Latin America: Chasing the Dragon, LatAm Firms Look to B2B Deals –

As the firm to support Latin American Internet start-ups most aggressively over the past three years, Chase Capital Partners’ (CCP) recent investment in Brazilian logistics company Total Express Air courier service stands out as representing a sea of change in Internet investing in Latin America. Firms in the region today are moving rapidly from business-to-consumer (B2C) to business-to-business (B2B). Sao Paulo-based GP Investimentos, itself the largest Brazilian organization to invest in technology in Brazil, went in with CCP on the deal.

Regarding Total Express, Susan Segal, the head of the Latin American group at CCP, said “They’re the leading last-mile delivery company in Brazil. [Because their focus is infrastructure, investing in them] is very synergistic to everything else we’re doing.” On the more macro scale, she said there will be a series of B2B investments but declined to cite specifics. She explained the change thusly, “It’s the point in time in the cycle when people are starting to circle B2B. They’ve invested in and been through B2C spaces.”

“The B2B space is very attractive in Latin America,” said Octavio Lopes, a partner with GP Investimentos. “We still believe B2C is attractive, that there are consumer-oriented opportunities. But B2B is less developed, and even more useful when you know the business community upside down and have contacts.”

Roberto Thompson, also a partner with GP Investimentos, added, “the consumer side has developed more rapidly, [partly because] in B2C you can build a start-up independently. With B2B, you have to get in touch with large companies, and if you don’t have anchor investors it won’t fly. B2B [also] requires a lot of knowledge about what makes sense here [in terms of] market regulations by sector and scalability.”

Saturation Just One Problem

It’s true that after more than a year of intense activity in the region, the B2C market is becoming saturated – for example there are roughly 15 auction sites throughout Latin America now – and investors are looking to new frontiers.

Couple that saturation with the stumbling blocks investors have run into from the start in B2C: low PC penetration; low credit card usage; and infrastructure problems that include everything from poor phone lines in many areas to poor product fulfillment, and the allure of B2B plays becomes clear.

An example is warehousing. Many dotcoms can’t afford warehousing because there aren’t enough customers, but when a customer does order, the item is out of stock because the company can’t afford warehousing.

In Brazil, which comprises two-thirds of the Latin American population, anywhere from 2% to 7%, or three to 11 million people, used the Internet last year, depending on which numbers are cited. At the same time, according to International Date Corp., (IDC) only 333,000 Latin Americans actually bought something online, and consumer spending amounted to $215 per user average.

Some industry watchers predict that that number will be 1.1 million users spending on average $675, or three times today’s numbers, by 2003. Yet, that still amounts to less than 1% of retail sales in Brazil.

At the same time, there’s a six-to-one ratio in advertising spending versus receiving for Latin American Internet portals.

“Without IPOs, that’s a burn rate that doesn’t go away,” said Robert Linton, of Sul America. Fourteen IPOs have been scheduled this year, but none have gone forward yet due to the recent volatility of Nasdaq.

Calling All Buyers

IDC has reported that in Brazil, only 2% of online users buy or sell items over the Internet, compared with 78% who use email, 46% who use preferred sites, and 10% who bank and perform other personal finance transactions.

Another recent survey from IDC indicated that among 500 businesses surveyed in Latin America, only 10% are presently engaged in online selling, while 25% are buying online. However, 70% of those not presently engaged said they expect to be so by year’s end. The communications industry is the most active in terms of making Internet commerce purchases, while the finance sector is the least active-but it is the most active in selling products and services.

Forrester Research Consulting Company believes the boom in Internet trade won’t happen until 2008, mainly in Argentina and Brazil, as companies realize the Internet will actually reduce costs in purchasing products and services.

But according to The Economist Intelligence Unit, in Brazil at least, companies with enough buying clout will soon make sure that offering merchandise over the Internet is not a supplier’s option, but an obligation. Bradesco, Brazil’s leading private bank, has stated it believes businesses can save between 5% and 25% on purchases by conducting their transactions and bargaining online.

For example, Ford Brazil saved $20 million recently in a tire-buying auction. It was prepared to spend up to $90 million, but through the net found a bidder for $70 million. “For a company that spends $10 to $15 billion a year, that’s serious procurement,” commented Sul America’s Linton.

Jupiter Communications, a provider of Internet commerce research, maintains that “those looking to claim victory in the Internet commerce market in Latin America [going forward] must devise strategies to separate the market’s opportunities from its many barriers.”

Lucas Graves, senior analyst, Latin America at Jupiter, added, “Businesses that succeed going forward will be those that apply innovative solutions to the barriers present in Latin America’s online markets,” at the company’s recent Jupiter Internet Conference. Graves could not be reached for further comment.