Sales of tablets are set to triple from 2012 to 2013, with Brazil leading the way.
BY MARCO SALAZAR
Tablets have seen the most sales in developed markets, but sales in emerging markets are expected to reach significant levels as tablets begin to decline in price. According to Euromonitor data, tablets in Latin America are expected to post retail value sales of $1.2 billion in 2012 and are set to peak in 2013 with retail value sales reaching $3.7 billion. Brazil will comprise the majority of sales in 2013, reaching $1.7 billion, approximately 46 percent of the region’s total sales value. Despite these figures, there are multiple factors in play that have slowed the adoption of tablets.
The first is the limited disposable income that is typical of a consumer in Latin America. Euromonitor estimates that consumers in Brazil have approximately 13 percent of the disposable income that is typical of a U.S. consumer. Following Brazil is Mexico which has seven percent of the disposable income that is typical of a U.S. consumer. Another barrier is the limited access to broadband. Ultimately, the telecommunications infrastructure in Latin America is not ready to support the loads of data that are typical of mobile devices like smart phones and tablets.
The third obstacle is the lack of legal digital distribution and region-specific content. Legal distribution of digital content is an emerging field and corporations have not made it a priority to produce content that specifically targets the Latin American consumer. The US business model that focuses on maximizing post hardware sales revenue has not seen success in Latin America. This leads to companies focusing on hardware sales and placing less of a priority on creating software/content that would appeal to the Latin American consumer.
The videogames industry is the perfect example of this phenomenon. Sales in the United States follow the razor and blades business model in which the video game console is sold at cost or at a loss with the hopes that profits will be earned on subsequent software/media content sales. The case is the opposite in Latin America as software sales dominate with 58 percent of total video games sales, while hardware sales account for 55 percent of total video games sales in the United States.
The final factor is the high average unit prices in Latin America. This can be attributed to both the limited opportunities to achieve post-hardware sales revenue in the form of software sales revenue and import restrictions. In Brazil, imported goods can be up to three times more expensive than in the United States. Brazil’s current policies look to encourage consumption of locally produced goods by levying heavy tariffs on imported goods. A similar situation exists in Argentina where locally produced goods are exempt of 21 percent in value-added taxes. In addition, the current Argentinean administration has also enacted policies limiting the import of certain goods as an additional measure. Venezuela also has restrictions in the form of foreign currency exchange policies. Corporations operating in Venezuela need to pay for imports using foreign currency, which can only be obtained through the approval of allotments by a government agency. These allotments are not large enough, and thus an officially recognized secondary market and illegal black market exists to meet demand. The secondary market is government approved and uses a regulated higher exchange rate, while the black market uses an exchange rate that can be between 2-3 times higher than the official exchange rate.
Recent socioeconomic developments have changed the attitude towards consumers in Latin America, and corporations are looking to establish a presence in the region. Both New-Age Families (young parents passionate about technology) and Screenagers (teens and preteens whose life revolves around social media) look to reach significant levels according to Euromonitor’s demographic data. The population in Latin America is young with 34 percent of the population forecast to be between the ages of 10 and 29 years of age in 2015. In addition, it is projected that there will be at least one child present in at least 55 percent of all households in Latin America by 2015.
The middle class in Latin America looks to grow in the coming years. Evidence of this is the positive outlook on the disposable income growth rates in Chile, Colombia and Brazil. Consumers’ disposable incomes in Chile, Colombia and Brazil are projected to post compounded annual growth rates (CAGRs) in constant terms of 5.01 percent, 4.45 percent and 4.43 percent respectively between 2011 and 2016. In comparison, the U.S. disposable income looks to post a CAGR of 2.6 percent in constant terms over the same period. The gap between the wealthy and the poor in Latin America is shrinking and will lead to additional consumers being able to purchase high ticket items like tablets.
Broadband access in Latin America is also set to see vast improvements. The current situation highlights the huge potential for growth for Internet providers within the region. Currently, approximately 40 percent of the population uses the internet, but only 8 percent of the entire population is a broadband subscriber. This is mostly due to the lack of infrastructure present in Latin America. Users access the internet at cafés or public Wi-Fi networks due to the high cost of an internet subscription and the unavailability of a reliable provider of an internet connection to consumers’ homes. Mobile internet access is also a rarity as the connection is not of the highest quality and is expensive. The lack of infrastructure does not leverage the fact that Latin Americans are extremely mobile. It is projected that 72 percent of all households will possess a mobile phone in 2015. One company that plans on capitalizing on this opportunity is Carlos Slim’s America Movil, as the company has begun making significant investments in the region, specifically focusing on improving mobile internet access. America Movil is projected to invest $10.2 billion, with $6.2 billion being invested in Brazil alone.
One of the problems outlined earlier was the need to have legal digital distribution of content. Providing consumers with a legal means by which to purchase digital content is a way to deter piracy in Latin America. Currently, consumers legally purchase content from the US sites of Amazon and iTunes. This limits the consumer base as most of the content is only available in English and does not focus on the Latin American consumer. The launch of Netflix in Latin America marked a major step in the right direction. iTunes followed suit by launching the iTunes store in 16 Latin American markets in mid-December. The launch in Brazil included the debut of the full music catalog of Brazilian great Roberto Carlos and thus demonstrated Apple’s commitment to providing content that will cater to local tastes.
The final hurdle is the import restrictions that have been imposed by the region’s governments. 2012 is an election year in Venezuela and it will be difficult to project any changes to the current foreign exchange policies especially with President Hugo Chavez’ declining health. The current administration in Venezuela has attempted to improve the imports of electronic goods/appliances by providing greater allotments of foreign currency to companies that have a local manufacturing plant. This has led to preferential treatment to companies like Haier, the consumer appliance giant, who is slated to open a manufacturing plant in Venezuela by the end of 2012.
In Argentina, President Christina Kirchner was recently re-elected and looks to continue with her policy on imports in an effort to increase the local production of goods. The situation in Brazil looks to be improving as President Dilma Rousseff has made it a priority to make tablets affordable. Foxconn, which is one Apple’s main suppliers, was able to secure a tax incentivized deal with the help of the Brazilian government. Foxconn has invested $12 billion in a new manufacturing plant that opened in late 2011. This plant will mostly manufacture iPads and iPhones. The price of the iPad was estimated to be approximately $870 at the end of 2011, the highest in the world. The price of locally produced tablets should decrease by approximately 30 percent as they avoid the value-added taxes imposed on imported goods.
Latin America is an emerging market that is full of potential. Improvements are being made in many key areas that will help the region prosper in the coming years. Increased incomes and improved living standards will play key roles as Latin American consumers will be able to satiate their thirst for sophisticated products like tablets and smart phones. Companies are now aware of the potential that exists in Latin America, but they must realize that establishing a presence in the region is only the first step.
CONTENT IS KEY
In order for sales of tablets and smart phones to reach their full potential, companies will have to focus on the creation of content that caters to the local tastes. Consumers in Latin America will not legally purchase media content that is not created with their tastes and preferences in mind, and will eventually become disenchanted with tablets and smart phones. Tablets are inherently dependent on the media content available to purchase. Without the content, tablets will not realize their full potential in Latin America.
Marco Salazar is a research analyst at Euromonitor International. This article was written for Latin Business Chronicle.
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