drive growth? Especially considering that our local production of information and computer technology (ICT) goods is virtually non-existent, except for the nascent mobile manufacturing industry which has declined consecutively for the last two years.

In such an environment, imports at least plug the hardware gap, even if they cost time, money and peace of mind. However, the government’s (mis)management of currency and the resulting trade restrictions have made ICT goods even more inaccessible.

Digitalising Pakistan will require investments in the hardware space and localising production. This is not to suggest that we can build global brands or become a supplier of semiconductor chips, as the government daydreams. But at the very least, there is potential to both manufacture and export simpler ICT goods components.

In this regard, Egypt serves as a great example as it has managed to indigenise the production of ICT goods, earning export proceeds of more than a billion dollars in 2022. This is not some high-growth Southeast nation but Pakistan’s long-lost brother in twin deficits and a loyal client of the International Monetary Fund.

But the bigger question is: who will make those investments? Contrary to the popular villainisation of hardware, it actually boasts pretty good returns. According to Bain & Company’s DealEdge, the median multiple on invested capital for hardware deals was 1.8 times between 2010 and 2023 — in line with the overall average.

Even in Pakistan, digital infrastructure can be a lucrative business as shown by the likes of Transworld, Nayatel and RapidCompute. According to their credit rating reports and insiders, net margins are often in double digits while gross margins typically exceed 30pc, though the payback period can be a bit long.

Put simply, the market is up for grabs, provided anyone is willing to jump on the opportunity. This is not just a nice-to-have but a key enabler of the tech sector’s growth. And until we set the rails for manufacturing, the least the government can do is not to make imports more expensive than they are by imposing additional taxes and duties.

The writer is the co-founder of Data Darbar

Published in Dawn, The Business and Finance Weekly, July 29th, 2024