- July 25
- 29 min
At the end of 2020, the EU undertook to reinvigorate relations with the countries of Latin America and the Caribbean (LAC). It intends to strengthen economic ties and work with the region to achieve sustainable development goals, including digital transformation. The success of these aims depends on productive cooperation in combating the COVID-19 pandemic and tackling its socioeconomic effects.
Challenges include differences in approach to the Venezuela crisis and the need for the EU to compete for influence in LAC with China, in particular. However, digital transformation and startup development are one of the driving forces of business relations between the EU and Latin American countries.
Table of contents:
The second wave of digital transformation
Why is the digital revolution far from Latin America, despite the forced momentum of the pandemic?
Startups as a driving force in Latin America
Circumstances favoring the development of startups in Latin America
Governments support the development of startups in Latin America
Digital transformation in Latin America: Key takeaways
Since the first wave of digital transformation a few years ago, companies in Chile and Venezuela and other Latin American countries have adapted to new technologies and trends. Today, though, they’re facing a second wave: now it’s not enough to simply use digital technologies – they must evolve and transform peoples’ experiences. This also means evaluating and modifying their business models.
Despite understanding this need, companies and their leaders often opt for smaller, incremental changes that deliver lower value than assumed. When they learn that digital transformation should include social, cultural and behavioral facets, they feel surprised.
Based on Hicron’s desk research, Latin American countries are having some problems taking one step closer to digital transformation. There are several reasons for this situation:
The high failure rate in digital transformation due to cultural habits
Digital transformations often fail in Latin America. Mostly due to resistance from employees. In fact, only 4% of companies in Venezuela, Argentina and Chile view their transformations as “very successful.”
Citizens in Latin America countries can’t see the benefits of remote work and digitalization because of cultural habits. In the same way, remote work is slowly starting to be displaced by stationary work, especially for those who are vaccinated. Many people could not stay at home because they need to go outside to make their way for life.
The benefits we have come to know from remote work for employees and executives in Latin America are perceived differently, hence companies are calling in employees to the office whose work might be completely remote. This is also reflected in the numbers. The percentage of people who were able to do their work remotely is a minority in the region, reaching 27% in Mexico – one of the highest – and in Colombia it was close to 25%.
Companies have short-sighted vision
Companies are focusing mainly on revenue, not on the holistic view of digital transformation including market, users, competitors and business research. Desk research shows that Latin American companies are more likely to cite revenue growth as the primary motivator of transformation.
Telecommunications investment in the region has been falling in per capita terms since 2010.
Latin America invested USD 43 per inhabitant in 2020, down from USD 46 in 2019. 45% of Latin Americans do not have access to the Internet, more than 285 million people. Around 45 million live in areas without coverage, networks, communications services and other basic infrastructure.
There are also problems with the quality of connectivity. It is difficult to work remotely or connect to a virtual classroom if you do not have the equipment or a stable connection. Also, the Internet of Things requires advanced digital infrastructures that can be deployed massively. This is something currently difficult to imagine in regions like Latin America.
The average number of projects is the lowest in the world due to lack of specialists
For example, the average number of projects undertaken in Chile was 6.08. Compare that to the global average of 7.89 and the U.S. average of 9.21. One reason may be a lack of resources, especially highly skilled digital professionals.
The pandemic does not accelerate the digital transformation as in the other regions
Latin America lost around 47 million jobs, not only due to the pandemic outbreak but also due to the acceleration in the adoption of software and automated tasks.
That all results in the biggest recession in 120 years. According to the report of the United Nations Economic Commission for Latin America and the Caribbean (founded in Chile in 1948), the coronavirus pandemic caused a decline of GDP by 6,8 percent in the region. In general, the incomes declined by 89,4 percent in the whole region.
In Caribbean countries, there were lower decreases – approx. 25 percent. The recession results in decreasing investment in all regions except for 5 countries: Bahamas, Barbados, Ecuador, Paraguay and Mexico.
Fortunately, the Latin American startup market is one of the most promising in the world. Especially among developing countries and in terms of innovation and entrepreneurship. Startups have evolved into an ever-growing technology ecosystem, and 2022 sees them on the rise. Despite being an emerging market with its own difficulties, in the second quarter of 2021, Latin American startups raised investments of 7.2 USD billion.
The data comes from a new report issued by the Brazilian intelligence platform Sling Hub. According to the report, the recovery in May was driven by the proptech and fintech sectors, which together took 725 USD million of the funds invested in the region. Fintech has been for long the biggest sector of investment, but e-commerce has made a strong comeback.
In addition to vertical marketplaces in sectors like pet food and groceries, the region has also seen a wave of brand aggregators raising big rounds. Fintech lost its position as a leader in the raised volume, something that had not happened since September 2021.
Heading the list of fintech, this time is a Colombian proptech, Habi, which raised $200 million led by Homebrew and SoftBank Latin America Fund. With this, the startup founded by Brynne McNulty Rojas and Sebastian Noguera also became the first Latin American unicorn proptech based out of Brazil, joining Brazilians Loft and QuintoAndar.
The growth of the startup market in Latin America has been made possible by many factors. On the one hand, Latin America is a big market (approx. 650 million people), which makes the region a huge place for e-commerce development. However, high rates of cell phone usage and hours spent on the Internet have made consumers increasingly demanding. This forces companies to constantly transform, which creates a space for business opportunities in the region.
Areas with great potential for doing business include sectors such as ICT, tourism, mobility, energy, healthcare and agriculture.
Other factors are related to the activities of the public sector. Concerning government support, some countries have tried to make life easier for startups. Countries such as Colombia, Chile and Argentina are enacting new laws to stimulate the creation of startups.
In Peru, there is the initiative “Startup Peru”, which offers programs for innovative ventures that contribute to the country’s development. The Central Bank of Brazil launched PIX, an instant payment system that favors the speed and efficiency of these businesses. The Colombian government has also made it easier for fintech startups to begin operating without complying with all the bureaucratic requirements that a financial services license would imply.
Moreover, agreements between countries have contributed positively to the solid and rapid growth of the startup ecosystem. This may be demonstrated by the Pacific Alliance that unites Mexico, Chile, Colombia and Peru in an initiative that has a big impact on the region’s development. Through different actions, the Alliance seeks to boost the entrepreneurial ecosystem of these countries. It launched specific programs to support start-ups that play a fundamental role in the further creation and commercial rise of other companies.
Digital transformation is supposed to revolutionize traditional industries and is likely to substantially change the social and business patterns we know. Latin America is facing a trend that will determine its economic future in the medium term and will be decisive in integrating into global value chains. But, to complete this integration, Latin American companies need to combat many challenges.
Despite high-level government support for new-tech and fintech companies, it seems that it is not sufficiently linked to infrastructure development. The reality indicates that countries with better digital infrastructures will make the most of digital transformation and startup development. Both for the development of related industries and for economic performance and social gains.
An initial diagnosis of the state of digital infrastructures in Latin America indicates that significant progress has been made over the past three decades, but that the digital ecosystem remains unprepared e.g.: to meet the demands of the IoT. In fact, a recent study by CAF indicates that Latin America invests four times less in digital infrastructure than OECD countries, and this partially explains why its digital economies are lagging.
CAF (Development bank of Latin America) studies show that better regional interconnection infrastructure would reduce the cost of international transit by 38%, which would involve a reduction of up to 8.3% in current broadband rates.
That’s why the institution is starting a Digital Interconnection Hub in Panama that would give the region the opportunity to improve the end-user experience, improve connectivity, reduce costs and have a regional offering that meets the needs of Latin America, Central America and Mexico.
Additionally, CAF is funding the construction of the first underwater cable between Latin America and Asia Pacific, the first digital gateway in the Pacific. This project has also received interest from Argentina, Brazil, Venezuela and Ecuador.
The revolution must be performed also from the corporate perspective. Latin American companies, to become global competitors, must do holistic value shifts that create lasting results. People – not profits, not technology – should be at the very heart of digital transformation and startup development.
Organizations generally don’t create an environment conducive to business transformation where all people (employees, stakeholders and customers) are heading in the same direction. Good UX and Business Strategy create exactly such an environment.
European companies can fuel the growth of companies in Latin America by sharing their experience and expertise. Good practices have been tested and refined. The high competence of European companies can give Latin American countries the opportunity for faster and more stable development.
The winners will be the organizations that engage stakeholders, employees and customers in the very early stages of the product and service development process. With the tested practices, they can solve the right problem from a transformation perspective.
After carefully evaluating suppliers, we decided to try a new approach and start working with a near-shore software house. Cooperation with DSS from Hicron was something different, and it turned out to be a great success that brought added value to our company.
With HICRON’s creative ideas and fresh perspective, we reached a new level of our core platform and achieved our business goals.
Many thanks for what you did so far; we are looking forward to more in future!
Hicron is a partner who has provided excellent software development services. Their talented software engineers have a strong focus on collaboration and quality. They have helped us in achieving our goals across our cloud platforms at a good pace, without compromising on the quality of our services. Our partnership is professional and solution-focused!