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Blog 2018


Latin America’s Digital Crossroads: Why the Opportunities Are Huge

Latin America is at a crossroads in the age of digital transformation. Opportunities abound to digitally leapfrog old ways of doing things thanks to the large mobile penetration of its 600 million inhabitants. There is big potential for advances in e-commerce, fintech, smart-city applications and other areas, notes a research paper by Felipe Monteiro titled, “Digital Transformation in Latin America: a Leapfrogging Opportunity?” Monteiro is a senior fellow at the Mack Institute for Innovation Management at Wharton, and also a professor of strategy at INSEAD. His co-authors are Gabriel Rozman and Anne-Marie Carrick, both of INSEAD. In this interview with Knowledge@Wharton, Monteiro talks about the opportunities for — and the challenges of — digital transformation in the region. (Listen to the full podcast using the player at the top of this page.)

An edited transcript of the conversation follows.

Knowledge@Wharton: One good example of leapfrogging is M-Pesa in Africa where not long ago they did not have traditional telephone landlines. Once most people had cellular phones, they leapfrogged that whole landline stage. That gave M-Pesa a way to bring financial inclusion to millions of people. Your paper suggests there are great opportunities for this idea of leapfrogging in Latin America.

Felipe Monteiro: Let me give a little bit of background on how we started thinking about this. There are a lot of conversations and actually a lot of work on this idea of digital transformation. And this is happening everywhere, in the U.S., here in Europe, in China — and one thing that has been puzzling me and my co-authors is, what is happening in other parts of the world?

I am pretty much convinced that digital transformation is here, and the impact is going to be huge across countries, across industries. And when we started researching about what is happening in other regions, and particularly in Latin America, it clearly became a very interesting angle to that conversation on digital transformation: Would that allow countries in emerging markets, and specifically Latin America, to leapfrog? And what is leapfrogging? It’s really this idea of, where you don’t have structure, you can use this opportunity to escape and then adopt a more advanced technology, a more advanced method.

So basically the idea is that you can really bypass development stages because you don’t have these legacy systems and can instead adopt the most developed ones. And we try to provide some examples and a lot of data in this article [to show] that with digital transformation, you create a number of leapfrogging opportunities for Latin America.

“If you know how precarious the health system is in a number of countries in Latin America, you can start to see the potential for initiatives like telemedicine.”

Knowledge@Wharton: Another example is China — desktops never reached the level of penetration that they did in the U.S. They didn’t skip desktops but they very early on adopted mobile phones. And some people say that is one reason why they are so far ahead when it comes to automated payments and so forth over the phone.

Monteiro: In both examples we were talking about really involved mobile penetration, and this is also the case in Latin America. If you look at the data, you see the penetration of mobile phones in Latin America is similar to what we knew in the case of M-Pesa. So that whole region skipped the fixed line, and most people adapted directly the mobile phone.

When we think about the digital world, the implication is that population is really eager, prepared and already doing a lot of mobile transactions. Mobile penetration in Latin America should be roughly 71% in a couple of years. There are 600 million people in Latin America, so there will be a lot of people with a mobile phone in their hands being prepared to do transactions, and this is going to have huge implications.

Knowledge@Wharton: What were some key takeaways from this research?

Monteiro: For me the key conclusion really has to do with this idea of, as you look at regions in the world, emerging markets, we can say there are so many inefficiencies and institutional gaps, and hurdles and barriers. And you can look at them and say, this is a half-empty glass. I think the main conclusion of the article — there is a question mark at the end. It’s a leapfrogging opportunity, so we don’t want of conclude that the region will be able to leapfrog.

But the main point is this will create an opportunity for leapfrogging. And I think if you see things this way, the glass becomes sort of half full, meaning that there are so many opportunities in so many sectors that these can allow companies in the region and countries in the region to make huge progress.

Knowledge@Wharton: What surprised you in this research? One thing I saw in the paper was that there are mini-Silicon Valleys popping up in Latin American cities. You cite something like 20 internet software companies with more than $250 million in revenues.

Monteiro: This idea of how many important players we have in the region was a surprise. When we think about Latin America, we think about those global Latin — really large — companies, like Petrobras, or Pemex in Mexico….. But there are many companies, some quite important, and I give this example of 20 that are in this $250 million or so category. Not only that, we have 10 unicorns in Latin America.

The most recent of them is a Brazilian [fintech] company called PagSeguro Digital, whose IPO generated $2.3 billion this year at New York Stock Exchange. And then you have about 40 companies that are between about $100 million and $1 billion in the digital space. This idea of how many innovative players you have in the region, and how many of them are already quite important, was also a surprise. Another surprise is how many of those ecosystems are emerging in the region.

They are far from being as important as the big clusters — like Silicon Valley or Boston– but there a number of those initiatives. And if you think about the speed of development in the digital world, meaning things have happened so fast and they can be deployed so quickly, and the population size in Latin America, you can see how the impact of this information can be really fast and can reach a large segment of the population.

Knowledge@Wharton: Which areas would be most ripe for of leapfrogging? I think you cited in particular e-health, fintech and e-commerce.

Monteiro: Fintech is the most developed in terms of the number of fintech companies in the region that are already doing a lot of innovation, but also have the potential to do even more in the future.

One important piece of data is knowing that about half of the Latin American population isn’t banked. If you think about all of the solutions that we can have – such as mobile payments with a cell phone from purely digital banks — we believe that fintech is really one area where you are going to see a lot of advances, and potentially some leapfrogging solutions.

Another example: In Brazil there is a new bank called Nubank — “nu” in Portuguese means “naked,” so it means a bank with no infrastructure, physical infrastructure, completely digital. And in two years they got about 5.5 million credit card applications, which is quite a lot for a new entrant in such a short period.

“Mobile penetration in Latin America should be roughly 71% in a couple of years.”

If you think about e-commerce in Latin America — you have one of the most important players in the region coming from Argentina — MercadoLibre. They have about $8 billion in sales. There are about 130 million online shoppers in Latin America. We are far from exhausting the available population, but if you look at fintech by this potential of people not banked, and then some important players, you see the potential for leapfrogging.

….If you look at e-health and you know how precarious the health system is in a number of countries in Latin America, you can start to see the potential for initiatives like telemedicine. There is a company in Chile called AccuHealth that has been providing remote patient monitoring, and it is spending a lot of money for helping governments and municipalities to provide medical services, many times remotely.

It is the same if you think about the potential of artificial intelligence applied to medicine and to health like IBM Watson solutions for cancer diagnosis. You can take the most advanced diagnoses to very remote locations in continents like Latin America. In those cases, to me the interesting aspect is not only the business potential — there are many companies making a profit that have business models which would take advantage of that — but also the social benefit and social inclusion, and the increase in living standards in the region.

Knowledge@Wharton: The other area that you broached in the paper was smart cities, and of course Latin America has a lot of mega-cities. They have all of the usual problems — traffic, pollution, and also government inefficiency, things that could be automated and made simpler, more efficient.

Monteiro: Take Sao Paulo, Mexico City, Rio, Buenos Aires — those are pretty large cities. Like other emerging markets, most of the Latin American population lives in cities. Not only those huge ones, those megalopolises as we were talking about, but also in cities in general.

Just to give you some figures, if you take the Brazilian population, 86% is urban [based]; Argentina, 92%; Chile 90%; Mexico 80%. So we have very large cities and most of the populations live in cities, and so you can see the potential of smart city solutions. That impact is going to be pretty critical.

Public transportation for Sao Paulo is a big challenge — for any large megalopolis in an emerging market. And then you have a solution like Uber, and in Brazil there was a Brazilian competitor to Uber called 99 Taxis, and they have just been acquired by China’s Didi. This is a $600 million deal. So we are talk about big numbers, big scale, with important and large implications for the populations who live in cities. In cities like Medellin, Colombia, such solutions have been quite important.

One way of seeing this is when you go to Zurich, Boston, LA or San Francisco, the standard of transportation is already very high. Of course you can make improvements, but it is very high.

When you go to Sao Paulo, Mexico, Medellin, Buenos Aires, the potential for applying digital solutions in smart cities is pretty substantial.

 “In the digital world there is a parallel way of learning, and a lot of that learning doesn’t really require the formal educational institutions as we know them today.”

Knowledge@Wharton: What are the obstacles to leapfrogging?

Monteiro: We are not short of obstacles at all, right? So I don’t want to give the false impression that you only have opportunity. The obstacles are as big as the opportunities. I would start with the physical infrastructure.

Let’s go to one concrete example. If you think about e-commerce — we can develop the most sophisticated e-commerce platforms, and some of the solutions we have in the region are very good, but still, if you’re buying a book or if you’re buying a fridge or a television or computer and you need to have it delivered, the logistics are really poor in many cities and in many countries in the region.

E-commerce … can go only as far as having an interface with the consumer and the internal logistics with the warehouse to ship the products, but then it has to be delivered. And improving the [delivery] logistics and improving infrastructure will be a big barrier. I think another one is really the red tape and the bureaucracy and inefficiency in many of these countries.

If you combine the physical infrastructure with the legal, bureaucratic, red tape infrastructure, to a large extent the success of the digital strategies will depend on how those countries will change their physical infrastructure and their institutional infrastructure to allow those firms that are very innovative to deliver on what they plan to do.

It is almost like the same aspects that may allow for leapfrogging are also the ones which can be an obstacle. You can say, “you have so many problems with infrastructure you will not be able to leapfrog.” Or you can say, “No, we have those problems with infrastructure, and it is exactly in that space that solutions like smart cities will come….”

The difficulties will motivate companies to come up with solutions, because this is such a big problem, a solution has to be solved, or there are going to be obstacles which really are going to deter, or are going to at least slow down, the digital information in the region.

I am talking about business solutions to business problems. It is also important to realize federal, state and local governments can play a big role both as investors in terms of directing where public investments go, and also as administrators — how they make doing business easier.

Clearly in the digital world we need coordination among players. Many times that coordination will be among different companies, different sectors. I have no doubt that for the region to make progress it will be necessary to have coordination among the business sector and governments to make sure everybody understands what are the promises of digital. Everybody has to work together to realize the potential.

Knowledge@Wharton: Another obstacle is education, but now there is this incredible informal education structure that has sprung up around the computer tech sector.

Monteiro: If you think about formal education, and if you look at these scores, or if you look at enrollment in many of those countries, the picture might be discouraging, because you see low scores [in Latin America], you see how difficult it is to access a university in many countries.

What is interesting in the digital space is that a lot of the skills which are necessarily for digital can be more technical skills. And with a lot of the technical skills, you have a lot of people who are kind of self-learners — they learn how to code independently or they learn how to code in coding schools, and they learn how to code online. So there is a whole new generation that might be able to be very good in having some of those coding skills, analytic skills, even without having all of the formal education, going to the universities, or doing at least the degree programs that we are familiar with today.

“We can sit here complaining about the deficiencies, but many companies view this with a different lens. They say we can take the deficiency that we have now not as an obstacle but as a motivator for us to leapfrog.”

I don’t want to underestimate the huge challenges in terms of education for the region, and I think governments should invest in formal education, make sure that children are going to school and learning the right skills, and that universities are good. But also I think we should acknowledge that in the digital world there is a parallel way of learning, and a lot of that learning doesn’t really require the formal educational institutions as we know them today.

Knowledge@Wharton: What sets your research apart from other work in this area? I am guessing that no one took the comprehensive look at this idea of leapfrogging that you and your co-authors have taken.

Monteiro: We are pushing people, companies and governments to see the leapfrogging opportunity. We can sit here complaining about the deficiencies, but many companies view this with a different lens. They say we can take the deficiency that we have now not as an obstacle but as a motivator for us to leapfrog, and for us to skip steps and come up with something that is going to lead the region and lead different companies to the next stage.

It was only after doing a lot of research that realization came to us. We did not start out saying, “Yes, this is leapfrogging.” I think it is only after really looking at the data and talking to a number of people that we started saying, “Yes, maybe there is a leapfrogging opportunity there.”

 Source: Wharton