Latin America’s biggest tech opportunity
Life reboots at 7 am in the streets of Bogota and traffic builds up as work commuters frenetically flood the streets. The presence of technology is palpable in the streets of the Andean capital. “Rappitenderos” carrying orange backpacks swerve their motorcycles through the traffic jam, surged-price ride-sharing vehicles pick up pedestrians left and right, and electric scooters swiftly move through bike lines avoiding the chaos of the morning commute. Every interaction begins with an internet-enabled device, and that is now a norm in Colombia and across the entire Latin American region.
A robust tech ecosystem is developing in LatAm, spearheaded by a group of visionary players. Venture capital investment grew from $500 million to $1.1 billion between 2016 and 2017 — and by the end of last year’s first quarter VC investment had already reached $700 million. Latin America’s increment in technology investment is just a glimpse of an evolving ecosystem, where entrepreneurs are re-thinking existing business models to capture new consumption preferences among a more ubiquitous middle class.
Technological growth and the appearance of new startups has been possible due to increasing institutional support across the region. The creation of government-funded accelerators, changes in regulation and new initiatives to improve investment fund’s transparency have been the main facilitators. The Latin American tech ecosystem has now achieved a very consequential inflection point, and a key step forward will be to understand customer spending patterns and build data-driven businesses that can capitalize on the growing unmet needs of the middle-class.
It is projected that by 2030, Latin America’s middle class will be represented by 400 million people (43% of the population), combined consumption of middle-income earners will amount to $5 trillion and smartphone penetration will reach 80%.
These mind-boggling growth prospects were once the foundation of a now avant-guard Chinese economy. Fast growing consumption power of the internet-savvy middle class fueled Chinese tech businesses to innovate and scale up rapidly to capture the ever-changing demand. Concurrently, technology and data allowed businesses to significantly reduce cost of services and effectively offer a variety of personalized choices.
As if entering a time machine, Latin America’s tech ecosystem and demography now resemble the booming tech environment that China capitalized on no more than a decade ago.
China’s tech ecosystem revolution
Walking around the streets of Shanghai one can immediately notice that life moves at a much faster pace, and that an invisible web connects every person on sight. In the early 2010’s,Chinese entrepreneurs and investors noticed that there was a big opportunity to capitalize on higher consumerism. As incomes rose, household spending budgets and daily consumption shifted away from mundane necessity spending into identity-driven discretionary purchases.
Higher disposable incomes combined with high mobile penetration created the necessary foundations to develop a highly profitable lifestyle services sector in China. Business models began to focus on reaching customers’ new demands quickly, using agile iteration methods and big data. The Chinese sensibly analyzed customer feedback and identified business models that could capture larger wallet sizes and adapt to changes in price sensitivity.
A company like Meituan-Dianping is a clear example of Chinese technology adapting to a rapidly growing middle class and capitalizing on new consumer habits. Meituan was founded in Beijing in 2010 by Wang Xing and started as a group-buying platform offering customers products and services at significantly reduced prices. In 2015 it acquired Dianping in order to expand its service offering towards the high-frequency service category, especially within the restaurant guide and food-delivery sectors. The company positioned itself as a lifestyle services platform, offering the middle-class a well-rounded and fulfilling experience. Today, anyone living in China can have immediate access to on-demand food delivery, hotel booking, movie ticketing, education, entertainment and payment services all in one place. Any platform that can offer that level of convenience and reliability will surely capture the hearts (and wallets) of consumers with a newly-found urge to spend more.
In just 4 years, Meituan-Dianping was able to capture 62% of the on-demand food delivery market in China and become the leading platform in the O2O (online-to-offline) lifestyle services market. Meituan’s success can be attributed to its ability to identify and provide any product or service that is frequently used in a Chinese person’s daily life. However, its key differentiator revolves around the engaging consumer experience the user enjoys while using the platform. Meituan’s proactive attitude towards investing in artificial-intelligence, powered dispatch capabilities and smart-delivery features has made it one of the most reliable and customer-centric platforms in the region.
Success stories like Meituan’s reflect the extent of opportunity that exists in emerging markets. Twenty years ago, China discovered that as the country experienced two-digit percentage growth in its middle-class, consumers started to seek convenient products that would enhance productivity or improve leisure time. The Chinese focused on ecosystem-building methodologies to consolidate value chains and reduce operational costs. In addition, customer engagement innovations arose in the digital space to boost growth and increase return customers — prioritizing a seamless customer journey through the best possible O2O experience.
Chinese investors’ experience working with cross-sectional tech businesses is an under-appreciated source of practical knowledge that can benefit ripening tech ecosystems around the globe.
China The Explorer, moving to new emerging tech markets
As China’s lifestyle, e-commerce and other B2C sectors became increasingly saturated and middle-class growth prospects stalled, investors and tech companies started to look outwards. Although historically famous for its “Made in China” tagline at the beginning of the century, China now wants to market its “Designed in China” brand. If there is something that Chinese investors and entrepreneurs have learned is to bypass legacy business models and create new industries better suited to take advantage of available technologies and population needs. In fact, credit card payments and hardware payment devices never caught on in China. Instead, mobile payments became mainstream — resulting in a mobile payment market 50 times larger than that of the U.S.
The logical next step for China was to tap into growing opportunities in other emerging countries, and use its expertise bridging technology and consumer experience to provide large middle-classes with virtually any lifestyle goods or services.
The “Going Overseas” wave of the Chinese tech sector is already happening in the neighboring markets, like India.
By 2016, half of India’s 1.2 billion population was represented by middle class citizens (defined by Mumbai University as household spending between $2 to $10 per capita a day) and 680 million people had mobile devices.
With a large and growing middle class and increasing IT&Mobile penetration, India had the foundations that Chinese tech investors and large startups had grown to understand very well.
Indian lifestyle, e-commerce and marketplace industries have highly benefited from the participation of Chinese investors and large tech corporations. A large part of the benefit comes from China’s earned ability to holistically view emerging markets as an ecosystem made up of different moving pieces and capture new markets across all verticals.
In 2017, tech giant Alibaba and large investor Ant Financial invested $680m in the Indian payment processing startup Paytm. The acquisition by these players made sense for two principal reasons: 1) it deemed an opportunity to support the growth of the leading online payments provider, and 2) it positioned both firms strategically to build an ecosystem around lifestyle services and capture India’s growing middle-class.
Ant Financial investors (majority owners at Ali Pay) have frequented Paytm operations in India to establish information-sharing practices and further complement Paytm’s latest pivot to offer e-retail capabilities. The investment firm’s commitment to Paytm goes beyond capital and is in fact focused on developing operational synergies to build an ecosystem for the middle-class. Paytm is also entering the movie-ticketing space, hoping to become a one-stop shop for India’s leisure-seekers and a reliable platform for online payments across the country.
China’s ecosystem-driven perspective has given investors and tech companies an upper-hand when building large businesses across sectors. That level of visibility when creating new business models can yield massive competitive advantages in large emerging regions; where developing top-bottom consumer infrastructures via technology have demonstrated successful results.
A great partnership opportunity for Latin America
Latin America has already achieved a crucial inflection point, with over half of its population being internet-connected through smartphones. When China’s 2.0 technological economy surfaced at the turn of 2010 and its BAT (Baidu, Alibaba, Tencent) companies emerged, the country’s mobile penetration was growing as fast as Latin America’s is today and the middle class represented a similar percentage of total population. BAT companies were able to capture larger market shares by taking on a user-targeted approach, gauging more customer feedback and quickly iterating through disruptive business models to ultimately offer products better suited to their users’ needs.
Latin America resembles a similar ecosystem today. Forecasts estimate that the region’s middle class will represent 35% of total households by 2020. Like China in 2010, mobile penetration in Latin America is quickly growing and it’s expected to reach 70% next year — which means that around 463 million people will be connected through a smartphone device. As a result of enhanced connectivity and rising incomes, the region has enjoyed three to four-digit percentage deal-value growth in consumer sectors like e-commerce, marketplace, mobility or fintech. LatAm’s tech growth reflects consumers’ increasing demand for new products and services that are now seen as accessible and that are perceived to improve life’s quality standards.
Latin America can greatly benefit from analyzing success and failure cases in China and using Chinese practical knowledge to leapfrog to new capabilities and efficiently grow new businesses for the middle class. While the technological ecosystem is quickly evolving in LatAm, the region still lacks the practical expertise that the Chinese have acquired through years of iteration and R+D. LatAm is not yet equipped with the peripheral vision that Chinese investors and tech companies have obtained from building companies that can capture market shares across the entire value chain. The Chinese have developed a sensitivity towards identifying and building business models that can solve a wide range of pain points through a one-stop shop and have relied on advanced data analytics to gain and lock-in their users’ loyalty.
With a new wave of Latin American middle-class consumers emerging, tech players can seek competitive advantages by developing enduring business models focused on fair prices and convenience. Combining the entrepreneurial drive now present in LatAm with the ecosystem-building view pioneered by the Chinese, the region could quickly evolve into a self-sufficient and tech-oriented economy.
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Reach out to Jose Rodriguez with any inquiries or ideas: [email protected]