How to profit from Latin America’s bubbling tech sector

published 5 August 2013

When it comes to reading and writing about Latin America, it can be hard to avoid the clichs. In the same way that Ireland has cornered the market for friendly people with the gift of the gab, and France for food and romance, Latin America has nailed dancing, passion and football. Of course, like most stereotypes, there's a fair bit of truth in some of them. But, like most stereotypes, there are also plenty of exceptions to the rule. I've met my fair share of quiet, unfriendly Irish people and I have seen lots of Latinos struggle on the dance floor.

Anyway, the point is, these stereotypes and exceptions exist in the world of investing too. Ask someone about Latin American economies and they'll tell you about commodity resources and infrastructure programmes. At a push you might hear about a growing middle class, consumer stocks and tourism investments. I'm as guilty of this as the next pundit. Over the past year, I've mostly concentrated on energy companies, cement makers, farm groups and consumer stocks. So today, I'd like to shine a light on a little-appreciated part of the Latin American economy the tech sector. I've also found an interesting stock that could make investors serious money.

Quietly, under the radars of most investors, Latin American tech firms have been expanding. I was shocked to find out that tech researcher Gartner ranks Mexico as the world's third-largest IT outsourcer, just behind the Philippines and India. Many American companies have taken advantage of the ready supply of cheap, quality labour across the border, choosing to outsource IT tasks. Last year 130,000 Mexicans graduated as engineers - that's much more than in the US and the most in the Americas.

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Sometimes it's difficult to evaluate statistics like this. After all, perhaps America's engineers are trained to a better standard. But one of the most interesting and convincing recommendations of Mexico's tech ability comes from Chris Anderson, the former editor-in-chief of Wired magazine. In case you haven't read it, Wired is the leading tech magazine in the world's most technologically advanced country, America. It analyses emerging technology and predicts how it'll reshape the world. As a result, Anderson is seen as something of a tech guru. And last year, he decided to quit the magazine and set up his own, suitably high-tech, 3D robotics company. And where did he decide to set up one of his factories? South of the border in Mexico, of course.

Anderson's firm has its headquarters in the US town of San Diego. Which means it's just a 20-minute drive for him to get across the border to Tijuana, where the Mexican factory is. "Some machine specialists are typically easier to find in Tijuana than in many big American cities. So, for that matter, are accountants experienced in production economics and other highly skilled workers." Cost is another factor, explains Anderson. "Inflation-adjusted labour costs in China have more than tripled in the past decade. Wages in China's southern cities are approaching $6 an hour, roughly what they are in Mexico."

Another interesting area is the internet. According to comScore, a US-based digital analytics firm, last year Latin America had the fastest-growing internet population in the world. Unique visitors rose 12% to 147 million in March 2013, but with an entire population of 600 million, it's clear that there is more room to grow. Internet penetration in Latin America currently sits at about 40%, compared to almost 80% in the US. Analysts expect that penetration will reach 60% by 2015.

Online shopping is another big growth area, with the total number of shoppers growing by 16% per year. The growth in online shopping is expected to continue as Latin Americans increasingly buy their own computers or smartphones, which give them more security than using cyber cafes. Online advertising is another growth area. Digital ad spend almost doubled in Brazil last year, and taken as a whole, the region's online advertising budget is growing at the second-fastest pace in the world.

Obviously there are big differences between countries. One way of measuring a country's internet nous is to look at how many websites it has created. Brazil leads the way with around three million websites registered with the .br domain name. In second place is Argentina with around 2.5 million websites listed as .ar, while Colombia is in third with around 1.4 million websites registered as .co. This suggests that among Latin America, these countries have the most internet-savvy entrepreneurs and local companies. Once you take population into account, Argentina has by far the most locally-registered domain names per capita.

Latin American policymakers have long been trying to support these industries like most emerging economies, they dream of following in the path of Singapore and turning themselves into knowledge economies'. In Chile, the government has been thinking of a way to lure internet entrepreneurs down to remote Santiago, one of the world's southernmost capital cities. The result is 'Start-Up Chile', which offers small tech entrepreneurs a visa and $40,000 of seed capital. "We don't even ask for equity in return", says Matias Mori, executive vice-president of the foreign investment committee of Chile. "We just ask that they stay in Santiago. We believe that the presence of these companies will help our labour force develop new skills."

Perhaps the most ambitious plan can be found in Mexico, where the government is building an extensive $5bn creative digital city' in the country's second-biggest city, Guadalajara. It is already a hotspot for Mexico's digital companies, so now the government is building a 600-acre campus that will bring tech firms and academics together in one place. The government hopes that by providing the right setting, everything from superfast broadband to a picturesque landscaped environment, it will encourage more companies to move to the city.

Andreu Tobella, the co-founder of Clicab, a Mexican technology firm that has developed a smartphone application that allows people to order safe taxis a major concern in Mexico City feels that Mexico's venture capital scene still needs much development. "In Mexico prospective investors want security. They want to know that a company is profitable before investing more money. As I try to explain to them, for a venture capitalist firm to make really significant profits, it needs to be prepared to take on more risk."

The figures back up Tobella's optimism, as annual Mexican venture capital investment has grown from $211m to $1bn since 2010. The same picture can be seen across Latin America. Last year venture capitalists invested $8bn in more than 200 deals across the region, with around half of those being in the IT sector. Data from the Latin American Private Equity and Venture Capital Association shows that the number of VC-backed IT deals in Latin America grew from just 18 in 2008 to 104 last year. That's faster growth than any other sector.

One of my favourite firms in the sector is MercadoLibre (Nasdaq: MELI),an Argentinian version of online auction house eBay. It is the largest e-commerce firm in Latin America and has customers across the region. Its platform allows people or businesses to trade goods between themselves online or sell them for a fixed price. It has also developed its own online payment system, a bit like eBay's PayPal, and offers classified advertising. The firm extracts commission for these services, which means that it should benefit as Latin American internet use increases and more people begin to shop online.

Now, this business isn't without its problems. It's currently trading near its all-time high and, on a forward price/earnings (p/e)ratio of 40, is very expensive. Moreover two of its biggest markets are Argentina and Venezuela, economies that face serious structural challenges that could wipe out consumer spending power. Another possible threat is that Amazon could decide to increase its Latin American presence and offer consumers a different place to shop online. But despite all this I like the firm.

James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the Forbes.com London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.