Will 2022 be the Year Pakistan’s Booming Tech Startups Drive Adoption of IoT Technologies?

Incubation of the Internet of Things (IoT) technology is indeed expected to accelerate, but 2022 may not be its breakout year. Pakistan has skipped several iterations of mass consumption of ‘dinosaur’ digital technologies like desktop computers, 2G phones, PDAs (personal digital assistants), and legacy chip-and-pin payment terminals altogether. Skipping early generation technology creates fertile ground for businesses and consumers alike to embrace next-gen IoT technology from the get-go. Startups in Pakistan rounded out 2021 by raising capital to the tune of US$350 million, which is more than a five-fold increase than the 2020 total of US$65 million and exceeds the past six years combined. Like other frontier markets, almost all IoT projects in Pakistan are greenfield. These greenfield deployments are matched by entrance of start-ups which are in their growth phase, these two factors of growing businesses and growing markets are expected to create disruption in key industry verticals. Other drivers of growth include commoditization of IoT hardware which reduces per unit hardware costs, thus improving the Return on Investment (ROI) calculation for firms by lowering the initial investment cost in IoT hardware. Some startups, like BridgeLinx and Rider have a practical use for IoT solutions, as BridgeLinx is deploying a digital freight marketplace to connect shippers with truckers while Rider provides last-mile delivery services. As they broaden both their operations and feature-set, the use of Operational Technology (OT) will increase in conjunction with Information Technology (IT), so bridging the IT/OT divide with IoT will be a natural fit especially for Real-time Track and Trace (RTT) solutions. This means startups can establish themselves and leverage their experience in T&L (Transport and Logistics).

The IoT value chain has three key components: hardware, network connectivity, and software services. In recent years, Pakistan has witnessed an exponential rise in both volume and revenue of broadband and cellular 3G/4G connections. This growth puts domestic providers of network connectivity in pole position in the IoT value chain, despite several challenges such as the lack of a domestic Mobile Virtual Network Operator (MVNO) operating in the IoT space. This challenge is compounded by a relatively slow rollout of NB-IoT (Narrowband-Internet of Things), and limited rollout of Cat-M. According to GSMA (Global System for Mobile Association), NB-IoT is currently only provided by Telenor Pakistan, albeit nationwide, who has partnered with a foreign operator, Things Mobile, to drive volume of connections. Other telecoms are catching up, including Zong (the Pakistani subsidiary of China Mobile) which recently completed a successful trial of NB-IoT. Nevertheless, amongst the three value chain components (hardware, network connectivity, and software services), network connectivity is the low-hanging fruit for domestic IoT players. This part of the value chain spans from MNOs (Mobile Network Operators) that can rollout Cat-M and NB-IoT, to MVNOs who can provide competitive pricing for IoT customers, and so local players are likely to dominate this component of the IoT value chain.

Aside from the low-hanging fruits of network connectivity, IoT hardware manufacturing is increasingly commoditized, making it a moon shot for Pakistani players to gain traction in this part of the IoT value chain, given the dominant position already held by the manufacturing juggernaut of China. This leaves software services, where there is scope for an IoT startup to enter and leverage Pakistan’s growing IT sector and develop platforms that can provide application enablement, data analytics, or even more basic device management services. While venture capital (VC) funding in a startup directly aimed at IoT software has yet to be launched, it is clear that the current universe of Pakistani startups has demand for IoT services which will only grow as they scale their operations. This increase in the Total Addressable Market (TAM) will create a ‘flywheel effect’ for future IoT startups in Pakistan, while the stickiness of software services creates an incentive for early movers to enter the IoT market.

Verticals like retail (inventory management) and logistics (supply chain management) are expected to see significant growth, due to the rise of e-commerce in Pakistan, which creates capacity for startups to raise capital and invest it in IoT solutions. Other verticals expected to see an uptick in IoT requirements include pharmaceuticals, which is driven not only by cold chain requirements due to the COVID-19 vaccine rollout but also due to expected regulatory changes by the DRAP (Drug Regulatory Authority of Pakistan), which is drafting regulations that will mandate serialization as part of traceability requirements, driving RTT solutions. Use cases such as temperature monitoring by sensors and location trackers unlocks use of IoT devices. Pakistan’s pharmaceutical industry caters to both domestic needs as well as exports, meaning the incentive to use IoT is bolstered by export regulations such as the EU’s FMD (Falsified Medicines Directive) and the DSCSA (Drug Supply Chain and Security Act) in the US with which Pakistani exporters of pharmaceuticals must be compliant. Another vertical ripe for IoT transformation is agriculture, which is driven by a combination of the disruption created by existing startups. For example, Tazah Technologie, an agricultural-tech startup whose co-founder has experience in the Pakistani IoT space at Telenor, is currently positioning its platform to disrupt the agriculture supply chain by introducing a Business to Business (B2B) marketplace from farmers to retail. Its delivery services are an example use case which will benefit from leveraging IoT solutions for logistics.

An area where slow progress is expected is the ‘Smart City and Infrastructure’ segment because the country has relatively underdeveloped infrastructure. As a result, an IoT-driven Smart City with connected things is not on the horizon in Pakistan’s major cities of KLI (Karachi-Lahore-Islamabad). Within Smart City and Infrastructure, use cases that are unlikely to see an immediate uptick in IoT include the utilities segments, which is due to a lack of innovation in the energy distribution (utilities) segment. Due to under-investment in these sectors, it is unlikely that next-gen IoT solutions will move from PoC (Proof-of-Concept) into field deployment on a large scale in these verticals, at least not in the near-term. Another laggard is the industrial manufacturing segment, where a key driver is the economics of the labor market. As workers migrate from rural to urban areas, it is relatively cheaper for manufacturing firms to choose from Pakistan’s abundant labor force over machinery, especially since the scarcity of industrial machinery means there’s a smaller amount of fixed assets to maintain on the factory floor. So, the ROI calculation of an Industrial IoT (IIoT) solution is diminished in Pakistan because of this smaller quantity of machinery. In contrast, larger emerging markets like China and Vietnam have a more sophisticated manufacturing sector that is less labor-intensive and more reliant on factory machinery, thus the mechanics of the ROI calculations (large cost savings due to heavy use of factory machinery) are in place in those countries to justify the upfront cash outlay in implementing IIoT.

To conclude, IoT developments fall in two distinctive buckets: one is adoption of IoT technologies by IoT customers, while the second bucket consists of local IoT vendors supplying IoT products across the value chain. Adoption of IoT technologies is expected to accelerate sooner rather than later, especially with greenfield IoT deployments such as those in Pakistan which are a growing phenomenon. However, suppliers entering the IoT value chain are running a marathon, instead of a sprint, with network connectivity being a key play for local IoT vendors in the foreseeable future. And while 2022 may not witness breakout in adoption of IoT technologies, the incubation of IoT deployments by startups is likely only to accelerate and result in more proof-of-concept and trial runs especially in logistics, pharma, and retail verticals with other verticals like agriculture expected to follow suit. However, there are verticals which may face roadblocks to implementing IoT solutions, not least due to a slow rollout of Cat-M and NB-IoT networks as well as structural disincentives for entrenched incumbents in oil & gas, utilities, and industrial manufacturing segments.