Small Businesses Grow in Latin America

In Latin America small businesses are thriving. So is the area's optimism—and its use of technology.

In Latin America, the overwhelming majority of companies are small. But the dreams grow bigger every day because:

• Currencies are stabilizing
• Inflation is moderate
• Debt is being managed
• Although interest rates in some countries are high, the foreseeable political future appears orderly

After years of sluggish growth, Latin American economies are expected to hit an average annual GDP growth of 4.8 percent through 2008.

According to the recent 2005 Net Impact study by the Momentum Group, Latin America spends less than any other major region (only 1.4 percent of its GDP) on IT investments, but two of the primary ingredients for growth-access to technology and the money to buy it-are both becoming easier to obtain.

"A stable macroeconomic climate is key for the region's small companies to flourish," says Gabriela Baez, a senior manager at Pyramid Research. Ricardo Villate, program manager of Enterprise Solutions for IDC Latin America, agrees. "I don't see a lot of serious threats on the immediate horizon," Villate says. "There is always uncertainty, but these days things are much more under control."

The State of the Region

Latin America includes some 33 countries, a combined population of more than 500 million, and three main languages: Spanish, Portuguese, and English. The biggest economies are those of Mexico, Brazil, Colombia, Venezuela, Argentina, Peru, and Chile.

According to IDC, which analyzes and predicts technology trends, businesses with between 10 and 99 employees represent 50 percent of the employers in Latin America. Pyramid Research estimates the ratio of SMBs to large corporations at 13 to 1, with more small businesses to come.

According to market-research firm AMI-Partners, PC penetration among SMBs in Latin America is about 42 percent overall, with Brazil at 50 percent and Mexico at 48 percent. Broadband penetration is estimated at 11 percent of all SMBs, compared to Western Europe at 56 percent. "The countries that are slower to adopt new technology will be at a tremendous disadvantage [in world markets] for some time," warns Anurag Agrawal, chief operating officer for AMI-Partners. But eventually, he says, they'll be able to skip generations of older technology, implementing the latest systems as their initial investments. "Despite problems, there is considerable potential for IT growth in Latin America, especially among the SMBs."

The Trends

Analysts are seeing positive activity in IT spending and adoption. A Pyramid survey of 400 SMEs in Latin America conducted in January of this year shows the following:

• Some 13 percent planned to adopt broadband in 2005, with 12 percent planning to migrate to Voice over Internet Protocol (VoIP) phone systems.
• Broadband prices should continue to drop.
• Companies need to outsource IT management to address limited or nonexistent IT staff.
• More than 30 percent expect their technology spending to increase this year.
• Wireless use is significant-about 70 percent of companies subscribe to mobile services.

Both IDC and AMI forecast that IT spending will continue to grow in Latin America at significantly higher rates than in the United States or Western Europe.

"We expect that SMBs will benefit from the Latin American governments' willingness to be big IT spenders in the near future," says Agrawal. "The governments are increasingly using IT as a means to modernize internal processes, improve services, and increase transparency to citizens."

The Needs and Drivers

"What is wanted is greater productivity and ways to be more competitive, to optimize our resources," says Carlos T. Pinto, who heads the computer department at Minera Michilla, a mining company with about 425 employees near Antofagasta, Chile. Minera Michilla is somewhat ahead of other Latin American companies of the same size in its use of networking technology: It is already using videoconferencing and wireless technology and is testing VoIP.

Like Minera Michilla, smaller organizations are focused on adding more PCs, getting broadband, and saving money by implementing VoIP and networking their PCs to move information quickly, easily, and automatically. Companies also want to automate and streamline common activities such as handling taxes and human resources issues. They want to be able to:

• Manage growth spurts
• Adapt to changes
• Reduce costs
• Optimize business practices
• Connect to customers and suppliers in real time

They expect that these capabilities will help them:

• Offer better customer service
• Extend their operations further into other countries
• Gain access to world markets

Encouraging Small Businesses

The largest countries in Latin America all have programs to encourage small businesses, ranging from efforts in Mexico to dramatically reduce the time it takes to legally incorporate, to training in various other countries in accounting and other basic business skills, and lending and credit programs.

Governments in the region appear serious about encouraging investment in broadband infrastructure and pushing to make low-cost PCs available. Brazil, Colombia, Peru, and Argentina have launched special low-cost, easy-credit desktop PC programs intended to provide Internet-connected PCs to millions of low-income households. Mexico's Telmex-Prodigy PC deal is a similar, privately sponsored initiative. Most of these programs target individuals or families with an average income of $200 per month.

Pyramid's survey shows that SMBs in the region are looking for "turnkey" services, such as the following:

• Web portals and online publications with content tailored for smaller businesses. For example, BrTurbo Empresas, a Brasil Telecom portal, offers news, tips, and case studies about how to improve productivity. BrTurbo's Web-hosting product Presenca Web offers 25 blueprints for companies to create their own online presence, starting from $10 a month.
• Telecom Argentina offers a loyalty program called Club Pymes in which companies accumulate points as they spend, which they can then exchange for products or services. In Colombia, Empresa de Telecomunicaciones de Bogotá offers Programa de Beneficios-Pymes, which allows customers to trade points for goods and services such as computers, copy machines, motorcycles, and language classes.
• Cantv in Venezuela offers Punto Pyme, a business advisory portal that provides integrated service solutions with partners such as Microsoft, HP, banks, insurance companies, and legal firms. Punto Pyme offers Web hosting and applications allowing small businesses to build an online presence and engage in e-commerce.

The Challenges

The region overall faces limited budgets, skills shortages, and tight credit. Because of economic and political uncertainties, Latin American companies tend to be less likely to take risks. The issues and opportunities vary from one country to another:

• Argentina: Inflation is still an issue, but Argentina is coming back from a political and monetary crisis.
• Brazil: Although Brazil has the lowest average purchasing budget in the region, it also has the highest number of SMBs. Despite interest rates that are among the highest in the world and a growing trade surplus, the economy appears relatively healthy.
• Chile: Chile is a sophisticated market with a solid economy. Most companies, while extremely conservative, are moving to the "best practices" stage after experiencing solid growth. With PC penetration at only about 30 percent, Agrawal says, "This is the next country that is really going to pick up IT."
• Mexico: In Mexico the technology budgets are generous, and the country displays a sophisticated approach to the benefits of technology; many SMBs in Mexico are early adopters.

One of the main challenges in this region is access to investment capital. But economies are rebounding and governments are realizing there is strength in the SMB market. And vendors like Microsoft, IBM, SAP, Oracle, Cisco Systems, and others are pushing into the area with incentive programs. Companies realize that technology, such as VoIP, can save them money and make them more efficient and productive.