Small and mid-sized manufacturers and brand owners of consumer-packaged goods are seeking to quickly regain the levels of performance they experienced pre-COVID-19. But retail consumer markets across the globe are in the throes of an economic downturn caused by the coronavirus pandemic, the recovery from which may take years. YK Law’s clients cannot wait for markets to recover fully. They are seeking solutions for near-term revenue growth. We advise our clients that a viable solution for small and mid-sized companies in the ASEAN, China, the EU, and the USA is accessing new customers in Latin America and the Caribbean (“LAC”). Also, we advise our clients not to repeat the same age-old mistake of entering the LAC region by the traditional method of appointing an independent local distributor.
The seminal study performed on the relationship between the local international distributor and foreign manufacturers/brand owners by Harvard Business School Professor David Arnold concluded that these relationships are almost always doomed to fail because of the fundamental misalignment of goals between the parties. However, there is hope for the small and mid-sized corporation that endeavors to enter Latin America and Caribbean, but is deterred by risky joint ventures and distribution agreements with local partners. The coronavirus pandemic, for all of its negative effects, has reshaped consumer habits in Latin America and the Caribbean in favor of online shopping and, consequently, the LAC region is experiencing a significant acceleration in the growth of e-commerce penetration of retail sales. Also, the readiness of the logistics sector in the LAC region to serve e-commerce is at an all-time high, especially in the Republic of Panama which has served as the logistics hub for the Americas for decades. This confluence of logistics and market factors has opened a window of opportunity for manufacturers and brand owners to disintermediate their quest for new customers in Latin America and the Caribbean, control their marketing in the LAC region at a strategic level, and thereby, minimize the costs and risks of entering Latin America and the Caribbean. Although HBS Professor David Arnold may have been premature in writing the epitaph for the independent distributor in the LAC region in 2000, the current rendering of the obit, which is precipitated by the increase in retail e-commerce distribution rates post-COVID-19, may prove to be dead on (pardon the pun).
In this article we will discuss how manufacturers and brand owners of consumer-packaged goods can take advantage of these changing dynamics in Latin America and the Caribbean to boost profits and hedge risk in domestic markets.
THE INDEPENDENT INTERNATIONAL DISTRIBUTOR IS AN ENDANGERED SPECIES
Business managers worldwide are familiar with David Arnold’s 2000 seminal analysis “Seven Rules of International Distribution” in which the Harvard Business School professor analyzed the tradeoffs involved in managing the traditionally conflict-ridden relationship between local distributors in emerging international markets and multinationals seeking a low-risk, cost-effective strategy to enter these markets.
Professor Arnold’s research found that most of the corporations he studied that had successfully grown sales by finding new customer bases in emerging international markets chose what he termed the “beach head” strategy: a “stepwise strategy for penetrating markets in emerging countries through a series of unplanned actions” “where initial moves into new countries occurred in reaction to proposals” from eager potential distributors.  Professor Arnold recounts that an executive from a Connecticut-based specialty adhesives company commented that the international distributors “would approach [him] at trade fairs or come directly to [their] office, and if they seemed convincing, [they] would be inclined to go ahead because the marginal cost was low, and the distributor was bearing most of the risk.”  Does this sound familiar?
Professor Arnold found that though to most executives appointing a local independent distributor in the emerging market makes sense at the outset, in the end this strategy produces mixed results. Professor Arnold found that the local distributor model often fails not only because the local distributor can often prove to be untrustworthy, lacks strategic marketing skills, is not willing to invest in business growth, and/ or is a poor communicator, but also because the interests of the company and the local distributor are not properly aligned. 
• Most companies entering emerging international markets seek to (i) control their business expansion at a strategic level; (ii) partner with local distributors, at least for the first years, to benefit from the local distributor’s expertise; and (iii) minimize costs and risks in these new ventures. 
• Conversely, most local distributors in emerging international markets want to (i) leverage existing customer contacts to achieve the greatest possible sales in the short term while (ii) making the lowest possible investment in long-term business development. 
Chart B: Disintermdiating LAC Cross-Border E-commerce Source: YK Law
Accordingly, most of the corporate managers that Professor Arnold studied opined that the misalignment of goals would render the independent international distributor an endangered species. More importantly than the misalignment, however, Professor Arnold concluded the future of independent distributors will be influenced by the growing regionalization of marketing management. He reasoned that (i) networks of directly owned national distributors inefficiently duplicate managerial resources at the country level and lead to missed opportunities in areas such as information systems and promotional expenditures, and (ii) regionalization gives multinationals greater strategic control. 
The impact of COVID-19 on global supply chains and logistics has made Professor Arnold’s empirical findings analysis as timely today as it was in the year 2000. Post COVID-19, global retailers and suppliers will place a premium on having inventory closer to consumption markets to achieve improved business continuity and to hedge against the next Black Swan event. The regionalization of supply chain and logistics will enable manufacturers and brand owners to disintermediate, control their business expansion into emerging international markets at a strategic level, and thereby, minimize the costs and risks of entering these markets.
A GLOBAL PANDEMIC FORCED LATIN AMERICA AND THE CARIBBEAN TO EMBRACE E-COMMERCE
In 2000, the corporate managers that Professor Arnold studied opined that the independent international distributor was an endangered species because of the misalignment of goals discussed above. Almost twenty years later, these misalignments persist. However, they most likely will not be the primary cause of the demise of the local distributor in the LAC region. Rather, COVID-19 will be the true death knell for independent international distributors, especially in Latin America and the Caribbean, because the pandemic has resulted in a significant acceleration in the growth of e-commerce penetration of retail sales in the LAC region. HSBC forecasts that online shopping, which now accounts for just 5% of the region’s retail sales, will surge to 25% in a decade.  HSBC analyst Ravi Jain opined that “Covid-19 could do to Latin America what SARS did to Chinese e-commerce in the early 2000s.”  See Chart A for information regarding the growth of e-commerce penetration rates in the LAC region.
Although the pandemic has increase e-commerce penetration in retail markets across the globe, the impact of COVID-19 on the growth of e-commerce in Latin American and Caribbean markets is proportionately greater than that in developed retail markets because the base line level of e-commerce penetration in the LAC region pre-COVID-19 was significantly lower. Only 34% of consumers in Latin American and Caribbean markets 15 years and older buy goods over the internet, compared with 82% in the U.K., 74% in the U.S. and just above 60% in China. 
Physical e-commerce in Latin America and Caribbean retail markets is still maturing. For example, in 2019 The Global Center of Excellence (a collaboration between DHL and the Ministry of Commerce & Industry for the Republic of Panamá,) reported that traditional retail had achieved little penetration in Latin America (less than 1 sq. ft/person versus 21.5 in the USA and 2 – 5 sq. ft/person in most of Western Europe).  Accordingly, financial analysts forecast that middle income emerging markets like Latin America will experience e-commerce penetration rates similar to those achieved in China or 20-25% of total retail.  Such levels will surpass the current rates of e-commerce penetration in the United States.
These projected trends in e-commerce penetration in the LAC region beg the question: Can foreign corporations that seek new customers in Latin America and the Caribbean overcome their lack of expertise and knowledge of the local markets by disintermediating by means of e-commerce? The COVID-19 pandemic has given a glimpse of the possibilities of a fully mature cross-border, direct-to-(“DTC”) business model in the LAC region. The potential to gain leverage over the middlemen of cross border sales of consumer-packaged goods is limitless for foreign manufacturers and brand owners. Indeed, the window of opportunity has already opened. COVID-19 has raised the mean of penetration rates sufficiently high so that a regression to pre-COVID levels is not possible without the occurrence of another dramatic macro-economic event that would impede the current shift in consumer behavior in favor of online shopping. The remaining peace of the puzzle to complete the framework needed for cross-border e-commerce businesses to flourish in Latin America and the Caribbean is the readiness of e-commerce logistics in LAC markets. Accordingly, the critical question for the survival of the independent international distributor in the LAC region is whether the key logistics services along the e-commerce value chain in Latin America and Caribbean are sufficiently developed to support a cross-border DTC business model?
PANAMÁ IS THE PREFERRED HUB FOR GROWTH OF E-COMMERCE IN LATIN AMERICA
From which city in Latin America and the Caribbean can a foreign business best execute a regional, direct-to-consumer, e-commerce business model that does not involve an independent international distributor?
In 2019, the Global Center of Excellence published a white paper on “E-commerce in Latin America” that benchmarks the strengths of Panamá and other cities in the Americas, that have traditionally served as logistics hubs in the region, regarding readiness to serve as the preferred hub for the growth of e-commerce in Latin America. The hub cities studied, other than Panama, were Houston, Los Angeles, Mexico City, Miami, Montevideo, Santiago de Chile, and São Paulo. The Benchmark Study found that Panamá is the preferred hub for growth of e-commerce in Latin America with an overall benchmark score of 90%. Miami came in second with an overall benchmark score of 80%. The 90% score reflects that Panamá brings to bear a comprehensive set of capabilities and geo-political advantages (i.e., dollar-based currency, stable constitutional democratic politics, the Panama Canal) rather than any one attribute. 
Chart C: Disintermdiating LAC Cross-Border E-commerce Source: YK Law
Accordingly, the empirical evidence indicates that Panama is ready today to serve as the preferred logistics hub for e-commerce in Latin America and the Caribbean. Foreign companies can sell direct to consumers and avoid the dysfunctionalities of the relationship with local distributors by consolidating cross-border manufacturing and logistics in Panama. Using Panama as the regional logistics hub, e-commerce businesses will be able to provide faster fulfillment times, enable the provision of end-to-end services (i.e., returns and replacements), and provide higher quality customer service.
Panama recognized over seven decades ago that an essential component of a successful trade-hub economy is the existence of numerous free trade zones within which foreign companies enjoy tax, labor, and immigration incentives. In 1948, Panama created the Colón Free Zone, which is one of the oldest special economic zones and the world’s second largest. The Colon Free Trade zone is home to over 3,000 enterprises, most of which are focused on the re-export of bulk inbound shipments sent onwards to small and medium sized economies in the Americas. In 2007, Panama created the SEM investment regime aimed at incentivizing multinational companies to establish regional headquarters in Panama that provide services to their Main Office or subsidiary in other countries from Panama. SEM has been a major success. Today there are approximately 167 multinational companies headquartered in Panama, including Dell, Baxter, Visa, McDonald’s from the USA; Samsung, Evergreen, HEC, Sony, ZTE, ISUZU, Huawei, Daewoo from Asia; and Roche, Phillips, and Lacoste from Europe. 
In August 2020, the Panamanian Government recently passed legislation for a new investment regime for the Establishment and Operation of Multinational Companies for the Provision of Services Related to Manufacturing (“EMMA”). EMMA exemplifies the diverse and integrated investment regimes that Panama offers foreign investors. Foreign companies operating in Panama with an EMMA license enjoy significant tax, labor, and immigration incentives, including a reduced income tax rate Value Added Tax (ITBMS); a fixed capital gains tax at 2%; an exemption from import tax on all types of merchandise and immigration benefits. 
Chart D: Disintermdiating LAC Cross-Border E-commerce Source: YK Law
The EMMA investment regime is designed to tip the risk-return scale such that the decision to use Panama as a hub for a regional e-commerce strategy is clearly net-net positive. The combination of (i) the superior e-commerce readiness of Panama’s logistics sector and (ii) the tax, labor and immigration incentives enjoyed by the EMMA license holders makes the execution of a direct-to-consumer model in the LAC region less risky than it has ever been. The unique combination of incentives that Panama offers removes the need for an independent local distributor. The following case study illustrates how.
CASE STUDY: DISINTERMEDIATING WITH A PANAMA EMMA CORPORATE AFFILIATE
Charts B-D describe the case of how a Utah-based U.S. manufacturer and brand owner of vegan, organic, and natural powdered dietary supplements that sells wholesale to B2B distributors and retailers across Latin America (“USCo”) disintermediates with a panama EMMA Corporate Affiliate:
• USCo ships consigned, pre-prepared, bulk powder manufactured by USCo in Utah to its Panama affiliate created to qualify for the EMMA license.
• USCo packages the bulk powder in one of the several Free Trade Zones in Panama with the assistance of the EMMA Corporate Affiliate; and
• USCo Sells directly to its LAC wholesale accounts and to its DTC e-commerce customers from Panama.
The result is the removal of the independent local distributor from the middle, hire gross revenues and profit margins secondary to more aggressive pricing to encourage sales, more control over regional marketing strategy, faster fulfilment times, and improved customer service.
In closing, an unexpected victim of the coronavirus is the independent distributor in Latin America and the Caribbean region. COVID-19 has permanently raised e-commerce penetration rates in the LAC region at a time when e-commerce logistics readiness in the Republic of Panama is outperforming Houston, Los Angeles, Mexico City, Miami, Montevideo, Santiago de Chile, São Paulo, and other traditional logistics hub cities in the Americas as the preferred hub for cross-border e-commerce. Additionally, the Panamanian Government has created several free trade zones that offer aggressive tax, labor, and immigration incentives to establish Panama as the preferred location from which to manage a regional e-commerce strategy in Latin America and the Caribbean. These factors have obviated the need for independent local distributors in the LAC region because post-COVID the foreign manufacturer/brand owner can cost-effectively place inventory in Panama and sell directly to their B2B and DTC customers in the region, control regional marketing strategy, and offer best-in-class, end-to-end accountability and customer service from Panama.
 Arnold, David (November–December 2000). Seven Rules of InternationalDistribution. Harvard Business Review. Retrieved February 23, 2021, from https://hbr.org/2000/11/seven-rules-of-international-distribution
 (Arnold, 2013)
 (Arnold, 2013)
 (Arnold, 2013)
 (Arnold, 2013)
 (Arnold, 2013)
 Andrade, Vinicius and Millan, Carolina (2020, April 30). It Took a Pandemic to Get Latin Americans to Buy More Online. Bloomberg.com. Retrieved February 23, 2021, from https:// www.bloomberg.com/news/articles/2020-04-30/virus-lock-downs-see-latin-america-online-buyers-playing-catchup
 (Andrade and Millan 2020)
 (Andrade and Millan 2020)
 Global Center of Excellence (2019). E-commerce in Latin America White Paper. Retrieved February 23, 2021, from https://www.dhl.com/global-en/home/insights-and-innovation/ thought-leadership/white-papers/ecommerce-in-latin-america. html
 (Global Center of Excellence 2019)
 (Global Center of Excellence 2019)
 Georgia Tech Panama Logistics Research and Innovation Center, https://logistics.gatech.pa/en/,
Anthony C. Robinson
Of Counsel, Head of Latin America and Caribbean Practice
YK Law LLP
D: (212) 837-2600