John Price: The forces shaping growth in Latin America right now

Disruption is needed to boost productivity, but adjustments will take their toll on legacy players.

Uber began operating in Mexico’s capital in 2013 with 20 drivers. Today, it is approaching 500,000 drivers and an estimated 12 million customers across Mexico, or 13 percent of all Mexicans over the age of 15. In the U.S., with four times the per capita income of Mexico, Uber has reached an adult customer penetration rate of 15 percent, after ten years of service. The success of Uber in Mexico and across Latin America’s largest markets is not an aberration. Today, Latin America is the world’s fastest-growing region for other disruptive business models like Airbnb, Coursera and Netflix.

Why is Latin America so ripe for disruption? To begin with, its moribund service sectors have remained untouched by globalization. That is a stark contrast to much of Latin America’s manufacturing and agricultural sectors, which go to work each day competing on a global scale thanks to close to 100 trade agreements signed by Latin American countries over the last three decades.

Embracing the gig economy

Disruptive new business models, most of which are imported, are compelling because they attack and exploit many of Latin America’s greatest economic weaknesses. Mexico has long boasted official unemployment levels far lower than the U.S., Japan or Europe but in fact, an estimated 25 percent of adult Mexicans who do work, do so less than 40 hours per week, and not by choice. Furthermore, the rigidity of labor laws in countries like Mexico, Brazil, Argentina and Colombia means that 30-50 percent of workers operate informally without receiving legislated benefits and often paying only partial taxes. As a result, gig-economy business models that offer flexible employment are met with enthusiasm. Long before Uber, multi-level marketing firms like Avon, Amway and Herbalife achieved massive success in Latin America by empowering the most underemployed demographic: women.

Another structural weakness ripe for disruption in Latin America is that of oligopolies and monopolies. Mexico and Brazil have tightly controlled the number of television companies ruling the airwaves. This created media giants like Televisa and TV Azteca in Mexico and Globo in Brazil. The result was limited programming, too many ads for the viewers’ liking and excessive rates for advertisers. Little wonder, then, that Netflix is taking both markets by storm. In 2017, Mexicans watched more Netflix content per user than any other of Netflix’s 190 worldwide markets. In fact, five out of the top 10 Netflix binge-watching countries in the world are found in Latin America: Peru (3rd), Chile (5th), Brazil (6th), and Argentina (7th). When customers are suddenly presented with choices for the first time, they tend to glom. The same thing happened in the U.K. with the arrival of cable and satellite TV after decades of operating with four television channels.

Often the thing that is facilitating monopolistic practices is Latin America’s greatest structural vice: corruption. People arriving at Mexican airports who want to take a taxi are normally obliged to use the nationally controlled airport taxi monopoly service, which is priced three to five times the cost of Uber. Little wonder that Mexican legislators (who many speculate share in the excessive profits of the national taxi service) have fought hard to prevent Uber’s access to airports.

The rise in online learning

Public education in Latin America, which receives more funding (as a percentage of GDP) than in Asia, consistently produces lackluster results with students scoring well below their Asian, European, North American and North African counterparts on international PISA and other tests. When Mexico took on education reform during the Peña Nieto administration, it was discovered that the national teacher’s union was grossly corrupt. Its director was thrown in jail, accused of embezzling millions while employing teachers who had not even graduated from high school but acquiesced to paying unmandated portions of their wages to union heads, and through them to politicians. It’s hardly surprising, therefore, that online education is growing at breakneck speed in Latin America. Coursera, the world’s largest player in the Massive Open Online Course (MOOC) market, began only four years ago developing original content in Spanish in collaboration with LatAm universities. When reported in 2017, enrollment for Coursera grew faster from LatAm countries than from any other region around the world. As far back as 2014, Microsoft provided free online programming courses to over 1 million students in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico and Peru, giving anyone with an internet connection a chance to learn some bankable IT skills.

Traffic drives e-commerce sales

Another Achilles heel in Latin America’s productivity is traffic. Of the world’s 25 most congested cities in the world, five are in Latin America, 10 in China but only one in the U.S. Traffic is an important driver of demand for e-commerce. Today, e-commerce sales of physical goods in Latin America represent about 2 percent of formal retail, closer to 1.5 percent of total retail product sales. That is a far cry from the estimated 18 percent of penetration of e-commerce/retail in China. The expansion of Alibaba from its base in Brazil and Amazon, and from its success in Mexico, will provide a supplier-side growth push on e-commerce, which Latin Americans clamor for. Beyond the convenience factor, e-commerce provides disruptive cost savings. Brazilian electronics consumers – who traditionally pay three times the retail price of the same goods in the U.S. or Asia – can now buy their next laptop or cellphone directly from a Chinese manufacturer. Even after paying import tariffs, e-shoppers save 30 to 40 percent versus buying in a Brazilian store. For those living outside of Latin America’s largest cities, e-commerce offers choice. According to a Credit Suisse report, there is only one square foot of retail space per capita in Mexico and 0.6 square feet in Brazil, versus 21.5 square feet in the U.S. For all of the reasons cited, retail e-commerce should grow close to 150 percent in Latin America over the next six years.  

Big opportunities for logistics

The logistics industry, particularly the highly regulated transportation sector, will undergo disruption. E-commerce offers a bold new opportunity for logistics players but also puts their traditionally asset-heavy business models to the test. Last-mile delivery of e-commerce packages is particularly vulnerable to disruption from Uber-like new players who leverage drivers’ cars and can deliver in hours what used to take days. Companies like Chazki, the Peruvian startup now also operating in Argentina and Mexico, employs independent drivers navigating their own cars, without cargo licenses or special vehicles or union labor wages. At the other end are cargo players who traditionally kept their pricing out of the public domain, making it difficult to shop and compare. Enter Gurucargo, originally from Uruguay, which formed a marketplace where cargo service buyers could compare and contrast multiple cargo providers like ticket purchasers do on Expedia.

The disruption of different segments of the transportation sector puts an added premium on controlling the client tower, the design and execution of the loftiest end of the logistics supply chain. Those who control the 4PL functions of logistics clients will ultimately have the power to reap the benefits of disruption by trimming excess hard assets and focusing on customer service and a software-driven approach to managing customers’ global supply chains.

John Price is Managing Director of Americas Market Intelligence and a 23-year veteran of Latin American competitive intelligence and strategy consulting. 

Published: April 2019

Images: Nina Tiefenbach for Delivered.