Recently
I was having drinks with a colleague of mine from a major European
analyst firm and we began the debate around market expansion and the
future of doing business in Latin America. While many organizations find
it compelling to enter a market that has substantial opportunities,
companies looking to expand into Latin America should do their homework
before they make an investment in that area. In Latin America, the
business, technological, and political environment is much different
from the United States and other areas of the world. Before companies
expand into the Latin American market, there are a number of issues that
must be researched and analyzed. Without due diligence, a company may
suffer substantial financial and market opportunity losses.
Expanding
into Latin America will prove different from domestic, European or Asia
Pacific market expansions. Business models and marketing strategies
that are effective in the United States may not mesh with the cultures
of Latin America. The prevailing political, social, economic, and
business environment in the different countries and cultures will often
times dictate the development of solutions unique to the circumstances.
Companies need to consider the multiple and diversified cultures in the
region, the stability of the local currency and political structure, the
state of technology, and the purchasing power of businesses and
individuals. Thorough market research on the region is essential prior
to entering the market. The information gained will provide the basis
for internal infrastructure development requirements and reasonable
growth expectations.
Political
environment: Some of the issues to research first include the political
system in place, the strength and stability of the current regime, and
the government's position on technological innovation. Determine whether
the government is considered to be populist or corrupt, and whether
elections generally are considered to be free and democratic or fraught
with inconsistencies and allegations of fraud. If the findings point to
political discord, then the risks associated in entering the market are
greatly increased. Political instability can have substantial
implications on international trade. Foreign investment tends to dry up,
leading to an economic slowdown and a subsequent devaluation of the
local currency, thereby reducing the locals' ability to purchase foreign
products and services.
But
democracy is expanding in Latin America. With democracy, new markets
are opening up, and opportunities for technology companies grow. Many
governments in Latin America are now focusing their attention on
infrastructure development, and some have recently privatized their
telecommunications and other industries to increase foreign investment
and the speed of development. Latin American countries and companies are
leapfrogging over older technologies, and are building the necessary
infrastructure to compete on a global level. Understanding the priority
that the local government is placing on technological development will
assist companies in identifying growth opportunities and the suitability
of their products or services.
Regional
trading alliances (e.g. CAN, OAS, NAFTA, CAFTA, Southern Cone, etc.)
should also be researched. They are growing rapidly and are helping make
export-import laws less restrictive. Companies that are considering
entering the market must have a solid understanding of the laws,
particularly as they relate to their business. This knowledge will
influence a company's decision on whether to enter the market, where
they enter, and how to enter. Reputable law firms located in the
targeted markets, with experience in the company's line of business,
will prove to be invaluable resources for this research, and will
provide the added benefit of introducing the company to their network in
the region. Additionally, there are several analysts who are
knowledgeable about region and country specific regulations that could
save you considerable money and keep you from having to hire a lawyer.
Currency
stability: Another area to consider is the stability of the local
currency. Brazil is one of the region's strongest markets for software
solutions providers, but the fluctuations of the currency, the Real, has
made many companies nervous about entering the market. With any
international market expansion, there are increased financial risks.
Companies need to review the current market valuations, historical
valuations and have a good understanding of the country's monetary
direction. Even slight fluctuations in a country's currency can
translate into substantial losses - especially with the current
condition of the US dollar. Trade terms and foreign currency hedging can
help mitigate some of the risks. Investigating the standard trade terms
of the local country (e.g. payment in U.S. dollars vs. local currency,
cash in advance, letter of credit, documentary collection, open account
using export credit insurance, and open account) will also assist in
assessing the risks of expansion. Companies with little experience in
foreign currency exchange, international trade terms and other
export-import issues should secure the services of a consultant or
financial institution that possess expertise in the targeted country.
Cultural
understanding: Business practices are different in Latin America, and
vary from country to country. Companies must understand that the pace of
doing business in Latin America is traditionally slower, particularly
when negotiations are underway. Nobody rushes into business in the
region. Pleasantries are mandatory before jumping into business
discussions. Relationships with a long-term commitment are the norm.
Best practice requires that companies understand and embrace the local
business customs -- not doing so could shut the company out of the local
market.
Other
cultural issues to examine are related to the company's product or
service, and its usefulness in the local business environment. Some
modules in software packages will need to be modified or removed.
Localization (translation) capabilities must also be evaluated. Again,
local business partners will be able to assist in addressing these
issues and other cultural modifications necessary for success.
Purchasing
power: Sixty percent of the buying power in Latin America is controlled
by the top 20 percent of the population. This demographic has an
average income that exceeds three times the regional average. Not only
is this wealth concentrated in certain individuals, but also in
geographic areas. Typically those with the greatest level of purchasing
power, both individuals and companies, are centralized in the country's
capital city or other large metropolitan areas. Within these areas,
wealthy individuals tend to concentrate even more by living in only
three to four neighborhoods. This concentration of wealth makes them
easier to target, and may make business models that have been
ineffective in the U.S. feasible in Latin America. By researching the
idiosyncrasies of this demographic; companies will gain invaluable
insights that will guide their business and marketing strategies.
To
identify growth patterns and market potential, research these factors:
the historic trends, Gross Domestic Product, per capita income, and
average disposable income for the targeted country. Two
factors are vital to a company's success. First, the market entrant
must identify the top 20 percent prospects with purchasing power.
Secondly, the entrant must develop relationships with the right
individuals within this group. In Latin America, numerous industries are
oligopolistic in nature. A handful of large companies control
substantial portions of the market, and many of these companies are
family owned. Connecting with the patriarchs of these families will,
with time, open the doors to their network, and hence, additional growth
opportunities. As relationships take time to develop in Latin America,
initial research must include a list of key individuals. Native agents
and, to a lesser extent, consultants with expertise in the region can
assist the company in identifying and developing relationships with the
players.
Technological
Infrastructure: Companies need to know which technologies are in use in
the country that is a candidate for market expansion. For the most
part, Latin American countries do not have technology as current as that
used in the U. S. Although this is changing, Latin American countries
are behind the technology curve because of expensive set-up and
operating costs.
Market
entrants in Latin America need to understand the candidate country's
technological infrastructure, the role of the local government in its
development, and the competitive trends shaping the business
environment. An entrant's research should include a broad, overall
assessment of the region's infrastructure, and deep evaluation of
technology as it relates to the entrant company's market. But keep in
mind, as the different markets continue to open up, U.S. firms that stay
out of the region due to concerns over the current state of
technological infrastructure will lose. Several analyst firms such as
Pierre Audoin (Sourcing & Software), IDC, Yankee & Pyramid
Research (infrastructure & Telecoms) have solid coverage of the
Latin American market and could be a valuable resource to help you get a
solid understanding of the technology landscape.
Technology
companies that are considering expanding into the Latin American market
must conduct sound market research before they enter. The region is
experiencing tremendous growth, and could provide substantial increases
in a company's revenue and profits. Success in Latin America is tightly
tied to understanding the local political systems, currency stability,
purchasing power, and state of technology, and, embracing the local
business practices and cultures. Not doing so can lead to substantial
financial losses, and can shut the company out of the local market.
