Global E-Commerce: Central and South America

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GLOBAL E-COMMERCE: CENTRAL AND SOUTH AMERICA

In the early 2000s, the development of e-commerce in Central and South America was several years behind similar development in North America and Europe. However, the region still represented a market with great promise. With a large and increasingly connected population, and markets that were ever more linked to those in the north, particularly those in the United States, business leaders both in the region and around the world were anxious to see the development of Central and South American e-commerce. Despite such hopes, however, only the growth of business-to-business e-commerce was assured in the short term, while the consumer market faced more serious challenges. A number of social, political, technological, and economic factors kept the most ambitious dreams somewhat in check. Perhaps most troublesome, much of the region is beset by political instability, which in turn can lead to fluctuating currencies and precarious economies. In addition, civil unrest, particularly in Colombia, increasingly encroached upon borders in the early 2000s, threatening to lead to more widespread instability.

Complicating matters is the fact that there is little in the way of a defined "Latin American market." Rather, Central and South America are highly fragmented and every country—and often regions within countries—has to be considered on its own terms. This concept poses a great challenge to both outside investors and domestic entrepreneurs. On one hand, those seeking to reap great financial rewards in Central and South America might want to push forward to develop a pan-regional market in which they could emerge as the standard bearer. On the other hand, an individual or company that is too aggressive risks losing sight of the nuances of the varying markets and thereby overextending its resources for diminishing returns.

CHALLENGES

REGULATORY AND TAX ISSUES.

The legal framework for e-commerce in South and Central America was fairly underdeveloped in the very early 2000s, thus inhibiting the possibilities for growth. In this vein, Latin American countries had done little, by and large, to address e-commerce taxation issues, as they were still struggling with the basic establishment of an Internet infrastructure. Central and South American governments derive their greatest share of revenue from value-added taxes, which are those levied on the sale of imported goods. When the various players involved in a transaction are all located in different countries, which often is the case with e-commerce, the assessment of a value-added tax becomes increasingly difficult.

For the most part, e-commerce taxation throughout the region is tied to the existing rules for physical-world taxation. However, the difficulty in enforcing such taxation and the resulting decline in tax revenues is expected to spur the region's governments into action to coordinate with governments elsewhere, particularly in Europe, to implement taxation schemes geared specifically toward e-commerce. A few countries that have negotiated tax treaties with the Organization for Economic Cooperation and Development (OECD) include Argentina, Brazil, Chile, and Venezuela. Additionally, several countries were working toward harmonizing some elements of their tax policies with their North American neighbors in 2001.

Many of the region's countries also retained relatively protectionist economic policies that aimed to cradle their own developing industries from foreign competition. Some countries, such as Brazil and Argentina, took large strides in opening up their markets to a more liberalized trade policy. This was attractive to foreign investors, including major North American and European Internet and telecommunications firms. According to many analysts, in a borderless Internet environment at least some degree of liberalization is necessary to attract such investment and to compete in the e-commerce world.

U.S. Federal Communications Commission (FCC) Chairman William E. Kennard, speaking in Lima, Peru, in spring 2000, insisted that it was the function of regulators in Latin America to check the influence of the powerful Internet carriers and level the playing field so that all people could enjoy and benefit from the Internet. Kennard announced the launching of a development initiative aimed at fostering telecommunications and information technology infrastructure throughout Latin America. The aim of the initiative was to bring more people in the region online and enable them to benefit from e-commerce. It was primarily based around the exchange of information and ideas, but signaled the U.S. government's interest in expanding e-commerce among its southern neighbors.

SOCIAL AND ECONOMIC INEQUITY.

A great deal of social and economic disparity, both within and between countries, plagued much of Central and South America, inhibiting the spread of e-commerce. Because Internet access throughout the region was so expensive and presented so many technical problems, Internet penetration hovered at around three percent in the early 2000s. Jupiter Communications placed the entire online population in Latin America at 11 million in 1999, while the most optimistic estimates for the year 2000 placed the total at 30 million users. However, Jupiter expected the total to skyrocket to 67 million by 2005, making Latin America the fastest-growing Internet population in the world. As a result, in the eyes of many e-merchants, the time was ripe to jump into the Central and South American market in order to capture the eyes of those users as they come online, thereby building early customer loyalty. According to Jupiter, one critical consideration for e-commerce was that its estimated number of Internet users referred to individuals versus households. Latin Americans were far more likely than North Americans to surf the Web at kiosks or other locations outside of the home, because PC penetration throughout the region was markedly low. As a result, those accessing the Internet were far less likely than those to the north to engage in e-commerce, since they didn't enjoy access in the privacy of their own homes.

For the most part, computer ownership in Latin America is a hobby for elites, and therefore business-to-consumer e-commerce has been fairly limited in its possibilities. This trend showed few signs of letting up in the early 2000s. However, as technologies become cheaper and information technology and telecommunications infrastructure grow more sophisticated and widespread, entrepreneurs remain hopeful that the consumer Internet market in Central and South America will ripen.

According to Euromoney, optimists hoped that the Internet could serve a social function in Latin America, one that eventually would filter down to generate benefits for e-commerce. By opening the information infrastructure, the Internet held the potential to serve as a democratizing force and break down what many saw as the region's rampant political and economic corruption. Such hopes, Euromoney reported, were fueling valuations of companies trying to stake a claim to Latin American e-commerce markets. Indeed, Business Week reporters Katz and Malkin noted that the Internet already was responsible for helping to reduce some of the corruption involved in the granting of both public-and private-sector contracts.

INADEQUATE INFRASTRUCTURE.

The biggest obstacle to Central and South American e-commerce in the late 1990s and early 2000s was the lack of a comprehensive telecommunications infrastructure throughout the region. This problem was beginning to be addressed, largely by outside investors eyeing the region's explosive potential, by way of new phone lines, computers, information technology, Internet service providers (ISPs), and wireless technology.

Katz and Malkin noted that the structural difficulties in the region, as of 1999, were deeply rooted. For instance, only about 10 percent of the population was connected to a phone line, while the average gross domestic product per capita was less than $4,000—hardly conditions that bring joy to the hearts of e-commerce merchants. The phone line penetration was expected to rise—to a still-miniscule two per every 10 people—by the middle of the 2000s, while PC sales trends were moving in the right direction to eliminate some of the extreme disparity within the region.

However, developing regions such as Central and South America had a key advantage over the more developed regions. North America and Western Europe pioneered the Internet infrastructure and e-commerce. However, the less developed regions benefit from the hindsight those leaders provided, and can avoid the same mistakes in the nascent stages. Moreover, the telecommunications infrastructure largely will move straight to the more sophisticated models, such as broadband, rather than try to adapt the Internet to a scarcely existing infrastructure. Indeed, Microsoft in 1999 pumped $126 million into the Globo Cabo, a leading Brazilian television and cable company, to develop a broadband infrastructure, and other U.S. and European companies followed suit with their own deals throughout the region.

E-merchants throughout Central and South America needed to come up with alternative models to facilitate shopping and purchasing rather than simply mimicking the U.S. model. Credit card ownership was exceptionally limited, as low as 10 percent in some areas, according to Jupiter Research. To dramatize the problem, Jupiter studied one of the most upscale neighborhoods in the region's most economically developed nation, Brazil, and found that even there half of the households did not own a credit card. Thus, the overwhelmingly preferred payment method for e-merchants in North America and Europe was not feasible in Central and South America. Some solutions that have been furthered in the region were the development of alternative currencies specifically for use in Web-based transactions.

Even where users did have credit cards, they were relatively unlikely to use them over the Internet in Central and South America, where merchants generally assume little responsibility for their products—"where 'caveat emptor' is the conventional wisdom," as Brandweek put it. Security fears, big enough problems in the United States, were greatly magnified in Latin America and highlighted another challenge for e-commerce in the region: overcoming consumers' reluctance to shop online in the first place. These fears were faced in North America and Europe, and have been largely dealt with through implementation of improved encryption technologies to safeguard credit card numbers, along with the establishment of formal government-sponsored frameworks designed to address such issues. However, in Latin America the problems are far more deeply rooted, and may not be remedied by simple technological solutions.

BUSINESS-TO-BUSINESS E-COMMERCE SET TO TAKE OFF

In early 2001, World Trade pointed toward Latin America as the next great market for business-to-business e-commerce, claiming that the first few years of the new century would see the rise of a range of new B2B exchanges and startups, while the leading firms for the long term would take root. Unlike most North American firms, much of Latin American business, according to World Trade, still relied on manual, paper-based accounting, procurement, and inventory management systems. Because of this, the switch to B2B market exchanges should add significantly more than incremental benefits to companies in Central and South America, promising to dramatically streamline their value chains. Forrester Research predicted that, in the early 2000s, business-to-business transactions would account for 93 percent of all Latin American e-commerce activity. By 2004, Forrester indicated that B2B e-commerce in Latin America, including Mexico, would total $76 billion.

Business-to-business development in Central and South America also was aided by the fact that, compared to North American firms, industries in that region were heavily fragmented and relatively inefficient. Therefore, they stood to benefit from the ability to trade goods and supplies online rather than using the established infrastructure. World Trade insisted that successful business-to-business ventures in South and Central America would be those that catered to industries with high fragmentation among both buyers and sellers, company and industry-wide inefficiency, little to lose in overhauling existing technological infrastructures to incorporate B2B e-commerce, and large size.

Among the large markets that were most likely to embrace business-to-business e-commerce in South America are Brazil, Chile, and Argentina. Not only are these countries home to the region's strongest economies overall, their technological infrastructures are the most advanced. Because B2B frameworks are most effective in large marketplaces where liquidity is relatively assured, these countries were the most ideal.

THE OVERALL MARKET: BRIGHT SPOTS AND FUTURE OUTLOOK

Total e-commerce volume for the region, as predicted by Forrester Research, will reach $82 billion by 2004. While this represents strong growth and an encouraging trend for Latin America, that figure still amounts to a relatively small share of the global e-commerce market. By way of comparison, Forrester estimated that by 2004 the total e-commerce traffic in the United States would reach $3.2 trillion, while the Asia-Pacific region would total $1.6 trillion, and Western Europe would amount to $1.5 trillion. Trailing the Latin American region would be Eastern Europe, Africa, and the Middle East, which would reach a combined total of $68.6 billion.

Some analysts were especially optimistic about the prospects for e-commerce in particular countries, such as Brazil. With about half the region's population and the eighth-largest economy in the world, Brazil was the nation most coveted by e-commerce players for growth in the short term, and was the most common invading ground for U.S. Internet companies seeking to make inroads into the South and Central American markets. Jupiter Communications predicted compound annual growth rates for Internet penetration of 19 percent between 1998 and 2003; by 2003, some 20 million Brazilians will be online. Brazil clearly is the largest e-commerce player in the region, with total e-commerce sales expected to reach $64 billion by 2004, according to Forrester Research. The Northbrook, Illinois-based consulting firm Core Strategies predicted that "e-commerce will experience an explosion in Brazil no place else in the world will equal." Core sited characteristics of the Brazilian market that make it so favorable. Among them are the fact that 40 percent of the Brazilian population lives more than 20 miles from a retail center, with transportation sporadically available. Such demographic features, Core suggested, will encourage the spread of e-commerce. Also, the Internet infrastructure is in place in Brazil as it is in no other Central or South American country, with about half, or $17 billion, of the Latin American information technology market centered in Brazil.

Brazil also harbored the highest percentage of South or Central American Internet shoppers. Fully 31 percent of Brazilian Internet users reported making an online purchase in 1999, a proportion nearly as high as that in the United States. And, while still paltry, credit card use was rising more quickly in Brazil than in any other country in the region. As might be expected, Brazil also had the most online merchants, according to Business Week. Brazil, in fact, faced a glut of ISPs in the early 2000s, with more than 500 providers. Internet analysts insisted that a shakeout was on the way.

According to the report "Web Sellers Best Practices 2000: Chile and Latin America," compiled by the Chilean Chamber of Commerce and International Data Corp. (IDC) Chile, e-commerce in Latin America's six-largest economies, including Mexico, grew 117 percent in 2000 to reach $1.1 billion, representing 4.3 percent of all retail sales in those countries. The report noted that Brazil led the region with 27 percent of all online retail sales, while Argentina claimed 21 percent, Chile 15.4 percent, Venezuela 9.3 percent, and Colombia 6.2 percent. Argentina, another regional powerhouse, would rack up $10 billion in e-commerce sales by 2004, according to Forrester Research.

With the growing population of Spanish-speaking individuals in the United States, which has close geographical proximity to Central and South America, many U.S. Internet businesses were shifting to capture a Spanish-speaking market. A growing flow of money was going south, and U.S. firms were realizing extraordinary benefits from trading with businesses in Central and South America. Indeed, the region constituted an extremely contentious field among international players in the late 1990s and early 2000s, as a few United States-based Web portals spent that period battling for position in the Central and South American markets. Yahoo!, StarMedia Networks, and Microsoft squared off against Brazil's own Universo Online, Argentina's El Sitio, and a handful of others to stake a claim as the region's preeminent Web portal. The leading force in the Internet service provider (ISP) field, meanwhile, was Telefonica of Spain, which operated major ISPs in Chile, Peru, and Brazil, building on its ownership of several leading telephone companies.

The Latin American market, therefore, offered savvy investors—who may have missed out on the dot-com explosion in the more developed regions—another chance, and with the benefit of hindsight as well. Estimates variously place the Central and South American Internet markets three of four years behind that of the United States—a prospect that greatly delighted entrepreneurs and venture capitalists in the early 2000s.