Global E-Commerce: Central and South America - Business-to-business E-commerce Set To Take Off, The Overall Market: Bright Spots And Future Outlook - CHALLENGES

CHALLENGES

REGULATORY AND TAX ISSUES.

The legal framework for e-commerce in South and Central America was fairly underdeveloped in the very early 2000s, thus inhibiting the possibilities for growth. In this vein, Latin American countries had done little, by and large, to address e-commerce taxation issues, as they were still struggling with the basic establishment of an Internet infrastructure. Central and South American governments derive their greatest share of revenue from value-added taxes, which are those levied on the sale of imported goods. When the various players involved in a transaction are all located in different countries, which often is the case with e-commerce, the assessment of a value-added tax becomes increasingly difficult.

For the most part, e-commerce taxation throughout the region is tied to the existing rules for physical-world taxation. However, the difficulty in enforcing such taxation and the resulting decline in tax revenues is expected to spur the region's governments into action to coordinate with governments elsewhere, particularly in Europe, to implement taxation schemes geared specifically toward e-commerce. A few countries that have negotiated tax treaties with the Organization for Economic Cooperation and Development (OECD) include Argentina, Brazil, Chile, and Venezuela. Additionally, several countries were working toward harmonizing some elements of their tax policies with their North American neighbors in 2001.

Many of the region's countries also retained relatively protectionist economic policies that aimed to cradle their own developing industries from foreign competition. Some countries, such as Brazil and Argentina, took large strides in opening up their markets to a more liberalized trade policy. This was attractive to foreign investors, including major North American and European Internet and telecommunications firms. According to many analysts, in a borderless Internet environment at least some degree of liberalization is necessary to attract such investment and to compete in the e-commerce world.

U.S. Federal Communications Commission (FCC) Chairman William E. Kennard, speaking in Lima, Peru, in spring 2000, insisted that it was the function of regulators in Latin America to check the influence of the powerful Internet carriers and level the playing field so that all people could enjoy and benefit from the Internet. Kennard announced the launching of a development initiative aimed at fostering telecommunications and information technology infrastructure throughout Latin America. The aim of the initiative was to bring more people in the region online and enable them to benefit from e-commerce. It was primarily based around the exchange of information and ideas, but signaled the U.S. government's interest in expanding e-commerce among its southern neighbors.

SOCIAL AND ECONOMIC INEQUITY.

A great deal of social and economic disparity, both within and between countries, plagued much of Central and South America, inhibiting the spread of e-commerce. Because Internet access throughout the region was so expensive and presented so many technical problems, Internet penetration hovered at around three percent in the early 2000s. Jupiter Communications placed the entire online population in Latin America at 11 million in 1999, while the most optimistic estimates for the year 2000 placed the total at 30 million users. However, Jupiter expected the total to skyrocket to 67 million by 2005, making Latin America the fastest-growing Internet population in the world. As a result, in the eyes of many e-merchants, the time was ripe to jump into the Central and South American market in order to capture the eyes of those users as they come online, thereby building early customer loyalty. According to Jupiter, one critical consideration for e-commerce was that its estimated number of Internet users referred to individuals versus households. Latin Americans were far more likely than North Americans to surf the Web at kiosks or other locations outside of the home, because PC penetration throughout the region was markedly low. As a result, those accessing the Internet were far less likely than those to the north to engage in e-commerce, since they didn't enjoy access in the privacy of their own homes.

For the most part, computer ownership in Latin America is a hobby for elites, and therefore business-to-consumer e-commerce has been fairly limited in its possibilities. This trend showed few signs of letting up in the early 2000s. However, as technologies become cheaper and information technology and telecommunications infrastructure grow more sophisticated and widespread, entrepreneurs remain hopeful that the consumer Internet market in Central and South America will ripen.

According to Euromoney, optimists hoped that the Internet could serve a social function in Latin America, one that eventually would filter down to generate benefits for e-commerce. By opening the information infrastructure, the Internet held the potential to serve as a democratizing force and break down what many saw as the region's rampant political and economic corruption. Such hopes, Euromoney reported, were fueling valuations of companies trying to stake a claim to Latin American e-commerce markets. Indeed, Business Week reporters Katz and Malkin noted that the Internet already was responsible for helping to reduce some of the corruption involved in the granting of both public-and private-sector contracts.

INADEQUATE INFRASTRUCTURE.

The biggest obstacle to Central and South American e-commerce in the late 1990s and early 2000s was the lack of a comprehensive telecommunications infrastructure throughout the region. This problem was beginning to be addressed, largely by outside investors eyeing the region's explosive potential, by way of new phone lines, computers, information technology, Internet service providers (ISPs), and wireless technology.

Katz and Malkin noted that the structural difficulties in the region, as of 1999, were deeply rooted. For instance, only about 10 percent of the population was connected to a phone line, while the average gross domestic product per capita was less than $4,000—hardly conditions that bring joy to the hearts of e-commerce merchants. The phone line penetration was expected to rise—to a still-miniscule two per every 10 people—by the middle of the 2000s, while PC sales trends were moving in the right direction to eliminate some of the extreme disparity within the region.

However, developing regions such as Central and South America had a key advantage over the more developed regions. North America and Western Europe pioneered the Internet infrastructure and e-commerce. However, the less developed regions benefit from the hindsight those leaders provided, and can avoid the same mistakes in the nascent stages. Moreover, the telecommunications infrastructure largely will move straight to the more sophisticated models, such as broadband, rather than try to adapt the Internet to a scarcely existing infrastructure. Indeed, Microsoft in 1999 pumped $126 million into the Globo Cabo, a leading Brazilian television and cable company, to develop a broadband infrastructure, and other U.S. and European companies followed suit with their own deals throughout the region.

E-merchants throughout Central and South America needed to come up with alternative models to facilitate shopping and purchasing rather than simply mimicking the U.S. model. Credit card ownership was exceptionally limited, as low as 10 percent in some areas, according to Jupiter Research. To dramatize the problem, Jupiter studied one of the most upscale neighborhoods in the region's most economically developed nation, Brazil, and found that even there half of the households did not own a credit card. Thus, the overwhelmingly preferred payment method for e-merchants in North America and Europe was not feasible in Central and South America. Some solutions that have been furthered in the region were the development of alternative currencies specifically for use in Web-based transactions.

Even where users did have credit cards, they were relatively unlikely to use them over the Internet in Central and South America, where merchants generally assume little responsibility for their products—"where 'caveat emptor' is the conventional wisdom," as Brandweek put it. Security fears, big enough problems in the United States, were greatly magnified in Latin America and highlighted another challenge for e-commerce in the region: overcoming consumers' reluctance to shop online in the first place. These fears were faced in North America and Europe, and have been largely dealt with through implementation of improved encryption technologies to safeguard credit card numbers, along with the establishment of formal government-sponsored frameworks designed to address such issues. However, in Latin America the problems are far more deeply rooted, and may not be remedied by simple technological solutions.