Posted: 09/1997
Global Initiatives
Latin America:
A New Frontier for Those with Time and Energy
By Jason Gursky
While there still exist many profitable opportunities for carriers and resellers in the U.S. market, many are discovering that overseas markets offer larger growth rates for revenues and profits. For example, AT&T, MCI, Global One, WorldCom, ACC, Teleglobe and many other companies are focusing a tremendous amount of energy on building networks and customer bases in Europe in an attempt to be well established when the doors to competition open in the region next year. However, many have discovered over the past decade that Latin America is also a very dynamic region for investing time, energy and money.
This is so primarily because the debt crisis of the 1980s has passed, and the economies of most countries south of the border are growing at rates significantly higher than that of the United States. In Chile for example, growth rates have consistently hovered around 8 percent per year since 1990, compelling some to call the country South America's "Emerging Tiger," reflecting on the rapidly developing countries of Southeast Asia. Although most of the region suffered a small setback after the Mexico peso devaluation in December of 1994, the region has regained its composure, and investors are once again pouring their money into stock exchanges, corporate bonds, privatization's, concessions and even sovereign loans.
Most of this newfound growth and success has come on the heels of so- called neo-liberal economic reform measures that most countries in the region have implemented since the debt crisis. While oftentimes very painful for the citizens of these countries because of the subsidies and state-sponsored jobs they usually cut, this growth and success have led to many opportunities for foreign investors as governments have sold off state-run companies and allowed for competition in many sectors. This is no exception for the telecommunications industry. In the past decade nearly every country in the region has privatized the once state-owned telephone companies, allowing companies like SBC, Sprint, Telefonica de Espana, AT&T and Telecom Italia the opportunity to take stakes in companies who are experiencing phenomenal growth rates in both domestic and international long distance traffic. (See Table 1 and Table 2 for growth in international traffic.)
There are several reasons for the growth in these traffic levels. First, increased economic activity. As an economy grows, so does the level of telephone usage by its inhabitants. This is further emphasized by the worldwide trend of economic integration. As countries form treaties to make trade amongst themselves easier, companies find that international expansion is a worthwhile option. Latin America is no exception. Mercosur links Brazil, Argentina, Uruguay, Paraguay and Chile. The Andean Pact links Bolivia, Peru, Ecuador, Venezuela and Colombia. The countries of Central America and the Caribbean have formed a treaty organization called Caricom. And of course, Mexico has linked itself to the United States and Canada. This integration has resulted in increased cross-border economic activity, and thus telephone traffic.
Additionally, increases in tele-density are contributing to growth rates in traffic. While there are nearly 60 phone lines for every 100 inhabitants in the United States, in most countries in Latin America there are less than 15. Ten years ago, this figure was under 10 per 100. In Mexico, the most recently deregulated market in the region and a hot spot for U.S. investment, only one of three households has telephone access. This compares to 100 percent in the United States. As underdeveloped phone systems are built out over the coming decade in the region, the levels of both international and domestic traffic will continue to increase as they have done over the past decade, and will contribute to growth rates in traffic much higher than those found in the United States.
Finally, competition also increases the levels of telephone usage. Chile is the perfect example. Limited competition began in 1992, and in October 1994 the "multicarrier" market was initiated, allowing the end user casual access to any of the half-dozen telephone companies. A customer needed only to pick up a telephone and dial the three-digit access code of the carrier of their choice before dialing the destination number. This is similar to the 10xxx product in the United States. With so many choices at hand, the carriers decided large marketing campaigns and price wars were the way to differentiate themselves from each other. As a result, usage of long distance became an affordable option to most anyone in the country, particularly international long distance. Between 1993 and 1995 the level of outgoing Minutes of Telecommunications Traffic (MiTT) increased 121.9 percent (See Table 1). Such growth rates, while extraordinary, are not out of reach in any monopoly market recently turned competitive.
This is significant for the potential investor from the United States because over the next decade, most countries in the region plan to open their telecommunications markets to similar competition. The most widely known is the deregulation occurring in Mexico today. AT&T, MCI, IXC and Sprint (through Temex) are all investing heavily for a share of not only the current market, but also the growth of traffic that is expected to come from the three factors outlined above (i.e. increased economic activity, increases in tele-density and competition). By the end of the century, Peru, Colombia, Argentina and several of the Central American countries will more than likely subject their monopolies to some sort of competition. Brazil, the telecom manager's most desired market due to its size (more than 155 million people), will privatize by the end of the decade and subject the market to competition during the first 10 years of the next century. While the growth rates of Chile may not be equaled anywhere else, there will be both large and small pieces of the telecommunications pie to carve for companies willing to step in and compete.
Where then, does the small- to medium-sized U.S. telephone company or reseller fit in this rapidly changing region of the world? In nearly every niche of the market, if it is willing to invest time, energy and a little money. However, Latin America is not the United States. There are barriers to entry, such as language, culture and non-transparent and unenforceable laws, and a myriad of other factors such as delays in customs houses, complicated tax laws, ownership laws, etc., that must be overcome before success can be claimed.
Country-by-country details on these issues can be accessed through research with government organizations or specialized consulting groups. To further clarify the variety and caliber of opportunities in this region, the remainder of this article is dedicated to outlining the distinct regions within Latin America that exist, some of the market niches that can be leveraged by the smaller players, the general barriers to entry that will be encountered in trying to enter the markets, and finally some of the general keys to success in investing and beginning operations in the region.
Introduction to Latin America 101
Although Latin America is often thought to be a homogenous group of countries sharing a similar language and culture, it is in fact made up of unique countries and regions with many historical, cultural and language differences. These differences should contribute significantly to how a potential investor approaches the region.
In general, the region is most often divided into the following regions:
Mexico and Central America--While geographically similar and near each other, Mexico and the countries of Central America (Honduras, Nicaragua, Guatemala, Costa Rica and Panama) are quite different. Mexico, a country of 80 million people, has been ruled by the same political party (the PRI) since the 1930s, while the Central Americans (Costa Rica being the exception) have experienced numerous changes in government regimes and oftentimes decades-long civil wars. Mexico has a diverse economy, supporting manufacturing, mining, agriculture and services, while the Central American economies are largely dependent on agriculture. Mexico, except for its southernmost provinces, is largely a mestizo population a mix between Spanish and Indian ancestors. The Central American countries have populations that are near half-indigenous and, as a result, many different languages other than Spanish are spoken in these countries. In the realm of telecommunications, Mexico, behind Chile, is at the forefront of Latin American deregulation. The Central Americans, on the other hand, are at the beginning of the privatization/deregulation process.
The Caribbean--This sub-region of what is considered Latin America by most, contrasts heavily with the other sub-regions. Obviously mostly island countries (Venezuela, Suriname, Guyana and French Guyana are found in the northernmost part of South America), most of their economies are dependent on tourism and have very little indigenous manufacturing, mining and agriculture. Most of the populations are of African descent due to the heavy concentrations of sugar plantations that existed on the islands during Spanish, Portuguese, English, French and Dutch colonial rule. Most countries speak the language of their colonial ancestors. As far as telecommunications is concerned, a large number of islands are dominated by Cable & Wireless of Great Britain. However, privatization and competition have occurred in some countries such as the Dominican Republic.
The Andean Countries--Colombia, Peru, Ecuador and Bolivia are dominated by the second highest mountain range in the world, the Andes. With the exception of Bolivia, which no longer has a coastline due to a war it lost last century to Chile, all countries have three distinct regions within themselves: the coastal region, the mountain region and the Amazon jungle region. The people of each region follow different customs and many speak different languages (all sharing Spanish as their common language), and they are economically dependent on different industries. As well, the populations who live in the mountains are more indigenous than those living on the coast. This makes doing business in Quito, located in the Andes, quite different from doing business in Guayaquil on the coast. All of the countries have privatized their telephone companies, and Peru and Colombia are forming concrete plans for competition.
The Southern Cone--This region is made up of Brazil, Argentina, Chile, Uruguay and Paraguay. All are very different from each other, not only in history (Brazil was a Portuguese colony and the language spoken is Brazilian Portuguese) but also in culture, geography and economy. Brazil is a huge country with various levels of development (Sao Paulo) and underdevelopment (the northeast of the country and the jungle regions), different races (African, indigenous and European descent) and different cultures (each corresponding to the ancestral heritage of the groups previously mentioned). Argentina, while mostly rural and dependent on agriculture, possesses Latin America's most cosmopolitan city, Buenos Aires. Paraguay and Uruguay are small countries with small economies that are often overlooked by the outsider. Chile, the world's skinniest country, has so many different climatic zones and economies, from the driest desert in the world and the copper-rich mines located in its north, to the grape-growing central valley, to frozen lands of Antarctica, that it would take an entire book to describe them all. As well, each differs significantly in the development of telecommunications competition. Chile, according to many experts, has the most competitive telecom market in the world, while Brazil has one of the most monopolistic. Argentina has privatized, but no real competition exists. Uruguay and Paraguay are just beginning the whole process.
Latin America is obviously a very diverse region. The Inca descendants living in the Bolivian antiplano have very little in common with the Caribbean islander or the second-generation European in Buenos Aires or Santiago. As well, the "Banana Republic" economies of Central America have very little in common with the increasingly diverse economies of the Southern Cone and Mexico. A North American telecom manager must thus be intimately familiar with these differences not only when introducing and marketing new products, but also when attempting to maintain and grow a company in the region.
Opportunities Abound
With so many differences in history, culture, language, and telecom deregulation, do concrete opportunities exist for the U.S. carrier or reseller? Yes. The following is a brief and non-comprehensive list of a few of them:
Prepaid Cards are probably the easiest way to enter a market and gain market share of international traffic. The cards can be targeted to people traveling to the United States, or if an 800 number can be arranged, to people in-country making international calls. The most important factor is finding the right distribution channels.
Call Back is the classic example of how U.S. companies have entered the regional market. With monopoly practices and pricing still found in most countries, there are opportunities for callback growth. Again, the key is distribution channels.
Paging can be found in various levels of market development throughout the region, from the paging-crazy country of Venezuela to the young markets of Central America and the Andes. While this product requires expensive capital outlay, resale is not out of the question for companies who feel they know the markets.
Internet Access is still a very small market in comparison to the United States, so the growth rates in the region are exciting. The easiest way to enter this market is to offer independent Internet service providers or the local monopoly access to the U.S. Internet backbone. The vast majority of Internet traffic in Latin America is hubbed through the United States, thus allowing those with superior access to the backbone there an advantage in winning Internet traffic. The key is to be able to access U.S. teleports and the network access points (NAPs) at a reasonable cost. Competition will be stiff in competing against global carriers like Teleglobe, MCI and AT&T, but those with a proven product and customer service should be able to win business.
Long Distance will offer many opportunities through the traditional 1+ product in the region. In some countries, however, the financial barriers to entry will be prohibitive, as many governments have decided to sell the concessions needed to offer such services. Large companies such as MCI, Telefonica de Espana, Telecom Italia and Bell South, among others, are sure to offer large dowries to enter the market. That being said, some countries will follow the Chilean model, whereby nearly anyone may apply for a free concession as long as they have a year or so to fulfill all of the requirements.
Resale of Long Distance is not yet a strong niche, but once a market has opened and more than one long distance network has been built in a country, resale opportunities will more than likely become available. This has occurred in Chile, where the three national long distance networks that have been built can together handle more than twice the long distance traffic that is produced by the country's 14 million inhabitants. Because carriers who build such networks want to keep them near capacity, they are often open to both traditional and non-traditional manners to increase traffic over the networks. Resale is the one of the easiest ways.
Wireless Local Loop may be the answer for companies with technical expertise. The growth of wireless local loop in Latin America over the next decade will be stimulated by the need for telephone companies to install large numbers of telephone lines and by their ability to do it quickly and in a cost-effective manner. Many licenses have already been issued throughout the region, and more are to come for secondary cities.
Wholesale is a market dominated by companies such as Teleglobe, AT&T, MCI, Telefonica de Espana and Telecom Italia. However, new companies that enter the telecom market in each country will need to terminate international calls and gain access to many of the products the former monopoly offers in order to compete. Carriers willing to establish facilities with new carriers and who can offer attractive prices for international transit, refile, Internet access and products such as paid 800 and international toll-free service will be able to garner new clients, and thus a piece of the growing Latin America telecom pie.
Entering the Region: Barriers and Keys to Success
Identifying opportunities in the region is fairly easy. Actually implementing a plan to take advantage of them is much more difficult. Barriers to entry ranging from government bureaucracy, corruption, and economic elites stand in the way. Thus, knowing the culture of a country and the right people becomes very important. For example, some governments are known to be so corrupt that it is near impossible to get things done without "befriending" the person who makes the decisions. However, this is not true everywhere. An attempt to do this in Chile would land you in jail overnight. Knowing the culture of each country will save you both money and time.
Economic elites are also very important actors in attempting to do business in Latin America. As most casual observers know, income distribution in the region is very unequal, and power, both political and economic, is very concentrated. There are very few middle-class, middle managers who have the power within the government or within a company to help push through the types of new business opportunities most U.S. telephone companies are looking to implement. Most important decisions are made by ministers in the government and general managers in the private sector. El Salvador is probably the most extreme example, where 14 families reportedly control nearly 80 percent of the country's entire economy. Without access to these elites, realizing the full potential of any venture will be limited.
Language, government customs agents and investment and repatriation laws, to name just a few, are also significant barriers to entering a Latin American market. Knowledge of Spanish, and Portuguese, if doing business in Brazil, are imperative. While the general manager of a company may speak English, many of the supporting actors will not, making business relationships awkward and slow moving without proficient knowledge of the languages spoken in the region.
Moving expensive capital equipment, such as switches and earth stations, through government customs can also be difficult. Import laws are just as complicated as those found in the United States, and when the corrupt behavior of customs officials and unions often found in the region is taken into consideration, importing such equipment appears a daunting task. Investment and repatriation laws can also act as barriers to entry. Most governments have passed legislation requiring capital investment to remain in the country for a specified period of time. As well, many restrict or heavily tax repatriated profits. All of this speaks nothing of whether deregulation has occurred in the country and if the type of business a U.S. carrier would like to do is legal.
Thus, there are several keys to success to doing business in the region:
- Know the laws of the country. Without expert legal advice about what can and cannot be done, attempting to establish business in the region is foolish.
- Know the culture and the language. Doing business, more so than the United States, is highly dependent on relationships. Without knowing the culture and the language, establishing such relationships will be very difficult.
- Establish strong contacts among the political and economic elites in the industry. Without them on board, business will move and grow slower than desired.
There are three basic ways to achieve these keys to success:
- Enter a joint venture or marketing agreement with a local company. Well-established companies already have the contacts and business infrastructure in place. While not necessarily telecom experts, companies that have access to distribution channels for such products as prepaid cards, callback, pagers and traditional long distance are the most attractive. As well, a joint venture with a local company will allow the opportunity to more easily offer new products and services when regulation permits.
- Partner with a North American company that has already established itself in the region. Successful callback companies, for example, already have distribution channels in place and a branded name in the countries in which they operate. As well, the more successful callbackers are intimately familiar with local laws, may already have local licenses where allowed and certainly know the languages and cultures of the region.
- Go it alone. Hire the people who speak the language, know the culture and are business-savvy. This alternative, of course, requires time and patience. And because time can equal money in business, this option should be carefully weighed.
Conclusion
Due to increased economic activity, integration, local phone lines and competition, Latin America is and will be a dynamic place for U.S. carriers and resellers to invest time, energy and money. However, success at home does not translate to success abroad. Both time and energy are required to find the right partners, establish and build relationships with governmental and economic elites, manage government and private sector bureaucracy and become knowledgeable of the laws, culture and customs of each country.
As many larger carriers have learned, throwing money at investments and managing projects themselves from headquarters does not always produce the desired results. Only those who partner with experienced companies in the region or who recruit or develop their own Latin Americanists will be able to enter and survive in the region.
Jason Gursky is the Gerente Comerical for PTT Chile, a
subsidiary of El Segundo, Calif.-based Justice Technology.
For information, call (310) 526- 2026.
