The pace and depth of disruption already under way in Latin America is impressive. Ride share apps have already captured an estimated 25-30% of the taxi market in Mexico, a little less in Brazil. Since 2014 Netflix has reached close to 20 million subscribers, roughly 25% of the pay TV market in Latin America. As our article on the drivers of disruption points out, Latin America’s inefficient service sectors are vulnerable to disruption.
However, many industries remain protected by regulations and the political forces that control them. Still others require massively capitalized competitive models or highly scarce skill sets to successfully disrupt them.
Analyzing the Obstacles
Rent-seeking capitalism may be the most powerful driver of disruption, but Latin America is not exactly Adam Smith’s favorite laboratory. There are plenty of forces at work that will slow or stall the tide of disruption in Latin America.
Regulations. These can reduce the vulnerability of an inefficient industry to disruption. For instance, Latin American banking rules are built to i) prevent money laundering by imposing reporting, auditing and processing procedures; ii) ensure capital liquidity by enforcing minimum reserves and risk protocols on lending, among other regulations. Obtaining a banking license requires both massive capital and a tedious application and approval procedure. Portions of a bank’s wide portfolio of services can be disrupted by fintechs but replacing banks in their entirety is almost impossible.
Political interference. Other regulations, like the value threshold above which a cross-border e-commerce delivery is subject to tariffs, are completely arbitrary and generally determined by the lobbying power of threatened incumbent industries. Retailers in Latin America fear the encroachment of Amazon and Alibaba. As huge collectors of government-sustaining VAT, retailers wield enormous influence over regulations and have been largely successful at stemming the tide of cross-border e-commerce. As more industries face disruption in Latin America, political interference, often lubricated by corruption, will play an increasing role in trying to slow the impact of disruptive competitors and new technologies. For example, in Argentina, when retailers tried to introduce automated check-out kiosks, the retail cashiers union called foul and used political pressure to outlaw the technology. The legal challenge to the legislation could take years to be fully litigated.
TURN INSIGHTS INTO ACTION
Successful disruptors come to market prepared to both counter the lobbying efforts of opponents and also to win the public relations battle. Uber has faced legal and political challenges to its business model across Latin America. It launched relatively late (2016) in Argentina because of the political strength of the taxi unions. Uber brings an army of lawyers to its defense and generally registers itself as a ride hailing technology provider, not a service provider. However, in Latin America, a strictly legal strategy is not always enough. When taxi companies in Mexico, many of which were allegedly protected by powerful politicians, tried to lobby regulations to stop Uber, the world’s largest ride share company launched a massive PR campaign. By then, Uber was widely used and coveted by middle class riders who appreciate both its convenience and the security born from its traceability. With so many voters condemning the thinly veiled corrupt motives of anti-Uber regulations, politicians backed down.
Capital intensity. Service sectors that utilize expensive technology on a large scale tend to be fairly immune to disruption. Mining and construction are two service sectors that may refine the way they operate by adopting tech-aided new processes, but they are not going to be replaced any time soon with a radically new business model. The exception to this rule of thumb is the ability to shrink economies of scale and disrupt the norm. A great example is the development of residential scale solar panels that can disrupt utility companies. In Argentina, a new start-up, Semtive, promises to scale down wind turbines to a residential/small business level. Another Argentine initiative, Satellogic, aims to produce and launch into space commercial satellites for as little as $100k, disrupting a very consolidated global market.
Scarcity of skills. Some services rely on the highly skilled people who are not easily replicated through training or replaced by technology. Air traffic controllers and pilots are highly skilled individuals who require years of training and certification in order to qualify as vital members of the passenger travel and air freight industries. As much as both industries could do with some disruption, they will continue to rely on highly skilled and costly individuals. Even if AI technology could soon replicate their actions, customers and regulators are not ready to embrace pilotless passenger airplanes or fully automated air traffic control towers.
Which LatAm Service Sectors Are Immunized from Disruption?
Below is a list of service sectors which have been disrupted in other parts of the world but may take more time to be disrupted in Latin America.
Commercial water usage: Water utilities in Latin America tend to be government monopolies or oligopoly privatized businesses. Disrupting them requires massive infrastructure investments and may be regulatorily impossible in many jurisdictions.
Consumer banking: Banking licenses are tightly controlled by Latin American governments both to ensure the viability of the industry but also because international overwatch authorities demand tight controls on money laundering and other issues.
Notary Public: No one relishes visiting a notary public in Latin America. It is a time-consuming, expensive endeavor. However, the legal and regulatory environment protects this ancient cabal of notary overlords and corruption helps keep their cozy business model going unchanged.
Network TV: Cable TV and now Netflix have dented the near-monopolistic power of network TV. However, the tight control of television licenses ensures that this oligopolistic business model can continue to enjoy privileged access to the 50% of the population that cannot afford to pay for TV content.
NEED HELP WITH A PROJECT?
Understanding both the drivers and obstacles of disruption helps our clients appreciate how vulnerable they are to competitive disruption as well as offers insights on how to either slow down or accelerate the pace of disruption, be you a company that sees disruption as an opportunity or a threat.
AMI is pleased to be teamed up with IG Motion, a boutique management consultancy that specializes in the digital transformation of its clients. Together, we diagnose the threat/opportunity of disruption, work with our clients to define an appropriate strategy, aid them in their decision making and guide them through the arduous, change management process of delivering on their new strategy.
Contact us to find out more about how we can help you diagnose disruption in your industry and prepare. And if you’re a disruptor looking to expand to LatAm, reach out so you can understand legacy players better, as well as potential roadblocks like legislation, protective practices and more.