Central America Today - A Trade and Investment Magazine

Trade: E-commerce in Central America
As ICT and Internet usage in the region expand, so do business opportunities

The new millennium has marked new ways of doing business and has introduced new challenges, especially when it comes to access to information.

The advent of Information and Communication Technologies (ICT) and its implementation in management activities has opened up a vast range of opportunities to companies—limited only by the creativity and vision that each business possesses.

Concepts have emerged in this new field that are not always clearly defined, such as e-commerce and e-business. E-commerce refers to purchase and sales transactions that are carried out by electronic means, while e-business is a broader concept that includes handling a variety of company operations by electronic means. This article concentrates on the status of e-commerce in Central America and the obstacles and opportunities that lay ahead.

Advantages of ICT

The use of ICT enables companies to increase their competitiveness, since ICT impacts almost all areas of a business. The resulting advantages are varied and can affect companies, consumers and even countries as a whole.

For a company, ICT has several strong advantages:

• Access to a potential market of more than 1.2 billion Internet users, with a relatively low investment

• Improved efficiency in business processes such as operations, finance, marketing and management

• Creation of profitable relationships with clients through Customer Relationship Management (CRM)

For Central American countries, where small and medium enterprises (SMEs) make up 34 and 40 percent of the GDP in countries such as Honduras and Nicaragua respectively, access to and use of the Internet allows these businesses to have a wider exposure that would otherwise be unaffordable.

At the country level, access to ICT usually leads to substantial economic improvements that contribute to higher levels of development and improved quality of life for a country’s inhabitants. According to the United Nations Conference on Trade and Development’s (UNCTAD) Information Economy Report of 2006, in developing countries, the use of the Internet has previously been limited to messaging (e-mail). However, 2004 data indicate that the use and application of the Internet to e-business has expanded in developing countries, specifically in the areas of online banking, e-government, online customer service and online product delivery.

ICT and Central America

Due to the worldwide impact of ICT, a number of organizations, such as the United Nations and the World Bank, have committed to studying and registering ICT behavior in different countries.

Although the Central American and Caribbean area, with the exception of Barbados and Jamaica, has received low rankings on the World Economic Forum’s 2006-2007 Networked Readiness Index, which ranks diverse technological development. That same study showed improvement in the region when compared to the previous year: Costa Rica climbed 13 spots from the 2005 Index to the 2006 Index, Guatemala climbed 19, and the Dominican Republic climbed 23, making the region more competitive and therefore more attractive to local and foreign investment.

The Networked Readiness Index evaluates countries based on three fundamental criteria:

• The presence of an ICT-conducive environment in a given country, which is assessed by a number of features of the broad business environment, regulatory aspects, and the soft and hard infrastructure for ICT

• The level of ICT readiness and propensity of the three main national stakeholders: individuals, the business sector, and the government

Out of 144 countries assessed, Costa Rica and El Salvador received the highest rankings in the Central American region (see Table 1).

Since 2000, reports by UNCTAD show that although there is still a broad technological gap between developed and developing countries, growth of technology use in developing countries is accelerating, thus making investments in this sector attractive in these countries. In addition, the International Telecommunications Union (ITU) has noted that Latin America has been a pioneer in the past in generating universal access to telephony, running water, electricity and roads within its own countries. These initiatives have been so successful they have been adopted by countries in Africa and Asia. Thus, proposals for penetration and use of ICT in the region are realistic.

ICT in companies

The most common type of e-commerce in Central America is business to consumer (B2C) websites. One popular model is websites designed to attract purchases from the approximately 2.5 million Central American emigrants who reside in the United States and are eager to buy goods for their families back home. For example, Almacenes Simán (www.siman.com.sv), a successful department store in El Salvador, has a website where Salvadorans residing outside the country can buy products online and have them delivered to their home in El Salvador. José Angel Adrian, Area Manager for Simán says that 80 percent of the sales on Simán’s website come from Salvadorans residing in the United States. They make an average of 80,000 visits per month to the site, buying mainly gift certificates for their relatives in El Salvador. Adrian says this market is so huge that Simán is planning a strategic alliance with Western Union to enable those emigrants who don’t have a credit card to make online purchases.

Credomatic, the largest credit card issuer in Central America, started offering e-commerce services to Central American companies in 2000, mainly processing payments with credit cards on line. Two years later, it created the website Mallcredomatic.com, the first of its kind in Central America, to sell products ranging from a trip to Disney World to a pair of shoes. According to Credomatic Honduras, that between 2003 and 2006, online sales in Honduras alone have grown at a 60 percent rate per year. The rate of growth for 2007 is projected to be 117 percent, due mainly to an increase of online payments for services such as cable television and college tuitions.

Another example is www.DeGuate.com, a Guatemalan site that sells flowers, cakes, stuffed animals and balloons online. According to DeGuate’s General Manager Sven Sánchez, 70 percent of its 420,000 monthly visitors are Guatemalans residing in the United States. The rest are customers in Mexico and Europe. At a regional level, Lacuracaonet.com sells furniture, appliances and electronics in Guatemala, El Salvador, Honduras, Nicaragua and the Dominican Republic.

Other online services for Central American customers include those offered by Supermercados Paiz (www.misuper.com) one of Wal-Mart’s supermarket chains in the region. This service allows customers in Guatemala, Honduras and El Salvador to purchase their groceries online and have them delivered to their home.

While a number of Central American emigrants are using e-commerce, online adoption rates within the region’s estimated 3.3 million Internet users differ from the users in the United States. José Mancía, Webmaster for Libroslaceiba.com, a bookstore in El Salvador that started offering online sales five months ago, notes that half of their customers are from the United States and the other half are from Spain. In Mancía’s opinion, Salvadorans residing in El Salvador don’t buy online because they are afraid of using their credit cards on a website. Mancía points out that people in El Salvador still prefer to ask for an account number, make a deposit at a brick-and-mortar bank, and fax the receipt to the store to get their books delivered.

While online stores may be slow to take root in the region, other online offerings are being adopted more rapidly. The tourism industry is one of the most advanced in e-commerce in the region. Two Central American airlines, TACA (based in El Salvador) and COPA (based in Panama), sell tickets to all of their destinations online. Hotels—both international franchises and local—use the Internet for reservations and payments. According to Credomatic Honduras, e-commerce for the tourism industry in Honduras grew by 41.5 percent last year. However, Costa Rica leads the region in international tourism and e-commerce for the industry.

Carlos Ruiz, Commercial Director for Spanish franchise Barceló’s Hotels, says 20 percent of the reservations for Barcelós hotels in the region (five in Costa Rica and one in Nicaragua) are made through their website (www.barcelo.com). According to Ruiz, online reservations have been growing at a 6 percent rate during the last five years. Most of the reservations are made by guests from the United States. Annette Cárdenas, Marketing Manager for Marriot-Panama Hotel, notes that their online reservations have increased at a rate of more than 100 percent in the last few years. Cárdenas says that sales through the Internet are extremely important to her company and that a company’s online success is dependent on the resources they decide to dedicate to e-commerce development. “We are currently dedicating lots of resources and efforts to make our website as user-friendly and attractive as possible due to the enormous potential for sales online in a business like ours,” she notes.

The Central American banking industry has seen the most success in e-commerce. Banks have developed user-friendly websites over the last five years to manage business to business (B2B) and B2C relationships with their customers round-the-clock. This process of online expansion has been accelerated by the arrival of global banking companies, such as GE Financial, Citi and HSBC to Central America. For more than five years, customers have been offered online services such as bill payment and direct transfers, and banks continue to roll out new online services. For example Banco Ficohsa in Honduras made its website (www.ficohsa.hn) available to customers through mobile phones and also introduced automatic text messages to customer’s phones every time an account registers a transaction. According to a study by Liliana Rojas-Suarez, a Senior Fellow at the Center for Global Development in Washington, DC, 10.5 percent of the adult population in Costa Rica practices online banking. This rate is high for Latin America when compared with countries such as Mexico, where 9.6 percent of the adult population use online banking, or Chile where 10.5 percent of the adult population use this service.

While banks and companies that sell products to emigrants have been successful in growing their online business, they don’t face the same problem that many other Central American companies face: transportation costs. Alessandra Foletti, General Manager of Acta de Honduras (www.lencanpottery.com), an indigenous pottery producer, says that transportation costs from Honduras to a major city in the United States can be three to four times the cost of the actual item. “Customers do get interested in our products, but when we tell them the shipping costs, they are not willing to make the purchase any more,” she says.

Limitations of ICT

Although ICT is a competitive advantage, in regions such as Central America, there are still a number of obstacles that hinder ICT advancement, including culture, infrastructure, regulations and information access.
On the cultural side, customers do not trust online purchases because they can’t physically see the product and they can’t confirm the authenticity of the vendor or the security of the payment transaction.

Another issue is the gap that Central America faces in telecommunications infrastructure. Broadband connections, which are often necessary for intensive use of ICT, are less than 25 percent for the region. This low rate makes the cost of connectivity higher, thus making e-commerce initiatives more expensive.

Infrastructure is also an issue when it comes to distributing products that are purchased online. The cost of transportation in Central America is very high when compared with costs in developed countries.

In addition, the ICT industry cannot grow without more support from the region’s governments. There cannot be an increase in the use of ICT in Central America without the existence of laws and regulations that encourage it, provide it with a legal framework and protect it.

While the Internet offers great opportunity to companies of all sizes, it requires a supportive environment that includes legal and governmental support as well as an information culture that educates the public and businesses about the advantages of ICT.

Opportunities

While Central America still faces a number of hurdles in the expansion of ICT and Internet usage in the region, there are also a number of opportunities for eager, innovative businesses to grow. Some of the sectors with the most potential for growth include:

• E-Tourism: The Internet is an ideal platform for reaching out to consumers in this area, as companies are able to visually display their destinations, lodgings and entertainment offerings, as well as coordinate and accept online reservations and payment.

• E-Commerce: Companies are no longer competing with the stores across the street but with those located around the world—this also means that they are open to business from consumers around the world.

• Education: Education is a necessity and the implementation of ICT is no longer optional. Educational sites for online teaching present business opportunities.

• Outsourcing: Companies today are increasing focus on their core business and outsourcing the rest. ICT allows companies to assign services to outside suppliers in a more efficient way without losing control over the processes.

ICT has revolutionized the way companies do business, as well as the manner in which people communicate and perceive the world. This new economy creates a number of opportunities for businesses and investors of all sizes and nationalities. All that’s needed to take advantage of the opportunities are vision, managerial commitment and support of regulating entities.